Liquidators' appointment valid despite breach of deemed consent procedure (Cash Generator Ltd v Fortune and others)

David Oliver, a consultant solicitor with the insolvency and business turnaround team at Verisona Law, examines an Insolvency and Companies Court decision that non-compliance with the statutory provisions for the appointment of liquidators did not invalidate the first and second respondents’ appointments as joint liquidators of three companies. There was also no cause for their removal to enable an independent investigation into the assignment of the companies’ leasehold interests in the business premises and the sale of their stock and assets.

Cash Generator Ltd v Fortune and others [2018] EWHC 674 (Ch)

What are the practical implications of the judgment?

The decision means that nominee liquidators need not worry about their appointment under the deemed procedure being declared invalid if a creditor is not sent notice of their nomination and a statement of affairs, in accordance with the statutory rules.

What was the background?

The three companies had, as franchisees, operated pawn-broking and ‘payday’ loan businesses before they became insolvent as a result of a tax mitigation scheme which was challenged by HM Revenue and Customs.

The companies nominated the first and second respondents as their joint liquidators and, when fewer than 10% of the relevant creditors objected, they were duly appointed under the deemed consent procedure under the Insolvency Act 1986 (IA 1986) and the Insolvency (England and Wales) Rules 2016, SI 2016/1024 (IR 2016).

Before the companies’ liquidation began, they assigned their leasehold interests in their business premises to a third party; and after the liquidation commenced, they sold, acting by the first and second respondents, their stock and assets.

The applicant, as franchisor of the companies’ businesses and claiming to be a creditor, sought declarations that:

  • the appointment of the first and second respondents as liquidators was invalid
  • the first and second respondents be removed from office
  • the first and second respondents be replaced by its own nominees or the court’s appointments

What did the court decide?

Invalidity

The applicant argued that as it and two other categories of creditors (which were not parties to the proceedings) had not been given notice of the first and second respondents' nomination, the mandatory statutory requirements for nomination under the deemed consent procedure had not been complied with. Consequently, the appointment was fatally flawed and new office holders were required.

The applicant conceded that a company could nominate a person to be liquidator at a company meeting at which the liquidation commenced. However, IA 1986, s 100(2) required the directors in mandatory terms to seek nomination from the creditors. In those circumstances, the court had to intervene and either order removal or the appointment of new liquidators pursuant to IA 1986, s 108 or require compliance with IA 1986, s 100(2).

The judge considered these arguments in the light of IA 1986, s 100(1B), which provides ‘the directors of the company must in accordance with the rules seek nomination (of a person to be a liquidator) from the company’s creditors’. He also reviewed the provision for deemed consent set out in IA 1986, s 246ZF and the procedure which is set out within IR 2016, rr 1, 6 and 15, but added that judicial notice can be taken due to the fact that the information made available to those assisting the directors will not infrequently contain errors for a variety of reasons, eg mistake or a failure to keep proper books and records or even decisions not to provide correct information.

The judge concluded that the purpose of the provisions was to ensure that the creditors who could vote were involved in the process, hence the mandatory language used. However, the deemed consent procedure was intended to encourage creditor involvement rather than to assure maximum number participation. Parliament would have anticipated that there was a prospect of one or more creditors not being given notice. As a result, it was reasonable to conclude that, absent an express provision, Parliament did not intend invalidity.

The judge observed that it would be surprising if the actions and omissions by the companies or their directors which produced non-compliance with the statutory obligations would nullify the decisions of the creditors who did vote. Otherwise many, if not the majority, of appointments within creditor voluntary liquidations would be open to uncertainty and the risk of litigation. Parliament’s purpose had been to achieve a speedy appointment of an insolvency practitioner nominated by creditors, not to incur uncertainty, delay and additional costs.

He added that the applicant had other remedies open to it. For instance, IA 1986, s 246ZE provided for the requisition of a meeting of creditors, as long as a minimum number was satisfied; an application could be made to the court for removal under IA 1986, s 108, and one of the matters to be considered under this section could be the rebuttal of IR 2016, r 15.15 concerning non-receipt of a decision notice; an application could be made for directions under IA 1986, s 112.

Removal

The applicant argued that there was a need for an investigation into the first and second respondents’ actions and omissions after their appointment, particularly the pre-liquidation assignment of leases and the post-liquidation sale of stock. As those investigations concerned the liquidators conduct, new office holders were required.

The judge followed the approach to removal set out by Warren J in Sisu Capital Fund Ltd v Tucker [2005] EWHC 2321 (Ch), [2006] 1 All ER 167, namely:

  • removal should be ordered where an independent review cannot be carried out because of conflict
  • the court should consider the views and wishes of the majority of creditors
  • removal should not be ordered merely because conduct has fallen short of the ideal
  • the court should remember that removal can impact upon professional standing and reputation

The judge found that the evidence extinguished any suggestion that the first and second respondents would not carry out investigations that they considered appropriate for the conduct of the liquidation. The early sale of stock had been based upon expert valuation advice and, as there was no business to sell, a ‘fire sale’ had been justified. Furthermore, they had been advised on the validity of the assignments and on the value of the leases.

As a result, the judge found that there was no cause established to remove the first and second respondents as liquidators. In passing, he noted that HMRC had not supported the application and was content for them to remain in office.

Finally, the judge issued a plea for the Rules Committee to consider whether the rules needed to be consolidated as those that the judge had referred to were in a variety of places and featured numerous requirements.

Further reading

If you are a LexisPSL subscriber, click the links below for further information on order of payments in administration:

 The deemed consent procedure, decision-making procedure, and meetings—the position under the Insolvency (England and Wales) Rules 2016 (Subscriber access only)

Guide to the destination of the Insolvency Rules 1986, SI 1986/1925 in the Insolvency (England and Wales) Rules 2016, SI 2016/1024 (Subscriber access only)

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First published on LexisPSL Restructuring and Insolvency

Verisona Law acted for the first and second respondent liquidators in this case.

Interviewed by Robert Matthews.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

 

 

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