Managing liquidation funds from future product liability claims—Re Powertrain Ltd (In liquidation)

What can liquidators learn from Re Powertrain Ltd (in liquidation)? Tina Kyriakides of Radcliffe Chambers examines this recent judgment, in which the court was asked to sanction a proposed distribution to creditors against the backdrop of potential future product liability claims.

Original news

Re Powertrain Ltd (in Liquidation) [2015] Lexis Citation 308, [2016] All ER (D) 48 (Jan)

The Chancery Division held that, on the facts, there was a strong case for liquidators of a company in creditors’ voluntary liquidation proceeding to make distributions without regard to product liability claims that might emerge in the future. The liquidators were also granted relief under section 1157(2) of the Companies Act 2006 (CA 2006).

What was the background to the case?

Powertrain Ltd (Powertrain) was part of the MG Rover Group. It carried on business in the design, manufacture and sale of engines and gear boxes. Powertrain went into administration on 8 April 2005. On 22 July 2005, the administrators entered into a contract of sale for the sale to Nanjing Automobile (Group) Corporation of the majority of Powertrain’s assets. Although Powertrain’s activities were curtailed at that point, it continued to effect sales until February 2006. On 20 March 2006, it went into creditors’ voluntary liquidation.

The liquidators reached a position whereby they did not expect to make any further realisations of significance other than the possible receipt of dividends on Powertrain’s claims made in the liquidation of the MG Rover Group. The liquidators held a balance of funds of £10.5m and wanted to distribute these funds to the company’s creditors. However, they were concerned about potential product liability claims that might later be made in respect of products sold between the date of administration and February 2006, when Powertrain ceased trading. The liquidators accordingly wanted to know whether they could distribute the whole of the funds in their hands to the then known creditors. If they could, they also wanted to ensure they were protected from personal liability towards contingent creditors who might later make claims.

What was the issue that the judge had to decide?

The judge had to decide two issues:

  • first, whether the liquidators should retain a fund in case claims were made in the future for products supplied post-administration and only distribute the balance. Any such claims would be an expense of the administration
  • secondly, if the court directed that the whole of the fund could be distributed, whether the liquidators could and should be excused prospectively under CA 2006, s 1157 from any claim that might be made against them in the future in respect of negligence, breach of duty or breach of trust

What were the legal points surrounding the issues in this case?

There were in essence two legal points that the court had to consider:

  • first, what the test was for the purpose of deciding what the liquidators should do—in this respect, the court held that the authorities showed the court had to strike a balance between the desirability of distributing assets to known creditors sooner rather than later and the potential injustice of leaving someone who has a valid claim with no effective remedy
  • secondly, whether a liquidator fell within the provisions of CA 2006, s 1157

What did the judge decide?

On the first issue, the judge decided an order should be made permitting the liquidators to declare and pay dividends without making provision for the possibility of unknown future product liability claims, subject to certain provisos. The judgment does not state what those provisos were, but it is assumed that they related to creditors who might notify the liquidators a claim prior to the distribution being made.

On the second issue, the judge decided that the liquidators were clearly officers falling within CA 2006, s 1157 and made an order granting relief to the liquidators under that section.

Why did the judge come to these conclusions?

On the first issue, the judge examined the evidence in order to assess the prospect of product liability claims being made in the future. The evidence was that Powertrain had ceased to trade for more than nine years. As at the date of the hearing, no proofs had been lodged in Powertrain’s liquidation or otherwise notified to its office-holders in respect of product liability claims. No notifications had been made against the wider group of companies relating to post-appointment supplies, which could potentially give rise to expense liabilities. None of the 120 product liability claims that had been made under the group’s insurance policy since 2000 had been made against Powertrain itself. Of the 93 claims that had not been settled, only 36 could, on their face at least, relate to Powertrain products, and all of those both related to events before administration and appeared to have been abandoned or to have become dormant. None of the 27 claims that had been settled by a member of the group or its insurers had been attributed to Powertrain.

Having regard to the above matters and to the lapse of time, which would have given rise to limitation issues in any event, the court held that the chances of product liability claims being made were remote. Further, the court held that creditors had already been kept out of the money in the liquidators’ hands for a considerable period of time. In these circumstances, the court decided that the balance to be struck between paying known creditors sooner rather than later and the injustice of leaving other creditors with no remedy lay strongly in favour of the liquidators making a distribution to the known creditors.

On the second issue, the court held that all that ‘officer’ meant in CA 2006, s 1157 was someone who held an office in relation to a company. In support of this, the court relied, in particular, on the case of Re Home Treat Ltd [1991] BCC 165.

What can liquidators take away from this judgment?

If a liquidator wishes to make a distribution, but there is a possibility of further claims being made in the liquidation, the liquidator should not do anything without first making an application for directions to the court. In order to protect the liquidator, this should be coupled with an application under CA 2006, s 1157, in the event that the court authorises a distribution to be made.

Each case will, however, depend on its facts. For example, in the case of Re R-R Realisations Ltd (formerly Rolls-Royce Ltd) [1980] 1 All ER 1019, the court refused to give permission to liquidators of the company to distribute the remaining assets to the members of the company when they had received claims, albeit very late, arising out of an aircraft accident. In Re R-R Realisations, the court found that it would be unjust to allow the distribution and to deprive these creditors of making an effective claim against the company. The court was also influenced by the fact that the proposed distribution was to be made to the company’s members. It held that a court would be more reluctant to facilitate a distribution among members than it would if the distribution were to be to creditors.

Tina Kyriakides has a strong practice in general commercial and chancery litigation and advisory work that covers company law, corporate and personal insolvency, contract, commercial fraud, lending and other finance transactions, mortgages, guarantees and other securities. She is consultant editor of Corporate Recovery & Insolvency, published by Butterworths and has authored various LexisPSL Restructuring and Insolvency practice notes on individual voluntary arrangements and company voluntary arrangements.

Interviewed by Barbara Bergin.

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

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First published on LexisPSL Restructuring and Insolvency

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