Meaning of ‘contributory’ for the purpose of the old insolvency Rules (Burnden Group Holdings Ltd v Hunt)

The High Court held, in Burnden Group Holdings Ltd v Hunt, that ‘contributory’ was to be given a wide meaning and included members who held fully paid-up shares. However, as Mark Spackman of St Philips Chambers comments, the ruling is relevant only to cases brought under the Insolvency Rules 1986, SI 1986/1925 (IR 1986) (ie before the new Insolvency (England and Wales) Rules 2016, SI 2016/1024 (IR 2016) came into force).

Burnden Group Holdings Ltd v Hunt (liquidator of Burnden Holdings (UK) Ltd) [2018] EWHC 463 (Ch), [2018] All ER (D) 106 (Mar)

What are the potential implications of this case?

At its heart, this was a case concerning the meaning of ‘contributory’ for the purpose of IR 1986, r 4.79(b). The issue was whether a fully paid-up member of the company—as opposed to only a partly paid up member—was a contributory for the purposes of the rule, and thus entitled to require Mr Hunt, the liquidator of the company, to permit inspection of the proofs filed (but not adjudicated upon) by the creditors of the company.

As it happens, the practical effects of the decision on the question of who is entitled to inspect proofs are likely to be of historic interest only because this was a case brought under the IR 1986, which confined the categories of persons entitled to inspect the proofs to any creditor who had submitted his proof (as long as it had not been rejected), a contributory of the company, and any person acting on behalf of the aforementioned.

Under IR 2016, r 14.6, the class of persons entitled to inspect the proofs has been extended to ‘member or contributory’, so the issue in Burnden would no longer arise. The case is still useful to practitioners however in that it clarifies that the definition of contributory in section 79 (and section 74) of the Insolvency Act 1986 (IA 1986) encompasses members (past and present) who hold (or held) fully paid-up shares.

What was the background?

Burnden Holdings (UK) Ltd was a holding company for subsidiaries trading in conservatories, and in power and energy. Two of the directors and the controlling shareholders in UK were Mr and Mrs Fielding. In 2007, the company underwent a restructuring, with the sale of its power and energy companies, and all of the shares in Burnden Holdings (UK) Ltd were registered in the name of Burnden Group Holdings Ltd (Group). Mr and Mrs Fielding were directors of and the controlling shareholders in Group.

Burnden Holdings (UK) Ltd went into administration in 2008 with an estimated deficiency of £9.5m, and then into liquidation in December 2009. Mr Hunt was appointed in 2012 and he brought proceedings against Mr and Mrs Fielding for breach of directors’ duties arising out of the restructuring of the company. The claim was said to be for £21m which, if successful and realised, might result in a surplus for distribution to members and thus to Group (so that Mr and Mrs Fielding would indirectly benefit).

On behalf of Group, Mr Fielding asked to inspect the proofs of debt submitted to Mr Hunt. Mr Hunt refused to allow Group to inspect, inter alia, on the ground that as a fully paid up member, Group was not a contributory for the purposes of IR 1986, r 4.79(b) because, in an insolvent liquidation, Group could not be called upon to contribute to the assets of the company. The application was heard by the district judge, before whom the issue of standing to make the application was not argued, the point being reserved for appeal.

The district judge held that Group was entitled to inspect the proofs, and Mr Hunt appealed.

What did the court decide?

Having heard full argument on the issue of standing, and having considered the old cases, decided upon the meaning of contributory (including two inconsistent Court of Appeal decisions), Norris J held that the word ‘contributory’ was to be given a wide meaning and included members who held fully paid-up shares even though, in an insolvent liquidation, they would not be required to contribute to the assets of the company.

The decision was based partly upon the definition of ‘contributory’ in previous versions of the IA 1986 which included all past and present members of the company. It mattered not whether the liquidation was an insolvent liquidation or one likely to result in a surplus—the meaning was the same.

On the facts, however, Norris J held that Group was not entitled to inspect the proofs because it had failed to establish a real interest in the relief being sought, namely that there would be a surplus in the winding up. Mr and Mrs Fielding had declined to provide any evidence that they had sufficient assets to satisfy the claim by Mr Hunt and, thus, that there was a real possibility of Mr Hunt recovering a sufficient sum to enable a distribution to members.

Interviewed by Nicola Laver.

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

Further Reading

If you are a LexisPSL subscriber, click the link below for further information:

Proof of debt—the position under the Insolvency (England and Wales) Rules 2016 (Subscriber access only)

Creditor's appeal against rejection of proof of debt—the position under the Insolvency (England and Wales) Rules 2016 (Subscriber access only)

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