Seamless insolvency—a pipe dream? (Barclays Bank plc v Registrar of Companies)

Examining the judgment in Barclays Bank Plc v Registrar of Companies, Matthew Weaver, a barrister at St Philips Chambers, observes that a ‘seamless insolvency’—while attractive in theory—may well be unachievable.

Original news

Barclays Bank plc (trading as Barclays Global Payment Acceptance) v Registrar of Companies and others [2015] EWHC 2806 (Ch)

The Chancery Division was asked to consider whether the former administrator of a company (Ms Sharma)—which was subsequently dissolved—was entitled to challenge the making of a restoration order made on the application of one of the company's creditors, who wished to obtain a winding-up order so that a liquidator could investigate payments made by the company prior to it entering into administration. A further question was whether the court could and should backdate the presentation of the winding-up petition to the date on which the company entered into administration.

On the facts of the case, it was held that Ms Sharma was entitled to challenge the making of the restoration order, but that her challenge would be unsuccessful. Further, a winding-up order was made, but would not be backdated.

Briefly, what were the facts of the case?

Client Connection Ltd (the company) was put into administration on 9 October 2012. The administrator (Ms Sharma) immediately effected a ‘pre-pack’ sale of the company’s claims book, resulting in a low return. Only 3.6 hours were spent by Ms Sharma investigating the company’s affairs. No details of the investigation or its outcome were disclosed to creditors. Ms Sharma then moved for a dissolution of the company, which occurred three months later. No liquidation ever took place.

In the meantime, Barclays Bank plc, a major creditor, had discovered that large sums of money had been paid out of the company which might be clawed back. It petitioned for the company to be restored to the register of companies and for its immediate winding-up, in order that a liquidator could be appointed to pursue clawback claims and a possible claim against Ms Sharma. A district judge ordered restoration. Ms Sharma applied to have the restoration order set aside to pre-empt the possibility of a liquidator’s claim against her.

What were the legal issues that Norris J had to decide?

Mr Justice Norris had to decide:

  • whether Ms Sharma had standing to oppose restoration
  • the jurisdiction to review restoration orders
  • whether the company should be restored to the register
  • whether to order an immediate winding-up
  • the appointment of the liquidator
  • whether the court can and should backdate Barclays’ petition—this was so that the payments sought to be clawed back would fall within the requisite time window, being two years before the onset of insolvency

What arguments were put forward? What did the judge decide, and why?

Ms Sharma’s standing

Ms Sharma argued that she had standing to ask the court to set aside the restoration order because a purpose behind Barclays’ petition was to pursue a possible claim against her.

Section 1029(2) of the Companies Act 2006 (CA 2006) lists those who have standing to make an application to the court for restoration, including ‘any other person appearing to the court to have an interest in the matter’. Norris J seems to have assumed that, by analogy, the listed persons are also entitled to apply for a restoration order to be set aside. He held that, while in general former office-holders would not have sufficient interest in the matter to have standing, on the facts Ms Sharma did have a sufficient interest given that Barclays’ winding-up petition envisaged a claim against her (para [19]).

Jurisdiction to review

The judge held that the power of review under rule 7.47 of the Insolvency Rules 1986, SI 1986/1925 applies only to court orders made under the jurisdiction in Parts 1–4 of the Insolvency Act 1986 (IA 1986). The correct procedure for Ms Sharma to challenge restoration (which is made under CA 2006) was to appeal the restoration order as a person adversely affected by it, pursuant to rule 52.1 of the Civil Procedure Rules 1998 (CPR), SI 1998/3132 (paras [22]–[24]). On the facts of this case, Norris J determined that this distinction was not material to the decision facing the court, and as Barclays had not taken any point on the correct procedure to be applied, this did not render Ms Sharma’s application null and void.

Restoration and winding-up

Ms Sharma submitted that Barclays had had ample opportunity to challenge her decisions or conduct or seek to remove her while the administration was ongoing—instead, Barclays had accepted her proposal to dissolve the company and should not, as a matter of principle, be allowed to change its mind.

Norris J rejected that submission. No such limitation should be read into CA 2006, s 1029. The only question is what is ‘just’, and the court will consider those who have an economic interest in restoration. It may be unjust to allow restoration where a creditor elected for dissolution and any subsequent restoration would unfairly prejudice another party. However, on the facts here, Ms Sharma had kept creditors in the dark and spent very little time investigating. Barclays could not be said to have acquiesced or be barred by laches. It was also perfectly legitimate for Barclays to have used its own resources to investigate the company’s clawback claims rather than embroil all creditors by way of an application in the administration.

Ms Sharma further submitted that the sole point of restoration was to recover further assets, and the prospects of such recovery were speculative, such that a winding-up order should not be made.

Norris J disagreed. He determined that it is not necessary to show that asset recovery is likely in order to secure a winding-up order. Winding-up could also be justified by the need to recover the company’s records and investigate past transactions, even if the likelihood of asset recovery cannot yet be shown. The restoration order was therefore upheld, and at the same time the judge ordered the company to be wound-up.

Appointment of a liquidator

Norris J appointed as liquidator the insolvency practitioner (IP) at Grant Thornton who had advised Barclays on the company’s clawback claims. There was no suggestion from Ms Sharma that she should be the liquidator.

Backdating the winding-up petition

Barclays then submitted that the petition ought to be backdated to either the date of administration to create one seamless insolvency (by way of a liquidation following an administration) or, alternatively, the date of dissolution, such that the transactions sought to be impugned would fall within the window of two years (for connected parties) or six months (for unconnected parties) prior to the onset of insolvency (for present purposes, the start of the winding-up). Otherwise, if the petition was not backdated, none of the impugned transactions would fall within the time window. Barclays submitted that the court had such a power under CA 2006, s 1032(3), which says that the court may make such orders as seems just to place the company and all other persons in the same position (or as closely as possible) as if dissolution had not occurred.

As a preliminary point, Norris J held that the petition could not be backdated to the start of administration, as it is impossible (save for in particular circumstances) for an administration and liquidation to run simultaneously.

The remaining option was backdating the petition to the dissolution date. Norris J held that, under CA 2006, s 1032, the court may make any order to give effect to the statutory fiction that the company continued in existence. That meant giving Barclays the opportunities which they had lost, namely, the opportunity at the date of dissolution to present a winding-up petition and suspend the dissolution. The judge therefore held that he had the jurisdiction to backdate the petition to the date of dissolution, so that the liquidator could be placed in the same position as though there had never been a dissolution.

Having established jurisdiction, the judge turned to the exercise of discretion. He laid down three broad principles:

  • the jurisdiction had to be exercised ‘with extreme caution’
  • it must be ‘just’ to grant relief to the company and the liquidator
  • the burden of justifying the grant of relief rests on the applicant

On the facts, the burden was not discharged for two reasons. Firstly, Barclays already possessed the requisite information about the impugned transactions before the dissolution occurred, and it did not adequately explain why it did not promptly apply to suspend the dissolution before it occurred. Secondly, while Barclays knew who the counterparties to the impugned transactions were, it had failed to give them notice of the application. It was an important factor in exercising its jurisdiction that the court should ensure that parties who might be affected by exercising the jurisdiction should be allowed the chance to make representations to the court.

Thus the judge made a winding-up order but refused to make an order backdating the petition under CA 2006, s 1032(3).

What practical lessons can those advising take away from this case?

Former office-holders do not automatically have locus to seek to appeal orders for the restoration of companies but may do subject to the facts of each case. Simply having an interest in the restoration and its practical effects is not sufficient on its own to set aside a restoration order.

The CA 2006, s 1032 jurisdiction, while broad, is treated by the courts as a method of last resort. Central to the exercise of the CA 2006, s 1032 discretion is whether the applicant delayed before making an application and whether sufficient notice has been given to affected parties. Where the applicant suspects or knows that the administrator has not properly discharged its responsibilities, the applicant cannot simply sit on that information. It must apply promptly and, where dissolution is proposed, apply before dissolution if possible.

To what extent is the judgment helpful in clarifying the law in this area?

The judgment answers some questions and throws up new ones. The judgment establishes that the CA 2006, s 1032 jurisdiction extends to backdating a winding-up petition to the date of actual dissolution for the purposes of ensuring pre-insolvency transactions fall within the statutory time window. However, Norris J expressly left open the question of how the period between the registration of the dissolution notice and the actual dissolution is to be treated. Without deciding the question, the judge expressed doubt as to whether CA 2006, s 1032 could be used to backdate the petition to pre-dissolution events ie to the date when the dissolution notice was registered. Thus, a ‘seamless insolvency’, while attractive in theory, may well be unachievable.

Are there any further points of interest?

Ms Sharma’s standing

The judge was not referred to the leading case on standing in this area, namely the Privy Council decision in Deloitte & Touche A.G. v Johnson [1999] 1 WLR 1605, concerning the standing of a debtor to apply for a liquidator's removal. The Privy Council held that assuming the court has jurisdiction, standing requires two things. First, the applicant must have sufficient interest to make the application. Second, the applicant must be a proper person, ie it must have a legitimate interest in the relief sought.

Norris J did not address the second step. While Ms Sharma may have had sufficient interest in opposing the restoration of the company, that does not mean it was legitimate for her to seek to have the restoration order set aside in an attempt to ‘head off a potential claim against her. As Lord Millett held at page 1611 in Deloitte:

The plaintiff is not merely a stranger to the liquidation; its interests are adverse to the liquidation and the interests of the creditors. In their Lordships’ opinion, it has no legitimate interest in the identity of the liquidators, and is not a proper person.

The same reasoning could be said to apply to Ms Sharma, whose interest was adverse to those of the creditors. It was not legitimate for her to attempt to ‘hijack’ the restoration issue as a means to defend herself from a potential, as yet unformulated claim. There is a good argument, therefore, that Norris J was wrong to hold that Ms Sharma had standing. Certainly, his reasoning overlooked a significant consideration.

Appointment of the liquidator

The judge did not make clear the jurisdiction under which he made the appointment. IA 1986, s 140, concerning the appointment of an IP as liquidator after administration, only applies where the new liquidator is the same person as the former administrator: Re Exchange Travel (Holdings) Ltd [1993] BCLC 887 at pages 891 and 892 per Edward Evans-Lombe QC (not cited to Norris J). Clearly IA 1986, s 140 did not apply on the facts here. Outside of IA 1986, s 140, the proper procedure is prescribed by IA 1986, ss 136–139, namely, the appointment of the official receiver, followed by nominations for a liquidator from creditors and contributories or an application to the Secretary of State to appoint a liquidator. As was held in Re Exchange Travel at page 892:

The Act does not confer upon the court any express residual power to appoint a liquidator.

Norris J’s appointment of the IP would seem to have been an oversight and made without the necessary jurisdiction.

However, a possible argument in favour of Norris J’s decision on this point is to import the (controversial) administrative law principle that a statutory procedure, despite being prescribed in an Act of Parliament, may nevertheless be validly waived in certain circumstances. That idea stems from a dictum of Lord Denning MR in Wells v Minister of Housing and Local Government [1967] 1 WLR 1000, a case concerning whether a planning authority could waive the procedure contained in section 43 of the Town and Country Planning Act 1962. At page 1007, the Master of the Rolls (Davies LJ concurring, Russell LJ dissenting on this point) said:

I take the law to be that a defect in procedure can be cured, and an irregularity can be waived, even by a public authority, so as to render valid that which would otherwise be invalid.

Given that the parties in the present case did not seem to have insisted on Norris J following the procedure in IA 1986, ss 136–139, it is arguable that the procedure was waived, rendering the appointment of the liquidator valid—although whether such a waiver could have taken place without the consent of the other (albeit minor) creditors remains doubtful.

Matthew Weaver has developed an impressive chancery/commercial practice with a particular specialisation in insolvency. He regularly appears in the specialist courts in both Birmingham and London. While Matthew’s commercial practice is founded on significant insolvency and company law expertise, he also specialises in the areas of banking and finance law, commercial fraud and professional liability. Matthew would like to thank Oberon Kwok, a third six pupil in chambers, for his input throughout this interview.

Interviewed by Kate Beaumont.

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

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Restoration to the register by court order

Reviews of orders from the insolvency court: what is the process and how can you appeal or review a decision and which court do you apply to?

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First published on LexisPSL Restructuring and Insolvency

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