Should I stay or should I go? (Kean v Lucas (as liquidator of J&R Builders (Norwich) Ltd))

How should a liquidator handle a request for his removal under section 177 of the Insolvency Act 1986 (IA 1986) and the Insolvency Rules 1986 (IR 1986)? Warren Bank of St Philips Stone Chambers reports, in the light of recent High Court ruling.

Original news

Kean v Lucas (as liquidator of J&R Builders (Norwich) Ltd)) [2016] EWHC 2684 (Ch), [2016] All ER (D) 50 (Nov)

How did the issue arise?

IA 1986, s 177 provides the mechanism under which a liquidator may be removed from office. In the case of a creditors’ voluntary liquidation (CVL), only a specially-summoned general meeting of the company’s creditors may do so, ‘…in accordance with the rules’ (IA 1986, s 177(2)(b)).

IR 1986, SI 1986/1925, r 4.114, states that the liquidator shall summon a meeting to remove him under IA 1986, s 177(2)(b) ‘if requested by 25 per cent in value of the creditors, excluding those who are connected with it’.

Of equal importance is IR 1986, SI 1986/1925, r 4.57, which provides that any request by creditors to the liquidator for a meeting to be summoned shall be accompanied by a list of the creditors concurring with the request and the amount of their respective claims in the winding up.

What were the facts?

Mrs Kean had requested the liquidator of J&R Builders (Norwich) Limited (the company) to convene a meeting of creditors under IA 1986, s 177 to consider his removal as liquidator. She had made the request in her capacity as ‘a significant creditor and former director and shareholder’ of the company. The liquidator refused to requisition the meeting on the ground that the request was not supported by 25% in value of the company’s creditors, as required by IR 1986, SI 1986/1925, r 4.114, and required ‘strict proof’ of the claim. Mrs Kean applied to Mr Registrar Briggs for a declaration that the liquidator had wrongfully refused to call the meeting and for a direction that he do so.

What were the legal arguments?

The liquidator had carried out a detailed exercise into the merits of one particular claim to determine whether it should be included in the calculation of creditors’ claims or not. It was undisputed that should this claim be included, the 25% threshold would have been met. The problem was, there is no direct authority on how a liquidator should decide which creditors are to be included in the total value of creditors.

On behalf of Mrs Kean, it was argued that the liquidator had adopted an incorrect approach by extensively analysing the merits of the claim—to requisition such a meeting, IR 1986, SI 1986/1925, r 4.57(1) requires the submission of a list of creditors concurring with the request for such a meeting, together with the amount of their respective claims in the winding up. There is no need to investigate the merits of any of the claims. Once a meeting has been called, the procedure set out in IR 1986, SI 1986/1925, r 4.67(1) entitles a creditor to vote in such meeting only once a proof of debt has been lodged. The chairman may then adjudicate on these proofs of debt at the meeting. It is only at this stage that an analysis of each claim should take place.

Reliance was placed on Re Greenhaven Motors Ltd (in liquidation) [1999] 1 BCLC 635. Although this case concerned the exercise of the liquidator’s powers with the sanction of the court under IA 1986, s 167(1)(a), Chadwick LJ said that ‘…an application under s 167(1)(a) is not a suitable context in which to decide whether or not a person claiming to be a creditor is indeed a creditor’ and also that it would be ‘…inappropriate for the court to embark, in the context of an application under s 167(1)(a) of the Act, on a detailed examination of the question whether a person wishing to be heard is indeed a creditor or a contributory’.

By extending this reasoning to the present situation of the requisitioning of a creditors’ meeting, the argument for Mrs Kean was that the liquidator should not have embarked on a detailed examination of the claim in question.

On behalf of the liquidator, it was argued that a liquidator still had to consider the claim of each creditor and apply a reasonable degree of scrutiny to such a claim, based on the evidence before him. This the present liquidator had done and there was thus no basis for the order and declaration sought.

What did Mr Registrar Briggs decide?

Mr Registrar Briggs found that although the test proposed on behalf of the liquidator ‘may at first sight seem attractive, it is unsupported by statute, the rules or case law’. He found Chadwick LJ’s dicta in Greenhaven Motors in considering who are the creditors for the purpose of deciding whether to sanction the exercise of a power under IA 1986, s 167(1)(a), were ‘most apposite to the exercise that should be undertaken by a liquidator for the purpose of requisitioning a meeting of creditors pursuant to s 171(2)’.

Mr Registrar Briggs distinguished between the degree of scrutiny of claims necessary at the requisitioning stage (a low degree) and the exercise undertaken at the creditors’ meeting, where the liquidator is provided by IR 1986, SI 1986/1925, r 4.70(1) with an express power to accept or reject a creditor’s claim, for the purpose of voting. By contrast, IR 1986, SI 1986/1925, r 4.114(1) gives no such power to the liquidator, whose only task at that preliminary stage is ‘to discount connected party claims and any claim that appears obviously wrong or mala fide’. He said that while there is no possibility within the rules of appealing a liquidator’s refusal to accept a claim when calculating creditor claims to ascertain whether 25% or more in value of creditors request a meeting, there is such a possibility when the liquidator, as chairman of the creditors’ meeting, decides on a creditor’s entitlement to vote. It follows that the threshold test is low at the requisitioning stage and ‘the claim has to be not obviously wrong’.

In the circumstances, Mr Registrar Briggs found that the liquidator was wrong to apply a ‘strict proof’ test and that he ought to have accepted the claim for the purpose of calculating claims to requisition the meeting, unless it was obviously wrong or there was evidence of mala fides. The claim would, of course, still fall to be accepted or rejected by the chairman of the meeting, where a higher threshold test applied. He granted the order and declaration sought.

What are the practical implications for insolvency practitioners (IPs) who are asked by creditors to convene a creditors’ meeting?

IPs should be aware of the clarity that this decision has brought to an area where there was no previous authority—claims ought not to be scrutinised in exacting detail when a meeting of creditors has been requisitioned. The time for such an exercise is at a later stage, during the meeting itself, when each claim will have to pass muster and may be rejected by the chairman.

While Mr Registrar Briggs noted the changes to the IA 1986 introduced by the Small Business Enterprise and Employment Act 2015 (in particular, the removal of the need of liquidators to obtain court sanction in certain respects) this would not affect his decision in this case. IPs should note that the Insolvency (England and Wales) Rules 2016, SI 2016/1024 (which come into force on 6 April 2017) amend the IA 1986 to introduce a new procedure for deemed consent of creditors and the replacement of formal creditors’ meetings with alternative creditors’ decision-making procedures.

An interesting development is the new section 246ZE to be inserted into IA 1986, which governs the provisions regarding the decision-making process and how a physical meeting of creditors can only be summoned by 10% of the creditors in value, 10% of the total number of creditors or 10% individual creditors. A discussion of this is beyond the scope of our topic, but it appears the way Mr Registrar Briggs expressed the threshold test for dealing with a controversial claim at the preliminary stage, will still remain relevant and of practical use.

Interviewed by Lucy Trevelyan.

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

Further Reading

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Practice Note: Removal of voluntary liquidator by general meeting

Practice Note: Convening a creditors' meeting

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First published on LexisPSL Restructuring and Insolvency

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