The Insolvency Act moratorium—Cook v Mortgage Debenture Ltd

In the recent case of Cook v Mortgage Debenture Limited the Court of Appeal discussed the scope of moratorium provisions in Schedule B1 to the Insolvency Act 1986 (IA 1986). Sebastian Clegg, barrister at Deans Court Chambers, who represented the respondent in this appeal, considers the issues before the court and how this decision informs our understanding of the IA 1986 moratorium.

Original news

Cook v Mortgage Debenture Ltd [2016] EWCA Civ 103, [2016] All ER (D) 247 (Feb)

The Court of Appeal, Civil Division, upheld an earlier decision allowing Mr Cook to be joined as a party to proceedings. The judgment considered the construction of the provisions for a moratorium in connection with the administration of a company contained in IA 1986, Sch B1, para 43(6).

What was the background to the appeal?

The underlying proceedings concerned proceedings brought in respect of a loan. Mortgage Debenture Limited (MDL) brought a claim against the defendants alleging certain wrongdoings in relation to the loan. Mr Cook had been involved in advising the defendants at the time of the alleged wrongdoings and his firm had been threatened with legal action by a third party should MDL claim’s succeed. To protect his firm’s position, Mr Cook applied to be joined to proceedings which failed at first instance.

Just before the hearing of that appeal, MDL issued a notice of intention to enter administration and IA 1986, Sch B1, para 43(6) was engaged. HHJ Waksman QC decided that Mr Cook’s appeal was not covered by the moratorium provided by IA 1986, Sch B1, para 43(6), the appeal was successful and Mr Cook was joined into the proceedings. MDL obtained permission from Lewison LJ to appeal the decision that Mr Cook’s appeal was not covered by the moratorium.

What were the legal issues the Court of Appeal had to decide?

The Court of Appeal had to interpret IA 1986, Sch B1, para 43(6) and its scope. The particular question was whether Mr Cook’s appeal before HHJ Waksman QC was covered by the moratorium but this also required consideration of whether Mr Cook’s underlying application to be joined into the proceedings would have been covered by the moratorium.

What were the main legal arguments put forward?

First, the appellant (MDL) argued that the phrase ‘legal process’ used in IA 1986, Sch B1, para 43(6) is very broad in its meaning and is not restricted to a substantive claim. It argued, with reference to Hudson v Gambling Commission (Re Frankice (Golders Green) Ltd) [2010] EWHC 1229 (Ch), [2010] All ER (D) 59 (May), that this includes any procedure that is governed by legal rules and a defined procedure. Second, the appellant argued that the purpose of the moratorium was to give the company a breathing space and so it protects the company just as much against applications brought in proceedings where the company is a claimant as against substantive claims against the company. Third, the appellant argued that an appeal is a separate legal process with a defined beginning and end and is caught by the moratorium irrespective of the underlying application.

I argued on behalf of the respondent, Mr Cook, that the moratorium did not apply to steps of a defensive nature taken in an action brought by a company in administration. I cited Humber & Co v John Griffiths Cycle Co (1901) 85 LT 141 as authority that an appeal could be pursued despite a moratorium. I argued that it was a principle of natural justice that someone should be able to defend themselves when under attack. MDL could have stopped Mr Cook from proceeding simply by discontinuing with its claims against the Chapmans and Basdring.

What did the Court of Appeal decide, and why?

The Court of Appeal decided that neither Mr Cook’s appeal before HHJ Waksman QC nor his underlying application to be joined into MDL’s proceedings was caught by the IA 1986, Sch B1, para 43(6) moratorium. David Richards LJ stated that, as a matter of basic fairness, defendants to proceedings where the claimant is a company in administration should be able to defend themselves without restriction, for example, by serving a defence or participating in a trial. He stated that principle extended to Mr Cook’s application to be joined into the proceedings as he was not seeking any relief against the company but was seeking to be heard on an issue which affected his firm’s interests in possible proceedings that might be brought by a third party. Thus, Mr Cook’s case was to be distinguished from Eastern Holdings Establishment of Vaduz v Singer and Friedlander Ltd [1967] 2 All ER 1192, where the interpleader summons before Buckley J sought, among other things, to bring a company in liquidation into proceedings as a party. Mr Cook’s application had none of the character of legal proceedings against the company. Further, the point that the appeal before HHJ Waksman QC itself was a separate legal proceeding to which the moratorium attached could not stand with the decision in Humber & Co v John Griffiths Cycle Co.

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

The judgment is helpful in clarifying the law because cases such as Re Olympia & York Canary Wharf Ltd [1993] BCLC 453 and Re Frankice (Golders Green) Ltd do appear to apply a very wide definition to the scope of process which may be caught by moratoria. The Court of Appeal has now made clear the importance of considering the quality of the material process and whether it can be said to be ‘against’ the company. David Richards LJ identifies that basic fairness should allow someone to defend their interests if they are under attack by an insolvent company in litigation which the company continues to pursue. The case also provided an opportunity for the Court of Appeal to explain the purposes of liquidation and administration and why moratoria are provided for, with reference to Re Atlantic Computer Systems plc [1992] Ch 505, [1992] 1 All ER 476. The principles laid down in the judgment are applicable not just to administrations but to all insolvency situations where issues of moratorium arise.

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

If you are faced with a legal process which may engage a moratorium in proceedings being pursued by an insolvent company then consider carefully what the nature of the legal process is and what it is trying to achieve. If the material legal process is purely defensive in nature then the moratorium may well not attach to it.

Sebastian Clegg is a barrister at Deans Court Chambers and his practice covers a variety of commercial and chancery work. This principally relates to company/partnership and real property issues but also includes probate and trust work. His company and partnership cases include dissolution and insolvency matters as well as fraud (diversion of profits, breach of covenants and fiduciary duties), minority shareholder’s rights and complex scenarios involving partnership shares and assets.

Interviewed by Janine Isenegger.

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

Further Reading

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 The moratorium in administration

Lifting the administration moratorium—for forfeiture

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First published on LexisPSL Restructuring and Insolvency

 

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