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INSOLVENCY LAW

Bankruptcy is concerned with the insolvency of individuals, and liquidation, or winding-up, with the

insolvency of companies.

BANKRUPTCY

The estate of insolvent individuals is dealt with by the trustee-in-bankruptcy and that of companies

by the liquidator.

Bankruptcy is applicable only to an insolvent individual (X). A licensed insolvency practitioner

(generally one selected by the creditors) is appointed to act as the trustee in bankruptcy, to collect in

the realisable assets belonging to X, convert them to cash and distribute this to the creditors. Once

this process is complete, X is released from any of the debts he incurred up to the date of bankruptcy

if they have not been fully settled in the bankruptcy.

A bankruptcy order is made by the court following presentation of a bankruptcy petition. The rules

are complex, but in essence, a petition can be lodged by X (on grounds that he is unable to pay his

debts), or by an unsecured creditor of X who is owed more than £750 and can demonstrate that X

cannot pay this debt or has no reasonable prospect of doing so.

Effect of bankruptcy

Once the trustee in bankruptcy is appointed, X’s assets vest in him automatically. Where this includes

leasehold property, this automatic assignment does not need the consent of the landlord. It is an

‘excluded assignment’ for the purpose of the Landlord and Tenant (Covenants) Act 1995.

Once the assets have vested in the trustee in bankruptcy, X loses the ability to dispose of them, so Y

should not enter into new contracts with X in relation to his property. Y should deal only with the

trustee in bankruptcy. However, there is limited protection, in the case of registered land, under s 86

of the Land Registration Act 2002, where Y, in good faith, buys the property from X for value without

knowing there has been a bankruptcy petition or order and without these having been registered (as

a notice of restriction) against the title to the property (see Pick v Chief Land Registrar [2011] EWHC

206).

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Powers of trustee in bankruptcy

The trustee in bankruptcy has a wide range of powers (detailed in the IA 1986), enabling him to

manage the assets and eventually sell them. The trustee in bankruptcy must observe any existing

restrictions and covenants which affect existing properties vested in him in this way (eg registered

restrictive covenants affecting the property). This includes paying rent on existing leases. However,

the trustee is not obliged to implement any outstanding contracts (such as sale or purchase contracts),

though he may choose to do so if this is consistent with proper realisation of X’s assets. If the trustee

considers the properties or contracts to be onerous, he can disclaim them (in the same way as a

liquidator, but not other insolvency officials).

Restrictions placed on the bankrupt

During the bankruptcy process there are restrictions both on what X can do and on the action its

creditors may take against X to recover sums due to them or secure performance of obligations. These

restrictions include the following:

(a) Between presentation of the bankruptcy petition and the vesting of the property in

the trustee in bankruptcy, any purported disposition of that property by X is void (IA

1986, s 284(1)) unless it is:

(i) made with the court’s permission or subsequent ratification; or

(ii) a disposition of registered land to a purchaser acting in good faith, for value

and without notice of the presentation of the petition.

(b) Between presentation of the bankruptcy petition and making the bankruptcy order

the court can, if asked, stay any action or legal process brought against X or its

property (IA 1986, s 285(1)).

(c) Once the bankruptcy order has been made, unsecured creditors may not enforce a

remedy against X or its property, or bring any action or legal proceedings against X,

unless they have the leave of the court to do so (IA 1986, s 285(3)). Secured creditors

are not affected by this restriction (IA 1986, s 285(4)).

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BANKRUPTCY PETITIONS: PRELIMINARY

Pursuant to s.264 of IA 1986, a bankruptcy petition may be presented by any of the following:

(1) one of the debtor’s creditors or jointly by more than one of them;

(2) the debtor;

(3) the supervisor of, or any person (other than the debtor) who is bound by, an individual

voluntary arrangement;

(4) the Official Petitioner or any person specified in a criminal bankruptcy order made in

pursuance of s.39(3)(b) of the Powers of the Criminal Courts Act 1973.

Thus, leaving aside criminal bankruptcy orders (which may no longer be made; Criminal Justice Act

1988, s.170(2)), there are three types of bankruptcy orders, there are three types of bankruptcy

petition:

(1) creditor's petition (set out in IA 1986, ss.267-271);

(2) debtor’s petition (set out in IA 1986, ss.272-275);

(3) petition by a supervisor or person bound by an individual voluntary arrangement (IVA) (set

out in IA 1986, s.276.

A bankruptcy petition shall not be presented unless the debtor (IA 1986, s.265(1):

(1) is domiciled in England and Wales; or

(2) is personally present in England and Wales on the day of presentation of the petition; or

(3) at any time within three years ending on the day of presentation has (a) been ordinarily

resident or had a place of residence in England and Wales, or (b) has carried on business in

England and Wales.

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‘Carrying on business’ includes being a member of a firm or partnership and conducting business

through an agent or manager for the debtor or the partnership and conducting business through an

agent or manager for the debtor or the partnership (IA 1986, s.265(2)). For the purpose of calculating

the period of three years a debtor does not cease to carry on business until arrangements have been

made to settle business debts (Theophile v Solicitor General [1950] AC 186; Re a Debtor (784 of 1991)

[1992] Ch 554.

CREDITORS’ PETITIONS

The most common route to bankruptcy is via a creditor’s petition presented pursuant to s267 of IA

1986 which satisfies the following conditions (IA 1986, s.267(2)):

(1) the amount of the debt or debts is equal to or exceeds the bankruptcy level, presently £750

(IA 1986, s.267(4));

(2) the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor (a

petition may be based upon an order for an interim payment under CPR, r.29.5, even where

it was ordered that there be a stay of execution: Maxwell v. Bishopsgate Investment

Management Limited (1993) The Times, 11 February, or one or more of the petitioning

creditors, either immediately or at some time certain, future time and is unsecured;

(3) the debt, or each of the debts, is a debt which the debtor appears either unable to pay or to

have no reasonable prospect of being able to pay; and

(4) there is no outstanding application to set aside a statutory demand served in respect of the

debt or debts.

‘Inability to pay’ is defined as being either:

(1) a statutory demand having been served by the petitioning creditor requiring the debtor to pay

the debt or secure or compound it to the creditor’s satisfaction which statutory demand has

neither been complied with nor set aside in accordance with the Insolvency Rules 1986 (or in

the case of a debt payable in the future that there is a reasonable prospect that the debtor

will be able to pay the debt when it falls due); or

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(2) execution or other process on a judgment or order of the court has been returned unsatisfied

in whole or part.

In most cases the failure of the debtor to pay or secure or compound to the creditor’s satisfaction

within 3 weeks of the service of the statutory demand forms the basis of the bankruptcy petition. In

large part, the practice and procedure relating to the form and content of statutory demands, their

service and applications to set aside are self-contained within Chapter 1 of Part 6 to the Insolvency

Rules 1986 and in the Practice Direction. Written evidence in support of an application to set aside a

statutory demand (CPR PD Insolvency, para. 12.1) and to prove service of a statutory demand (CPR PD

Insolvency, para. 13.1)may be in the form of either an affidavit or a witness statement (CPR PD

Insolvency, para. 13.4).

Form of statutory demand

The IA 1986 requires (IA 1986, s.268(1) and (2)) the service of a statutory demand in the prescribed

form’. There are three forms prescribed in Sch 4 to the Insolvency Rules 1986; Form 6.1 (debt for a

liquidated demand payable immediately), Form 6.2 (debt for a liquidated demand following a

judgment of the court) and form 6.3 (debt payable at a future date). Although r.12.7 of the Insolvency

Rules 1986 states that the forms prescribed in Sch 4 ‘shall’ be used in connection with insolvency

proceedings, the forms may be used ‘with such variations, if any, as the circumstances may require’

(Insolvency Rules 1986, r.12.7(2)). The statutory demand must be dated and signed either by the

creditor or by a person stating himself to be authorised to make the demand on the creditor’s behalf

(Insolvency Rules 1986, r.6.1(1)). The prescribed forms require a signature by an individual who must

state his relationship to the creditor and give the name of his firm.

The statutory demand must:

(1) specify whether it is made under s.268(1) (debt payable immediately) or under s.268(2) (debt

not so payable) (Insolvency Rules 1986, r.6.1(2));

(2) state the amount of the debt and the consideration for it, or if no consideration, the way in

which the debt arises; (Insolvency Rules 1986, r.6.1(3));

(3) if it is a debt payable immediately based upon a judgment or order of the court, it should set

out the details of the judgment order (Insolvency Rules 1986, r.6.1(3)(a)); and

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(4) if it is in respect of a debt payable in the future, it must state the grounds on which it is alleged

that the debtor appears to have no reasonable prospect of paying (Insolvency Rules 1986,

r.6.1(3)(b)).

If the statutory demand includes amounts for charges or interest not previously notified to the debtor

or other charges accruing from time to time, the amount and rate must be identified separately and

the grounds for the claim must be stated. The amount claimed must be limited to that accrued at the

date of the demand (Insolvency Rules 1986, r.6.1(4)). A statutory demand may be in respect of more

than one debt. They must be separately identified and the basis of each set out (Bennett v Filmer

[1998] BPIR 444).

Bankruptcy is a regime for dealing with the unsecured liabilities of a debtor. Thus, a creditor cannot

petition or serve a statutory demand in respect of any element of his debt which is secured. If a

creditor holds security in respect of the debt, the full amount of the debt must be specified, but the

creditor must in demand identify the security and place a value upon it at the date of the demand.

The amount claimed in the statutory demand must be limited to the balance due after giving credit

for the value of the security (Insolvency Rules 1986, r.6.1(5)). ‘Security in respect of the debt’ refers to

security over any property of the debtor and not security provided by a third party (IA 1986, s.383(2)

and Re a Debtor (No 310 of 1988) [1989] 1 WLR 452, Knox J).

The Insolvency Rules 1986 set out further requirements for the information that must be given in a

statutory demand (Insolvency Rules 1986, r.6.2). These include an explanation of the following

matters:

(1) that if the demand is not complied with bankruptcy proceedings may be commenced;

(2) the time within which the demand must be complied with;

(3) the methods of compliance open to the debtor; and

(4) the debtor’s right to apply to the court for the statutory demand to be set aside (Insolvency

Rules 1986, r.6.2(1)).

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The demand must specify one or more individuals with whom the debtor may, if he wishes, enter into

communication in order to secure or compound the debt or establish that there is no reasonable

prospect that the debt will be paid when it falls due (Insolvency Rules 1986, r.6.2(2)).

Service of a statutory demand within the jurisdiction

The creditor is under an overriding obligation to do all that is reasonable for the purpose of bringing

the statutory demand to the attention of the debtor, and if practicable to effect personal service

(Insolvency Rules 1986, r.6.3(2)).

The following specific points are to be noted.

(1) Service by advertisement is permissible where the creditor has a judgment of the court and

believes with reasonable cause that the debtor is avoiding service and there is no real prospect

of the judgment being recovered by execution or other legal process (Insolvency Rules 1986,

r.6.3(3)). There is no statutory form of advertisement. However, para. 11.1 of the Practice

Direction sets out a form which the court will accept.

(2) A statutory demand may be served by insertion through the letter box or by first-class post

(CPR PD Insolvency, para. 11.1). As a statutory demand is an extrajudicial document (Re A

Debtor (No 190 of 1987) (1988) The Times, 21 May (Vinelott J); it is not possible to obtain an

order for substituted service. In all cases where substituted service (which, of course, will be

without an order) is effected, the creditor must have taken all those steps which would justify

the court. However, service may be effected in any of the ways that would justify it making

an order for substituted service of a petition (CPR PD Insolvency, para. 11.3). Upon issuing a

bankruptcy petition, the creditor must file an affidavit of service of the statutory demand.

Failure to comply with the requirements may result in the court declining to issue the petition

(Insolvency Rules 1986, r.6.11(9), CPR PD Insolvency, para. 11.3).

(3) The following steps will in most cases suffice to justify an order for substituted service of a

petition and will suffice for the service of a statutory demand (CPR PD Insolvency, para. 11.4):

(a) one personal call at the place of residence and business of the debtor (or either of

such places as are known),

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(b) that a letter of appointment has been sent at least 2 business days before the

proposed further appointment,

(c) that the letter should state that:

(i) if the appointment time is inconvenient, the debtor should name some other

time and place,

(ii) in the case of a statutory demand that if the debtor fails to keep the

appointment, the creditor proposes to serve either by advertisement, post or

letter box and that the court will subsequently be asked to treat such as

service, and

(iii) in the case of a petition, that if the debtor fails to keep the appointment, the

creditor proposes to apply to the court for an order for substituted service,

(d) that in attending any appointment made by letter, inquiry should be made whether

the debtor has received the previous letters, or if the debtor is away, whether letters

are being forwarded, and

(e) if the debtor is represented by a solicitor, an attempt should be made to arrange

personal service through that solicitor; a statutory demand may be served on a

solicitor (or any other person) who is duly authorised to accept service (Insolvency

Rules 1986, r.6.11(4)).

Where the court makes an order for substituted service of a petition by first-class post, the order will

normally provide that service be deemed to be effected on the seventh day after posting (CPR PD

Insolvency, para. 11.5). The same method of calculating service may be applied to service of a

statutory demand (ibid).

Application to set aside a statutory demand

The debtor may apply within 18 days of service to set aside the statutory demand (Insolvency Rules

1986, r.6.4(1)). The form of application is prescribed Form 6.4. CPR, r.2.8 applies to the computation

of time (Insolvency Rules 1986 (as amended), r.12.9). The date of service of the demand itself does

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not count for the purposes of calculating the 18-day period. Written evidence is required in support

of the application to set aside in Form 6.5 (Paragraph 12.1 of CPR PD Insolvency). It must state the

date upon which the statutory demand came into the debtor’s hands, the grounds for setting aside

and must exhibit a copy of the statutory demand (Insolvency Rules 1986 r.6.4(1)). A letter written to

the court, not in the prescribed form is not an application to set aside (Ayrto v Sovereign Leasing Plc

[1998] BPIR 177, CA). The requirement for ‘written evidence’ allows the evidence to be either in the

form of an affidavit of a witness statement (CPR PD Insolvency, para. 13.4).

Hearing of application to set aside

On receipt of an application to set aside a demand, if the court is satisfied that no sufficient cause is

shown, it may dismiss it without giving notice to the creditor. From the date it is dismissed, time for

compliance with the demand begins to run again (Insolvency Rules 1986 r.6.5(1)). If the application

is not dismissed, the court will give at least 7 days’ notice of a hearing to the debtor, the creditor and

the person named in the demand as being the person to whom the debtor may communicate

concerning the demand (Insolvency Rules 1986 r.6.5(2)). The hearing is a summary hearing (usually

listed for no more than 15 minutes) in which the court will either summarily determine the application

or adjourn it and give directions. There is no requirement under the Insolvency Rules 1986 for the

creditor to serve his evidence before the hearing. If he wishes to oppose the application and to put in

evidence, the directions given will ordinarily provide for a time to serve such evidence with a further

time for the debtor/applicant to put in evidence in reply. The applicant usually has the last

opportunity to put in evidence. In the High Court, at the hearing, the court will usually fix a date and

time for the hearing of the adjourned application.

The court may grant the application to set aside if (Insolvency Rules 1986 r.6.5(4)):

(1) the debtor appears to have a counterclaim, set-off or cross-demand which equals or exceeds

the amount of the debt or debts specified in the statutory demand;

(2) the debt is disputed on grounds which appear to the court to be substantial;

(3) it appears that the creditor holds some security in respect of the debt claimed by the demand,

and either r.6.1(5) (which requires: (a) the demand to specify the nature of the security and

the value that the debtor puts on it at the date of the demand; and (b) the amount of which

payment is claimed shall be the full amount of the debt, less the amount specified as the value

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of the security) is not complied with in respect of it, or the court is satisfied that the value of

the security equals or exceeds the full amount of the debt; or

(4) the court is satisfied, on other grounds, that the demand ought to be set aside.

Where the debtor claims to have a counterclaim, set-off or cross-demand, whether or not he could

have raised it in the action in which the judgment or order was given which equals or exceeds the

amount of the debt or debts specified in the statutory demand, the court will normally set aside the

statutory demand if in its opinion on the evidence there is a genuine triable issue (Paragraph 12.4 of

the Practice Direction). Assuming that the counterclaim, set-off or cross-demand does give rise to a

triable issue, the court will need to assess its potential maximum value. If after giving the debtor credit

for that value the balance is greater than the statutory minimum for a bankruptcy petition (£750),

then the application to set aside will be dismissed (AIB Finance Limited v. Debtors [1997] 4 All ER 677,

Carnwarth J and [1998] BPIR 533, CA).

Where a debtor raises a counterclaim, set off or cross-demand, the creditor may bring into account a

further debt not included within the statutory demand. However, an exception to this principle will

apply where there is an equitable set-off between the total sums claimed by the creditor (including

debts claimed and unclaimed in the statutory demand), for example sums owing under a bank

account(s), and the debtor’s claims, for example for negligent sale of property secured (TSB Bank plc

v Platts [1998] 2 BCLC 1). The rule allows the demand to be set aside in cases where the debtor has a

cross-demand. This would appear to cover those claims that are unrelated to the creditor’s debt in

the statutory demand.

Where the debt, not being the subject of a judgment or order, is disputed, the court will normally set

aside the demand on being satisfied that there is a genuine triable issue (Paragraph 12.4 of the Practice

Direction). The debtor need not go as far as showing that his defence offers a reasonable prospect of

success. If the genuine dispute is not to the whole debt, but merely part, the debtor will be unable to

have the demand set aside unless the undisputed element is less than the statutory minimum (Re A

Debtor (Nos 49 and 50 of 1992) [1995] Ch 66). Where the undisputed element is greater than the

statutory minimum, then the debtor will need to pay compound or secure to the creditor’s satisfaction

the undisputed element.

Whilst there is a conflict of authority on the point, it is generally considered that a statutory demand

cannot be set aside conditionally, for example on payment of money into court or a joint account. In

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Re A Debtor (No 517 of 1991) ((1991) The Times, 25 November) Ferris J ordered a stationary demand

to be set aside on the condition that the sum demanded was paid into a joint account. However, it

has been doubted whether there is jurisdiction conditionally to set aside the statutory demand (see

Re A Debtor (No 90 of 1992) (1993) The Times, 12 July (Knox J) and Re A Debtor (32-SD-91) [1994] BBC

524 (Vinelott J)). In Re A Debtor (No 90 of 1992) Knox J considered that in the context of applications

to set aside statutory demands there was no scope for ‘shadowy defences’ leading to the imposition

of a condition. Either there was a triable issue or there was not. As a matter of practicality, it may be

that some of the difficulties arising from the supposed inability to set aside conditionally may be

surmounted. If the debtor is able to put up the disputed debt by the time of the effective hearing of

the application to set aside, then it is suggested that such payment into, for example, a joint solicitors’

account will constitute the provision of security which ought to lead to setting aside of the demand.

Further, if the court dismisses the application to set aside it shall make an order authorising the

creditor to present a bankruptcy petition forthwith or on or after a date to be specified (Insolvency

Rules 1986 r.6.5(5)). In appropriate cases the court may be invited to order a date for the authorising

of a petition which allows time for the debtor to secure the debt. Should the debt then be secured,

for example by payment into an account before presentation of the petition, then it is suggested that

the creditor would be unable to satisfy the precondition in IA 1986, s267(2)(b) that the debt is

unsecured.

Rule 7.55 of the Insolvency Rules 1986, which provides that no insolvency proceedings shall be

invalidated by reason of any formal defect or irregularity, does not apply to applications to set aside

statutory demands as they are not insolvency proceedings (Re A Debtor (No 190 of 1987) (1988) The

Times, May 21 (Vinelott J); Re A Debtor (No 1 of 1987, Lancaster) [1989] 1 WLR 271, CA). However, a

demand for a wrongly overstated amount will not be set aside solely as a consequence of the

overstatement. It may be set aside where it is perplexing (Re A Debtor (No 1 of 1987, Lancaster) [1989]

1 WLR 271, CA; Re A Debtor (490-SD-1991) [1992] 1 WLR 507 (Hoffman J), not following his previous

decision in Re A Debtor (No 10 of 1988) [1989] 1 WLR 405. Further, the use of the wrong form will not

necessarily lead to the statutory demand being set aside (Cartwright v Staffordshire and Moorlands

District Council [1998] BPIR 328).

Where the statutory demand is based upon a judgment or order, the court will not at this stage go

behind the judgment and inquire into the validity of the debt nor, as a general rule, will it adjourn the

application to await the result of an application to set aside the judgment (Practice Direction, para.

12.3). As a matter of generality, the same Applies to judgments or tax assessments that are under

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appeal (Cartwright v Staffordshire and Moorlands District Council [1998] BPIR 328); Re A Debtor (960-

SD-1992) [1993] STC 218).

It is of no relevance to an application to set aside a statutory demand that the debtor is able to prove

solvency. Whilst such a matter may be of relevance to the question of whether a bankruptcy order

ought to be made, it forms no part of whether the debtor is unable to pay his debts within the meaning

of s.268 of IA 1986.

It is a ground for setting aside the statutory demand if the creditor either omits to value its security in

the statutory demand or the court is satisfied that the value of the security is equal to or greater than

the debt claimed (Insolvency Rules 1986, r.6.5(4)(c)). The proper value to be placed would appear to

be the forced sale value of the property secured (Platts v Western Trust & Savings Limited [1996] BPIR

339, CA). Rule 6.5(5) provides that where the court is satisfied that the security is under-valued, the

creditor may be required to amend its demand accordingly. Security means security over the property

of the debtor and not that of a third party (IA 1986, s.383(2) and Re A Debtor (No 310 of 1988) [1989]

1 WLR 452 (Knox J). It would now appear to be settled that a landlord’s right of re-entry is not a

security (Razzaq v Pala [1997] 1 WLR 1337; Re Park Air Services [1999] 2 WLR 396 HL; Re Lomax Leisure

Limited [1999] 3 All ER 22).

Examples of statutory demands set aside under on other grounds are:

(1) where the undisputed element was slightly over £750 (City Electrical Factors Limited v

Hardingham [1996] BPIR 541);

(2) where the demand was in respect of a statute barred debt (Re A Debtor (50A-SD-1995) [1997]

2 WLR 57; Re Karnos Property Co Ltd [1989] BCLC 340); and

(3) where the demand raised a difficult point of law that could only be resolved at trial (Cala v

Assiudoman (KPS) Harrow Limited [1996] BPIR 245).

Difficult issues arise where the debtor seeks to secure or compound the debt. In Re A Debtor (415-SD

1993) ([1994] 1 WLR 917) Jacob J held that an offer to secure or compound was not a ground for

setting aside the demand. That was a matter for consideration at the hearing of the petition where

the court may consider whether in making a bankruptcy order the creditor has unreasonably declined

an offer to secure or compound the debt under s.271 of IA 1986. He further held that r.6.5(4) was

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designed to deal with procedural matters rather than substantive issues. The point, however, remains

unclear. In Budge v AF Budge (Contractors) Limited, ([1997] BPIR 366) the Court of Appeal suggested

that r.6.4(5) should not be too constricted. Further, the marginal notes to Form 6.5 set out various

grounds for setting aside a statutory demand. These include a ground that the debtor wishes to secure

or compound the debt.

A demand in relation to unpaid professional fees will not be set aside merely on the basis that the

debtor has sought some form of assessment or taxation which may result in the fee being reduced (Re

A Debtor (No 88 of 1991) [1993] Ch 286 (Nicholls V-C); Re A Debtor (No 833 of 1993) [1994] NPC 82. A

statutory demand is not an ‘action’ within the meaning of the s.69 of the Solicitors Act 1974 and so a

solicitor need not wait until the expiry of 1 month from its invoice before serving a demand (Re A

Debtor (No 88 of 1991) [1993] Ch 286).

An appeal against a decision on an application to set aside a statutory demand is not a trial on the

merits. Accordingly, fresh evidence may be adduced and is not subject to the restrictions on the

introduction of such evidence on appeal set out in Ladd v Marshall ([1954] 1 WLR 1489; see Royal

Bank of Scotland v Binnell [1996] BPIR 352; Laurier v United Overseas Bank [1996] BPIR 635; Salvridge

v Hussein [1999] BPIR 410; Purvis v HM Customs and Excise [1999] BPIR 396).

Costs

The use of statutory demands in both personal and corporate insolvency has been described as a high

risk strategy (In Re A Company (No 0012209 of 1991) [1992] 1 WLR 351 per Hoffman J.). Where the

debt is subject to a bona fide dispute, the demand may constitute an abuse of process and its setting

aside may be on terms that the creditor pay the debtor’s costs on an indemnity basis (ibid). Where a

solicitor or a director swears an affidavit in support of a statutory demand or a bankruptcy petition

without adequate grounds for his belief he may be ordered to pay the costs personally (Re A Company

(No 006798 of 1995) [1996] 1 WLR 491; Re A Company (No 003689 of 1998) (1998) The Times, 7

October). Rule 7.33 (as amended) incorporates the costs provisions of CPR Parts 43-48 (save for the

provisions relating to fast-track costs in Part 46). The summary assessment procedure applies to

applications to set aside statutory demands.

CREDITORS’ BANKRUPTCY PETITIONS

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There are three prescribed statutory forms of creditor’s petition set out in Sch 4 to the Insolvency

Rules 1986:

Form 6.7 failure to comply with a statutory demand for a liquidated sum payable immediately;

Form 6.8 failure to comply with a statutory demand for a liquidated sum payable at a future date;

Form 6.9 where execution or other legal process on a judgment has been returned in whole or in

part.

In relation to a petition presented on the basis of an unsatisified execution, this is limited to a return

by the High Court sheriff or county court bailiff. It does not cover other forms of judgment

enforcement such as a garnishee or charging orders (Muir Hunter Personal Insolvency (Sweet &

Maxwell, looseleaf, para. 3-084/2). The usual practice (at least in the High Court) is that the sheriff’s

or bailiff’s return must be produced to the court. It must be shown that there was a serious attempt

to levy execution. A return which simply states that the sheriff or bailiff was unable to gain access will

be insufficient (Re A Debtor (No 340 of 1992) 2 BCLC 171 (Aldous J); [1996] 2 All ER 211, CA).

Formalities

The contents of the petition are prescribed in the relevant form, the Insolvency Rules 1986, rr.6.7 and

6.8 and para. 15 of the Practice Direction. There are a few points to be noted. The title to the petition

need only recite the debtor’s name. Any alias or trading name or names will appear in the body of the

petition (CPR PD Insolvency, para. 15.1). Where the petition is based upon a statutory demand, only

the debt claimed in the demand may be included (CPR PD Insolvency, para. 15.2). A creditor cannot

claim in the petition a greater sum than that included in the demand, for example, by including interest

accrued from the date of the demand (Insolvency Rules 1986, r.6.8(1)(c)). However, r.7.55 may save

a petition from being dismissed where it irregularly includes post statutory demand interest (Re A

Debtor (No 510 of 1997) (1998) The Times, 18 June.

The petition must set out the date of service of the demand (CPR PD Insolvency, para. 15.5). In the

case of personal service, the date of service as set out in the affidavit of service should be recited and

whether service is effected before or after 5 pm on Monday to Friday or at any time on a Saturday or

a Sunday (See CPR Part 6.7(2) and (3)). In the case of substituted service (other than by advertisement)

the date alleged in the affidavit of service should be recited. This will usually be 7 days after posting

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or being inserted in the letter box. In the case of substituted service by advertisement (under r.6.3);

it will be the date of the advertisement or, as the case may be, the first advertisement.

Where the petition is based on a statutory demand that is based upon a county court judgment there

will need to be endorsed on the petition a certificate stating:

‘I/We certify that on the day of 19 I/We attended on the county court and was/were

informed by an officer of the court that no money had been paid into court in the action or

matter [name] v [name] [claim number] pursuant to the statutory demand.’ (CPR PD

Insolvency, para. 15.7(2)).

The endorsement is not required if the petition is additionally based upon a debt over £750 which is

not the subject of a county court judgment.

Where a petition contains a request for the appointment as trustee in bankruptcy of a person who

was the former supervisor of an individual voluntary arrangement of the debtor, the proposed

appointee, not less than 2 days before the hearing of the petition must file in court a report giving

particulars of the date on which he gave written notice to those creditors bound by the arrangement

of his intention to seek appointment (such a date to be at least 10 days before the day on which the

report is filed) and details of any responses (Insolvency Rules 1986, r.6.10(6)).

Issue of petition

The petition is issued in the High Court in the following cases (Insolvency Rules 1986, r.6.9(1)):

(1) if the petition is presented by a Minister of the Crown or a government department and it is

based either on a statutory demand which has specified an intention to petition in that court

or on an unsatisfied execution;

(2) if the debtor has resided or carried on business within the London insolvency district for the

greater part of the 6 months immediately preceding the presentation of the petition, or for a

longer period in those 6 Mondays than any other insolvency district;

(3) the debtor is not resident in England and Wales; and

(4) the petitioner is unable to ascertain the residence or place of business of the debtor.

16

In any other case the petition is presented in the county court for the insolvency district in which the

debtor has resided or carried on business for the longest period during those 6 months (Insolvency

Rules 1986, r.6.9(2)). If he has carried on business in one district and resided in another, the petition

is presented to the court for the insolvency district in which he has resided (Insolvency Rules 1986,

r.6.9(2)). If he has carried on business in more than one district in the 6-month period, the petition is

presented to the court for the insolvency district which is or has been his principal place of business

for the longest time (Insolvency Rules 1986, r.6.9(4)). Where an individual voluntary arrangement is

in force, it is presented to the court to which the nominee’s report was submitted (Insolvency Rules

1986, r.6.9(4A). It is not clear whether this rule only applies to a petition presented under s.264(1)(c)

of IA 1986 – a supervisor or a person bound by an individual voluntary arrangement (IVA). Whilst the

rule does not expressly state this, the better view is that it is so limited. A post IVA creditor may have

no knowledge of the individual voluntary arrangement). If the petition is presented in the wrong

court, the court has the power under r.7.12 of the Insolvency Rules 1986 to transfer it or to order that

the proceedings continue in the court in which they have been commenced.

To issue a petition there must be presented to the court (Insolvency Rules 1986, r.6.10):

(1) the petition verified by an affidavit or witness statement verified by a statement of truth; (in

accordance with rr.6.12(1) and 7.57(5));

(2) where the petition is based upon the statutory demand, an affidavit (or witness statement

verified by a statement of truth) of service of the demand exhibiting a copy of the petition;

(3) the court issue fee plus the deposit for the official receiver’s fees; if a bankruptcy order is not

made, the deposit will be returned; or

(4) sufficient copies of the petition must be filed for service on the debtor and on the supervisor

of any individual voluntary arrangement that is in force (Insolvency Rules 1986, r.6.10(3)).

There are prescribed forms of affidavit of service of the demand. Form 6.11 sets out the form for

personal service. Form 6.12 sets out the form for substituted service. Where the demand has been

acknowledged (however served) the acknowledgement must be exhibited to the affidavit (Insolvency

Rules 1986, r.6.11(4)). If the demand has been neither personally served nor acknowledged, the

affidavit of service must set out the steps taken to serve the debtor personally and state the means

whereby it was sought to bring the demand to the debtor’s attention and it must specify a date by

17

which (to the best of the knowledge, information and belief of the deponent) the demand will have

come to the debtor’s attention. (Insolvency Rules 1986, r.6.11(5)). The date specified will be deemed

to be the date of service unless the court orders otherwise (Insolvency Rules 1986, r.6.11(7)).

However, the court may decline to file a petition if not satisfied that the creditor has not discharged

the obligation to do all that is reasonable to bring the demand to the debtor’s attention (Insolvency

Rules 1986, r.6.11(7)) if there is a delay of more than 4 months between the service of the statutory

demand and the presentation of the petition, the reasons for the delay must be explained in the

affidavit verifying the petition (Insolvency Rules 1986, r.6.12(7)).

Service of the petition

As with statutory demands, the overriding requirement is to effect personal service on the debtor

(Insolvency Rules 1986, r.6.14(1)). If the court is satisfied by affidavit or other evidence on oath that

the debtor is keeping out of the way to avoid service, or for any other cause, I understand that may

order substituted service of the petition. Paragraph 11.4 of the Practice Direction (Insolvency Rules

1986, r.6.14(2)) sets out the attempts personally to serve which will usually be required to justify an

order for substituted. Service of the petition will need to be proved by an affidavit or witness

statement verified by a statement of truth exhibiting a copy of the petition and (in cases where

substituted service of the petition has been ordered, a copy of the order) (Insolvency Rules 1986,

r.6.15).

Matters before the hearing of the petition

There are various matters over which the court has jurisdiction prior to the hearing of the petition.

The most important are as follows.

Consensual dismissal or withdrawal of the petition with leave

A petition cannot be withdrawn save with leave of the court (IA 1986, s.266(2)). The most likely

circumstance for an application for leave to withdraw will be a case in which the petition debt has

been paid or terms of settlement have been agreed. The debtor may want to get rid of the petition

as soon as possible for a number of reasons. First, whilst the petition is alive, other creditors may give

notice of support and seek to be substituted for the original petitioning creditor. Secondly, should

this come about and a bankruptcy order subsequently be made on the petition, any payment by the

debtor from his own monies to the creditor after presentation of the petition in an attempt to see off

18

the petition will be void (IA 1986, s.284). Thirdly, in the event of a bankruptcy order on the petition,

the debtor’s ordinary payments during the pendency of the petition will be void (ibid) unless validated

by the court.

Where the petitioner applies to the court for the petition to be dismissed or withdrawn, he must

(unless the court requires otherwise) file an affidavit setting out the grounds of the application and

the circumstances in which it is made (Insolvency Rules 1986, r.6.32). If, since presentation of the

petition, payment has been made, the affidavit must set out what dispositions have been made for

the purposes of the settlement, whether any dispositions were of the debtor and whether any

disposition of the debtor’s property was made with leave of the court.

The court cannot give leave to withdraw the petition before it is heard (Insolvency Rules 1986,

r.6.32(3)). In practice, the High Court will permit withdrawal of the petition before service and will

order it to be dismissed after service. Ordinarily, the court will dispense with the detailed affidavit

where there are no creditors who have given notice supporting the petition. Such orders may be

made without attendance (Practice Direction, para. 16.3(2)). Where a petition is withdrawn or

dismissed after payment of the petitioning debt, the petitioning creditor will usually be entitled to an

order for costs (Re A Debtor (No 510 of 1997) (1998) The Times, 18 June).

Non-consensual dismissal

The court may dismiss a petition (IA 1986, s.266), for example for want of prosecution (TSB Bank v

Platts [1997] BPIR 151).

Disclosure and further information

Any party to insolvency proceedings may apply to the court for an order for clarification and further

information in accordance with CPR Part 18 and for disclosure in accordance with CPR Part 31

(Insolvency Rules 1986, r.7.60 (as amended). For an example of the use of this provision, see Re

Primlaks (UK) Limited (No 2) [1990] BCLC 234).

Security for costs

Rule 7.51 (as amended) incorporates the provisions of the CPR into insolvency proceedings, save

insofar as inconsistent with the Insolvency Rules 1986. Thus, the provisions of CPR, r.25.12-25.15

19

apply. Accordingly, the principles upon which the court will ordinarily order a claimant to proceedings

to provide security will apply to petitions. It would also appear that s.726 of CA 1985, which provides

that a limited company plaintiff to legal proceedings may be required to give security, also applies. In

addition to these provisions, in relation to petitions presented in respect of debts payable in the

future, the petitioner may be required to give security for the debtor’s costs (Insolvency Rules 1986,

r.6.17).

Hearing of the Petition

Ordinarily, the petition will not be heard until at least 14 days after service on the debtor, subject to

expedition in appropriate cases or where the debtor has absconded. The persons who may appear on

the hearing of the petition are the petitioner, the debtor, the supervisor of any individual voluntary

arrangement in force and any creditor who has given notice of intention to appear. A creditor who

has not given notice may appear with the leave of the court.

A debtor intending to oppose the petition must (not later than 7 days before the day fixed for the

hearing) file in court a notice specifying the grounds on which he will object to the making of the

bankruptcy order and he must send a copy to the petitioner (Insolvency Rules 1986, r.6.21). The

Insolvency Rules 1986 provide no penal sanction for non-compliance with this rule. Failure to serve a

notice probably amounts to an irregularity under r.7.55, which may be waived.

The court will not make a bankruptcy order unless it is satisfied that the debt or one of the debts in

respect of which the petition was presented is either (IA 1986, s.271(1)):

(1) a debt, having been payable at the date of presentation or having become payable, has been

neither paid (It would seem that payment by a debtor out of his own money after presentation

of the petition in a case where there are supporting creditors will not prevent the making of

a bankruptcy order: Smith v Ian Simpson and Company [2000] 3 WLR 495), nor secured or

compounded for; or

(2) a debt which the debtor has no reasonable prospect of being able to pay when it falls due.

The court may dismiss the petition if it is satisfied that the debtor is able to pay all his debts (including

contingent and prospective liabilities) or is satisfied that the debtor has made an offer to secure or

compound the petition debt, that the acceptance of the offer would have required the dismissal of

20

the petition and that the creditor has unreasonably refused (IA 1986, s.271(3). It will not be

unreasonable for a petitioning creditor to refuse to accept payment where there are supporting

creditors who obtain a bankruptcy order: Smith v Ian Simpson and Company [2000] 3 WLR 495).

The following points are to be noted.

(1) The discretion whether or not to make a bankruptcy order is wider than the matters

considered on an application to set aside a statutory demand. It would appear that a debtor

is not prevented from repeating at the hearing of the petition those arguments that were

unsuccessful at the application to set aside the demand (Erberhardt v Mair [1995] 1 WLR 1180.

However, see Brillouet v Hachette Magazines Limited [1996] BPIR 518).

(2) The burden of satisfying the court of the matters in s.271(1) lies with the creditor. The burden

of satisfying the court to apply s.271(3) lies with the debtor.

(3) Unreasonable refusal has been held to mean a refusal which is beyond the range of any

possible reasonable reaction in the circumstances (Re A Debtor (No 32 of 1993) [1994] 1 WLR

899 (Timothy Lloyd QC)). A creditor is entitled to have regard to his own interest. Acting

reasonably is not the same as acting justly, kindly or fairly (IRC v A Debtor [1995] BCC 971

(Robert Walker J).

(4) A creditor who was capable of voting down a proposal for an individual voluntary arrangement

could be held to have acted unreasonably for the purposes of s.271(3) (Re A Debtor (No 2389

of 1989) [1991] Ch 326 (Vinelott J).

(5) The court may make a bankruptcy order if satisfied that the statements in the petition are

true and the petition debt has not been paid, secured or compounded for (Insolvency Rules

1986, r.6.25(1)). The rule requires the court to investigate the statements in the petition

including the underlying debt (See Muir Hunter, para. 7-121). Where the debt is disputed, the

court may give directions for service of evidence, disclosure and for deponents to attend for

cross-examination.

(6) If the petition is brought in respect of a judgment the court may stay or dismiss the petition

on the ground that an appeal is pending or that execution has been stayed (Insolvency Rules

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1986, r.6.25(2)). A petition may not be dismissed solely on the grounds that the debt is

overstated (Insolvency Rules 1986, r.6.25(3)).

It is of note that whilst the court will usually not set aside a statutory demand where there is an appeal

pending, it may stay or dismiss the petition in cases where the appeal is genuine (Re A Debtor (No 799

of 1994), ex parte Cobbs Property Services [1995] 1 WLR 467). If the petitioning creditor fails to appear

at the hearing of the petition, he shall not be entitled to present another petition in respect of the

same debt without leave of the court (Insolvency Rules 1986, r.6.26). If the petition has not been

served by the hearing date, the petitioner may apply for an extension stating the reasons why the

petition has not been served (Insolvency Rules 1986, r.6.28). If an application for an extension is made

less than 2 clear working days before the hearing date, the costs of the application will be disallowed.

If the petition has not been served and no one attends, the petition will be re-listed for 21 days later.

Written evidence will need to be filed by the petitioner explaining the reasons for the delay and the

non-attendance and giving reasons why the petition ought not to be dismissed (CPR PD Insolvency,

para. 14). The petitioning creditor or his solicitors should attend the court to ascertain whether the

application has reached the file. It should not be presumed that an extension would be granted (CPR

PD Insolvency, para. 14(3)).

Adjournment, substitution and change of carriage of petition

The court has the power to adjourn the hearing of the petition (Insolvency Rules 1986, r.6.29), but

repeated adjournments to allow the debtor to make payments by instalments are improper. The

petitioner is entitled to have his debt paid in full, or alternatively secured or compounded to his

reasonable satisfaction. Adjournments to enable payment ought ordinarily to be granted only on the

basis that there is a reasonable prospect of payment within a reasonable time (Re Gilmartin [1989] 1

WLR 513; Judd v Williams [1998] BPIR 88).

There are two separate provisions in rr.6.30 and 6.31 of the Insolvency Rules 1986 allowing supporting

creditors to take over a petition in circumstances where the original petitioning creditor is either found

not entitled to continue with his petition or for a variety of reasons does not proceed with it. The

advantages to a supporting creditor of proceeding under the existing petition rather than starting

afresh are that:

(1) any payments made during the pendency of the petition will be void unless the court orders

otherwise (IA 1986, s.284);

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(2) the relevant time for attacking transactions at undervalue or preferences is determined by

reference to the date of presentation of the petition which results in the bankruptcy order

being made (IA 1986, s.341); and

(3) the earlier the date, the more antecedent transactions that may be caught; and

(4) time and costs are saved.

Where a petitioner is found not entitled to petition or consents to withdraw the petition or allows it

to be dismissed or consents to adjournment or fails to appear or does not seek a bankruptcy order,

then a supporting creditor may apply for substitution, provided he satisfies three conditions

((Insolvency Rules 1986, r.6.30):

(1) he has given notice of intention to appear pursuant to r.6.23;

(2) he wants to prosecute the petition; and

(3) he was at the date when the petition was presented, in a position to present its own petition.

Therefore, a substituting creditor must either have served a statutory demand more than 21 days

before the petition in respect of which there was no outstanding application to set aside or had an

unsatisfied sheriff’s return. Should an order for substitution be made, then the petition will need to

be amended to include the details of the substituted debt re-verified and re-reserved.

As an alternative to substitution, the court may authorise a supporting creditor to have the carriage

of the petition in place of the original petitioner (Insolvency Rules 1986, r.6.31). If an application is

successful, the petition is not amended, but is proceeded with in its original form by the ‘new’

petitioner. The petition is prosecuted on its original basis. The applicant must have served notice of

support (Insolvency Rules 1986, r.6.23) and must be an unpaid and unsecured creditor (Insolvency

Rules 1986, r.6.31(2)(a)). The court may order a change in carriage of the petition where the petitioner

intends to secure the postponement, adjournment or withdrawal of the petition or does not intend

to prosecute it diligently or at all (Insolvency Rules 1986, r.6.31(2)(b)). Whilst r.6.31 contains none of

the restrictions as to the ability of the new petitioner to present its own petition, it provides in para.

(3) that no order shall be made if the petitioner’s debt has been paid, secured or compounded for by

23

either a disposition by a third party or a disposition by the debtor which has been ratified by the court

(IA 1986, s.284).

Making of a bankruptcy order

Where a bankruptcy order is made, it will be settled by the court and will state the date of presentation

of the petition and the time and date of the order (Insolvency Rules 1986, r.6.33). The usual order as

to costs is that the petitioning creditor’s costs be paid as an expense of the bankruptcy. If the debt is

paid before the hearing of the petition, the petitioner will be entitled to his costs unless defects in the

proceedings added to the debtor’s costs (Re A Debtor (No 510 of 1997), (1998) The Times, 18 June.

Once the bankruptcy order is made, copies are sent by the court to the official receiver who sends a

copy to the debtor. The official receiver sends a copy to the Chief Land Registrar (Insolvency Rules

1986, r.6.34).

DEBTOR’S BANKRUPTCY PETITIONS

A debtor may present his own bankruptcy petition on the sole ground that he is unable to pay his own

debts (IA 1986, s.272). The petition is to be accompanied by a statement of affairs, verified by affidavit

(Insolvency Rules 1986, r.6.41. It would seem that a witness statement verified by a statement of

truth is permissible: see Insolvency Rules 1986, r.7.57(5) and (6) (as amended)). Inability to pay debts

has been held to mean an inability to pay debts as they fall due. It is not a book debt value of assets

(Re Coney [1998] BPIR 333. It may be an abuse of process for a debtor to present a bankruptcy petition

with a view to avoiding the claims of a former spouse in matrimonial proceedings (Woodley v Woodley

(No 1) [1992] 2 FLR 417; Woodley v Woodley (No 2) [1994] 1 WLR 1167.

The petition must contain details of any previous bankruptcy, composition with creditors, individual

voluntary arrangement or administration order within the meaning of the CCA 1984 within the last 5

years (Insolvency Rules 1986, r.6.39(2)). If there is a current individual voluntary arrangement in force,

the petition must give details of the supervisor (Insolvency Rules 1986, r.6.39(3)). The petition is filed

in the same court as applies to the setting aside of a statutory demand (as set out in the Insolvency

Rules 1986, r.6.4(2), save that where there is an individual voluntary arrangement in force the petition

is presented to the court in which the nominee’s report was filed (Insolvency Rules 1986, r.6.40(3A).

Save where there is an individual voluntary arrangement in force, the petition will be heard forthwith.

Where there is an individual voluntary arrangement, a copy of the petition will be served on the

24

supervisor on at least 14 days’ notice. The supervisor may appear at the hearing (Insolvency Rules

1986, r.6.42(2A).

The court will not make a bankruptcy order where (Insolvency Rules 1986, r.6.42(2A):

(1) the unsecured bankruptcy debts are less than the small bankruptcy level (£20,000);

(2) the value of the bankruptcy’s estate would be equal to or more than the minimum amount

(£2,000);

(3) within 5 years before the presentation of the petition the debtor had not been adjudged

bankrupt or made a composition with creditors or a scheme of arrangement; and

(4) it would be appropriate to appoint an insolvency practitioner to prepare a report (IA 1986,

s.274).

If the court considers it appropriate, an insolvency practitioner will be appointed to prepare a report

and to act in relation to any individual voluntary arrangement to which the report relates either as

trustee or as supervisor (IA 1986, s.273(2)). On considering the report, the court may make an interim

order (IA 1986, s.252) to facilitate an individual voluntary arrangement proposal or it may make a

bankruptcy order. The debtor is entitled to appear at the hearing of the petition at which the

insolvency practitioner’s report is considered (Insolvency Rules 1986, r.6.44).

The court may grant a certificate for summary administration of the bankrupt’s estate if the aggregate

unsecured debts are less than the small bankruptcy level and within 5 years before the presentation

of the petition of the debtor has not been adjudged bankrupt or made a composition with creditors

or a scheme of arrangement (IA 1986, s.275).

PETITION BY SUPERVISORS AND PERSONS BOUND BY INDIVIDUAL VOLUNTARY ARRANGEMENTS

A bankruptcy petition may be presented by the supervisor of, or any other person (other than the

debtor), who is for the time being bound by an individual voluntary arrangement (IVA) (Pursuant to

s.264(1)(c) of IA 1986. A debtor who is subject to an IVA who wishes to present his own petition must

file a debtor’s petition pursuant to s.272 of IA 1986 and serve it on his supervisor pursuant to

25

Insolvency Rules 1986, r.6.40). The court shall not make a bankruptcy order on a petition by such

person unless it is satisfied (IA 1986, s.276(1)):

(1) that the debtor has failed to comply with his obligations under the voluntary arrangement; or

(2) that information which was false or misleading in any material particular or which contained

material omissions was contained in the statement of affairs or other document put to

creditors in the consideration of his proposal for an IVA or was made at, or in connection with

the creditors meeting at which it was considered; or

(3) the debtor has failed to do all such things as may for the purposes of the IVA have been

reasonably required of him by the supervisor.

Form 6.10 in Sch 4 to IA 1986 sets out a prescribed form for a petition under this section. It should be

noted from the form that there is no requirement for the prior service of a statutory demand. That is

only required as a preliminary to a creditor’s petition. The form requires details to be provided of the

default in connection with the IVA upon which the petition is based.

The Insolvency Rules provide (Insolvency Rules 1986, r.6.6) that the rules relating to creditor’s

petitions (contained in Chapter 2 of the Insolvency Rules 1986) shall apply to a petition under

s.264(1)(c) of IA 1986 with any necessary modification. The procedure in creditor’s petitioners relating

to filing, verification, service, the hearing of the petition and substitution would apply. The provision

relating to statutory demands would not. It has been held that (unlike a creditor’s petition for a debt

which has been before the hearing of the petition) the court retains a jurisdiction to make a

bankruptcy order on a supervisor’s petition where the complained of default has been remedied

before the hearing of that petition (Peat v Carter-Knight (2000) The Times, 11 August).

TYPES OF INSOLVENCY ACTIONS

Compulsory Winding Up

A compulsory winding-up usually begins with a petition presented by the company, its directors, one

or more creditors or one or more contributories (Section 124). In the meantime, proceedings pending

against the company may be stayed or restrained (Section 126) and there are further powers regarding

the protection of the company’s property after the commencement of a winding-up (Section 127,

26

discussed at 19.69-19.80) and the control of proceedings against the company after the order has

been made (Section 130(2)). There may then follow an investigation of the company’s affairs and an

examination of its officers by the official receiver (Sections 131-134). The court may appoint a

provisional liquidator (Section 135) before meetings are held by creditors and contributories

separately for the appointment of a liquidator and for the (optional) appointment of a liquidation

committee (Sections 139 and 141). The liquidator’s function is to get in, realise and distribute the

company’s property and to co-operate where necessary with the official receiver (Section 143). Upon

the conclusion of the winding-up, the liquidator summons a final meeting of the creditors to receive

his report and release him (Section 146). After its winding-up, the company is formally dissolved

(Section 201 et seq).

Voluntary Arrangements

Voluntary arrangements are schemes for the composition of indebtedness that are an alternative to

bankruptcy and liquidation (Hence they are taken before these procedures in the Insolvency Act and

also do not require the company or individual to be insolvent as defined by the Act) and that, by pre-

empting the latter procedures, are designed to salvage a debtor in financial distress. Corporate

voluntary arrangements (CVAs) have proved to be less successful than individual voluntary

arrangements (IVAs).

CVAs

The rules concerning CVAs are in part I of the Insolvency Act. A CVA is a matter of contract for those

party to it (Johnson v Davies [1998] EWCA Civ 483, [1999] Ch 117) and need not entail a composition

of claims (see Commissioners of Inland Revenue v Adam & Partners [2001] 1 BCLC 222, CA). Except for

small companies, a CVA does not impose a moratorium on proceedings against the company (see

Alman v Approach Housing Ltd [2001] BCLC 530) or on the exercise of rights by secured creditors. Prior

to liquidation and administration, only the directors of the company, and not the members or

creditors, may propose an arrangement (Section 1(1), (3)), and thereafter only liquidators and

administrators may do so. In the case of a directors’ proposal, a nominee will be appointed to

supervise the arrangement and may act in the character of ‘trustee or otherwise’ (Section 1(2). The

conduct of the supervisor is open to review and the supervisor himself may apply for directions: s 7.

Whether there is a trust over the CVA moneys is, like the range of assets included in the CVA, a matter

of construction of the CVA: Re Kudos Glass Ltd [2001] 1 BCLC 390; NT Gallagher & Son Ltd v Tomlinson

[2002] EWCA Civ 404, [2002] 1 WLR 2380). This nominee is obliged first to report to the court

27

(members and unsecured creditors may challenge the arrangement in court where there has been

unfair prejudice or material irregularity in the conduct of meetings: s 6) before summoning separate

meetings of the company’s members and all of its creditors (Sections 2-3, Creditors include those with

contingent and unquantified claims: Doorbar v Alltime Securities Ltd [1996] 1 WLR 456, CA).

Liquidators and administrators may proceed directly to the summoning of the meetings (Section 3(2)).

An agreed arrangement, which turns upon majority voting (Rule 1.19 (three-quarters in value of debt

owed to creditors present in person or by proxy and voting; r 1.20 (one-half in value of members

present in person or by proxy and voting) binds all of the company’s members and its creditors with

notice of this meeting (Section 5(2)(b)). Nevertheless, the concurrence of secured creditors (who do

not include landlords forfeiting a lease: Razzaq v Pala [1997] 1 WLR 1336 (which is consistent with Re

Park Air Services plc [2000] 2 AC 172, HL). See also Thomas v Ken Thomas Ltd [2006] EWCA Civ 1054

[2007] Bus LR 429, from which may be inferred that the owner of goods the subject of a finance or

equipment lease is an unsecured creditor for present purposes) and of preference creditors is required

if their rights are to be affected by the arrangement (Section 4(3), (4)), which reveals the limitations

of the CVA process. The two meetings of members and creditors must approve the same arrangement

(Section 5(1) (modifications to proposed scheme). For the power of the court to reconcile differences

between the two meetings, see Insolvency Act (as amended by Sch 2 to the Insolvency Act 2000), s

4A). For small companies, the above moratorium is available. A small company is one that meets at

least two of the requirements for a small company laid down in the Companies Act 2006 (Section

382(3)).

For companies other than small companies, the prospects of an arrangement are improved in the case

of administration and liquidation by the moratorium on the taking of proceedings and (in the case of

administration only) the enforcement of security against the company.

IVAs

The rules concerning IVAs (certain changes were introduced by Sch 3 to the Insolvency Act 2000 and,

for post-bankruptcy IVAs, the Enterprise Act 2000 (s 264, amending the Insolvency Act, creating a fast-

track procedure where the Official Receiver is the nominee), which have proved to be popular with

debtors and to leave creditors with more than the bankruptcy process, are to be found in Part VIII of

the Act (The procedure under the Deeds of Arrangement Act 1914 is different and mutually exclusive

(s 260(3) of the 1986 Act) and, though still extant, barely used). They are mutatis mutandis the same

as for CVAs. In those cases where an application is made for an interim order and is pending, there is

a moratorium in the form of a stay of proceedings (Section 254). This is followed by the order itself

28

whose effect is to prevent or discontinue bankruptcy petitions and to require the leave of the court

for other proceedings, legal process and execution against the debtor or his property (Section 252.

The Insolvency Act 2000 extended this to include the levying of distress and re-entry by the landlord.

For the assets subject to an IVA, see Welburn v Dibb Lupton Broomhead [2002] EWCA Civ 1601, [2003]

BPIR 768). The debtor himself may apply for an interim order, as well as, in the case of an undischarged

bankrupt, his trustee or the official receiver (Section 253(3)). A nominee must be appointed to act as

trustee or otherwise supervise the arrangement (Section 253(2)). There follows the nominee’s report,

a summoning of a meeting of creditors if the report favours this and a decision of the meeting (Sections

256-258).

Other insolvency procedures for company debtors: receivership and administration

Receivers

Receivership, and its sub-category, administrative receivership, are dealt with at length in the

Insolvency Act. A standard bank debenture (The statutory power of a chargee or mortgagee to

appoint a receiver under ss 101 and 109 of the Law of Property Act 1925 is very similar) will authorise

the creditor in stated circumstances, under the terms of an irrevocable power of attorney, to act in

the name of the company by appointing a receiver whose function is to pay down the debt. The

creditor is entitled to pursue self-interest when exercising this power (Shamji v Johnson Matthey

[1986] BCLC 278, CA). Unlike most other legal systems, English law permits secured creditors to take

steps to enforce their rights with minimal interference from company liquidators and trustees-in-

bankruptcy. Whilst advancing the creditor’s self-interest, receivership is widely credited as having

saved many businesses. The receiver will be given broad powers of management in the debentures,

which are presumed by the Act in the case of administrative receivership (See s 42 and Sch 1). The

receiver acts as the agent of the company (it is an unusual type of agency: Gomba Holdings UK Ltd v

Minories Finance Ltd [1989] BCLC 115, 117, CA. Under s 109(2) of the Law of Property Act 1925, a

receiver appointed thereunder is also the agent of the mortgagor or chargor), which the Act explicitly

treats as being the case for administrative receivers prior to the liquidation of the company (Section

44(1)(a)). Administrative receivers are those appointed pursuant to a debenture secured by a charge

or charges, including a floating charge, extending to at least substantially the whole of a company’s

property (a qualifying charge) (Section 29(2)). They have special powers of contracting and of

investigation which takes them out of the realm or ordinary debt enforcement, hence their prominent

treatment in insolvency legislation. Since the Enterprise Act 2002, an administrative receiver may be

appointed only in the case of designated transactions (Section 249, adding ss 72B-G of the Insolvency

29

Act (major capital market and financial market transactions, utility transactions and public-private

finance transactions).

Administrators

Initially, administrators were appointed only by the court. Since the Enterprise Act (see now Sch B1

of the Insolvency Act), they may now also be appointed out of court by the holder of a qualifying

charge, defined as required for administrative receivership, empowered expressly or impliedly to do

so by the company (Schedule B1, para 14). Administrators may also be appointed by the debtor

company or its directors. In all cases, the administrator is an officer of the court (Schedule B1, para

5). The purpose of administration is, in order, first, to rescue the company as a going concern,

secondly, to achieve a better result for the creditors as a whole than liquidation; thirdly to realise

property for distribution to secured or preference creditors (Schedule B1, para 3(1). For the use of

administration to reorganise a business, see Re British American Racing (Holdings) Ltd [2004] EWHC

2947 (Ch), [2005] 2 BCLC 324. Administrators are empowered to distribute to secured and preferential

creditors and, usually with the leave of the court, to other creditors: Schedule B1, paras 65-66:

Insolvency Rules, rr 2.68-2.71). Since the salvage of value depends heavily on an administrator’s speed

of action, it is common for administrators to be appointed with a pre-packaged plan of action, which

at times has given rise to judicial concerns about the possibilities of abuse (e.g., Re Kayley Vending Ltd

[2009] EWHC 904 (Ch), at [2]; Clydesdale Financial Services Ltd v Smailes [2009] EWHC 1745 (Ch), at

[6]).

Administrators are appointed by the court if the company is unable to pay its debts and if the court is

satisfied that one or other purpose of administration will be served by the appointment (Schedule B1,

para 11). They may be appointed by the holder of a qualifying charge if it provides for the appointment

of an administrator (or an administrative receiver). The power of a company or its directors to appoint

an administrator is essentially unrestricted (Schedule B1, para 22), except that the floating chargee is

in the driving seat and can pre-empt an appointment by either of the other two means (Schedule B1,

para 7 (and the floating chargee’s ability to move at speed). Administrators appointed out of court

under a qualifying charge are required to exercise their functions in the interests of creditors as whole

(Schedule B1, para 3) and have certain responsibilities when carrying out their functions and reporting

to creditors. Nevertheless, there is likely to be little practical difference in outcome between

administrative receivership and an out of court administration.

THE INSOLVENT’S ESTATE

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Prior to any distribution, the insolvent’s estate must first be gathered in (for the powers of

administrative receivers, administrators and liquidators to take possession of company property and

its papers, see s 234 and Walker Morris v Khalastchi [2001] 1 BCLC 1. For bankruptcy, see s 312). The

property of bankrupt individuals first vests automatically in the trustee upon his appointment taking

effect (Section 306. This vesting rule is compatible with the European Convention on Human Rights:

Young v Official Receiver [2010] EWHC 1591 (Ch), [2010] BPIR 1477. As in the case of a winding-up,

the property of the bankrupt will be impressed with a trust in favour of his creditors: Ayerst v C&K

(Construction) Ltd [1976] AC 167l HL; Re Yagerphone Ltd [1935] Ch 392; Re MC Bacon Ltd [1991] Ch

127). Bankruptcy differs from liquidation in that a portion of the property of the bankrupt is retained

for his beneficial enjoyment and does not vest in the trustee (namely, essential personal and

vocational items (s 283) and personal rights of action: discussed at 19.34. With regard to the

bankrupt’s home, see ss 283A (vesting the property interest in the bankrupt after three years if the

trustee does not realise the interest) and 313A (low value homes) of the Insolvency Act). The property

of the company does not vest in an administrator, nor does it vest in an administrative receiver, both

of whom enjoy broad powers in respect of the property.

The ‘property’ of the insolvent

Under section 436, the word ‘property’ embraces ‘every description of property wherever situated

and also obligations and every description of interest, whether present or future or vested or

contingent, arising out of, or incidental to, property’ (that value may be indirectly realised. See Re Rae

[1995] BCC 102 (fishing licences terminated on bankruptcy but the Ministry recognised bankrupt’s

‘entitlement’ to apply for new licences). It is hard to imagine a wider definition (Bristol Airport plc v

Powdrill [1990] Ch 744, 759, CA: Re Rae [1995] BCC 102, 113. Hence ‘property’ can include rights of

pre-emption (Dear v Reeves [2001] EWCA Civ 277, [2002] Ch 1), discretionary payments under a

pension scheme (Patel v Jones [2001] EWCA Civ 779, [2001] BPIR 919); and the benefit of a proprietary

estoppel (Webster v Ashcroft [2011] EWHC 3848 (Ch), [2012] 1 WLR 1309). Indeed, an item need not

have realisable value or be capable of being beneficially enjoyed by the creditors of the insolvent for

it to be property.

In the case of bankruptcy, the date for testing when an item is property is the date of appointment of

the trustee when the vesting occurs. Items purely personal to the bankrupt (life insurance policies,

purchased with premiums that would otherwise have gone to the estate, are not personal: Cork v

Rawlins [2001] EWCA Civ 197, [2001] Ch 792) at that time will not vest in the trustee. Thus the

personal correspondence of the bankrupt, even if valuable, is excluded since the opposite conclusion

31

would entail a ‘gross invasion of privacy’ (Haig v Aitken [2001] Ch 110, 118). Although an action for

breach of contract for wrongful dismissal, occurring before the vesting date, will vest in the trustee

(Bailey v Thurston & Co Ltd [1903] 1 KB 137, CA. Any sums the bankrupt recovers in proceedings for a

breach arising after the date of the trustee’s appointment will be subject to the provisions on after-

acquired property, discussed at 19.32-19.33. The approach in Bailey v Thurston & Co Ltd does not

readily lend itself to corporate insolvency), the rights of a bankrupt under a continuing personal

services contract will not. Nevertheless, if property rights of the bankrupt can be enjoyed only by him

but entail expenditure that will affect the dividend available to his creditors, they are treated as

property of the estate for the purpose of the trustee’s disclaimer power (De Rothschild v Bell [2000]

QB 33, CA).

Property is defined widely in the insolvency process because, apart from gathering in an estate so that

the maximum is available for distribution, its existence is a precondition for the exercise by a liquidator

or trustee of the power of disclaimer. The exercise of this power (an unprofitable contract can be

disclaimed (ss 178(3)(a), 315(2)(a)); it should make no difference that the contract contains a no-

assignment clause (see De Rothschild v Bell [2000] QB 33, CA) permits the removal from the estate of

items that are worthless or even, because their burdens outweigh their benefits, possess negative

value. Value, therefore, is not a precondition for the treatment of an item as property (Whether in

the actual sense (Is this in fact worth anything?) or in its potential sense (Is this capable of having value

attributed to it?). The meaning of property may depend upon its context (Nokes v Doncaster

Amalgamated Collieries [1940] AC 1014, 1051, HL) but there is just one definition of property in the

Insolvency Act and no justification for giving the word one interpretation when dealing with

disclaimer, another when dealing with the gathering in and distribution of the estate and another

when dealing with the enforcement of security over the property of a company in administration

(Bristol Airport plc v Powdrill [1990] Ch 744, CA (interest of lessee in aircraft).

The definition of property is capable of including causes of action, in so far as their assignment does

not infringe rules of public policy against champerty and maintenance. It includes anything that can

be held subject to the terms of a trust (See Swift v Dairywise Farms Ltd [2000] 1 WLR 1177, aff’d [2001]

EWCA Civ 145, [2003] 1 WLR 1606 (Note)), such as the benefit of a non-assignable contract (See King

(Don) Productions Inc v Warren [1998] 2 All ER 608, aff’d [2000] Ch 291, CA) and carbon trading

allowances (Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), [2012] Bus LR

1199). As long as there is a framework of entitlement, it also includes items of value that cannot be

transferred by the insolvent, such as a waste management licence (Re Celtic Extraction Ltd [2001] Ch

475, CA (a disclaimer case)) and items that can be transferred only by very indirect means, such as a

32

milk quota (Swift v Dairywise Farms Ltd [2000] 1 WLR 1177, aff’d [2001] EWCA Civ 145, [2003] 1 WLR

1606 (Note)).

Beneficial property rights

The property available for distribution to creditors comprises only assets that are beneficially owned

by the insolvent (Section 283(3)(a) (bankruptcy, but references in the Act to getting in and distributing

company property impliedly recognise the rights of beneficiaries). It does not extend to property held

on trust (Mountney v Treharne [2002] EWCA Civ 1174, [2003] Ch 135), or to property the subject of a

reservation of title clause or of a security interest (see s 283(5). Even it if has not been realised, the

security also remains in existence after the discharge of the bankrupt: s 281(2)) by way of charge or

mortgage. The insolvent’s equity of redemption (although a charge is merely an encumbrance and no

property interest is conveyed to the chargee, it is common to say loosely that the chargor has, like the

mortgagor, an equity of redemption in the property charged: see, e.g., Re Bank of Credit and

Commerce International SA (No 8) [1998] AC 214, HL) is available for distribution but the liquidator or

trustee may not prevent the realisation of the security, any more than he may prevent the exercise of

a lien, a right of retention or a right of stoppage of goods in transit (but note that a lien over a

company’s books, papers and records (excepting documents of title) is unenforceable against an

administrator or liquidator: s 246(2), (3). For the moratorium on the exercise of lien, security and

related rights in administration).

Disclaimer of onerous property

General

The Insolvency Act contains provisions on the right to disclaim onerous property for winding-up

(Sections 179-182) and for bankruptcy (Sections 315-321), which are essentially the same in their

effect (References to the liquidator below should be read as referring also to the trustee-in-bankruptcy

unless otherwise stated).

Onerous property is defined as any property that is unsaleable or not readily saleable or is such as to

give rise to a liability to pay money or perform any other onerous act (Section 178(3)(b)). Onerous

property will frequently but not necessarily detract from the value of the insolvent’s estate. The need

to distribute an estate expeditiously, e.g., might make it appropriate for a liquidator to disclaim

property that has a book value in excess of any costs to be incurred in maintaining it. Onerous

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property includes some causes of action (see, e.g. Re Ballast Plc [2006] EWHC 3189 (Ch), [2007] BCC

620) as well as unprofitable contracts (Section 178(3)(a). See Re SSSL Realisations (2002) Ltd [2006]

EWCA Civ 7, [2006] Ch 610), where the statutory right to disclaim permits the liquidator unilaterally

to terminate the contract. An alternative to disclaimer may be to permit the company to breach the

contract thus giving the co-contractant a provable claim.

To effect a disclaimer, the liquidator files a notice of disclaimer in court and serves a copy of it on, as

the case may be, any mortgagee or underlessee of leasehold property, co-contractants and any person

he knows claims an interest in, or incurs a liability in respect of, disclaimed property (Rules 4. 187(1),

4.188(2)-4.188(4). See also r 4.189 (public interest)). The liquidator does not need the leave of the

court and the property may be disclaimed despite his occupation of the property or exercise of

ownership rights over it (Section 178(2)).

Embargo on proceedings against the insolvent

General

In the case of a compulsory winding-up, the leave of the court is required for an action or proceeding

against the company or its property to be commenced or continued after the making up of a winding-

up order or the appointment of a provisional liquidator (Section 130(2). This follows on from another

provision that, between the presentation of a winding-up petition and the making of a winding-up

order, the company or any creditor or contributor may apply to the court for any further proceedings

to be restrained or stayed (Section 126). For both provisions, the action may be permitted or stayed,

as the case may be, on such terms and conditions as the court thinks fit. The action proceeding in

question is commonly distress by a landlord (It is now settled beyond challenge that distress is a

‘proceeding’: Re Herbert Barry Associates Ltd [1977] 1 WLR 1437, HL; Re Memco Engineering Ltd

[1986] Ch 86) or by a creditor entitled to similar relief (Other examples include an application for the

appointment of a receiver: Croshaw v Lyndhurst Ship Co [1897] 2 Ch 154). An ordinary creditor facing

a bleak prospect of recovery will need little further discouragement to discontinue pending litigation

and is unlikely to commence litigation once an insolvent winding-up supervenes.

The purpose of these various provisions (the corresponding provisions for bankruptcy are ss 285 and

346-347. There are no such specific provisions for voluntary liquidation, but the same effect is reached

under s 112, which permits a liquidator to apply to the court to exercise any powers that the court

itself might exercise in a compulsory winding-up) is to maintain the integrity of the company’s estate

34

so that it may be rateably distributed in the usual pari passu way, a process that is at odds with a

judgment creditor’s right to enforce a money judgment (Roberts Petroleum Ltd v Bernard Kenny Ltd

[1983] 2 AC 192, HL). Upon the commencement of a winding-up, the individual process of debt

collection gives way to a collective, solidary procedure in which creditors are treated as a class.

Individual creditors of the company may not therefor act unilaterally to improve their position even

if, like execution creditors, they have invested significant time and assets in the collection of what is

owed to them and have been vigilant and energetic when other creditors may not have been. This

result is consistent with the assets of a company in liquidation being held on the terms of a notional

trust in favour of its creditors (see Ayerst v C&K (Construction) Ltd [1976] AC 167, HL: Re Yagerphone

Ltd [1935] Ch 392; Re MC Bacon Ltd [1991] Ch 127).

Distress

Taking first the general provisions as they relate to actions and proceedings begun before the

commencement of a winding-up, the discretion will be exercised so as to allow the distress (Distress

at common law will be superseded by a new statutory process when s 71 and Sch 12 of the Tribunals,

Courts and Enforcement Act 2007 come into force), or other action or proceeding, to continue, unless

special circumstances are shown rendering such continuance inequitable, since the general creditors

have no intrinsic right to be preferred to the creditor taking action (Re Great Ship Co Ltd (1862) 4 De

GJ & S 63, 69, 46 ER 839; Re Roundwood Colliery Ltd [1897] 1 Ch 373, 381, CA; Venner’s Electrical

Cooking and Heating Appliances Ltd v Thorpe[1915] 2 Ch 404, 407, CA). Once the winding-up has

commenced, however the general position is reversed and the landlord will not be allowed to distrain

(Thomas v Patent Lionite Co (1881) 17 Ch D 250, CA, where a compulsory winding-up succeeded a

voluntary winding-up, with the landlord distraining between the dates of commencement of each

winding-up). The burden of persuasion thereupon switches from the liquidator to the landlord, and

the landlord would be compelled to show special reasons in the nature of fraud or unfair dealing if the

distress were to be allowed to continue (Venner’s Electrical Cooking and Heating Appliances Ltd v

Thorpe [1915] 2 Ch 404, CA). In the exercise of its discretion, the court conducts a balancing exercise,

considering the interests not of one particular class of creditor but of ‘each’ of them (Re Great Ship Co

Ltd (1862) 4 De GJ & S 63, 69, 46 ER 839; Re Roundwood Colliery Ltd [1897] 1 Ch 373, 381, CA; Venner’s

Electrical cooking and Heating Appliances Ltd v Thorpe [1915] 2 Ch 404, 407, CA). In an execution case

involving a similar discretion, the court declined to draw a distinction between trade creditors and

loan creditors on the ground that the latter were a less deserving class (Re Caribbean Products (Yam

Importers) Ltd [1966] Ch 331, 347-348, 351, CA, where the proposal was to divide the fruits of

execution with other trade creditors to the exclusion of loan creditors who had anticipated becoming

35

members of the company. The court was also reluctant to reward the execution creditor merely on

the ground of his ‘extra vigilance’; at 347).

Executions

In the case of executions (a distress, such as one for unpaid taxes, is not an execution: Re Modern Jet

Support Centre Ltd [2005] EWHC 1611 (Ch), [2005] 1 WLR 3880) against land or goods and attachments

of debts, a creditor is not entitled to retain as against the liquidator the ‘benefit of the execution’ or

attachment unless the execution or attachment has been completed before the commencement of

the winding-up (Section 183 (compulsory and voluntary winding-up). For bankruptcy, the execution

must be completed before the bankruptcy order is made: ss 278 and 346(1). If the creditor has notice

of the calling of a meeting at which a voluntary winding-up resolution is to be proposed, the date of

such notice is substituted for the date of commencement of the winding-up: s 183(2)(a)). In cases

where the execution is not completed by the relevant time, the court has a broadly stated discretion

to set aside the rights of the liquidator (Section 183(2)(c)), when formerly its discretion was confined

to trickery or dishonesty by the judgement debtor (Armorduct Manufacturing Co Ltd v General

Incandescent Co Ltd [1911] 2 KB 143, CA). When exercised, the discretion can lead to a division of

moneys between creditor and liquidator and may be invoked against impropriety and undue pressure

by the debtor (Re Grosvenor Metal Co Ltd [1950] 1 Ch 63). The conduct of the debtor leading up to

judgment and up to the completion of execution are equally open to review (Re Suidair International

Airways Ltd [1951] Ch 165, 172; Landan v Purvis (High Ct, 15 June 1999)).

Completion of an execution against land occurs when it is seized, a receiver is appointed or a charging

order (under the Charging Orders Act 1979. The fact that the debtor is insolvent and will inevitably go

into liquidation is no ground for refusing to make final an interim charging order. There would have

to be some additional significant factor present, such as a scheme of arrangement set on foot by the

main body of creditors with a reasonable prospect of success: Roberts Petroleum Ltd v Bernard Kenny

Ltd [1983] 2 AC 192, CA. Although the court has a discretion to stay an execution hen bankruptcy

proceedings are pending (s283(1)), it will not set aside an execution completed before the bankruptcy

order is made merely because of the making of that order. See Nationwide Building Society v Wright

[2009] EWCA Civ 811, [2010] Ch 318, where the court noted the limited survival of the doctrine of

relation back in s 284) is made against it (Insolvency Act, s 183)(3)(c)). The attachment of a debt is

completed by the receipt of the ‘debt’ or rather its proceeds (Section 183(3)(b)) and an execution

against goods when the goods are seized and sold (Section 183(3)(a) or a (rare) charging order made

under the Charging Orders Act 1979)) and the proceeds remitted to the creditor (Bluston & Bramley

36

Ltd v Leigh [1950] 2 KB 548 (even though, prior to any divestment effected under s 183, the sheriff

holds moneys received from the sale to the use of the judgment creditor). The position regarding

goods is reinforced by a duty placed on the sheriff, as and when he has notice of the commencement

of the winding-up (Section 184(1) (or of the appointment of a provisional liquidator)), to make over to

the liquidator the goods as well as any money received or seized in part satisfaction of the judgment

(Section 184(2)).

Administrators: general

In the case of administration, there is an equally compelling reason for constraining execution,

attachments and related actions and proceedings by individual creditors. Indeed, the justification for

restraint may be even more compelling given that administration may last longer than a winding-up,

and that the administrator during that time carries on the company as a going concern while a

liquidator exercises limited powers of management. Prior to 2002, the administrator was not charged

with pari passu distribution (powers are conferred by the Insolvency Act on the administrator for the

running of the company: see Bristol Airport plc v Powdrill [1990] Ch 744, CA; Smith v Bridgend County

Borough Council [2000] 1 BCLC 775, CA, reversed on other grounds [2001] UKHL 58, [2002] 1 AC 336)

since administration was only an interim process, yielding to a winding-up in those cases where the

company could not be saved. The administrator may now make distributions (Insolvency Act, Sch B1

para 65) compliant with the pari passu principle (Insolvency Rules, r 2.69). The administrator is

charged with designated statutory purposes (Insolvency Act, Sch B1, para 3(1)) with the attainment of

those purposes. Hence, as soon as an administration application is made, there is a ‘moratorium on

other legal process’ so that no ‘legal proceedings, execution, distress…may be instituted or continued

against the company’ (A statutory right of detention exercised under the Civil Aviation Act 1982, s

88(1), is not a right of distress for present purposes: Bristol Airport plc v Powdrill [1990] Ch 744, CA)

without the leave of the court (Insolvency Act, Sch B1, paras 43(6) and 44(5)). The same embargo

continues upon the appointment of the administrator except that the administrator also may grant

leave for the action or proceedings to continue (Insolvency Act, Sch B1, paras 43(6) and 44(5). The

exercise of the discretion to grant leave is discussed below).

Dispositions of the insolvent’s property

General

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Upon the commencement of a compulsory winding-up, section 127 of the Insolvency Act provides

that any disposition of the company’s property is void unless the court otherwise orders (A similar

provision introduced in the 1980s applies in bankruptcy between the date the bankruptcy petition is

presented and the date that the bankrupt’s property vests in the trustees: s 284. The discretion is

exercised in broadly the same way as the discretion under s 127: Re Flint [1993] Ch 319. Under the

previous law, the title of the trustee to the bankrupt’s assets related back to the commission of an act

of bankruptcy, so that the preservation of the estate for pari passu distribution was achieved by other

means). The section treats in the same way transfers of shares and alterations in the status of the

company and its members. The simple effect of the section is to avoid dispositions of the company’s

property.

The object of section 127 is to protect the estate of the insolvent (if the s 127 proceedings involved a

company, it may not be insolvent. The expression ‘insolvent’ conveniently unites companies and

individuals) from improper dissipation (Re Wiltshire Iron Co (1868) 3 Ch App 443, 446-447) pending

the appointment of a liquidator to take control and the eventual distribution of the estate in the usual

way. A compulsory winding-up normally commences with the petition to wind up and not with the

making of a winding-up order or the appointment of a provisional liquidator (Section 129(2)). The

date of commencement for a voluntary winding-up is the passing of the resolution (Section 86)

whereupon the rules regarding the distribution of the estate come into effect (Section 107) and the

company ceases to carry on treading except for the purpose of a beneficial winding-up (Section 87(1)).

The directors’ powers cease as soon as the liquidator is appointed (Sections 91(2) and 103. Transfers

of shares after the winding-up resolution are also avoided: s 88). In a voluntary winding-up, there is

no backdating measure corresponding to section 127 that bars dispositions of property between the

notice of a meeting at which a winding-up resolution is proposed and the passing of the resolution.

Section 127 is a very wide provision. It extends to any disposition (its companion provision, s 284, has

been applied to reverse a court order vesting the matrimonial home in the wife of the bankrupt,

counsel for the trustee not basing his submissions on the fact that the order was a consent order: Re

Flint [1993] Ch 319) of the company’s property (it therefore does not operate to strike down

assumptions of liability or the consumption or exhaustion of the company’s assets: Coutts & Co v Stock

[2000] 1 WLR 906) which for present purposes includes property the subject of a charge (Mond v

Hammond Suddards (No 1) [1996] 2 BCLC 470). The company’s hands are therefore completely tied.

As from the commencement of the winding-up it is not at liberty to trade without the sanction of the

court. Particular difficulties are posed with regard to the operation of the company’s bank accounts

which the bank will freeze only when it learns of a winding-up petition.

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It is not always the case that the company is insolvent when a petition is presented to wind it up. A

compulsory winding-up may be the outcome of unresolvable deadlock in a closely held company.

Furthermore, it is by no means inevitable that a petition will actually lead to the winding-up of the

company. It may be possible to sell the company as a going concern. Consequently, it may be for the

good of all parties interested in the assets of the company that it be permitted to trade on (Re Wiltshire

Iron Co (1868) LR 3 Ch App 443, 446).

The court’s discretion

In exercising its discretion with regard to dispositions of the insolvent’s property, the court is

principally guided by a concern for unprotected creditors who would be harmed by a preferential

disposition (Re Gray’s Inn Construction Co Ltd [1980] 1 WLR 711, CA; Denney v Hudson (J) & Co Ltd

[1992] BCLC 901, CA; Re Leslie (J) Engineers Co Ltd [1976] 1 WLR 292). Where, exceptionally, the

disposition is challenged by a secured creditor, the outcome is that the recovered property is

impressed with the security and is not distributed in favour of the unsecured creditors (Mond v

Hammond Suddards (No 1) [1996] 2 BCLC 470 (where a floating charge crystallised upon the

appointment of receivers after the void disposition had taken place).

Transactions that have given rise to dispositions approved under section 127 include payments arising

from trade that are paid into a bank account to maintain an overdraft facility (Re Construction (TW)

Ltd [1954] 1 WLR 540) the speedy sale of property that commands an exceptionally good price (Re

Gray’s Inn Construction Co Ltd [1980] 1 WLR 711, 717, CA) the grant of security to a director injecting

fresh capital into a company to help it pay its wages bill (Re Park Ward and Co Ltd [1926] Ch 828) and

the payment of outstanding trade debts to a supplier whose goods are vital to the continuing trading

prospects of the company (Denney v Hudson (J) & Co Ltd [1992] BCLC 901). The object of the section

is the benefit of creditors that comes from preventing the dissipation of the estate for the purpose of

pari passu distribution. But the pari passu principle may have to yield to the need to maximise the

estate, which is why the discretion may exceptionally be exercised in favour of a creditor disponee

whose debts are paid in full when other creditors receive no more than a dividend (Denney v Hudson

(J) & Co Ltd [1992] BCLC 901; Re Gray’s Inn Construction Co Ltd [1980] 1 WLR 711, 718, CA). Creditors

benefit more from a large dividend and some measure of inequality than they do from equality and a

smaller dividend.

Section 127 does not list the persons eligible to seek approval for the disposition but the usual

applicant will be the company or the disponee. In one case, however, the successful applicant was a

39

bank to which the disponee of land had granted a mortgage. Stressing the flexibility of the statutory

discretion, the court upheld the transaction to a limited extent, namely, the extent of the bank’s

mortgage interest (Royal Bank of Scotland Plc v Bhardwaj [2002] BCC 57). Section 127 also fails to list

those who may challenge the disposition. A secured creditor may invoke the provision.

SECURED CREDITORS IN THE INSOLVENCY PROCESS

Recognising security

The assets available for distribution to unsecured creditors do not include assets that are subject to a

charge or other security granted by the insolvent (except to the extent that the security can be

overturned as a transaction concluded in the twilight period) or that they are still owned by a creditor

seller supplying them under the terms of a valid reservation of title clause. Title reservation is more

effective even than security, for the seller need not procure the registration of his reserved interest

under the Companies Act 2006 (Section 859A). Moreover, title reservation defats at source an earlier

security, granted by the buyer and extending to future assets, whose description covers the goods

supplied by the seller, since that security only attaches to assets of the buyer.

Although assets caught by a security are not generally available for distribution, this does not mean

that the secured creditor has first call on all such assets. In the case of assets the subject of a charge

that, as created, was a floating charge, preference creditors, followed by unsecured creditors up to a

stated money limit (expenses of the liquidation may also be paid out of floating charge assets) have

priority in a winding-up ahead of the secured creditor (Section 175(2)(b)). Where an administrative

receiver is appointed to enforce such a floating charge, the preference creditors’ priority is expressed

as a rule that, where other assets of the company are insufficient to pay the preference creditors

(Section 40(3)) a receiver is bound first to pay them before the secured creditor (Section 40(2). This

provision, together with s 175(2)(b) will be discussed in more detail later). The same rule now applies

to administrators too since they were empowered to make distributions (Insolvency Act, Sch B1, para

65(2)). A similar rule prevents a secured creditor who enters into possession from paying himself off

before the preference creditors (Companies Act 2006, s 754(2)).

Dealing with secured assets

General

40

The onset of a winding-up or bankruptcy does not prevent the secured creditor from taking practical

steps to enforce the security since there is no moratorium equivalent to the moratorium that takes

place when the company goes into administration. The enforcement of security rights does not

amount to actions or proceedings against the company requiring the leave of the court (Section

130(2)). Nor does the termination of an administrative receiver’s agency to act in the name of the

company borrower, occurring when the company goes into liquidation (Section 44(1)(a)), prevent the

receiver from enforcing the security in favour of the secured creditor who procured his appointment

by the company (Sowman v Samuel (David)Trust [1978] 1 WLR 22. The equivalent issue does not arise

in administration because of the moratorium on insolvency proceedings: Insolvency Act, Sch B1, paras

40, 42). In such a case, the liquidator of the company is in practical terms powerless to move in and

distribute the estate if only because the contents of the estate cannot be defined until the receiver

has carried out the responsibilities of the receivership. A novel attempt was made by an unsecured

creditor in one case to have the receive ousted by the appointment of a provisional liquidator, on the

ground that the receiver’s imposition of harsh trading terms upon that creditor, who was a trading

partner heavily dependent upon supplies from the company in receivership, amounted to blackmail.

The court dismissed the application, holding that the receivers were entitled to exploit the company’s

only real asset, namely, its bargaining position against the creditor (Ford AG-Werke AG v TransTec

Automotive (Campsie) Ltd [2001] BCC 403). If, however, it should be necessary for a secured creditor

to take legal proceedings to enforce his security, as might e.g. happen if a liquidator disputes the

creditor’s right to take possession, the creditor will need the leave of the court to take proceedings

(Sections 130(2) and 285(1)) which should without undue difficulty be granted (Re Lloyd (David) & Co

(1877) 6 Ch D 339, CA).

Administration

Although the secured creditor is free to realise his security notwithstanding winding-up or bankruptcy,

there is a moratorium on such action if the company enters into administration (Bloom v Harms AHT

‘Taurus’ GmbH & Co KG [2009] EWCA Civ 632, [2010] Ch 687). Once a company enters into

administration (for the moratorium that arises where the directors of a small company seek a

voluntary arrangement, see Insolvency Act, Sch A1) ‘[n]o step may be taken to enforce any security

over the company’s property’ without the consent of the administrator or the leave of the court

(Insolvency Act, Sch B1, para 43(2). This provision is disapplied for financial collateral arrangements:

Financial Collateral Arrangements (No 2) Regulations 2003, SI 2003/3226, reg 8(1)(a). In the case of a

court-appointed administrator, an earlier, interim moratorium applies from the time notice of the

application is filed with the court: Sch B1, para 44(2)). Security has the conventional meaning of ‘any

41

mortgage, charge, lien or other security’ (Section 248. The decision in Re Park Air Services plc [2000]

2 AC 172, HL, that security did not include a landlord’s power of re-entry under a lease, was overtaken

by the separate listing of re-entry as a step requiring the administrator’s permission or the leave of

the court: Insolvency Act, Sch B1, para 43(4)). It includes a solicitor’s lien (Re Carter Commercial

Developments Ltd [2002] BCC 803), a carrier’s lien (Re Sabre International Products Ltd [1991] BCLC

470. Enforcement will be allowed where the administrator’s proposals are inadequate to protect the

carrier’s rights: Re La Senza Ltd [2012] EWHC 1190 (Ch)), and a statutory right of detention akin to a

lien conferred over aircraft in respect of unpaid airport charges (Bristol Airport plc v Powdrill [1990]

Ch 744, CA). Equally, ‘[n]o step may be taken…to repossess goods in the company’s possession under

a hire-purchase agreement’ (Insolvency Act, Sch B1, para 43(3)). Hire purchase is defined expansively

so as to include title-retention sales agreements, conditional sales and chattel leasing agreements

(Schedule B1, para 111(1). A delay in seeking consent or permission may injure the prospects of a

successful administration, so that the court will refuse permission: Re Fashoff (UK) Ltd v Linton [2008]

EWHC 537 (Ch), [2008] BCC 542 (retention of title)). If a receiver of part of the company’s property is

appointed before an administrator, then that receiver is required to vacate office (Schedule B1, para

41(2)). Formerly the appointment of an administrator could be blocked by a floating chargee able to

secure the appointment of an administrative receiver, but the replacement in the great bulk of cases

of the administrative receiver by an administrator appointed out of court has dispensed with the need

for such a provision (Former s 9(3)(a) of the Insolvency Act). In consequence, the moratorium on the

enforcement of security and related rights will now serve mainly secured creditors with a qualifying

floating charge at the expense of other creditors. This moratorium on creditors’ rights does not

expunge them. Consequently, if an administrator abusively withholds his consent to the enforcement

of a security right, a creditor with a continuing right to immediate possession of goods has standing to

sue in the tort of conversion (Barclays Mercantile Business Finance Ltd v Sibec Developments Ltd

[1992] 1 WLR 1253 (semble, both administrator and company might be liable)).

Apart from security and related rights, the moratorium can affect third parties in other ways. A

landlord needs the consent of the administrator or the permission of the court to forfeit a leave by

peaceable re-entry, which consent or permission is also required in the case of legal process, including

execution, against the company (Schedule B1, para 43(4), (6). For the denial of the court’s permission

to a landlord where premises were needed for the business of the company, see Innovate Logistics

Ltd v Sunberry Properties Ltd [2008] EWCA Civ 1312, [2009] BCC 164. Leave will normally be given if

the purposes of the administration will not be impeded: Metro Nominees (Wandsworth) (No 1) Ltd v

Rayment [2008] BCC 40). Permission will be refused if there is no good reason for separating the

application from other creditors (as in the case of employees with monetary claims arising from non-

42

performance of employment contracts, see Re Nortel Networks Ltd [2010] EWHC 826 (Ch), [2010] BCC

706). Similarly, when the company is in administration, no administrative receiver may be appointed

(Schedule B1, para 43(6A)) and no resolution may be passed or order made for the winding-up of the

company (Schedule B1, para 42 (2), (3) (with exception)).

In Re Atlantic Computer Systems plc ([1992] Ch 505, CA), the court’s discretion to grant leave to

enforce a security received an authoritative exposition. The case concerned the lease and sub-lease

of computer equipment, the lessee being in administration. The lessor unsuccessfully argued that the

administrator was bound to pay rentals due under the head lease as expenses of the administration,

in the same way that a liquidator would have to pay expenses of the winding-up. The amounts in

question were significantly larger than the amount of sub-rentals paid under the various sub-leases

since the latter had been entered into on disadvantageous terms and because, in some cases, sub-

rentals had been withheld by the sub-lessees. Instead, the lessor was awarded, the hollow victory of

repossessing computer equipment adapted to the needs of the sub-lessees. The administrator was

not entitled to retain the equipment in the cause of shoring up the lessee’s client base, the lessee’s

only substantial asset. A balancing exercise (see also Re ARV Aviation Ltd [1989] BCLC 664, Innovative

Logistics Ltd v Sunberry Properties Ltd [2008] EWCA Civ 1312, [2009] BCC 164) had to be conducted

and the prejudice that the lessor would suffer as a result of the administrator retaining the equipment

meant that the court exercised its discretion in favour of the lessor.

Besides the embargo on enforcing security without leave during an administration, secured creditors’

rights are affected in other ways during the conduct of an administration. The administrator may deal

with and dispose of property subject to a floating charge (defined as such at the date of creation and

ignoring subsequent crystallisation: s 251. The floating chargee at risk here is not a floating chargee

able itself to procure the appointment of an administrator in the first place) without leave of the court

(Insolvency Act, Sch B1, para 70(1)) but the chargee’s priority is transferred to the proceeds

(Insolvency Act, Sch B1, para 70(2)). Since, however, the administrator himself ranks ahead of the

floating chargee (but not a fixed chargee) in respect of his remuneration and expenses, recoverable

from property in his control or custody immediately before the cessation of his appointment

(Insolvency Act, Sch B1, para 99(3). For the list of such expenses, broadly in line since 2003 with

liquidation expenses, see r 2.67), and since sums payable in respect of debts or liabilities incurred by

the administrator under contracts made, or contracts of employment adopted (confined to ‘wages or

salary’ (para 99(5)(c)), and therefore not including redundancy or unfair dismissal payments: Re Allders

Department Stores Ltd [2005] EWHC 172 (Ch), [2005] BCC 289. For a discussion of the difficult issues

concerning ‘wages or salary’ and arising under para 99(5), (6), see Re Huddersfield Fine Worsteds Ltd

43

[2005] EWCA Civ 1072, [2005] BCC 915) during the conduct of the administration rank ahead of the

administrator’s personal claim (Insolvency Act, Sch B1, para 99(4), (5)) the priority standing of a

secured creditor with a floating charge is considerably diminished during administration (The above

provision of Sch B1 apply at the end of the period of administration: Re A Company No 005174 of 1999

[200] 1 WLR 502, though in practice the administrator will make payments in the ordinary course

during the conduct of the administration. The implications of administration for the limitations rule

are displayed in Re Maxwell Fleet and Facilities Management Ltd (No 1) [2001] 1 WLR 323).

Administrative receivership

Administrative receivership does not have the same capacity for interfering with the rights of secured

creditors. Nevertheless, the administrative receiver may apply to the court under section 43 for

permission to dispose of charged property where this ‘would be likely to promote a more

advantageous realisation of the company’s assets than would otherwise be effected’. This power

would be appropriately exercised when the administrative receiver wants to dispose of a block of

integrated assets or to hive down some or all of the assets of the company to another company. It is

not needed if the secured creditor for whom he acts ranks ahead of any other secured creditor with

an interest in the same assets. Typically, it will be needed where the floating charge, created by the

debenture under which the administrative receiver was appointed, is subordinate in respect of one or

more assets to a fixed charge or mortgage granted in favour of another creditor. This latter creditor

has the first call on the proceeds of realisation of the assets in question: section 43 does not alter

priorities.

Unlike the case of administration, administrative receivership does not involve the freezing of secured

creditors’ and title retainers’ rights of enforcement. Nevertheless, in one decision (Lipe Ltd v Leyland

Daf Ltd [1993] BCC 385), the court ingeniously manufactured such a power in the interest of permitting

the receivership to work. The title retainer sought an interlocutory injunction to prevent further

dealings by the administrative receiver with the disputed goods, despite the latter’s personal

undertaking that the title retainer’s rights would be respected by the later payment, but was denied

it on the balance of convenience. The risk of non-payment of the title holder was too slight to justify

an interlocutory injunction.

DISTRIBUTING THE INSOLVENT’S ASSETS

The pari passu principle

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General

It is a fundamental principle of insolvency law that the assets of the insolvent are to be distributed

pari passu, i.e. rateably, among the creditors of the insolvent (Sections 107 and 328(3); rr 2.69 and

4.181. See G McCormack, Proprietary Claims in Insolvency (1997) ch 2; F Oditah, ‘Assets and the

Treatment of Claims in Insolvency’ (1992) 108 LQR 459). Not stated in general legislative terms is

another fundamental principle, the so-called anti-deprivation principle, that assets should not be

removed from the estate of the insolvent in the event of insolvency. Particular applications of this

principle, dealt with in the legislation, are the rules dealing with fraudulent transfers and undervalue

transactions, which exist to hold the estate together pending its distribution on a pari passu basis.

Although the two principles are different, they may sometimes coincide in their application, as in the

treatment of preferences, where the estate is both diminished prior to insolvency proceedings and a

particular creditor is singled out for special treatment. Neither the pari passu not the anti-deprivation

principle guarantees an appreciable estate for distribution. Creditors able to take security do so and,

apart from the rules on preferences and late floating charges, there is nothing to stop them from

encumbering the assets of the future insolvent so that in the event of bankruptcy or winding-up there

is nothing or very little left for distribution. Insolvency is the very event when the security is most

needed. Since the grant of security has already abstracted assets from the estate prior to the

insolvency process, it does not fall foul of the anti-deprivation principle. Further, the pari passu

principle applies only to the contents of the estate at the relevant time in insolvency proceedings, so

assets the subject of security are not in the distribution pool in the first place (for part of the

distribution process, however, the assets covered by a floating charge are removed from the chargee).

The anti-deprivation principle renders unlawful the forfeiture of property rights upon insolvency (to

be distinguished from clauses in a proprietary transfer that determine interests upon an insolvency.

The property rights must have value for this rule to be applied: Money Market International

Stockbrokers Ltd v London Stock Exchange Ltd [2002] 1 WLR 1150) and has been explained as denying

any right to bargain for an additional advantage upon insolvency (Higinbotham v Holme (1812) 19 Ves

88, 92, 34 ER 451, per Lord Eldon). A clause in a partnership deed transferring one partner’s share in

a mining lease to the other partner upon his bankruptcy is therefore void (Whitmore v Mason (1861)

2 J & H 204, 70 ER 1031). Where the owner of patent rights was indebted to the licensee, the diversion

upon the owner’s bankruptcy of royalty payments, so as to pay down the debt owed to the licensee,

was also void (Re Jeavons (1873) 8 Ch App 643). An unlawful forfeiture also occurred in a case where,

under a settlement agreement between an insurer and an insured that concerned a disputed claim

under a liability policy, moneys paid to the insured reverted to the insurer if the moneys were not paid

45

to third party claimants prior to the insured’s entry into winding-up proceedings (Folgate London

Market Ltd v Chaucer Insurance Plc [2011] EWCA Civ 328. See also Re Brewer’s Settlement [1896] 2

Ch 503 (bankrupt settled property on himself with a remainder on his bankruptcy); Re Harrison (1880)

14 Ch D 19, CA (forfeiture of bankrupt’s building materials to landlord); Fraser v Oystertec plc [2004]

EHWC 2225 (Ch). [2004] BCC 233 (forfeiture of patent rights)). It has been held that a clause is valid if

bankruptcy is only one of a number of events empowering forfeiture in the event of default (Re Garrud

(1881) 16 Ch D 522, CA. See also Re Waugh (1876) 4 Ch D 524. cf Re Walker (1884) 26 Ch D 510, CA).

This case has long been considered controversial. In Money Markets International Stockbrokers Ltd v

London Stock Exchange Ltd, ([2002] 1 WLR 1150) the court disapproved of this reasoning in Re Garrud

on the ground that this was inconsistent with the decision of the House of Lords in British Eagle

International Airlines Ltd v Cie Nationale Air France ([1975] 2 All ER 390, HL). Prior to recent

developments, it was hard to define the scope of the anti-deprivation principle in certain cases and

fine distinctions were sometimes drawn (e.g. in Smith v Bridgend County Borough Council [2001] UKHL

58, [2002] 1 AC 336, Lord Scott distinguished between a seizure of an insolvent contractor’s machinery

on account of the local authority’s claim (not an unlawful forfeiture) from a seizure in satisfaction of

the claim. A clause that imposes certain restrictions on, or even prohibits, assignment will not

however prevent property from vesting in a trustee-in-bankruptcy, since a vesting in this way will not

be treated as a prohibited assignment: Re Landau [1998] Ch 223; Patel v Jones [2001] EWCA Civ 779,

[2001] BPIR 919 (regulations governing a pension scheme could have prevented a vesting in the

trustee but were never made). In Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services

Ltd ([2011] UKSC 38, [2012] 1 AC 383) the Supreme Court, while it did not reconcile past authority,

laid down a broad approach to the application of the anti-deprivation principle in commercial

transactions. The case concerned a complex securitisation programme attached to a credit default

swap, and the dispute event was the reversal of priorities between two creditors on the occurrence

of an event of default respecting one of them. The transaction was upheld. So long as a transaction

was a bona fide, commercially sensible transaction, where there was no fraudulent intent, it would

not be struck down on the ground of unlawful forfeiture. The majority of the court was not, however,

prepared to go the extra distance of accepting a general exception to the principle based upon the

idea of flawed assets, namely, that a contractual right might from inception be defined as to be

determined upon insolvency. Yet the Belmont case signals an important retrenchment of the anti-

deprivation principle. An ex post facto test of the sort that was approved, however, does not provide

the ex ante certainty that contracting parties need in complex and volatile financial markets. In the

result, apart from the uncertainty point, there is little difference between the court’s conclusion and

46

a limitation of the principle to cases where it is explicitly recognised in the Insolvency Act, e.g.,

fraudulent transfers (Sections 423-425).

Expenses of the insolvency process

Various expenses are incurred in the conduct of a winding-up, bankruptcy or administration that have

to be paid before the balance of the insolvent’s assets is distributed. The Insolvency Act and

Insolvency Rules make provision for the priority treatment of expenses incurred by liquidators (Section

175(2)(a); see also ss 107, 115 and 156, Sch 8 para 17 and rr 4.218-4.220 and 12.2), administrators

(Schedule B1, para 65(2) and rr 2.67 and 12.2. See Exeter City Council v Bairstow [2007] EWHC 400

(Ch), [2007] BCC 236; Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch), [2010]

recourse to the court if dissatisfied with the amount permitted by creditors, see r 2.67A), and trustees-

in-bankruptcy (Section 328(2) and Sch 9 para 22 and rr 6.202, 6.224 and 12.2). In putting the expenses

claim ahead of preference creditors, fixed charges and floating chargees. They also require a careful

distinction to be drawn between pre-insolvency process expense claims, provable in a winding-up,

administration or bankruptcy, and expenses of the insolvency process, which occupy a preferential

position (Re Toshoku Finance plc [2002] UKHL 6, [2002] 1 WLR 671).

Priority: expenses, preferential creditors, unsecured creditors and members

Another critical difficulty is to determine whether the expenses properly recoverable by a liquidator

or administrator, and therefore ranking ahead of preference and other unsecured creditors, should

be recoverable at the expense of secured creditors with a floating charge. The scheme of the

Insolvency Act invites the assumption that, because expenses rank ahead of preferential creditors

(Sections 116 and 175(2)(a)), who in turn rank ahead of secured creditors with a floating charge, it

therefore follows that expenses rank ahead of floating charges. The order of distribution in the case

of insolvent companies would therefore be as follows: fixed chargees, expenses of the insolvency

process, preferential creditors, floating chargees, unsecured creditors and members. Subject to the

special provision made for unsecured creditors by the Enterprise Act 2002, this ranking is confirmed

by section 176ZA of the Insolvency Act, which overturned a House of Lords decision (Buchler v Talbot

[2004] UKHL 9, [2004] 2 AC 298) that had altered the previous understanding of the law.

Floating charges

47

Distribution takes place out of the assets of the company. It is particularly important to determine

what those assets are in the case of preferential creditors and, since the Enterprise Act 2002,

unsecured creditors participating in the special fund created by amendment to the Insolvency Act (See

Insolvency Act, s 176A). These assets do not include assets the subject of a fixed charge or mortgage

(the court has no inherent jurisdiction to interfere with the rights of secured creditors: Re MC Bacon

Ltd [1991] Ch 127, 140. The company’s equity of redemption in the assets would be subject to

distribution in the normal way) but they do include assets subject to a floating charge (Re Barleycorn

Enterprises Ltd [1970] Ch 465, CA (in the light of legislative changes of 1888 and 1897 introducing the

special category of preferential claims and ranking them ahead of floating charges); Re MC Bacon Ltd

[1991] Ch 127).

Preferential claims

In response to the recommendation of the Cork Committee (Cmnd 8558 (1982), ch 32) the insolvency

reforms of the 1980s drastically reduced the number of preferential claims. For example, local

authorities’ claims for unpaid rates lost their preferential status. When first enacted, the Insolvency

Act listed six types of preference claim, but the number has now been reduced to three (Enterprise

Act 2002, s 251 (amending as necessary the Insolvency Act). In the event of a bankruptcy or winding-

up, preferential claims rank equally and therefore abate equally if there are insufficient assets to

satisfy them all (Sections 175(2)(a) and 328(2)). Since they are a closed list, there is no judicial

discretion to create others, eg, by authorising payments made to selected creditors under section 127

(Re Rafidain Bank (No 1) [1992] BCLC 301).

The three remaining preferential claims (the three preferential claims abolished by the Enterprise Act

2002 were claims for PAYE tax deducted in the preceding 12 months, VAT and certain other taxes

referable to the preceding six months, and social security contributions due in the preceding six

months) are for all unpaid contributions to contributory pension schemes, remuneration up to £800

in amount (Insolvency Proceedings (Monetary Limits) Order 1986, SI 1986/1996) owed to employees

in respect of the preceding four months, and ECSC coal and steel levies (Schedule 6). The time

provisions are based on the ‘relevant date’, which is defined by reference to the particular

circumstances of company and individual voluntary arrangements, voluntary and compulsory

winding-up, winding-up preceded by an administrator and bankruptcy (Section 387). For example,

the date for a voluntary winding-up is the passing of the resolution, for compulsory winding-up the

date of the winding-up order or (where relevant) of the appointment of a provisional liquidator, and

for bankruptcy the date of the order or (where relevant) of the appointment of an interim receiver.

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The special fund for unsecured creditors

The disadvantageous position of unsecured creditors in insolvency has attracted adverse judicial

comment (Saloman v A Saloman & Co Ltd [1897] AC 22, 53, HL (Lord Macnaghten); Borden v Scottish

Timber Products Ltd [1981] Ch 25, 42 (Templeman LJ)) and was responsible for the creation of

preferential claims in the first place. A new section 176A of the Insolvency Act was added by the

Enterprise Act 2002 (Section 252) at the time when the ranks of preferential creditors were being

reduced, to improve the position of unsecured creditors. Under section 176A, a prescribed part of the

company’s ‘net property’ is set aside to be applied by liquidators, administrators and receivers to

unsecured claims. Net property includes assets the subject of a floating charge. The prescribed part

of the company’s property constituting the fund is not linked to the loss of the Crown’s status as

preferential creditor. Instead, given a minimum net property value of £10,000, 50 per cent of the first

£50,000 is set aside for unsecured creditors, followed by 20 per cent of the remainder of the net

property. The total amount constituting the fund, however, is capped at £600,000 (The Insolvency

Act 1986 (Prescribed Part) Order 2003, SI 2003/2097). Access to the fund is denied to secured

creditors even in respect of a shortfall arising after the realisation of their security (Re Permacell

Finesse Ltd [2007] EWHC 3233 (Ch), [2008] BCC 208; Re Airbase Services (UK) Ltd [2008] EWHC 3233

(Ch), [2008] BCC 208. It is uncertain whether a qualifying chargee, having taken advantage of its

floating charge in appointment an administrator out of court, might then disclaim its floating charge

so as to see participation in the fund. In general, a secured creditor surrendering its security is entitled

to participate; Re PAL SC Realisations 2007 Ltd [2010] EWHC 2850 (Ch), [2011] BCC 93). There is no

duty on liquidators, administrators, and receivers to set up a fund where the cost of the distribution

would be disproportionate to the benefits of the distribution (Section 176A(5). See Re Hydroserve Ltd

[2007] EWHC 3026 (Ch), [2008] BCC 175. cf Re International Sections Ltd [2009] EWHC 137 (Ch), [2009]

BCC 574) but this discretion does not permit the exclusion of particular creditors whose claims would

be disproportionately expensive to recognise (Re Courts plc [2008] EWHC 2339 (Ch), [2009] 1 WLR

1499).

Final claimants

Last in the distribution list come unsecured creditors who have put in a proof of debt (a debt can also

include any liability, including liability in tort: Insolvency Rules (as amended by SI 2006/1272), r 13.12)

so far as they have not been paid in full out of the special fund, followed by members (Section 107),

in the case of winding-up, and spouses (Section 329), in the case of bankruptcy. Furthermore,

49

members may be liable as contributories (Section 79) to contribute to the assets of the company in a

winding-up (Section 74), e.g., where their shares are not fully paid up.

Set-off (insolvency and receivership)

General

An unsecured creditor who is also indebted to the insolvent is in a better position than an unsecured

creditor who is not. The former may take advantage of set-off rights which, if the claim of the insolvent

matches the claim of the creditor, permits the creditor to recover in full instead of receiving only the

very limited dividend that would otherwise be paid. Set-off in fact operates as a form of security (Stein

v Blake [1996] AC 243, 251, HL, per Lord Hoffmann), though it will often arise as a windfall benefit if

insolvency supervenes at a time when the creditor happens to owe money to the insolvent. Indeed,

it is more effective in that it can be exercised passively by the creditor and does not require any

particular formalities or notice.

Insolvency set-off is provided for in section 323 for bankruptcy and rule 4.90 for winding-up. Section

323 re-enacts, with only slight changes, section 31 of the Bankruptcy Act 1914. In the case of

companies, set-off was first applied in winding-up as a result of the Judicature Act 1873 (Section 10),

the language of the bankruptcy section was being extended by analogy to companies before language

apt for companies was created in rule 4.90 (modified in significant respects by the Insolvency

(Amendment) Rules 2005 (SI 2005/527), reg 23), which is mutatis mutandis identical to section 323.

Nevertheless, rule 4.90 is expressed so that it applies in solvent and insolvent windings-up alike,

section 323 is obviously confined to bankruptcy.

Scope of set-off

According to rule 4.90, an account has to be taken of what is due from creditor to company and

company to creditor where, before the company goes into liquidation, there have been ‘mutual

creditors, mutual debts or other mutual dealings’. This results in the extinguishment of the two claims

in favour of one net claim so that neither of the previous claims may thereafter be assigned (Stein v

Blake [1996] AC 243, HL). A balance due to the company has to be paid to the liquidator; a balance in

favour of the creditor is the subject of a proof. The cut-off date for amounts due from the company

is the date when the creditor had notice that a meeting of creditors had been called or that a winding-

up petition was pending, as the case may be (Rule 4.90 (2), which also cuts off claims arising during

50

administration and claims acquired by assignment after the cut-off date. See Re Eros Films Ltd [1963]

Ch 565; Re Gray’s Inn Construction Co Ltd [1980] 1 WLR 711, CA). Otherwise, an incentive would arise

for debtors of the insolvent company to purchase claims against the company, which is impermissible

(Re Charge Card Services Ltd [1987] Ch 150).

Set-off can take place only where the claim and cross-claim are monetary claims. In one case, the

notion of a monetary claim was given an extended meaning where one of the claims was not

immediately money-based but was for the return of goods that were subject to a direction to the

recipient that they be sold (Rolls Razor Ltd v Cox [1967] 1 QB 552, CA (confined to goods held by a

salesman for sale as opposed to demonstration purposes)). Otherwise, an obligation to deliver non-

monetary assets, even assets with a definable market value, may not be included in insolvency set-

off. Close-out netting, which involves accelerating asset delivery obligations so as to commute them

into monetary obligations, on an event of default such as insolvency, therefore falls outside the

insolvency set-off rule. For close-out netting to take effect on insolvency, it therefore needs the

sanction of special legislation (Financial Collateral Arrangements (No 2) Regulations 2003, SI

2003/3126, reg 12).

Mutuality is present even though the two claims are completely unrelated to each other (Re Daintrey

[1900] 1 QB 546, CA). Moreover, one claim may be a debt and the other for unliquidated damages

(Mersey Steel and Iron Co v Naylor Benzon & Co (1884) 9 App Cas 434, HL). At one time it was thought

that a claim in tort could not be the subject of set-off in insolvency (Re Mid-Kent Fruit Factory [1896]

1 Ch 567; cf Tilley v Bowman [1910] 1 KB 745). Subsequent case law justified this approach on the

ground that a tort claim was not provable under the Bankruptcy Act 1914 (Re DH Curtis (Builders) Ltd

[1978] Ch 162). Since, under section 322, a tort claim is now provable, it follows that it may be the

subject of a set-off, like any other provable claim consisting of a pecuniary demand (Re Bank of Credit

and Commerce International SA (No 8) [1998] Ac 214, HL; Eberle’s Hotels and Restaurant Co Ltd v Jonas

(E) & Bros (1887) 18 QBD 459, CA).

Mutuality of claim and cross-claim is absent where money has been paid by the insolvent for a purpose

that can no longer be accomplished. The insolvent’s representative may recover the money without

giving credit for a claim against the insolvent (Re Pollitt [1893] 1 QB 455, CA; Re City Equitable Fire

Insurance Co Ltd [1930] 2 Ch 293, CA) since the dedication of money to a purpose takes it ‘out of the

course of accounts between the parties to be held…in suspense between them’ (Re City Equitable Fire

Insurance Co Ltd [1930] 2 Ch 293, 312, CA). Moneys held on the terms of a Quistclose trust will thus

fall outside the bounds of mutuality. Indeed, since money is always paid for one purpose or other, it

51

would be preferable to confine special purposes cases to the existence of such a trust or, at least, to

cases where it would be a ‘misappropriation’ of the money to use it other than for the purpose for

which it was paid (National Westminster Bank Ltd v Halesowen Presswork and Assemblies Ltd [1972]

AC 785, 808, HL, per Lord Simon). A further restriction on set-off arises in respect of a contributory’s

claim against an insolvent limited liability company. As a contributor to the insolvency fund (Cherry v

Boultbee (1839) 4 My & Cr 442, 41 ER 17 1 gives its name to the rule that contributors to a fund must

first make their contribution to that fund before being able to assert a claim against it. Where the rule

applies exceptionally in insolvency cases, as it does where the rule against double proof ousts

insolvency set-off, the rule in Cherry v Boultbee is likewise subject to the rule against double proof: Re

Kaupthing Singer and Friedlander Ltd [2011] UKSC 48, [2012] 1 AC 804. According to the rule against

double proof, a single debt may not be the subject of more than one claim on the estate), the

contributory may not set off any claim he has against the company against his indebtedness as a

contributory (Re Overend Gurney (1866) 1 Ch App 528; Re West Coast Gold Fields Ltd [1905] 1 Ch 597,

602, aff’d [1906] 1 Ch 1, CA) unless the creditors of the company have been paid in full (Section 149(3)).

The absence of mutuality may go to the personalities of claimant and cross-claimant. A claim asserted

by one party as trustee for a third party is not bound by mutuality to a cross-claim against the former

party in his personal capacity (Re ILG Travel Ltd [1995] 2 BCLC 128). The Crown may be seen as

presenting a special case. Since the Crown in its various emanations is the beneficial owner of all

central funds, a company may set off a claim against Customs and Excise for overpaid VAT against a

subrogated Crown claim for the company’s failure to make redundancy payments (Secretary of State

for Trade and Industry v Frid [2004] UKHL 24, [2004] 2 AC 506).

Nevertheless, the answer to this question turns upon whether the director has incurred personal

liability on the loan by the bank to the company. Where the director undertakes liability to the bank

as ‘principal debtor’, set-off will take effect automatically as between the director’s claim against the

bank and the bank’s claim against the director (MS Fashions Ltd v Bank of Credit and Commerce

International Ltd (No 2) [1993] Ch 425, CA). Consequently, to the extent of the satisfaction of the debt

to the bank arising out of the set-off, the bank’s claim against the company is abated. If, however, the

director charges his rights against the bank in favour of the bank (It is now settled that a bank may

take a charge over its own indebtedness to an account holder: Re Bank of Credit and Commerce

International SA (No 8) [1998] Ac 214, HL) as security for the loan to the company, without undertaking

a personal liability to the bank, there can be no set-off since there are no ‘mutual creditors, mutual

debts or other mutual dealings’ between the director and the bank (Re Bank of Credit and Commerce

International SA (No 8) [1998] AC 214, HL). Although insolvency set-off may not be excluded by

agreement the parties are not prevented from defining their relationship in such a way as to place the

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director at financial risk without incurring personal liability. The intermediate case is that of the

director who undertakes as surety secondary liability on the loan in such a way as not to become liable

until a demand is made on him by the bank (Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833, CA).

Set-off can be effected in respect of the bank’s contingent claim against the director (see MS Fashions

Ltd v Bank of Credits and Commerce International Ltd (No 2) [1993] Ch 425, CA) but this holds little

comfort for the director. The reason is that a solvent corporate borrower will be able to pay in full

and the bank’s liquidator will not call upon the director in such a case, or indeed in any case where

the amount unrecovered from the company is less than the amount deposited by the director with

the bank.

DEALING WITH THE ESTATE (Liquidators, Trustees-in Bankruptcy, Administrators, and Administrative

Receivers)

Powers of the liquidator

Schedule 4 to the Insolvency Act 1986 contains in Part I those powers of the liquidator that may be

exercised with sanction, which will be the sanction of an extraordinary resolution for a members’

voluntary winding-up and of the court or a liquidation committee for a creditors’ voluntary winding-

up. The remaining powers in Parts II and III of the Schedule may be exercised without sanction in a

voluntary winding-up (Section 165). For a compulsory winding-up, the liquidator needs the sanction

of the court or liquidation committee to exercise the powers in Parts I and II but needs no sanction to

exercise the powers in Part III (Section 167). In the case of a creditors’ voluntary winding-up, where

the creditors have not yet met (For the company’s duty to call a meeting, see s 98), the sanction of

the court is needed in all cases before the liquidator’s powers may be exercised. This control is in

place to counter the evil of ‘centrebinding’ (The name comes from Re Centrebind Ltd [1967] 1 WLR

377), which consists of the members of a company appointing their own complaisant liquidator who

acts to the disadvantage of creditors by stripping the company of its remaining assets before a

deferred creditors’ meeting is called (At least as effective a control is the requirement that liquidators

and other insolvency professionals be accredited insolvency practitioners: s 388 et seq). There are

other powers contained in the main body of the Act, relating to the settling of the list of contributories

(Section 165(4)(a) (voluntary winding-up)), the making of calls (Section 165 (4)(b) (voluntary winding-

up)), the payment of debts (A duty: s 165(5) (voluntary winding-up)), and the calling of meetings

(Sections 165(4)(c) and 168(2)). The liquidator may apply to the court for directions concerning

matters arising in the course of the winding-up (Sections 112 and 168(3)). The court also exercises a

continuing supervisory jurisdiction over his actions (Sections 112 and 167(3)).

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Powers of the trustee-in-bankruptcy

A similar structure of powers applies in the case of bankruptcy. There is a division between powers

that may be exercised without sanction and powers that may be exercised with the sanction of the

court or the creditors’ committee (Section 314. The powers are contained in Sch 5)). Provided the

court or the creditors’ committee agrees, the trustee may employ the bankrupt to carry on his

business or otherwise assist the trustee (Section 314(2)). The trustee also has power to summon a

general meeting of creditors (Section 314(7)).

Powers of the administrator and the administrative receiver

The powers of an administrator and of an administrative receiver are both expansive and more or less

identical (Schedule 1: s 42 and Sch B2, paras 59-60. The powers of a contractually-appointed receiver

are purely a matter of contract), except for the moratorium on enforcing rights and taking action. The

powers of an administrative receiver may be increased by agreement, which however is unlikely to

exceed the administrator’s power to do ‘anything necessary and expedient for the management of

the affairs, business and property of the company’ (Schedule B1, para 59(1)). As befits the condition

of the company, the powers in Schedule 1 go beyond conventional management. The prospect of

insolvent liquidation bulks large, even though administrative receivers do not as such distribute assets

(The administrator may now distribute: Sch B1, para 65(1), (3)) and perform the other functions of a

liquidator. Administrators may, e.g., present a petition for the winding-up of the company (Schedule

1 para 21). Both administrator and administrative receiver present proposals or report to a meeting

of the company’s creditors (Section 48 and Sch B1, paras 49-54. But an administrator may make

disposals in advance of the meeting: Re Transbus International Ltd [2004] EWHC 932 (Ch), [2004] 1

WLR 2654). This meeting may establish a creditors’ committee (Section 49 and Sch B1, para 57).

Administrators and administrative receivers (in their general character as receivers or managers of the

company’s property) may apply to the court for directions.

Rights of those dealing with the insolvent

In managing the affairs of the insolvent, liquidators, trustees-in-bankruptcy, administrators, and

administrative and other contractual receivers act as agents of the insolvent. The position at common

law is that agents do not in normal circumstances incur personal liability on contracts they negotiate

on behalf of their principal, providing that the principal is disclosed.

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Winding-up and bankruptcy

In the case of a winding-up, co-contractants are protected largely by the priority standing of their

claims to be paid as expenses of the liquidation ranking ahead of preferential claims (Section

175(2)(a)). Sums owed to persons doing business with the company, and to landlords for rent arising

out of the company’s continuing occupation of premises (Re ABC Coupler and Engineering Co Ltd (No

3) [1970] 1 WLR 702), are recoverable expenses even if the liquidator refuses to pay them. Moreover,

as far as they are ‘necessary disbursements’ they rank ahead of the liquidator’s own claim for

remuneration (Rule 4.218(1)(m),(o); Re Linda Marie Ltd [1989] BCLC 46). It is no doubt open to co-

contractants to require the liquidator to undertake personal liability on contracts concluded with the

company in liquidation. Indeed the Insolvency Act expressly contemplates that utility suppliers of

water, electricity, gas and telecommunications will require this of liquidators in the case of continuing

supplies, though it prohibits demands for payment for past supplies as the condition for continuing to

supply (Section 233 (s 372 for bankruptcy). The position under the section is the same for

administrators, administrative receivers, provisional liquidators and the supervisors of voluntary

arrangements).

Given the provision now made for expenses of the administration (Rules 2.67 and 2.67A) the position

in administration is broadly the same as for liquidation, except that the more active powers of

administrators will entail a greater number of pre-preferential creditors with claims arising during the

conduct of the administration (Schedule B1, para 99(4)) in addition to the recoverable costs of the

administration itself. The position in bankruptcy is very similar to that of a winding-up. Section 324(1)

requires the trustee when distributing dividends to retain such sums as are necessary for the expenses

of the bankruptcy, and the priority order ranks ‘necessary disbursements’ ahead of the trustee’s own

claim for remuneration (Rule 6.224(1)(m), (o)).

Administration and receivership: personal liability

Administration and receivers, though agents of the company, are capable of incurring personal liability

on contracts during their period of office. Taking first receivership, court-appointed receivers, who

are not agents of the company, have always been personally responsible on contracts they conclude

(Burt Boulton & Hayward v Bull [1895] 1 QB 76, CA), even if they make their status clear in documents

addressed to the other contracting party. They are expected to look to the assets of the company for

indemnification, though they may stipulate special terms excluding that liability with the other

contracting party.

55

VULNERABLE TRANSACTIONS AND FRAUDULENT TRANSFERS

Distributable assets

It is only the assets of the insolvent at the time of the bankruptcy or winding-up order or resolution

that are distributed. There is, however a major exception that arises in the case of dispositions of the

insolvent’s assets occurring in the run up to bankruptcy or winding-up. In that period, certain

transactions are vulnerable to challenge by insolvency officers (The sanction of the court is needed for

actions to be brought by liquidators and trustees: Insolvency Act, Sch 4, para (3A) and Sch 5, para (2A))

and administrators, but not by receivers. These challenges may be made under different heads, but

their broad purpose, taken together, is to reinforce the pari passu principle by preserving the

insolvent’s assets for distribution and by preventing one creditor from being singled out for favourable

treatment at the expense of the others. This is consistent with the principle that the directors owe a

duty to the company in its final stages to run it for the benefit of its creditors (West Mercia Safetywear

Ltd v Dodd (1988) 4 BCC 30, CA; Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39, [2009] 1 AC 1391).

In consequence of the purpose served by those heads of challenge and their confinement to

liquidators, trustees-in-bankruptcy, and administrators, the moneys recovered are, ‘impressed…with

a trust’ for the benefit of the unsecured creditors, who are the eventual victims of the transactions in

question. They are not assets of the company so as to be caught by a security given to one of its

creditors (Re Yagerphone Ltd [1935] 1 Ch 352; Re Oasis Merchandising Services Ltd [1998] Ch 170, CA).

Money paid under the impugned transactions ceases to be the property of the company.

Consequently, there is no proprietary claim for its recovery. The conclusion that the unsecured

creditors benefit from the liquidator’s action means that an office-holder is not pointlessly bringing

proceedings that can only benefit a secured creditor.

Undervalue transactions

The first head of challenge arises under section 238 and concerns transactions (Section 436 defines

‘transaction’ as ‘gift, agreement or arrangement’, which is a broad definition: Phillips v Brewin Dolphin

Bell Laurie Ltd [1999] 1 WLR 2052, CA, aff’d on different grounds at [2001] UKHL 2, [2001] 1 WLR 143

where the word ‘transaction’ meant connected contracts in a complex business sale and permitted

the value of the consideration to be drawn from a connected contract, cf National Westminster Bank

plc v Jones [2001] EWCA Civ 1541, [2002] 1 BCLC 55) entered into at an undervalue (For bankruptcy,

the provision is s 339). This head, introduced for companies by the Insolvency Act 1985, was

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developed from earlier bankruptcy legislation (Section 42 of the Bankruptcy Act 1914). An undervalue

transaction exists either where the insolvent makes a gift (Re Barton Manufacturing Co Ltd [1999] 1

BCLC 740), or where the insolvent receives either no consideration (Past consideration is no

consideration: Re Bangla Television Ltd [2006] EWHC 2292 (Ch), [2007] 1 BCLC 609) or a consideration

that is worth ‘significantly’ less in money terms than the consideration provided in return (Sections

238(4) and 339(3). The latter, bankruptcy provision also lists transactions in consideration of marriage.

An example of undervalue would be the transfer by husband to wife of an interest in the matrimonial

home that exceeds in value the mortgage commitments assumed by the wife: Re Kumar [1993] 1 WLR

224). The adequacy of consideration is calculated in terms of what a reasonably informed buyer would

pay in an arm’s length transaction (Phillips v Brewin Dolphin Bell Laurie Ltd [2001] UKHL 2, [2001] 1

WLR 143, at [30] (Lord Scott, HL. On the process of valuation, see Agricultural Mortgage Corp plc v

Woodward [1995] 1 BCLC 1; Jones v National Westminster Bank plc v Jones [2001] EWCA Civ 1541,

[2002] 1 BCLC 55; Ramlors Ltd v Reid [2004] EWCA Civ 800, [2005] 1 BCLC 331). These provisions are

confined to transactions (On various dealings amounting to a transaction, see Phillips v Brewin Dolphin

Bell Laurie Ltd [2001] UKHL 2, [2001] 1 WLR 143: Ailyan v Smith [2010] EWHC 24 (Ch), [2010] BPIR 289)

that deplete or reduce the value of the transferor’s assets. On one view, an undervalue transaction

was not concluded where a company granted a security to one of its existing creditors, a bank.

Although this transaction ‘adversely affect[ed] the rights of other creditors in insolvency’, the only

thing that the company lost as a result of the transaction was ‘the right to apply the proceeds [of the

changed assets] otherwise than in satisfaction of the secured debt’ (Re MC Bacon Ltd [1991] Ch 127.

See also Re Lewis’s of Leicester Ltd [1995] 1 BCLC 428. On a sale of the secured asset, the value for

undervalue purposes has been held to be the value of the asset minus the security: Re Brabon [2001]

1 BCLC 11), which could not be valued in monetary terms. Nevertheless, the opposite view that

section 238 does apply to the grant of security has been firmly and authoritatively expressed (Hill v

Spread Trustee Co Ltd [2006] EWCA Civ 542, at [93], [2007] 1 WLR 2404 (Arden LJ), noting that a

security granted for no consideration at all would be a gift under s 238).

The date of the transaction is relevant if it is to be challenged. In the case of companies, the

transaction has to be entered into two years before the ‘onset of insolvency’ (Section 240(1)(a)), which

is the date of commencement of the winding-up (Where the winding-up is preceded by an

administration, see s 240 for the relevant dates). In the case of individuals, the period is five years

(Section 341(1)(a) (substituting the former period of ten years)). Where the company going into

liquidation has been in administration, care has to be taken that the winding-up follows directly on

from the administration or else the passage of time during the administration will prevent the

liquidator from challenging pre-administration transactions (For the procedure to overcome the

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various difficulties, see Re Powerstore (Trading) Ltd [1997] 1 WLR 1280; Re Mark One (Oxford Street)

plc [1999] 1 WLR 1445; Re Norditrack (UK) Ltd [2000] 1 WLR 343).

In the case of companies, an order will not be made by the court if, despite the undervalue, the

company carried out the transaction in good faith and for the purpose of carrying on its business, and

if at the time of the transaction there were reasonable grounds for believing that the transaction

would benefit the company (Section 238(5). No equivalent provision exists for bankruptcy). The order

made by the court is designed to restore the status quo ante, but the court has a discretion as to how

this should be accomplished (Sections 238(3) and 339(2)) and may indeed make no order at all (Re

Paramount Airways Ltd [1993] Ch 223, 239; Singla v Brown [2007] EWHC 405 (Ch), [2008] Ch 357; Re

MDA Investment Management Ltd [2003] EWHC 227 (Ch) and [2004] EWHC 42 (Ch), [2005] BCC 783

(company worse off without the undervalue transaction) or an order on terms (see, e.g., Weisgard v

Pilkington [1995] BCC 1108).

Undervalue transactions and third parties

The order made may in certain cases affect the property of, or subject to liability, third parties

subsequently acquiring assets from the other party to the undervalue transaction (Sections 241(2) and

342(2)). The central idea is that bona fide third parties purchasing former company property should

be put beyond the reach of a court order (The burden of proof of good faith is on the third party: Re

Sonatacus Ltd [2007] EWCA Civ 31, [2007] BCC 186).

A third party with notice of the relevant circumstances and the relevant proceedings is now presumed

to have acted otherwise than in good faith (Sections 241(2A) and 342(2A)). This same presumption

arises against persons connected or associated with the company or individual transferor even in the

absence of such notice. In the case of the purchaser of unregistered land, notice of the relevant

proceedings will thus not arise from searching title. The title that that purchaser acquires upon the

conveyance ought therefore not to be safe from the attentions of the administrator or insolvency

officer. The third party defence of good faith purchase has thus become significantly easier to

establish.

Transactions defrauding creditors

The provisions dealing with undervalue transactions (On the meaning of transaction, see Ailyan v

Smith [2010] EWHC 24 (Ch), [2010] BPIR 289; DEFRA v Feakins [2005] EWCA Civ 1513, [2007] BCC 54)

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are similar in scope to section 423, which concerns transactions defrauding creditors (Section 423

applies to both companies and individuals. Legislation of this type dates from the time of Elizabeth I.

It has long been the practice to refer to such transactions as fraudulent conveyances (or transfers),

though there is no requirement of fraud in the text of s 423 (see Arbuthnot Leasing International Ltd

v Havelet Leasing Ltd (No 1) [1992] 1 WLR 455). The mental state of the transferor comes into play at

the remedial stage: 4Eng Ltd v Harper [2009] EWHC 2633 (Ch), [2010] BCC 746). The transaction must

be at an undervalue, which is defined in the same way as it is for undervalue transactions in bankruptcy

in section 339 (Akin to the rules in s 423 are ss 342A to 342C, which give the court power to make such

order as it thinks fit where a bankrupt has previously made excessive contributions to a pension

scheme so as to unfairly to prejudice his creditors. The individual’s purpose in putting assets beyond

the reach of his creditors is relevant in determining whether excessive contributions have been made.

Amounts are excessive in the light of the individual’s circumstances when the contributions were

made) and any order made by the court will be made on similar principles (See Arbuthnot Leasing

International Ltd v Havelet Leasing Ltd (No 1) [1992] 1 WLR 455). Furthermore, there has to be present

an intended purpose of putting assets beyond the reach of present or future claimants or of otherwise

prejudicing their interests, the burden of proof being on the person challenging the transaction though

it can be inferred from the circumstances of the undervalue transaction (See Barclays Bank plc v

Eustice [1995] 1 WLR 1238, CA). This purpose need not be the only purpose (Chohan v Saggar [1992]

BCC 306, 321, CA) but it has to be a ‘substantial’ one (Hashni v IRC [2002] EWCA Civ 981, [2002] BCC

943; Royscot Spa Leasing Ltd v Lovett [1995] BCC 502, CA (disapproving of ‘dominant’ in Chohan v

Saggar [1992] BCC 306, CA)).

One example of a fraudulent transfer is that of the lease of agricultural land by a farmer to his sons at

an annual rent payable (unusually) in arrears, the effect of which was to place the sons in a ‘ransom

position’ against the bank which had a charge over the land (Barclays Bank plc v Eustice [1995] 1 WLR

1238, CA. See also National Westminster Bank plc v Jones [2001] EWCA Civ 1541, [2002] 1 BCLC 55).

Consequently, the bank’s interests had been prejudiced for the purpose of section 423. Moreover, it

did not matter that, after the transaction, the bank still held security exceed ing in value the debt

owed. There was no realistic possibility of the bank being able to realise the freehold land and the

debt was mounting from day to day. In another case (Arbuthnot Leasing International Ltd v Havelet

Leasing Ltd (No 1) [1992] 1 WLR 455), the claimant financed the defendant’s business by leasing

coaches and aircraft to the defendant which in turn sub-leased them to end users. Fearing prospective

litigation, the defendant transferred its business and assets, including the benefit of certain leases

with the claimant, to an undercapitalised shell company. The shell company acquired the benefit of

these leases for the same sum that the defendant had to pay under the various leasing agreements,

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but it paid for these benefits quarterly and in arrears. Furthermore, the shell company was paid by

the defendant an annual management fee of £1.5 million. The receipt of deferred payments in return

for its income stream would itself have been enough to mark out the transfer as an undervalue

transaction. Even legal advice to the effect that the transaction was a proper one did not preclude

the existence of the purpose forbidden under section 423.

Certain differences exist between section 423 and section 238. The former provision is not subject to

a qualifying period at all. Indeed, calculating the commencement of a limitation period, especially for

a transaction transferring both present and future assets, is no easy matter (See Hill v Spread Trustee

Co Ltd [2006] EWCA Civ 542, [2007] 1 WLR 2404 (the period itself is 12 years). Furthermore, a

challenge to a transaction may be mounted, not just by insolvency officer and administrator, but by

‘any victim’ (Anyone prejudiced by the transaction whether contemplated by the transferor or not:

Sands v Clitheroe [2006] BPIR 1000) who is treated as acting representatively on behalf of other victims

too. The leave of the court is nevertheless required if a victim wishes to challenge a transaction

entered into by a company in winding-up or administration (National Bank of Kuwait plc v Menzies

[1994] 2 BCLC 306, CA. See the discussion above on proceedings against companies in administration

and liquidation).

Preferences

The provisions dealing with undervalue transactions (Sections 239 and 340) are also related to the

provisions dealing with preferences. A number of sections of the Act apply to both, notably those

dealing with the qualifying period, the order of the court and the protection given to good faith

purchasers. The period of vulnerability, however, is in the case of preferences six months for both

winding-up and bankruptcy except in the case of connected persons or associates where it is extended

to two years (Sections 240(1)(a), (b) and 341(1)(b), (c)).

The preference itself exists where the insolvent ‘does anything or suffers anything to be done

which…has the effect of putting that person into a position which, in the event of the company going

into an insolvent winding-up, will be better than the position he would have been in if that thing had

not been done’. This will certainly include the giving of security, which does not constitute an

undervalue transaction. An example of a preference was the payment of £2,000 to a 17-year-old

management trainee (the son of the majority shareholder) a month before the company went into

liquidation. It exceeded the amount that the trainee could have recovered in a breach of contract

action (Re Clasper Group Services Ltd [1989] BCLC 143).

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A preference is not enough of itself for the transaction to be struck down. The person conferring the

preference has to be ‘influenced’ by a ‘desire’ to bring down the preferential effect.

In the case of preferences in favour of associates or connected persons, there exists a rebuttable

presumption of a desire to prefer (Sections 239(6) and 340(5)). It is only in such cases that the

legislation has real teeth, since the absence of desire may be nearly as hard to prove as its presence.

In one case (Re Fairway Magazines Ltd [1993] BCLC 643), a publishing company granted a debenture

to one of its directors who provided in return a borrowing facility to the company. The immediate

purpose of the transaction was to reduce the bank overdraft to below its permissible ceiling. The

director was a guarantor of this overdraft. Payments were made directly into the company’s account,

thus benefiting the director who had a security for the sums advanced at the same time as he

commensurately reduced his liability as guarantor. The presumption was rebutted because the

company was actuated by proper commercial considerations, namely the need to obtain finance from

someone other than the bank, while it kept going the publication of a ‘valuable title’ that it was seeking

to sell.

Misfeasance and fraudulent and wrongful trading

Misfeasance

A series of provisions in the Insolvency Act 1986 deals with misfeasance by directors (While de facto

directors are included, shadow directors are not: Revenue and Customs Commissioners v Holland

[2010] UKSC 51, [2010] 1 WLR 2793. On de facto directors, see Re Idessa (UK) Ltd [2011] EWHC 804

(Ch), [2012] BCC 315) and officers of a company and with wrongful and fraudulent trading in the run

up to liquidation. Under section 212, a summary remedy for misfeasance lies in the course of winding

up a company if there has been, on the part of directors and other persons taking part in the

‘formation, promotion or management of the company’ (The section extends also to the conduct of

liquidators, administrators and administrative receivers) conduct that amounts to the misapplication

or retention of, or refusal to account for, the company’s property or money, or to misfeasance (Under

the antecedent provision in companies legislation, misfeasance meant conduct in the nature of a

breach of trust: Coventry and Dixon’s case (1880) 14 Ch D 660, CA) or a breach of any fiduciary or other

duty owed to the company (A developing case law requires directors of an insolvent company to treat

the interests of creditors as paramount: Colin Gwyer and Associates Ltd v London Wharf (Limehouse)

Ltd, [2002] EWHC 2748 (Ch), [2003] 2 BCLC 153; Miller v Bain [2002] 1 BCLC 266). The breach of a duty

owed to the company now extends under the current provision to a breach of the duty of care in

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negligence (Re DuJan of London Ltd [1994] 1 BCLC 561) but otherwise the section merely creates a

summary remedy without altering the law. The court may require restitution of the money or

property and has a broad discretion to make a compensatory award (Section 212(3)). The Insolvency

Act 1986 also sets out a series of criminal offences arising out of fraud on the part of a company’s

officers in the period preceding a winding-up (Section 206 et seq).

Fraudulent trading

Like the misfeasance provision, the fraudulent and wrongful trading provisions also deal with the

emergence of prior wrongdoing in the course of winding up a company. Fraudulent trading, according

to section 213 (The section has extraterritorial application: Balta (UK) Ltd v Nasir [2012] EWHC 2163

(Ch)), arises where the business of a company has been carried on with an intent to defraud creditors

or for any other fraudulent purpose (It is not enough that individual creditors were defrauded in the

course of a business: Mephitis v Bernasconi [2003] EWCA Civ 289, [2003] Ch 552). The test of fraud is

a very difficult one to satisfy (But the knowledge of an employee can be attributed to an employer:

Bank of India v Morris [2005] EWCA Civ 693, [2005] 2 BCLC 328) and is not met just because the

company’s indebtedness arises at a time when it is known by its directors to be insolvent (Re Patrick

and Lyon Ltd [1933] Ch 786. Proceedings may be taken against anyone who knowingly is a party to

the carrying on of the business in a fraudulent manner: s 213(2). For the requirement of knowledge,

see Morris v Bank of America National Trust [2000] 1 All ER 954, 963, CA). Only the liquidator can

bring proceedings under the section (The sanction of the court is required for this and for wrongful

trading actions: Insolvency Act, Sch 4, para (3A) (as added by s 253 of the Enterprise Act 2002)) which

may be brought against outsiders (Bank of India v Morris [2005] EWCA Civ 693, [2005] BCC 739). In

the unlikely event of those proceedings being successful, the court has a broad discretion to require

defendants to make a contribution to the assets of the company.

Wrongful trading

The wrongful trading provision, section 214, was conceived by the Cork Committee as an objective

replacement for the subjective fraudulent trading provision (Cmnd 8558 (1982), para 1775 et seq).

Wrongful trading concerns conduct that the section never defines: the word trading appears only in

the title of the section. It exists whenever a person does the prohibited thing (Parliament rejected the

Cork Committee’s proposal that the conduct consist of incurring ‘further debts or other liabilities’:

Cmnd 8558 (1982), para 1806) at a time when that person was a director of a company (This includes

shadow directors (ss 214(7) and 251) and de facto directors (Re Hydrodan (Corby) Ltd [1994] BCC 161)

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and should have known that there was no reasonable prospect of the company avoiding the insolvent

liquidation that subsequently occurred.

Proceeds of actions

As in actions dealing with vulnerable transactions, the proceeds of wrongful and fraudulent trading

actions are held for the general body of creditors (Re Oasis Merchandising Services Ltd [1998] Ch 170,

CA: Re MC Bacon Ltd [1991] Ch 127).

Powers of investigation and examination

The liquidator has powers of investigation and examination to assist him in determining whether to

challenge pre-liquidation transactions or to take proceedings against officers of the company. These

powers assist also in gathering in the assets of the company. Under section 133 (This may be extended

to voluntary liquidation with the aid of s 112), the compulsory liquidator may apply to the court for

the public examination of former officers of the company and of receivers and administrators, as well

as of those involved in the promotion, formation or management of the company (See R Richbell

Strategic Holding Ltd [2000] 2 BCLC 794. For voluntary liquidation, see Bishopsgate Investment

Management Ltd v Maxwell Mirror Group Newspapers Ltd [1993] Ch 1, CA). A sufficient number of

creditors or members may require an application to be made unless the court rules otherwise. A

similar process of public examination applies to bankrupts (Section 290).

The Insolvency Act also contains duties on the part of identified individuals such as promoters,

employees and officers of the company (also administrators and administrative receivers) to co-

operate with office holders, namely the official receiver, the liquidator, the administrator and the

administrative receiver, by supplying information and making themselves available (Section 235. The

equivalent provisions for bankruptcy are ss 291(4) and 333). This is backed up by a further provision

for a judicial enquiry into a company’s dealings calling for affidavits, books, papers and company

records as well as for attendance by officers, promoters and persons suspected of having in their

possession company property (Section 236). Books, papers and records will have to be surrendered

even if the holder has a lien over them (Section 246. See Akers v Lomas [2002] 1 BCLC 655. For a

demand made by an administrative receiver, see Re Aveling Barford Ltd [1989] 1 WLR 360). The

inquiry must be necessary and must not oppress those who are summoned to appear (Re British and

Commonwealth Holdings plc (No 2) [1993] AC 426, CA. The need for speed may outweigh the

avoidance of oppressive conduct: Shierson v Rastogi [2002] EWCA Civ 1624, [2003] 1 WLR 586). Its

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purpose has been said to be to reconstitute the company’s knowledge in the event of, eg, an ensuing

winding-up (see e.g. Re Cloverhay Ltd (No 2) [1991] Ch 90, CA) but the reason for it has also been put

more broadly as the facilitation of the work of an office holder (Re British and Commonwealth Holdings

plc (No 2) [1993] Ac 426, HL). The inquiry should not take place where the decision to take proceedings

against individuals has already been firmly taken (Re Cloverhay Ltd (No 2) [1991] Ch 90, CA). But it is

permissible if the purpose is to gather evidence to determine if directors’ disqualification proceedings

should be taken (Re Pantmaenog Timber Co Ltd [2003] UKHL 49, [2004] 1 AC 158). Nevertheless,

persons summoned to appear are not protected by a privilege against self-incrimination (Re Levitt

(Jeffrey S) Ltd [1992] Ch 457. Whether the process infringes the European Convention on Human

Rights (Art 6: right to a fair trial) depends on various factors, such as the nature of the proceedings

and the level of coercion required for different proceedings: Official Receiver v Stern [2000] 1 WLR

2230. See also Saunders v United Kingdom [1997] EHRR 313; Shierson v Rastogi [2002] EWCA Civ 1624,

[2003] 1 WLR 586).

THE CONDUCT OF INSOLVENCY OFFICERS (ADMINISTRATORS AND RECEIVERS)

Personal liability

The Insolvency Act provides for actions against liquidators who act in breach of certain duties. Section

212, the summary misfeasance provision, applies also to liquidators (The misfeasance provision for

trustees-in-bankruptcy, who are liable on the same principles as liquidators, is s 304). The liquidator’s

misfeasance may consist of negligence in admitting to proof claims against the estate without making

proper inquiry (Re Windsor Steam Coal Co [1929] 1 Ch 151, CA; Re Home and Colonial Insurance Co

Ltd [1930] 1 Ch 102 (a high standard of care and diligence is required). Proceedings may be launched

by the official receiver, a creditor or a contributory (Leave of the court is required in the case of a

contributory: s 212(5)). Further control over the conduct of liquidators in office can be exercised by

an application to the court to remove the liquidator ‘on cause shown’ (Section 108(2)) which is a

broadly stated discretion that can be employed to deal with dilatory liquidators for the general

advantage of those interested in the assets of the company (Re Kaypak Homecare Ltd [1987] BCLC

409. The removal of trustees-in-bankruptcy is stated simply as occurring when the court so orders or

a general meeting of the creditors so decides: s 298(1). Further provision is made for control of the

trustee by the creditors’ committee and by the court: ss 301 and 303). Administrators and

administrative receivers (but not other receivers except insofar as they have been involved in

managing the company: s 212(1)(c)) are also open to misfeasance proceedings (In their case, the

proceedings may be started by the liquidator. In the absence of a special relationship, an

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administrator owes no common law duty of care to creditors: Kyrris v Oldham [2003] EWCA Civ 1506,

[2004] 1 BCLC 305). The leave of the court is required if proceedings are to be taken against liquidators

and administrators after their release (Section 212(4)). Administrators may be removed from office

at any time by an order of the court (Schedule B1, para 88). The same applies to administrative

receivers (Section 45(1)). Liquidators, administrators and receivers are all exposed to public

examination under section 133. Under section 235, liquidators, administrators and administrative

receivers (but not other receivers) are all under a duty to co-operate with the office-holder.

There is no statutory misfeasance provision for receivers but, when dealing with company assets, the

question has arisen whether they may incur liability outside the Insolvency Act to the company and to

others. A court-appointed receiver is under a duty to preserve the assets and goodwill of the company

(Re Newdigate Colliery Ltd [1912] Ch 468, CA), but there is no true corresponding and unqualified duty

on contractual receivers (but see the attempt to move towards this position in Astor Chemical Ltd v

Synthetic Technology Ltd [1990] BCC 97. The receiver’s entitlement to act against the interests of the

company’s co-contractants is recognised in Airlines Airspares Ltd vHandley Page Ltd [1970] Ch 193 but

he may be enjoined from disregarding contracts of the company to the extent that he is not preferring

the interests of the debenture holder: Ash and Newman Ltd v Creative Devices Research Ltd [1991]

BCLC 403). The primary duty of the contractual receiver is owed to the debenture holder who

procured his appointment and not to the company as such, which is not entitled to expect of him the

performance of its own directors and managers (Re B Johnson & Co [1955] Ch 634, 661-2, CA).

Yet there is a duty owed by the receiver. The starting point is the position of the mortgagee who

enforces a security directly without procuring the appointment of a receiver. That mortgagee is not a

trustee of his power of sale for the mortgagor but may exercise it exclusively in his own interests

without however fraudulently or recklessly sacrificing the interests of the mortgagor (Kennedy v de

Trafford [1896] 1 Ch 762, 772, CA). This is consistent with the rule that a debenture holder is not

obliged to consult the interests of the company when deciding to send in a receiver (Shamji v Johnson

Matthey Bankers Ltd [1991] BCLC 36, CA). Over the years, attempts have been made to introduce an

element of due care into the performance by the receiver of his responsibilities. The fundamental

issue that has arisen is whether a duty to take care, going beyond a duty to abstain from acting

fraudulently, can sit with the receiver’s right to place the interests of the debenture holder first. A

secondary issue, whose late resolution has clouded the debate, has been the largely taxonomic one

of determining whether the provenance of the receiver’s duty lies in equity or in the tort of negligence.

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In one important case, the Court of Appeal held that a mortgagee taking possession and exercising a

power of sale owed a duty to the mortgagor to obtain a proper price (Cuckmere Brick Co Ltd v Mutual

Finance Ltd [1971] 1 Ch 949, CA. The creditor’s freedom to choose the time to sell is not always easily

reconciled with the duty to conduct a sale in a competent manner: see Den Norske Bank ASA v Acemex

Management Co Ltd [2003] EWCA Civ 1559, [2004] 1 Lloyd’s Rep 1). The same approach was adopted

in the case of a receiver when the matter arose collaterally as between the debenture holder and

guarantor of the company’s obligations (Standard Chartered Bank v Walker [1982] 1 WLR 1410, CA).

Nevertheless, the Privy Council has asserted that the law of tort has no part to play and that a

receiver’s duties lie only in equity (China and South Seas Bank v Tan [1990] 1 AC 536, PC. See also

Silven Properties Ltd v Royal Bank of Scotland plc [2003] EWCA Civ 1409, [2004] 1 WLR 997; Raja v

Austin Gray [2002] EWCA Civ 1965, [2003] BPIR 725) stressing that the receiver’s duty to others must

not be allowed to conflict with the duty owed to the debenture holder (Downsview Nominees v First

City Corporation Ltd [1993] AC 295, PC). In equity, the receiver must act in good faith and refrain from

wilful default. More recently, however, the equitable duty has been held to encompass an obligation

on the part of a receiver to manage the affairs of a company with care when there is no conflict with

the essential duty owed to the debenture holder (Medforth v Blake [2000] Ch 86, CA). Since the tort

of negligence is sophisticated enough to tailor due care to the exigencies of the receiver’s position, it

hardly matters, as far as the company is concerned (guarantors, e.g., may well be a different matter),

whether the duty is classified as equitable or tortious.

Officers of the court and ex p James

Official receivers, compulsory liquidators, trustees-in-bankruptcy and administrators, all officers of the

court (The rule therefore does not apply to voluntary liquidators (Re TH Knitwear (Wholesale) Ltd

[1988] 1 Ch 275, CA) and contractual receivers (Triffit Nurseries v Salads Etcetera Ltd [2000] 1 BCLC

262). For its applicability to receivers, see Wallace v Shoa Leasing (Singapore) PTE Ltd [1999] BPIR

911. Insolvents receiving money for services they know they cannot provide may hold those moneys

on constructive trust terms (Neste Oy v Lloyds Bank plc [1983] 2 Lloyd’s Rep 658), which may be a

more promising avenue in some cases than the rule in ex p James) are bound by a particular rule of

ethical conduct to behave in a high-minded fashion and abstain from shabby conduct (Criticised as an

‘anomalous’ rule by Harman J in Re Bateson (John) & Co [1985] BCLC 259, 262). This is known as the

rule in ex p James ((1874) 9 Ch App 609) which goes beyond any legal duties owed by the insolvent

individual or company and concerns essentially the undue enrichment of the insolvent’s estate (The

rule appears to be confined to cases of enrichment: Government of India v Taylor [1955] AC 491, 513,

HL; Re Clark [1975] 1 WLR 559, 563). There is no true proprietary claim against the officer and the

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estate (Re Tyler [1907] 1KB 865, 869, CA explaining James LJ’s reference to ‘equity’ in ex p James), but

rather an application to the court to control the conduct of one of its own officers so as to nullify the

effect of the enrichment (Re Clark [1975] 1 WLR 559, 564 (and not to restore the claimant to the status

quo ante). Early cases concerned the officer’s receipt of money paid over under a mistake of law (Ex

p James (1874) 9 Ch App 609; ex p Simmonds (1885) 16 QBD 308, CA). The recoverability now of

money paid in such circumstances (Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, HL)

abridges the scope of the rule in ex p James, which however is not confined to mistake of law (Re

Thelluson [1919] 2 KB 735, CA; Re Tyler [1907] 1 KB 865, CA). It is a matter of no small difficulty to

estimate the reach of the rule, for ‘questions of ethical propriety…will always be…the subject of honest

difference among honest men’ (Re Wigzell [1921] 2 KB 835, 845, CA). It does not, e.g., prevent a

trustee from bringing an action to recover the proceeds of collected cheques drawn by the bankrupt

when paying gambling debts (Scranton’s Trustee v Pearse [1922] 2 Ch 87, CA).

ADMINISTRATION

Administration is applicable only to an insolvency company (X). It is intended to provide an

opportunity to rescue X from insolvency (perhaps selling it as a going concern). If this is impossible,

the administration will focus instead on realising X’s assets in a manner that produces a better result

for the creditors as a whole than they would achieve in a liquidation. The administrator will seek to

ensure that secured and preferential debts are cleared in full.

Appointment of the administrator

The administrator may be appointed by the court (on the request either of a director of X or of a

creditor) or directly (without court involvement) by resolution of X in general meeting, or by resolution

of its directors or by the holder of a floating charge (dated on or after 15 September 2003) over the

whole or substantially the whole of X’s assets. The administrator must be a licensed insolvency

practitioner).

Powers and duties of the administrator

The administrator has powers and duties as set out in the IA 1986. These are designed to equip the

administrator to manage X’s business and property, with a view to rescuing X from insolvency. The

administrator will put forward proposals as to which assets should be sold and which retained, which

debts should be compromised and at what level, which contracts (to which X is a party) will be

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performed by X and which the administrator proposes should be terminated, and whether and how X

should continue to trade. The administrator is an officer of the court, so must act fairly.

An administrator cannot disclaim any property of X, neither can he simply repudiate contracts into

which X has entered. He must negotiate their termination, or allow X to be in breach of them and let

the other party pursue what remedies it may have for that breach.

The administrator acts as X’s agent and has no personal liability on the contracts into which X has

already entered, or new ones into which it enters during the course of the administration. X’s property

does not vest in the administrator, so if the administrator wishes to dispose of properties, he does so

in X’s name. Once X is in administration, the directors lose their ability to determine the disposal of

the properties.

Administration usually lasts for no more than one year. If the company is still insolvent at that point,

the administration will generally change either to a CVA or to liquidation.

Moratorium

Whilst X is in administration, a statutory moratorium applies (IA 1986, Sch B1, para 43). This prevents

both forfeiture by peaceable re-entry and any ‘legal process’ against X without the consent of the

administrator or the court. This restricts X’s creditors from seeking specific performance by X of its

contracts with them (perhaps a contract to purchase land), suing for damages in lieu of performance,

or seeking repayment of debts owed to them by X (such as a landlord trying to recover rent arrears).

Similarly, those creditors cannot issue a petition to put X into liquidation, and the restriction on legal

process means that a tenant will need consent before it can apply for a new lease under Pt II of the

LTA 1954 where its landlord is in administration (Somerfield Stores Lt v Spring (Sutton Coldfield) Ltd

[2009] EWHC 2384). While consent will sometimes be given, the delay and uncertainty means that

the moratorium can be very frustrating for creditors.

LIQUIDATION OF COMPANIES

Liquidation is also applicable only to companies (not individuals). They are usually (but not always)

insolvent. Where X is insolvent but cannot be rescued, liquidation is appropriate. All X’s assets must

be realised (converted into cash) for distribution to its creditors (or shareholders if there is a surplus).

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In such circumstances, the unsecured creditors may receive very little towards the debt or damages

for breach of contract owed to them by X.

Types of liquidation

A voluntary liquidation is started by a resolution of X’s shareholders (members). Usually they pass

such a resolution because X is insolvent, and in this case X’s creditors must approve the resolution and

choice of liquidator. This is a creditors’ voluntary liquidation. Sometimes, the shareholders wish to

wind up the company even though it is solvent (a members’ voluntary liquidation). No court order is

needed to confirm a voluntary liquidation.

Alternatively, compulsory liquidation occurs where the court makes an order following presentation

of a winding-up petition against X because it cannot pay its debts. Such a petition is often lodged by

a creditor (who must be owed at least £750, though it would seem that, unlike a bankruptcy petition,

this need not be on an unsecured basis).

Powers and duties of the liquidator

The liquidator deals with realisation of X’s assets and distribution of the proceeds, but X’s assets do

not vest in him. The liquidator must be a licensed insolvency practitioner. He has wide-ranging powers

and duties as set out in the IA 1986, but may need approval for some actions, depending on whether

the liquidation is voluntary or compulsory.

Unlike other insolvency officials, a liquidator (and a trustee in bankruptcy) has the ability to disclaim

any property or other assets belonging to X that are considered to be onerous. Section s 178(3)(a) of

the IA 1986 allows the liquidator to disclaim an unprofitable contract. A contract is not unprofitable

just because it is financially disadvantageous. The liquidator has to balance the benefit to the creditors

from complying with the contract against the liability which the contract imposes on the company.

Contracts which impose obligations on X, either to do things or to pay money, would generally be

onerous. This would include contracts in which X agrees to take a new lease or purchase property, or

existing leases where X is the tenant. It might also include a sale agreement where X is the seller

(perhaps where the sale price is rather low). Disclaimer terminates X’s rights and obligations under

the contract and is possible regardless of whether there is a termination clause in the contract. It is

very rare for freehold property to be considered onerous, as it usually has a positive value. However,

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if the obligations associated with its ownership are extensive and costly, it could be disclaimed as

onerous.

Moratorium

Unlike administration, no moratorium applies in a voluntary liquidation. Thus creditors, and other

parties (such as Y) to contracts into which X entered (but of course which is now in breach) can take

enforcement action, unless the liquidator obtains a court order (under s 112 of the IA 1986) to prevent

this.

In a compulsory liquidation, once the winding-up order is made by the court, Y cannot take any action

or proceedings against X or its property without the consent of the court. Also, form the earlier point

when the winding-up petition is presented, any purported disposition by X of its property is void,

unless made with the court’s permission or subsequent ratification.

THE EFFECT OF A TENANT BECOMING INSOLVENT

The range of remedies available to a landlord

Where an insolvent tenant (X) fails to pay its rent or perform its obligations, the landlord

may want to pursue all or any of the following remedies:

(a) sue for unpaid rent (proceedings);

(b) levy distress for unpaid rent (the rules on this are due to change);

(c) divert to itself the rent due from a sub-tenant to X (under s 6 of the Law of Distress

Amendment Act 1908) (a ‘s6 LODAA notice’);

(d) sue for specific performance (proceedings);

(e) sue for damages for breach of covenant (proceedings);

(f) forfeit the lease on grounds either of insolvency or breach;

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(g) start insolvency proceedings (perhaps a petition for bankruptcy or compulsory

liquidation) in order to bring pressure to bear;

(h) force a trustee in bankruptcy or liquidator, acting for X, to decide whether to disclaim

the lease or not, so that (if they do disclaim) at least Y is free to re-let.

(i) persuade the insolvency official to surrender the lease

In some cases the insolvency official may be personally liable to pay the rent, or the rent may qualify

as an expense of the insolvency. This gives the landlord an extra remedy.

The landlord should also consider whether it has meaningful remedies against third parties (for

example, guarantors, or through a rent deposit or a performance bond from a bank).

Recovering the premises – forfeiture and its drawbacks

The forfeiture clause in most leases includes insolvency events as a trigger for possible forfeiture.

These usually include the appointment of an administrator, a liquidator or a trustee in bankruptcy, but

can extend to voluntary arrangements or the appointment of a receiver. Usually, the preliminary steps

in those insolvency processes (such as lodging a petition for winding up, rather than just the making

of the winding-up order) are enough to give the landlord the right forfeit.

Where the landlord can insist that a third party/source pays the rent and performs the covenants

(perhaps a guarantor or a rent deposit), it may prefer the keep the lease alive, for once it has been

forfeited these remedies will generally cease with it. One exception may be if the guarantee states

that the guarantor will take a replacement lease if the original is forfeited. The landlord may also be

reluctant to forfeit if it will be difficult to find a replacement tenant quickly, or if the cost of the

necessary incentives to achieve a re-letting will be prohibitive or if the bill for rates whilst the property

stands empty is unaffordable.

If the landlord decides to forfeit on an insolvency ground, it must serve a notice on the tenant under

s 146 of the LPA 1925. However, the insolvency ground is irremediable, so that the tenant need not

be given a reasonable time to remedy the breach. The greatest source of delay in forfeiture is likely

to be the need for consent from the court or the insolvency official to allow forfeiture (either by

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proceedings or by peaceable re-entry). The main case is to consider whether such consent should be

given for forfeiture proceedings is Re Atlantic Computer Systems plc [1990] EWCA Civ 20.

Even if forfeiture is permitted and achieved, X or its insolvency official can apply for relief from

forfeiture. The court has a wide discretion to permit this, and can set terms for doing so (eg requiring

X to pay off the arrears or remedy the breach of covenant).

REQUIRING THE INSOLVENCY OFFICIAL TO PAY RENT

Rent arrears for the period leading up to the insolvency event

These must be claimed for by the landlord in the insolvency.

Rent/service charge arising after the start of the insolvency

Whether these are payable in full depends on the type of insolvency.

Voluntary arrangements

The terms of the CVA/IVA will determine whether X is liable for the ongoing rent in full or in part, or

not at all. The supervisor of the CVA/IVA is not liable personally to pay these sums.

Receiver

The tenant company remains liable for the rent and service charge, and the receiver may choose

to require the tenant company to pay those sums or it may not. The receiver is not personally liable

to pay these sums (even if it chooses to direct the tenant company to pay them). Moreover, the

receiver can collect in sub-lease rents and account for these to the mortgagee even if the main lease

rent is not being paid.

If the ongoing rent is not paid, the tenant company will be in breach and the landlord will have its

normal remedies, which may include forfeiture, diverting any sub-lease rents under s 6 of the LODAA

1908, or commencing more formal insolvency proceedings (such as bankruptcy or liquidation). The

unpaid rent will usually rank as an unsecured claim in such an insolvency.

Bankruptcy

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The lease becomes vested in the trustee in bankruptcy, who will be personally liable on the covenants

in the lease. The trustee should therefore pay the rent and other sums that fall due whilst the lease is

vested in him. Generally the trustee will try to bring his liability for rent and other payments to an end

by assigning, surrendering or disclaiming the lease.

If the trustee disclaims the lease, the landlord cannot sue the trustee for rent arrears accruing for the

period prior to the disclaimer. Instead the landlord will have to submit a claim in the bankruptcy for

that sum, as an unsecured creditor, and may well recover only part of the debt. It is possible (but not

yet established by case law) that where the trustee has been using the let premises for the purpose

of realising the assets (perhaps continuing to trade X's business from them pending sale of that

business as a going concern), the landlord's claim for rent arrears (for the period from the making

of the bankruptcy order to the date of disclaimer) might be treated as an expense of the bankruptcy

and therefore more likely to be paid in full.

Administrator or liquidator

Rent and other sums need not be paid by an administrator or liquidator as they are not personally

responsible for the contracts into which X has entered. However, if they choose to occupy the

property (or part of it) for the purposes of the administration or winding up, then they may be liable

to pay both rent and service charge that fall due during that period (as an expense of the

administration or liquidation). What qualifies as use for such purposes was considered in Sunberry

Properties Limited v Innovate Logistics Ltd (in administration) [2008] EWCA Civ 1261. If the rent and

service charge qualify as expenses of the administration or liquidation, they will be settled as a priority

debt in the insolvency (ahead of the remuneration of the insolvency official) and, therefore, should be

paid in full. The cases on this are very complex, and not all possibilities have yet been clarified.

Rent payable in advance which falls due before the administration starts is never payable by the

administrator as an expense of the administration. This is true even if that rent instalment was

payable in respect of a period when the administrator is occupying the property for the purposes of

the administration (Leisure Norwich (II) Ltd v Luminar Lava Ignite Ltd & Others [2012] EWHC 951 (Ch)).

Rent payable in advance which falls due during the administration is payable in full even if it in part

covers a period when the administrator is no longer occupying the property for the purposes of the

administration (Goldacare Offices) Ltd v Nortel Networks (UK) Ltd (in administration) [2009] EWHC

3389).

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Rent payable in advance which falls due during the administration for a property where the

administrator is occupying part only of that property for t5he purposes of the administration is

payable in full as an expense of the administration (not just an apportioned part) (Goldacre, above).

Rent payable in arrears which falls due during a liquidation is payable in full as an expense of the

liquidation, even though the period in respect of which it is paid in part relates to a period before the

start of the liquidation (Re Silkstone & Dodsworth Coal & Iron Co (1881) 17 ChD 158). It is not clear

(there is no case) whether the same would be true in administration, and some doubt was cast on this

in the Luminar case.

REQUIRING THE INSOLVENCY OFFICIAL TO OBSERVE THE LEASE COVENANTS

The insolvency official acting for an insolvent corporate tenant is not personally liable to perform the

other covenants in the lease (for example, to carry out repairs, make good dilapidations at the end of

the lease, or observe the user covenant). The insolvency official is merely the agent of the tenant

(which continues to exist). By contrast, a trustee in bankruptcy acting for an insolvent individual

tenant is personally liable to perform the lease covenants.

Where the tenant remains liable to observe the lease covenants and fails to do so, the landlord will

have its normal remedies, subject to any relevant restrictions on their exercise.

Voluntary arrangements (CVA or IVA)

The tenant is still bound to perform the covenants in the lease (though the extent of the obligation to

perform them may be varied by the CVA or IVA terms). The nominee is not personally liable.

Receiver

The tenant company remains liable as tenant under the lease. The receiver can control whether the

tenant will discharge its obligations under the lease. The receiver is not personally liable.

Administrator

The tenant company remains liable as tenant under the lease. The administrator will not be personally

liable, although he will control whether the tenant discharges its obligations under the lease. If the

administrator has chosen to continue to occupy and trade from the property for the purposes of the

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administration, then he will have a powerful incentive to observe the lease covenants, in order to

avoid the risk of the landlord applying for leave to forfeit the lease. It is possible (by analogy with the

Nortel case) that any debts due to the landlord from the tenant, arising as a result of its failure to

comply with the lease covenants during the period of occupation for the purposes of administration,

may qualify as a priority debt, as being an expense of the administration.

Liquidator

The tenant company remains liable as tenant under the lease. The liquidator will not be personally

liable. If the liquidator has continued to trade from the premises (rather than disclaiming the lease,

or leaving the premises empty) or wishes to sell the lease (because it has some capital value) then he

will have an incentive to observe the lease covenants, in order to avoid the risk of the landlord applying

for leave to forfeit the lease. It is very unclear whether debts arising due to failure to observe the

covenants of the lease during such period would be recoverable as a priority debt in the liquidation,

as an expense of the liquidation.

Trustee in bankruptcy

The lease vests in the trustee in bankruptcy, who is therefore bound to observe all its provisions,

unless he chooses to disclaim. The trustee can claim (from the bankrupt’s estate) reimbursement for

any costs incurred in complying with the lease. The tenant will also remain bound (as the statutory

assignment to the trustee in bankruptcy does not release the tenant from liability, under the Landlord

and Tenant Covenants Act 1995).

DISCLAIMER AND ITS EFFECTS

Who can disclaim?

Only trustees in bankruptcy (IA 2006, s315) and liquidators (IA 2006, s178) can disclaim property.

What is disclaimer?

The insolvency official, by notice filed in court, renounces future involvement by X in the contract, or

future ownership by X of the property (as appropriate). Copies of that notice have to be served on

the other people who may be interested in the disclaimed property, or who will remain under an

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obligation in relation to it despite the disclaimer. This gives them the chance to decide whether they

want to apply for an order vesting the disclaimed property in them.

Where X is a tenant, and the insolvency official wishes to bring liability under the lease to an end, it

may prefer to do so by methods other than disclaimer. It may be possible to terminate the lease by

notice to quit (a periodic tenancy), or by exercising a break right. The landlord may be willing to take

a surrender of the lease (particularly if there are sub-leases, as this will be a more reliable way for the

landlord to take over those sub-leases). Alternatively, the insolvency official may choose to do

nothing, fail to pay the rent or observe the provisions of the lease, and hope that the landlord takes

the initiative and chooses to forfeit the lease.

What can be disclaimed?

Any property which the insolvency official considers to be onerous can be disclaimed. Onerous

property is defined (IA 1986, s 178(3)) as property which is either unsaleable or not readily saleable,

or which might give rise to a liability to pay money or perform any onerous act. This will include:

Leasehold property

i) a lease where X is the tenant (because a tenant has a range of obligations which involve

paying money or doing things);

ii) a lease where X is the landlord, if the obligations which the landlord must discharge

(perhaps carrying out repairs) may cost more than it can recover from the tenants. This

is rarely done where X is the freeholder, as well as the landlord, because disclaimer of

the lease requires disclaimer of the underlying freehold interest too, and this usually has

some value.

Sale contracts

(a) a sale contract or agreement for lease where X is the buyer/tenant, if that contract

is unprofitable;

(b) a sale contract or agreement for lease where X is the seller/landlord and the contract

is unprofitable (perhaps because it imposes on X obligations beyond the mere

transfer of the property for the agreed price – for example to carry out extensive

repair works).

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In each case, disclaimer of the contract must be accompanied by disclaimer of the property to which

it relates (so, in the case of a sale contract where X is the seller, the freehold or leasehold property it

covers). This is unlikely where the freehold property has value.

Freehold property

Freehold property is rarely encumbered with such extensive obligations that it will be onerous, so

disclaimer of freehold property is very unusual.

Is consent needed for disclaimer?

In most cases consent is not needed to disclaim (there are a few situations where a trustee in

bankruptcy will need the consent of the court to disclaim, but these are beyond the scope of this

book).

When can the onerous property be disclaimed?

The insolvency official can disclaim whenever he wishes, as long as he does so before the insolvent

party is discharged from bankruptcy (where X is an individual) or finally dissolved (where X is a

company).

If the insolvency official delays, the other party to the contract is left in limbo, not knowing whether

the contract will be observed. That other party can force the pace, by serving on the insolvency official

a notice to elect whether or not to disclaim (IA 1986, s 316(1) or s 178(5)). The insolvency official then

has 28 days to serve notice of disclaimer. If no notice is served in time:

(a) the trustee in bankruptcy is deemed to have adopted the contract and will be

personally liable to perform it;

(b) the liquidator is still not personally liable to perform the contract, but (at least in the

case of a lease) may be taken to have retained the premises for the benefit of the

liquidation, in which case rent and other payments due under the lease will rank as

expenses of the liquidation and be payable as a priority debt (ABC Coupler and

Engineering C Ltd (No 3) [1970] 1 All ER 650).

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Effect of disclaimer

On the insolvent party (X) and the insolvency official

The disclaimer releases X from its obligations (and rights) under the contract from the date of the

disclaimer. It also releases the insolvency official from any such liability.

On the other party to the contract

The other party to the disclaimed contract will be left with a claim in the insolvency for the damages

or losses it suffers as a result of the contract not being performed by X. In some circumstances it may

be able to secure performance by a third party and will not, therefore, suffer any loss.

Where it is a lease that is disclaimed, the landlord will be entitled to retake possession. However, it

should not do so if it wishes to require a third party to take on the responsibility for the lease.

On third parties

Disclaimer does not (unless this is necessary in order to release X from its obligations) affect the

liabilities and rights of any third party (IA 1986, s 178(4)). For example, if X has agreed, jointly with Z,

to purchase a property from Y, X’s insolvency official can disclaim the purchase contract but Y may still

seek specific performance against Z. This comes up most often in the context of a lease where there

is a guarantor for X, or possibly previous tenants who are still liable to perform the lease (either as

original tenant under a pre-1996 lease, or under an AGA for a more recent lease). All will remain liable

to the landlord under the guarantee arrangements, despite the disclaimer, unless the terms of the

guarantee state that it terminates on disclaimer (Hindcastle v Barbara Attenborough Associates [1997]

AC 70 and Doleman v Shaw [2009] EWCA Civ 283).

In such circumstances, the landlord can, despite disclaimer, still sue the guarantor or former tenant

for the rent or performance of the lease covenants. If (as is usual) the guarantee clause provides for

this, the landlord can, alternatively, require the guarantor or former tenant to take up a replacement

lease.

The landlord must be careful not to retake possession of the premises following disclaimer, if it wishes

to be able to pursue such remedies against third parties. If the landlord does retake possession, this

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will be treated rather as if it had successfully forfeited the lease, which brings the lease to an end, and

with it the liability of the guarantors and former tenants (see Hindcastle, above, and Active Estates Ltd

v Parness [2002] EWHC 893).

On sub-tenancies

Sub-tenants are a special variety of third party where a lease is disclaimed, and the rules are very

complex. In simple terms, disclaimer of the head-lease brings to an end the obligations which X had

as landlord of the sub-leases and the subtenants’ rights against and obligations to X. However, it does

not:

(a) terminate the sub-tenants’ interests in the property (so disclaimer differs from

forfeiture in this respect);

(b) substitute the superior landlord as landlord of the sub-leases (as would occur if X’s

lease had been surrendered).

There is privity neither of contract nor estate between the superior landlord and the sub-tenant. In

effect, the disclaimed head-lease is treated as still being in existence, unless and until the superior

landlord chooses to forfeit it (for default in rent payments or performance of other conditions). if that

forfeiture is successful then the sub-lease will be forfeit too (assuming the sub-tenant does not obtain

relief from forfeiture). Until that point, the sub-tenant has a continued right to possession (not under

the sub-lease but under a sui generis set of rights).

This means that if the sub-tenant continues, in practice, to pay the rent and observe the covenants of

the disclaimed head-lease, the superior landlord may have no grounds for forfeiture. If the sub-tenant

pays more rent (under the head-lease) than it was obliged to do under the sub-lease, it can claim in

the insolvency for the difference.

Vesting orders

Where a third party (perhaps a guarantor, former tenant or sub-tenant) ends up paying the rent under

X’s disclaimed lease, it may want to apply for a vesting order. Likewise, a mortgagee of X’s disclaimed

property may want to apply for a vesting order. If successful, the lease or property will be transferred

to the third party. This gives that party control over the property, and thus the ability to ensure

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performance of relevant covenants and to sell or assign the property, in order to bring their liability

to a close.

The court has discretion over whether to make a vesting order and on what terms. Generally it will

require the person in whom the property is vested to be subject to the same obligations (in relation

to that property) as X was before the disclaimer. If more than one person applies for a vesting order,

the court applies an established pecking order in deciding who should succeed (sub-tenants come

higher up this order than guarantors, former tenants or the landlord itself). If the landlord applies for

a vesting order (so as to be sure that the lease is under his control), the court will give people higher

up the pecking order (such as sub-tenants) the chance to take the vesting order instead. If they do

not take up this opportunity reasonably quickly, they will lose the right to apply for a vesting order at

a later date.

If the vesting order is granted, ownership of the lease or other property transfers automatically. There

is no need for a conveyance, an assignment or a transfer.

A party seeking a vesting order must apply for it within three months of becoming aware of or being

notified of the disclaimer. This period can be extended by the court.

NATURE OF WINDING UP AND ADMINISTRATION

Winding up

The Insolvency Act 1986 confers on the High Court and county courts a jurisdiction to order the

winding up of virtually any kind of business, other than one conducted by a sole trader. Sole traders

are excluded from the winding-up jurisdiction because they are subject to bankruptcy law. The making

of a winding-up order is discretionary.

In practice the great majority of applications for winding up are to wind up companies which have

been incorporated by registration with the Registrar of Companies in England and Wales under the

Companies Act 2006 or its predecessors. These include private limited companies and plcs. They are

often referred to as ‘registered companies’, though in the legislation they are simply called

‘companies’.

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The winding up of a company by order of the court is known as a ‘compulsory’ winding up to contrast

it with a winding up effected without a court order, which is called a ‘voluntary’ winding up (as in the

Insolvency Act 1986, s. 84(2)).

The procedure for compulsory winding up serves three principal purposes:

(a) It enables unsecured creditors of an insolvent company to have it liquidated for their benefit

(and in this respect compulsory liquidation has some affinity with the bankruptcy).

(b) In enables members of a solvent company to have it liquidated for their benefit. (The

Insolvency Act 1986 is misleadingly titled: it applies to the winding up of solvent as well as

insolvent companies. In the special jargon of insolvency, the members of a company are

referred to as ‘contributories’.

(c) It enables the Secretary of State and other public officials to have a company liquidated in the

public interest.

The winding up or liquidation (the terms are used interchangeably) of a company is carried out by its

liquidator. The provisions of the Insolvency Act 1986, ss. 136 to 140, ensure that a company has a

liquidator as from the time that a court makes an order for it to be wound up. Initially the liquidator

is the official receiver, but if the assts are sufficient, an insolvency practitioner, who must be qualified

to act in relation to the company may be appointed.

The liquidator of a company being wound up by the court entirely displaces the company’s directors

and performs his or her duties as an officer of the court subject to its control. The task of the liquidator

of a company is to remove the company from all its legal relationships. Its contracts must be

completed, transferred or otherwise brought to an end; it must cease carrying on its business except

so far as may be necessary for its beneficial winding up; its liabilities (including post-liquidation

interest) must be paid, as far as possible, and its legal disputes must be settled.

The members are entitled to benefit from any property remaining unless the company’s constitution

provides otherwise. Surplus non-cash assets may be sold and the proceeds distributed to the

members or, if the company’s constitution provides, the property may be distributed in kind.

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In the compulsory winding up of an insolvent company the official receiver is required to report to the

Secretary of State if it appears to the official receiver that the conduct of any person who has been a

director of the company makes that person unfit to be concerned in the management of a company,

and an application may then be made for a disqualification order (Company Directors Disqualification

Act 1986, ss. 6 and 7).

The liquidation of a registered company is completed by dissolving it, which means removing its name

from the Register of Companies so that it ceases to exist as a juristic person.

Winding up is a process undertaken for the collective benefit of a company’s creditors and members.

A winding-up order is said to operate ‘in favour of all the creditors and of all contributories of the

company’ (Insolvency Act 1986, s 130(4)).

Administration

For an involved registered company, administration is an alternative to both winding up and the

appointment of an administrative receiver. An administrator of a company manages it affairs,

business and property in accordance with a proposal approved by creditors and usually does so in the

interests of all the company’s creditors (Insolvency Act 1986, sch. B1, paras 1(1) and 3(2)). The statute

law on administration is in the Insolvency Act 1986, part 2 (s. 8) and sch. B1.

A company enters administration when the appointment of an administrator takes effect (Insolvency

Act 1986, sch. B1, para. 1(2)). Until 14 September 2003, only the court could appoint an administrator.

Now an administrator of a company may be appointed out of court by the company itself or its

directors or by the holder of a qualifying floating charge in respect of the company’s property (sch. B1,

paras 14 and 22), though such an appointment does not take effect until notice of appointment is filed

in court (sch. B1, paras 18, 19, 29 and 31). Persons who are entitled to appoint an administrator out

of court may alternatively apply to the court to make an appointment, by means of an administration

order under sch. B1, para. 10, and in certain circumstances must do so. An application for an

administration order may also be made by certain persons, such as creditors who do not hold

qualifying floating charges, who are not entitled to make an appointment out of court. The making of

an administration order is discretionary.

An administrator of a company is asked to formulate, if possible, proposals for achieving the purpose

of administration. The proposals must be submitted, within 10 weeks of the administrator’s

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appointment, to the company’s unsecured creditors for approval (sch. B1, para. 51). If the proposals

are approved, the administrator must manage the affairs, business and property of the company in

accordance with them (sch. B1, para. 68).

The administrator of a company is required to report to the Secretary of State if it appears to the

administrator that the conduct of any person who has been a director of the company makes that

person unfit to be concerned in the management of a company, and an application may then be made

for a disqualification order (Companies Directors Disqualification Act 1986, ss. 6 and 7).

OFFICIAL RECEIVERS

Each court in England and Wales with insolvency jurisdiction has attached to it one or more official

receives who are appointed by, and act under the general authority and directions of, the Secretary

of State (Insolvency Act 1986, s 399(2), (3), (5) and (6) and s. 400)2)). The same official receiver may

be attached to two or more different courts (s. 399(5)).

The main tasks of an official receiver are to investigate the causes of insolvencies and to act as trustee

in bankruptcy and as liquidator or provisional liquidator in compulsory liquidations of companies.

Although the creditors of an insolvent person can put their own appointee (who must be a qualified

insolvency practitioner) in place of the official receiver as trustee or liquidator, most insolvent estates

are not sufficiently valuable to remunerate an insolvency practitioner.

For the purposes of the Insolvency Act 1986, ‘the official receiver’, in relation to any winding up, is the

person who is authorised under s. 399(4) or (6) to act as the official receiver in relation to that winding

up (s. 399(1)).

An official receiver exercises the functions of his or her office as an officer of the court in relation to

which those functions are exercised (s. 400(2)).

WHO CAN PETITION FOR WINDING UP?

A person may petition for the compulsory liquidation of a company only if given standing to do so by

the legislation that applies to the company (Mann v Goldstein [1968] 1 WLR 1091 at p. 1094). The

persons who may petition are:

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(a) any creditor or creditors of the company (including any contingent or prospective creditor or

creditors) (Insolvency Act 1986, s. 124(1));

(b) any contributory or contributories of the company (s. 124(1));

(c) the company itself (s. 124(1));

(d) the directors of the company (s. 124(1));

(e) a supervisor of a voluntary arrangement of the company (s. 7(4)(b));

(f) the designated officer for a magistrates’ court (if the company has failed to pay a fine) (s.

124(1); Criminal Justice Act 1988, s. 62(2));

(g) a liquidator (within the meaning of Regulation (EC) No. 1346/2000, art. 2(b)) appointed in

proceedings in another EU State (apart from Denmark) by virtue of art. 3(1) of the Regulation,

or a temporary administrator (within the meaning of art. 38 of the Regulation) (Insolvency Act

1986, s. 124(1));

(h) all or any of the parties listed in (a) to (g) together or separately (s. 124(1));

(i) the Secretary of State (s. 124(4));

(j) an official receiver (though only if the company is already in voluntary liquidation) (s. 124(5));

(k) an administrator of the company (sch. B1, para. 60; sch. 1, para. 21) – an administrator of a

company is deemed to act as the company’s agent (sch. B1, para. 69);

(l) an administrative receiver of the company (s. 42(1) and (2); sch. 1, para. 21) – an

administrative receiver of a company is deemed to act as the company’s agent (s. 44(1));

(m) a receiver (other than an administrative receiver) appointed under a change on property of

the company, if the charge was created as a floating charge and s. 176A (share of assets for

unsecured creditors) applies (IR 1986, rr. 3.39 and 3.40);

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(n) a foreign representative appointed in a foreign main proceeding or a foreign non-main

proceeding in Denmark or a State outside the EU (Cross-Border Insolvency Regulations 2006

(SI 2006/1030), sch. 1, art. 11).

In addition, various public officials and bodies have statutory powers to petition for the winding up of

particular types of company. For example, the Financial Services Authority may petition for the

winding up of a company which provides financial services (Financial Services and Markets Act 2000,

s. 367).

The Secretary of State may petition for the winding up of a company under the Insolvency Act 1986,

s. 124(4)(b), if the case falls within s. 124A. A case falls within s. 124A if the company is not already

being wound up by the court (s. 124A(2)) and it appears to the Secretary of State that it is expedient

in the public interest that the company should be wound up, this being apparent from a report made

or information obtained using various powers of inspection and investigation listed in s. 124A(1).

Petitions in cases falling within s. 124A are known as ‘public-interest petitions’.

Effect of voluntary arrangement and administration moratoriums

A petition for a company to be wound up by the court cannot be presented while a moratorium under

the Insolvency Act 1986, s. 1A (moratorium when directors propose a voluntary arrangement), is in

force in relation to the company (sch. A1, para. 12(1)(a)).

While a company is in administration, and while an interim moratorium is in force when an

administration applicable has been presented or notice of intention to appoint an administrator out

of court has been filed, the court may not make a winding-up order, except on a public-interest

petition presented by the Secretary of State or the Financial Services Authority (sch. B1, paras 42 and

44). When the court makes an administration order it must dismiss any outstanding winding-up

petition (paragraph 40(1)(a)).

Grounds on which a winding-up order is sought

A petition for a winding-up order must allege the existence of one or more of the circumstances in

which the court may make a winding-up order and state the facts from which it may be concluded

that the alleged circumstance or circumstances exist.

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The circumstances in which a registered company may be wound up by the court are listed in the

Insolvency Act 1986, s. 122(1):

A company may be wound up by the court if-

(a) the company has by special resolution resolved that the company be wound up by the court,

(b) being a public company which was registered as such on its original incorporation, the

company has not been issued with a trading certificate under section 761 of the Companies

Act 2006 (requirement as to minimum share capital) and more than a year has expired since

it was so registered,

(c) it is an old public company, within the meaning of Schedule 3 to the Companies Act 2006

(Consequential Amendments Transitional Provisions and Savings) Order 2009 [SI 2009/1941],

(d) the company does not commence its business within a year from its incorporation or suspends

its business for a whole year,

(e) [repealed]

(f) the company is unable to pays its debts,

(fa) at the time at which a moratorium for the company under section 1A comes to an end, no

voluntary arrangement approved under Part 1 has effect in relation to the company,

(g) the court is of the opinion that it is just and equitable that the company should be wound up.

A petition is bound to fail if it does not allege any facts from which it may be concluded that at least

one of the prescribed circumstances exists (Re Wear Engine Works Co. (1875) LR 10 Ch App 188;

Securum Finance Ltd v Camswell Ltd [1994] BCC 434, in which it was said that such a petition would

be an abuse of process).

Evidence that company is unable to pay its debts

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By far the most common type of petition is a creditor’s petition alleging that the company is unable to

pay its debts and the Insolvency Act 1986, s. 123, provides several means of proving that

circumstances in the case of a registered company:

(1) A company is deemed unable to pay its debts-

(a) if a creditor (by assignment or otherwise) to whom the company is indebted in a sum

exceeding 3750 then due has served on the company, by leaving it at the company’s

registered office, a written demand (in the prescribed form) requiring the company

to pay the sum so due and the company has for three weeks thereafter neglected to

pay the sum or to secure or compound for it to the reasonable satisfaction of the

creditor, or

(b) if, in England and Wales, execution or other process issued on a judgment, decree or

order of any court in favour of a creditor of the company is returned unsatisfied in

whole or in part, or

(c) if, in Scotland, the induciae of a charge for payment on an extract degree, or an extract

registered bond, or an extract registered protest, have expired without payment

being made, or

(d) if, in Northern Ireland, a certificate of unenforceability has been granted in respect of

a judgment against the company, or

(e) if it is proved to the satisfaction of the court that the company is unable to pay its

debts as they fall due.

(2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court

that the value of the company’s assets is less than the amount of its liabilities, taking into

account its contingent and prospective liabilities.

Unlike the position in bankruptcy proceedings, it is not necessary for a creditor of a company to

present a statutory demand or issue execution before presenting a winding-up petition. In practice,

it is common for a creditor petitioner to rely on the fact that the company has not aid a debt owed to

the petitioner as proof (under s. 123(1)(e)) of the company’s inability to pay its debts (see Taylors

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Industrial Flooring Ltd v M and H Plant Hire (Manchester) Ltd [1990] BCLC 216 at p. 219; Re a Company

(No. 003079 of 1990) [1991] BCLC 235 at pp. 235-6).

If a statutory demand is used, it must be in the prescribed form, which is form 4.1 in sch. 4 to the IR

1986. A statutory demand can be served only for an amount due for payment at the time of service:

it cannot, for example, be served for a contingent debt where the contingency has not occurred (JSF

Finance and Currency Exchange Co. Ltd v Akma Solutions Inc. [2001] 2 BCLC 307). Unlike bankruptcy,

there is no procedure for obtaining a court order setting aside a statutory demand served on a

company.

Only an undisputed creditor of a company has standing to petition for it to be wound up: if there is a

dispute on substantial grounds about the existence of the petitioner’s debt, the petition will be

dismissed.

STOPPING PRESENTATION OF, OR PROCEEDING WITH, PETITION

Presentation of a petition for the winding up of a company may cause it considerable disruption. The

provisions of the Insolvency Act 1986, s. 127, for the control of transactions while a petition is pending

mean that the company’s bank account will be frozen. Advertisement of the petition is taken up by

credit reference agencies and may damage the company’s business and reputation. Despite the great

inconvenience that can be caused by the presentation of an unsuccessful winding-up petition, a

petitioner is never required to give an undertaking in damages unless there is an application for the

appointment of a provisional liquidator (Re Highfield Commodities Ltd [1985] 1 WLR 149).

If the court considers that a petition to wind up a company is an abuse of process, it will:

(a) if the petition has not already been presented, restrain presentation of the petition;

(b) if the petition has been presented, either restrain notification of the petition and the taking

of further steps to prosecute it, or strike out the petition or restrain notification of the petition

and strike it out; the usual order is to dismiss the petition.

An application to restrain presentation of a petition to wind up a company must be made to a court

having jurisdiction to wind up the company (IR 1986, r 4.6A(a)). It must be listed before a judge (PD

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Insolvency Proceedings, para. 3.2(3)). Applications to stop proceedings on a petition that has already

been presented are made by application in those proceedings. It is usual to ask (under CPR, r. 39.2(3))

for the hearing to be held in private, on the ground that publicity would defeat the object of the

hearing (r. 39.2(3)(a)) and/or that the hearing involves confidential information and publicity would

damage that confidentiality (r. 39.2(3)(c)). However, unless the court expressly prohibits publication

of information heard in a private hearing, it is not contempt of court to make that information public

(A. F. Noonan (Architectural Practice) Ltd v Bournemouth and Boscombe Athletic Community Football

Club Ltd [2007] EWCA Civ 848, [2007] 1 WLR 2614).

An order made by the court on an application to restrain presentation of a petition is not made in the

exercise of its jurisdiction to wind up companies, and therefore cannot be reviewed, rescinded or

varied by it under IR 1986, r. 7.47 (Re Portedge Ltd [1997] BCC 23 at p. 27).

In any proceedings to prevent the prosecution of a petition for the compulsory winding up of a

company, the company must prove that the petition or proposed petition would constitute an abuse

of process by showing, for example:

(a) That it is bound to fail because it is a disputed debt or cross-claim petition.

(b) That it is an abuse of process because it is oppressive or unfair (Cadiz Waterworks Co v Barnett

(1874) LR 19 Eq 182 at pp. 194-7).

(c) That it is an abuse of process because it has been presented for a collateral purpose and not

for the benefit of creditors generally (or the benefit of contributories if it is a contributory’s

petition) (Cadiz Waterworks Co v Barnett (1874) LR 19 Eq 182 at pp. 195-6).

(d) That it is an abuse of process or is bound to fail, because the petitioner is seeking to wind up

the company instead of pursuing an alternative and more appropriate remedy (Charles Forte

Investments Ltd v Amanda [1964] Ch 240). The reason is most often found in relation to

contributories’ petitions, where the suitable alternative remedy may be an unfair prejudice

petition under the Companies Act 2006, s. 994, or a fair offer to purchase the petitioners

shares. When a creditor’s petition is based on an undisputed, unpaid debt, it cannot be

objected that there is a suitable alternative remedy (Cornhill Insurance Plc v Improvement

Services Ltd [1986] 1 WLR 114 at p. 118). In particular, if there are no substantial grounds for

disputing the petitioner’s debt, the petitioner is not required to obtain judgment for it before

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presenting a winding-up petition (Cornhill Insurance Plc v Improvement Services Ltd [1986] 1

WLR 114; Re a Company (No. 003079 of 1990) [1991] BCLC 235 at pp. 235-6).

(e) In the case of a petition that has already been presented, that it is bound to fail as a matter of

law or because of lack of evidence (Charles Forte Investments Ltd v Amanda [1964] Ch 240).

A contractual obligation of a creditor not to apply for winding up (or administration) will be enforced

by the court, if necessary by striking out, and is not contrary to public policy (Re a Company (No. 00928

of 1991) [1991] BCLC 514; Re COLT Telecom Group Plc [2002] EWHC 2815 (Ch), LTL 20/12/2002). But

a company’s articles of association cannot remove its members’ statutory right to apply as

contributories for it to be wound up (Re Peveril Gold Mines Ltd [1898] 1 Ch 122).

Improper purpose

A winding-up order operates in favour of all creditors and contributories of the company (Insolvency

Act 1986, s. 130(4)). It is an abuse of process for a person to petition for a company’s compulsory

liquidation otherwise than for the purpose of providing for all its creditors and contributories the

benefits that the liquidation will produce (though no doubt self-interest will be the petitioner’s

primary concern) (Re Wheal Lovell Mining Co. (1849) 1 ac & G 1 at p. 22; Re a Company (No. 001573

of 1983) [1983] BCLC 492). In Re Southbourne Sheet Metal Co. Ltd [1992] BCLC 361 Harman J said, at

p. 364:

A winding-up petition is not a lis inter partes [lawsuit between parties] for the benefit of A as

against B. It is the invoking by A of a class remedy for the benefit of himself and other

members of the class. Nonetheless, it is (a) based upon a commercial interest of the person

invoking the remedy, and (b) it is for the benefit of himself amongst other members of the

class.

If other members of the petitioner’s class take the view that it is not expedient to pursue the petition,

the court will consider their views when deciding whether to exercise its discretion to make a winding-

up order. The idea of a petitioner as a representative of a class applies primarily to creditors’ petitions.

Disputed debts

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If there is a dispute about the existence of a petitioner’s debt then, as a matter of practice, it is usual,

on the company’s application, to strike out the petition (Re Gold Hill Mines (1883) 23 ChD 210; Re a

Company (No. 0013734 of 1991) [1993] BCLC 59). A disputed debt petition is prevented from

proceeding even if the company sought to be wound up is insolvent (Mann v Goldstein [1968] 1 WLR

1091; Re Record Tennis Centres Ltd [1991] BCC 509 at p. 514; Re a Company (No. 00212 of 1995) (1995)

The Times, 7 April 1995).

A disputed debt petition is prevented from proceeding because ‘the petitioner is not a creditor of the

company within the meaning of [the insolvency Act 1986, s. 124] at all, and the question of whether

he is or is not a creditor of the company is not appropriate for adjudication in winding-up proceedings’

(per Buckley LJ in Stonegate Securities Ltd v Gregory [1980] Ch 576 at p. 580). The petition will not be

prevented from proceeding if the court decides that it would be proper for the dispute to be

determined in the winding-up proceedings (Re Claybridge Shipping Co. SA [1997] 1 BCLC 572).

If the fact that a company is indebted to a creditor is not disputed, but the amount to be paid, and/or

the time at which it is to be paid, is disputed (in particular, if only part of the petitioner’s debt is

disputed) then the petitioner’s standing is not in question and the petition will not be struck out (Re

Tweeds Garages Ltd [1962] Ch 406; Re Claybridge Shipping Co. SA [1997] 1 BCLC 572 per Lord Denning

MR at pp. 574-5; Re Pendigo Ltd [1996] 2 BCLC 64; Corbern v Whatmusic Holdings Ltd [2003] EWHC

2134 (Ch), LTL 1/10/2003).

If it is found that only part of the debt is disputed and there is no evidence of the company’s ability to

pay the undisputed part, the petition may be adjourned for a short time to allow the company to pay

the undisputed debt if it can (Re Javelin Promotions Ltd [2003] EWHC 1932 (Ch), LTL 30/9/2003).

In practice it may be difficult to distinguish between a dispute about existence and a dispute about

quantum (see Re a Company (No. 003729 of 1982) [1984] 1 WLR 1090; Re R. A. Foulds Ltd (1986) 2

BCC 99,269).

The court will not prevent a disputed debt petition proceeding unless it is satisfied that ‘the debt is

disputed on some substantial ground (and not just on some ground which is frivolous or without

substance and which the court should, therefore, ignore)’ (Mann v Goldstein [1968] 1 WLR 1091 per

Ungoed-Thomas J as p. 1096). In Stonegate Securities Ltd v Gregory [1980] Ch 576 Goff LJ, at p. 589,

expressed the court’s task as distinguishing ‘whether there is a bona fide dispute or whether it is

insubstantial or trumped up’.

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In Re a Company No. 0012209 of 1991) [1992] 1 WLR 351 Hoffman J said, at p. 354, that a disputed

debt petition would be allowed to proceed if the court concluded that the dispute was either not put

forward in good faith or that it had no rational prospect of success. In Re a Company (No. 0013734 of

1991) [1993] BCLC 59 the court expanded on the second of these alternatives, holding that it is not

necessary to decide the arguments over a petitioner’s debt: the petition will be allowed to continue if

the arguments ‘afford the company no real rational prospect of success or ... the argument of the

petitioner cannot be seriously questioned’.

It is for the court hearing the petition to decide whether the dispute is substantial enough to justify

dismissing the petition: the question is not decided by the continuance of other proceedings brought

by the petitioner to recover the debt, even if an application by the petitioner for summary judgment

in those proceedings has failed (Re Welsh Brick Industries Ltd [1946] 2 All ER 197). If the court hearing

the petition decides there is not a substantial dispute then the petition must continue even if other

proceedings are also continuing (James Dolman and Co. Ltd v Pedley [2003] EWCA Civ 1686, LTL

25/9/2003)/

Cross-claim against petitioner

If a creditor of a company presents a petition for the compulsory winding up of the company, but the

company claims from the petitioner a sum which is greater than or equal to the petitioner’s debt, or

falls short of it by £750 or less, the practice is to treat the petition in the same way as a disputed debt

petition (Re Portman Provincial Cinemas Ltd [1999] 1 WLR 157; Re LHF Wools Ltd [1970] Ch 27; Re

Bayoil SA [1999] 1 WLR 147). Unless there are special circumstances, the petition will be prevented

from proceeding.

If the company’s cross-claim against the petitioner is less than the petitioner’s debt and it is shown

that the company is unable to pay its debts, a winding-up order will be made (Blue Star Security

Services (Scotland) Ltd 1992 SLT (Sh Ct) 80).

According to Nourse LJ in Re Bayoil SA [1999] 1 WLR 147 at p.155, the company has the burden of

proving:

(a) that its cross-claim is larger than the admitted debt of the petitioner or falls short of it be £750

or less (Greenacre Publishing Group v The Manson Group [2000] BCC 11);

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(b) that its cross-claim has substance (per Lord Denning MR in Portman Provincial Cinemas Ltd

[1999] 1 WLR 157), or is ‘genuine and serious’ (Re Bayoil SA [1999] 1 WLR 147 per Nourse LJ

at p. 155 and Ward LJ at p. 156) or is ‘genuine, serious and of substance’ (Orion Media

Marketing Ltd v Media Brook Ltd [2002] 1 BCLC 184 at p. 191); provided the cross-claim meets

this standard, it does not matter that it is disputed.

The fact that there has been delay in taking steps to establish a cross-claim by arbitration or litigation

may show that the cross-claim is not based on substantial grounds (Re a Debtor (No. 544/SD/98)

[2000] 1 BCLC 103 per Robert Walker LJ at p. 114; Guardi Shoes Ltd v Datum Contracts [2002] CILL

1934). But it is wrong to require a company to prove that it has been unable to litigate a cross-claim

as a condition for preventing presentation of, or proceeding with, a creditor’s winding-up petition

(Bolsover District Council v Dennis Rye Ltd [2009] EWCA Civ 372, [2009] 4 All ER 1140 at [23]; Accessory

People Ltd v Rouass [2010] EWCA Civ 302, LTL 13/4/2010).

Costs of proceedings to stop a petition

Orders as to costs of proceedings for preventing a petition are at the discretion of the court but will

normally follow the event (Canon Screen Entertainment Ltd v Handmade Films (Distributors) Ltd (1988)

5 BCC 207). Abuse of process by presenting a petition to put pressure on a solvent company to pay a

disputed debt is ‘a high risk strategy’, and the petitioner may be ordered to pay the company’s costs

on an indemnity basis (Re a Company No. 0012209 of 1991) [1992] 1 WLR 351).

In Re Vidiofusion Ltd [1974] 1 WLR 1548 the advertisement incorrectly gave the company’s name as

‘Videofusion Ltd’ (‘e’ instead of ‘I’). Megarry J waived the mistake and said that, normally, an error

would be waived if four conditions are satisfied:

(a) There must be no other company on the register with a similar name.

(b) The true name and the misspelt name should have substantially the same pronunciation.

(c) There should be no marked visual difference between the true name and the misspelt name

(so that ‘Jaxen’ for ‘Jackson’ would not be waived despite the similarity of pronunciation).

(d) The error must not materially affect the alphabetical order of the names.

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It is submitted that it is no longer appropriate to waive errors in spelling, now that there are over 2

million British registered companies and now that banks and other persons checking whether they

deal with companies which are the subject of winding-up petitions use computer searches which are

usually not capable of recognising such errors.

CONTROL OF TRANSACTIONS AND LITIGATION

WHILE PETITION IS PENDING

If a winding-up order is made against a company, the winding up is deemed to have commenced at

the time when the petition was presented, or the time the company went into voluntary liquidation,

if earlier (Insolvency Act 1986, s. 129). The general principle of winding-up is that all non-preferential

unsecured creditors are treated equally. So the Act makes provision to prevent specific unsecured

creditors recovering payment of debts at the expense of the other unsecured creditors. (The winding

up of a company does not, in general, affect security interests in the company’s property.) Provision

is made for the stay of other proceedings against the company while the petition is pending

(Insolvency Act 1986, s. 126), for all dispositions of the company’s property to be invalid unless

sanctioned by the court (s. 127), and for avoidance of attachments, sequestrations, distresses and

executions against the company’s property (s. 128). The company itself and its directors may not

appoint an administrator out of court (sch. B1, para. 25(a)), though a holder of a qualifying floating

charge may do so unless a provisional liquidator has been appointed (para. 17(a). The Act also

prevents alterations in the status of the company’s members without the approval of the court (s.

127).

APPOINTMENT OF A PROVISIONAL LIQUIDATOR

Function of a provisional liquidator

A provisional liquidator of a company may be appointed by the court under the Insolvency Act 1986,

s. 135. An appointment may be made at any time in the period between presentation of a petition

for the compulsory winding up of the company and the court’s disposal of the petition (by making a

winding-up order, dismissing the petition or striking it out) (Insolvency act 1986, s. 135(1) and (2); Re

a Company (No. 00315 of 1973) [1973] 1 WLR 1566).

The usual object of the appointment is that an independent person will take charge of the company’s

affairs, maintain the status quo and prevent prejudice either to those supporting the winding-up

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petition or to those against it, pending the court’s decision on the petition (per Lord President Clyde

in Levy v Napier 1962 SC 468 at p. 477; per Street J in Re Carpark Industries Pty Ltd (1966) 86 WN (Pt

1) (NSW) 165 at p. 171). Provisional liquidators are independent persons operating under the

direction of the court for a purpose that is entirely one of preservation during an interim period: a

provisional liquidator does not represent any one group of creditors (Re Bank of Credit and Commerce

International SA (No. 2) [1992] BCLC 579). The name’ provisional liquidator’ is misleading because the

one thing that a provisional liquidator of a company does not do is carry out the liquidation of the

company.

The appointment of a provisional liquidator of a company terminates the powers of the directors as

effectively as does the making of a winding-up order (Re Mawcon Ltd [1969] 1 WLR 78). The directors

do, however, have standing to apply for the provisional liquidator’s appointment to be discharged (Re

Union Accident Insurance Co. Ltd [1972] 1 WLR 640) or apply for an administration order to be made

in relation to the company (Re Gosscott (Groundworks) Ltd [1988] BCLC 363 per Mervyn Davies J at p.

366).

Who may apply for a provisional liquidator to be appointed

When a petition has been presented for the compulsory liquidation of a company, an application to

appoint a provisional liquidator may be made by (IR 1986, 4. 2591)):

(a) the petitioner,

(b) a creditor of the company,

(c) a contributory of the company,

(d) the company itself,

(e) the Secretary of State,

(f) a temporary administrator,

(g) a member State liquidator appointed in main proceedings,

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(h) any person who would, under any enactment, be entitled to present a petition to wind up the

company.

HEARING A WINDING-UP PETITION AND MAKING THE ORDER

Judge

A winding-up petition is heard by the registrar or district judge, who may give any necessary directions

and may, in the exercise of his or her discretion, either hear and determine it or refer it to the judge

(PD Insolvency Proceedings, para. 3.1). The registrar exercises the jurisdiction of the High Court, but

not as a deputy judge of that court (Re Calahurst Ltd [1989] BCLC 140 per Harman J).

Who may be heard?

Company as a litigation in person For representation of a company by an employee.

Directors As part of their general management powers conferred, for example, by art. 3 of each set

of model articles of association in the Companies (Model Articles) Regulations 2008 (SI 2008/3229)

the directors of a company sought to be wound up have power to instruct solicitors and counsel to

appear for the company, even if the company is in administrative receivership (Re Reprographic

Exports (Euromat) ltd 91978) 122 SJ 400, but or a provisional liquidator has been appointed (Re Union

Accident Insurance Co. Ltd [1972] 1 WLR 640). However, the managing director of a company does

not have implied authority to make crucial decisions following the presentation of a petition to wind

up the company, and, in particular, does not have implied authority to instruct solicitors to oppose

the petition (Re Qintex Ltd (No. 2) (1990) 2 ACSR 479; Nece Pty Ltd v Ritek Incorporation (1997) 24

ACSR 38).

Contributories A person wishing to appear as contributory must admit to being a contributor (Re

Eastern Counties Junction and Southend Railway Co. (1859) 14 LT OS 369) and must have a tangible

interest in the company (Re Rodencroft Ltd [2004] EWHC 862 (Ch) [2004] 1 WLR 1566).

Administrative receiver By the Insolvency Act 1986, s. 42 and sch. 1, para. 21, an administrative

receiver of a company has a power to defend a petition to wind up the company.

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Voluntary liquidator If a petition is presented to wind up a company in voluntary liquidation, the

voluntary liquidator should instruct counsel to appear for the company: there should not be separate

appearances for the liquidator and the company (Re A. W. Hall and Co. Ltd (1885) 53 LT 633; Re Mont

de Piété of England [1892] WN 166; Re William Adler and Co. Ltd [1935] Ch 138). The appearance

should be for the purpose of providing information and arguing the company’s case: the liquidator

should not take sides in an argument among creditors or between contributories and creditors (Re

Roselmar Properties Ltd (No. 2) (1986) 2 BCC 99, 157; Re Arthur Rathbone Kitchens Ltd [1997] 2 BCLC

280). If the petition criticises the liquidators conduct of the voluntary winding up, the liquidator should

answer the criticisms fully (Re Arthur Rathbone Kitchens Ltd; Re Leading Guides International Ltd

[1998] 1 BCLC 620).

Provisional liquidator If a provisional liquidator has been appointed then he or she does not, it seems,

have a right to appear at the hearing of the winding-up petition (Re General International Agency Co.

Ltd (1865) 36 Beav 1; Re Laverton Nickel NL (1979) 3 AcLR 945 at p. 947) but, if heard as advocate to

the court, will be awarded the costs of appearing out of the company’s assets (Re Times Life Assurance

and Guarantee Co. (1869) LR 9 Eq 382; Re Laverson Nickel NL).

Notice of appearance

By IR 1986, r. 4.16, any person wishing to appear on the hearing of a winding-up petition must send

notice to the petitioner or the petitioner’s solicitor to arrive not later than 4 p.m. on the business day

before the day appointed for the hearing (or the date of an adjournment). ‘Business day’ is defined in

r. 13.13(1).

ORDERS THAT THE COURT MAY MAKE

On hearing a winding-up petition the court has, by virtue of the Insolvency Act 1986, s. 125(1), the

following options:

(a) make the winding-up order applied for;

(b) dismiss the petition;

(c) adjourn the hearing conditionally;

(d) adjourn the hearing unconditionally;

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(e) make an interim order;

(f) make any other order that it thinks fit.

Court’s Discretion

The fact that one or more of the circumstances in which a company may be compulsorily wound up

exists does not mean that a winding-up order will be made as a matter of course (Re Metropolitan

Railway Warehousing Co. Ltd (1867) 36 LJ Ch 827 per Lord Cairns LJ at p. 829). The court’s power to

order the winding up of a company is discretionary – the Insolvency Act 1986, s. 122(1), says that a

registered company ‘may be wound up by the court’ in the circumstances specified in the subsection.

In relation to a creditor’s petition, even if the creditor’s debt is undisputed and unpaid, the court

nevertheless has a discretion whether or not to make a winding-up order (Re P. and J. Macrae Ltd

[1961] 1 WLR 229; Re Southard and Co. Ltd [1979] 1 WLR 1198).

The basic rule is that where the debt is undisputed and not satisfied and there are no exceptional

circumstances, the creditor is entitles to expect the court to exercise its jurisdiction in the way of

making a winding-up order (per Buckley LJ in Re Southard and Co. Ltd [1979] 1 WLR 1198 at p. 1203).

But, as a winding up order on a creditor’s petition should be for the benefit of creditors generally, the

court will consider the views of creditors than the petitioner. In Re Crigglestone Coal Co. Ltd [1906] 2

Ch 327 the elder Buckley J said, at pp. 331-2, in relation to a creditor’s petition:

the order which the petitioner seeks is not an order for his benefit, but an order for the benefit

of a class of which he is a member. The right ex debito iustitiae [by an obligation of justice] is

not his individual right, but his representative right. If a majority of the class are opposed to

his view, and consider that they have a better chance of getting payment by abstaining from

seizing the assets, then, upon general grounds and upon [the Insolvency Act 1986, s. 195], the

court gives effect to such right as the majority of the class desire to exercise.

So it may be said that, as between the company and an unpaid admitted creditor, the creditor is

entitled to a winding-up order as a matter of course, but, as between the petitioning creditor and the

other creditors, the majority’s opposition to compulsory liquidation may prevail (see Re Great Western

(Forest of Dean) Coal Consumers’ Co. (1882) 21 ChD 769 at p. 773; Re Chapel House Colliery Co. (1883)

24 ChD 259 at pp. 265-6). Those who oppose the petition of an unpaid admitted creditor must

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produce reasons to persuade the court to vary its normal practice of making a winding-up order on

such a petition; the court does not simply abide by a majority decision that there should not be a

compulsory liquidation. In Re J. D. Swain Ltd [1965] 1 WLR 909 Diplock LJ said, at p. 915:

if the only circumstances which are available are that the petitioner seeks a compulsory

winding up and the majority of the creditors seek that there should be no winding up at all,

then prima facie the petitioning creditor is entitled to a winding up unless there are some

additional reasons for deciding to the contrary.

The court will not pay so much regard to the views of the creditors who are connected with the

company – for example, as directors, shareholders or subsidiaries – as to genuine outside creditors,

even if the outsiders’ debts are smaller (Re ABC Coupler and Engineering Co. Ltd [1961] 1 WLR 243 at

p. 245; Re Holiday Stamps Ltd (1985) 82 Ls Gaz 2817; Re Lowersoft Traffic Services Ltd [2001] 1 BCLC

81 at p. 84; Re Lummus Agricultural Services Ltd [2001] 1 BCLC 137).

The court will not, unless there are special circumstances, make a winding-up order on a creditor’s

petition if the amount owed to the creditor is less than the minimum amount for which a statutory

demand may be served, currently £750 (Re Herbert Standring and Co. [1985] WN 99; Re Fancy Dress

Balls Co. [1899] WN 109).

Interim or other order; alternative remedies

The power given to the court by the Insolvency Act 1986, s. 125(1), to make an interim or other order

is limited to making ancillary orders in furtherance of or otherwise in connection with a present or

prospective winding-up order: the subsection does not empower the court to order some remedy

other than winding up. The power to make any other order the court things fit is at the end of a list

of powers in s. 125(I) and is subject to the eiusdem generis rule (Re Bank of Credit and Commerce

International SA (No. 10) [1997] Ch 213 at p. 239). It does not, for example, empower the court to

direct that the company’s claim for damages for petitioning maliciously be heard in the winding-up

proceedings (Partizan Ltd v O. J Kilkenny and Co. Ltd [1998] 1 BCLC 157). It does not empower the

court to direct how the liquidation is to be conducted (Re Bank of Credit and Commerce International

SA (No. 10) [1997] Ch 213 at p. 239).

COSTS

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General

In relation to a winding-up petition, as with any court proceedings, the question of costs is always at

the discretion of the court (Senior Courts Act 1981, s. 51(1); CPR, r. 44.3(1)). The general rule is that

the unsuccessful party will be ordered to pay the costs of the successful party, but the court may make

a different order (CPR, r. 44.3(2)).

The petitioner

Successful petition: The petitioner’s costs of a successful petition are normally ordered to be paid as

an expense of the liquidation (Re Humber Ironworks Co. (1866) LR 2 Eq 15; Re Bostels Ltd [1968] Ch

346 at p. 350). These are included in the usual compulsory order, so there is no need to ask for them

separately at the hearing. The petitioner is also entitled to the costs of any interim applications, unless

there is good reason to the contrary (Re Ryan Developments Ltd [2002] EWHC 1121 (Ch), [2002] 2

BCLC 792).

If a petition succeeds after substitution of the petitioner, the original petitioner’s costs of presenting

and advertising the petition will be ordered to be paid as an expense of the liquidation (Re Bostels Ltd

[1968] Ch 346), even if the original petitioner does not appear at the hearing as a support (Re Castle

Coulson and MacDonald Ltd [1973] Ch 382).

If the effective opposition to a successful petition came from a party other than the company itself,

that party may be ordered to pay the petitioner’s costs (Re Worldhams Park Golf Course Ltd [1998] 1

BCLC 554 (contributory’s petition opposed by another contributory)).

Unsuccessful petition Normally, if a petition is unsuccessful, the petitioner must pay the company’s

costs, one set of costs to opposing creditors and one set to opposing contributories.

If the petition of an unpaid creditor whose debt is undisputed is refused only because the court accepts

the view of opposing creditors that there should not be a compulsory liquidation, no order as to costs

will be made unless the petitioner was acting unreasonably, for example where the petitioner ought

to have known that the petition would fail (Re Chapel House Colliery Co. (1883) 24 ChD 259; Re East

Kent Colliery Co. Ltd (1914) 30 TLR 659; Re R. W. Sharman Ltd [1957] 1 WLR 1008; Re A. E. Hayter and

Sons (Porchester) Ltd [1961] 1 WLR 1008; Re Sklan Ltd [1961] 1 WLR 1013; Re Riviera Pearls Ltd [1962]

1 WLR 722). In Re Arrow Leeds Ltd [1986] BCLC 538 the company was ordered to pay the petitioner’s

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costs because it did not become clear that the majority of creditors opposed winding up until the

petition had been adjourned twice.

In some cases, a costs penalty has been imposed on a company for not giving timely information to a

petitioner about the circumstances which would lead to dismissal of the petition (Re M. McCarthy and

Co. (Builders) Ltd (No. 2) [1979] 2 All ER 339; Re Lanaghan Bros Ltd [1977] 1 All ER 265).

Creditor’s petition achieving payment of the petitioners debt If a creditor petitioner’s debt is paid

before the hearing and no winding-up order is asked for at the hearing then, provided the petition has

been advertised, the company will be ordered to pay the petitioner’s costs (Re Alliance Contract Co

[1867] WN 218) even if the company does not appear (Re Shushella Ltd [1983] BCLC 505). The

petitioner is regarded as having effectively succeeded (Re Nowmost Co. Ltd [1996] 2 BCLC 492).

However, the court may make no order as to part or all of the petitioner’s costs as a penalty for

unreasonable pre-action behaviour (CPR, r. 443(4)(a) and (5)(a)).

The company

Successful petition The company’s costs of preparing for and appearing at the hearing of a successful

winding-up petition are normally ordered to be paid as an expense of the liquidation (Re Humber

Ironworks Co. (1866) LR 2 Eq 15; Re Bostels Ltd [1968] Ch 346 at p. 350). However the company’s

assets available for distribution to its creditors should not be expended unjustifiably. If the company

has unjustifiably opposed the petition or tried to prevent it proceeding, the court may order the

person who instigated the company’s opposition to pay its costs (Re a Company (No 004055 of 1991)

[1991] 1 WLR 1003). There must be an opportunity for the person against whom such a costs order is

sought to submit a defence and, if necessary, put in evidence, before the order is made (ibid).

In Re Gosscott (Groundworks) Ltd [1988] BCLC 363, after a petition for the winding up of the company

was presented by a creditor, the directors of the company presented a petition for an administration

order to be made in respect of the company, in good faith and on the advice of competent

professionals. The administration petition was abandoned and a winding-up order was made. The

company’s costs in relation to the administration petition were allowed as costs of the winding up.

Unsuccessful petition The company’s costs of opposing an unsuccessful winding-up petition must be

paid by the petitioner unless there are exceptional circumstances (Re Humber Ironworks Co. (1866) LR

2 Eq 15; Re Fernforest Ltd [1990] BCLC 693). The company will be awarded its costs against the

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petitioner if the petition is dismissed for failure to file a certificate of compliance (Re Royal Mutual

Benefit Building Society [1960] 1 WLR 1143).

Supporting creditors and contributories

Successful petition When a winding-up order is made, creditors who appeared to support the

petition will be awarded one set of costs between them to be paid as an expense of the liquidation,

and a second set of costs will be awarded on the same basis to supporting contributories (Re European

Banking Co. (1866) LR 2 Eq 521; Re Peckham etc. Tramways Co. (1888) 57 LJ Ch 462 per Chitty J at p.

463; Re Bostels Ltd [1968] Ch 346 at p. 350). It is an invariable rule that only one set of costs is awarded

to successful supporting creditors even if the several persons legitimately appear to present separate

views (Re Esal (Commodities) Ltd [1985] BCLC 450). The creditors and contributories must arrange

among themselves how to divide up the costs.

Costs ordered to be paid to supporting creditors and contributories rank equally with the petitioner’s

costs in the order of priority of payments set out in r. 4.218 of the IR 1986 (where they are item (h)).

Supporters who instruct the same solicitors as the petitioner are not allowed to separate costs and

solicitors instructed in such circumstances should not instruct counsel to represent the supporters in

addition to counsel instructed to represent the petitioner (Re Military and General Tailoring Co. Ltd

(1877) 47 LJ Ch 141; Re Brighton Marine Palace and Pier Co. Ltd (1897) 13 TLR 202).

Unsuccessful petition Supporters of an unsuccessful petition are not entitled to costs (Re Humber

Ironworks Co. (1866) LR 2 Eq 15).

Opposing creditors and contributories

Successful petition Creditors or contributories appearing to oppose a successful petition are not

entitled to costs (Re Humber Ironworks Co. (1866) LR 2 Eq at p. 18; Re Criterion Gold Mining Co. (1889)

41 ChD 146 at p. 149; Re Bathampton Properties Ltd [1976] 1 WLR 168 at p. 17).

Unsuccessful petition: Creditors who appear to oppose an unsuccessful petition may be given one set

of costs between them from the petitioner and so may opposing contributories if their interests are

distinct from the company’s (Re European Banking Co. (1866) LR 2 Eq 521; Re Anglo-Egyptian

Navigation Co. (1869) LR 8 Eq 660; Re Heaton’s Steel and Iron Co. [1870] WN 85; Re Carnarvonshire

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Slate Co. Ltd (1879) 40 LT 35; Re Peckham etc. Tramways Co. (1888) 57 LJ Ch 462 per Chitty J at p. 463;

not following Re Humber Ironworks Co. (1866) LR 2 Eq 15). A contributory whose interests are not

distinct from the company’s will not be awarded costs (Re Times Life Assurance and Guarantee Co., ex

parte Nunneley (1870) LR 5 Ch App 381).

Opposers who instruct the same solicitors as the company are not allowed separate costs (Re Brighton

Marine Palace and Pier Co. Ltd (1879) 13 TLR 202).

Assessment

The court may order costs of proceedings on a winding-up petition to be decided by detailed

assessment (IR 1986, r. 7.34A(5)). If costs of a successful petition to wind up a company are payable

as an expense out of the insolvent estate, they must be decided by detailed assessment unless agreed

between the liquidator and the person entitled to payment (r. 7.34A(1)). In the absence of agreement,

the liquidator may serve notice requiring detailed assessment proceedings to be commenced by the

person entitled to payment (r. 7.34A(2)(a)). Such a notice must be served if required by the liquidation

committee (r. 7.34A(2)(b)). Detailed assessment proceeding must be commenced in the court to

which the winding-up proceedings are allocated (r. 7.34A(3)).

NOTICE TO OFFICIAL RECEIVER AND PERFECTION OF THE ORDER

When a winding-up order is made the court gives notice to its official receiver forthwith (IR 1986, r.

4.20(1)).

When a winding-up order has been made, the court sends three sealed copies to the official receiver

(IR 1986, r. 4.31(1)). The official receiver sends one of those copies by post to the company at its

registered office (r. 4.21(2)). (If there is no registered office the company’s copy may be sent to the

company’s principal, or last known principal, place of business, or be served on such person or persons

as the court directs: r. 4.21(2).) A second copy is forwarded to the registrar of companies (r. 4.21(3))

who must enter it in his records relating to the company (Insolvency Act 1986, s. 130(1) and officially

notify receipt of it in the London Gazette (Companies Act 2006, ss. 1077 and 1078(1) and (2)).

If a winding-up order made against a registered company has been erroneously made against the

wrong company, it may be rescinded and the registrar of companies may be ordered to correct the

records at Companies House (Re Calmex Ltd [1989] 1 All ER 485).

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PERMISSION FOR LITIGATION AGAINST COMPANY

IN LIQUIDATION

Section 130(2) of the Insolvency Act 1986 provides that when a winding-up order has been made, no

action or proceeding shall be proceeded with or commenced against the company or its property,

except be permission of the court and subject to such terms as the court may impose.

CORRECTION OF ERRORS

The court may at any time correct an accidental slip or omission in a judgment or order (CPR, r. 40.12).

An application for permission to amend an error in a petition discovered after the winding-up order

has been made should be made to the member of court staff in charge of the winding-up list in the

RCJ or a district judge in a district registry or a county court (PD Insolvency Proceedings, para. 11.6.1).

Details are given in PD Insolvency Proceedings, paras 11.6.2 and 11.6.3.

RESCISSION AND APPEAL

A winding-up order may be rescinded by the court which made it on the application of an interested

party (IR 1986, r. 7.47(1)).

An appeal against an order made by a court on hearing a winding-up petition is subject to the same

rules as any other appeal in insolvency proceedings.

ADMINISTRATION APPLICATIONS

Which Court?

An application for an administration order to be made in respect of a company may be presented to

a court which has jurisdiction to order the company to be wound up. An application must be made

by means of an administration application (Insolvency Act 1986{, sch. B1, para. 12(1); IR 1986, r.

2.2(1)).

Standing to apply

An application for an administration order to be made in relation to a company may be made by:

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(a) the company itself (Insolvency Act 1986, sch. B1. para. 12(1)(a));

(b) the directors of the company (para. 12(1)(b));

(c) one or more creditors of the company (para. 12(1)(c)) – ‘creditor’ includes a contingent

creditor and a prospective creditor (para. 12(4));

(d) the designated officer for a magistrates’ court (if the company has failed to pay a fine) (para.

12(1)(d); Magistrates’ Courts Act 1980, s. 87A);

(e) a supervisor of a voluntary arrangement of the company (Insolvency Act 1986, s. 7(4)(b) and

sch. B1, para. 12(5));

(f) a combination of persons listed in (a) to (e) (sch. B1, para. 12(1)(e));

(g) a foreign representative appointed in a foreign main proceeding or a foreign non-main

proceeding (Cross-Border Insolvency Regulations 2006 (SI 2006/1030), sch.1, art. 11).

The company, the directors of the company, or a creditor who holds what the legislation calls a

‘qualifying floating charge in respect of the company’s property’, may alternatively appoint an

administrator without court proceedings (Insolvency Act 1986, sch. B1, paras 14 and 22), though such

an appointment does not take effect until notice of appointment is filed in court (sch. B1, paras 18,

19, 29 and 31). The wide-ranging definition of ‘qualifying floating charge in respect of a company’s

property’ in sch. B1, para. 14, will, in practice, include any floating charge which alone or in conjunction

with other charges, covers the whole or substantially the whole of the company’s property.

In the following circumstances persons with the power to appoint an administrator out of court cannot

do so and must instead apply to the court for an appointment, if the right to apply is available:

(a) If the company is being wound un voluntarily or by the court, an administrator cannot be

appointed out of court and an administration application may be made only by the liquidator

(sch. B1, paras 8 and 38) or (if it is a winding up by the court) by the holder of a qualifying

floating charge (paras 8 and 37).

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(b) If an administrative receiver of the company has been appointed, an administrator cannot be

appointed out of court and the court will make an appointment only if the charge who

appointed the receiver consents or the court is satisfied that if an order were made the

floating charge under which the receiver was appointed would be discharged or avoided or

declared invalid by the court under ss. 238 to 240 (transactions at an undervalue and

preferences) or s. 245 (avoidance of floating charges given to secure existing debts) (sch. B1,

paras 17(b), 25(c) and 39). The administrative receiver must vacate office if an administrator

is appointed (para. 41(1)).

(c) If a petition has been presented asking for the company to be wound up by the court and has

not been disposed of, the company itself and its directors may not appoint an administrator

out of court (para. 25(a)), though a holder of a qualifying floating charge may do so unless a

provisional liquidator has been appointed (para. 27(a)).

(d) If an administration application has been made and has not been disposed of, the company

itself and its directors may not appoint an administrator out of court (para. 25(b)), though a

holder of a qualifying floating charge may do so.

(e) An appointment may not be made out of court by the company or its directors within 12

months of the ending of a previous administration initiated by it or them (para. 23) or within

12 months of a moratorium under sch. A1 (moratorium to enable preparation of a voluntary

arrangement) which failed to produce a workable voluntary arrangement (sch. B1, para. 24).

(f) While a moratorium under sch. A1 is in force, an administrator cannot be appointed out of

court, and an administration application cannot be made to the court (sch. A1, para. 12(1)(d)).

Need for insolvency

Unless the administration application is made by the holder of a qualifying floating charge, the court

cannot make an administration order in relation to a company unless it is satisfied that the company

is, or is likely to become, unable to pay its debts (Insolvency Act 1986, sch. B1, para. 11(a)). To show

that a company is likely to become unable to pay its debts it must be shown that it is more probably

than not that it will be unable to pay its debts (Re COLT Telecom Group plc [2002] EWHC 2815 (Ch),

LTL 20/12/2002).

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If an administration application by the holder of a qualifying floating charge states that it is made in

reliance on sch. B1, para. 35, the court may make an administration order without proof of the

company’s insolvency, but only if satisfied that the conditions for appointing an administrator out of

court, under para. 14, are satisfied. The most important of these conditions are that the floating

charge must presently be enforceable (para.16), and the holder of any prior qualifying floating charge

must either give written consent or be given at least two business day’s notice (para. 15).

Statutory purpose

The court may not make an administration order in relation to a company unless it considers that the

order is reasonably likely to achieve the purpose of administration (Insolvency Act 1986, sch. B1 para

11(b)). The purpose of administration is the objective with which the administrator must perform his

or her functions, defined in sch. B1, para. 3(I), as:

(a) rescuing the company as a going concern; or

(b) achieving a better result for the company’s creditors as a whole than would be likely if the

company were wound up (without first being in administration); or

(c) realising property in order to make a distribution to one or more secured or preferential

creditors.

Objective (a) must be given priority unless the administrator believes it is not reasonably practicable

or that objective (b) would achieve a better result for the company’s creditors as a whole (para. 3(3)).

Objective (c) may be pursued only if the administrator believes (i) it is not reasonably practicable to

achieve either objective (a) or objective (b) and (ii) the interests of the creditors of the company as a

whole will not be harmed unnecessarily (para. 3(4)).

In order to show that an administration order is ‘reasonably likely to achieve the purpose of

administration’ it is necessary to show that there is a real prospect that the purpose of administration

will be achieved (Hammonds v Pro-Fit USA Ltd [2007] EWHC 1998 (Ch), [2008] 2 BCLC 159 at [24]).

Court’s powers on hearing an application

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On hearing an application for an administration order to be made in relation to a company the court

may, by the Insolvency Act 1986, sch. B1, para. 13(1), make the order, or dismiss the application, or

adjourn the hearing conditionally or unconditionally, or make n interim order, or treat the application

as a winding-up petition and make any order which it could make under s. 125, or make any other

order that it thinks fit. If a winding-up order is made, the winding up commences on the making of

the order (s. 129(1A)).

If an administration order is made, the costs of the applicant, and of any other person whose costs are

allowed by the court, are payable as an expense of the administration (IR 1986, r. 2.12(3)).

An administration order must be in form 2.4B in IR 1986, sch. 5 (r. 2.12(2)). If the company was in

liquidation, the order must provide for the transition from liquidation to administration, as specified

in the Insolvency Act 1986, sch. B1, paras 37 and 38, and IR 1986, r. 2.13. If a winding-up petition was

pending, it must be dismissed (Insolvency Act 1986, sch. B1, para. 40(1)(a)).

An interim order may restrict the exercise of a power of the company or of its directors (sch. B1, para.

13(3)(a)). An interim order may make provision conferring a discretion on the court, or on a qualified

insolvency practitioner, in relation to the company (para. 13(3)(b)). The appointment of an insolvency

practitioner to supervise under para. 13(3)(b) is analogous to the appointment by the court of a

receiver of disputed property that is in jeopardy; such a person is not an administrator, because the

appointment is not be an administration order, and so the rights of the holder of a floating charge to

intervene (para. 36) or veto the appointment (para. 39) do not arise (Re a Company (No. 00175 of

1987) (1987) 3 BCC 124).

If an administrative receiver of the company has been appointed, and the chargee who made the

appointment has not consented to the making of an administration order, and the court is not satisfied

that the charge would be discharged or avoided or declared invalid under ss. 238 to 240 or s. 245, the

court can only dismiss the application (sch. B1, para. 39; Re a Company (No. 00175 of 1987) (1987) 3

BCC 124). This applies whether the administrative receiver was appointed before or after the

administration application was made (sch. B1, para. 39(2)).

Notice of court’s order

If an administration order is made, the appointment of the administration takes effect when the order

is made, unless some other time is specified in the order (Insolvency Act 1986, sch. B1, para. 13(2)).

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The court must, as soon as reasonably practicable, send two sealed copies of the order to the

application (IR 1986, r. 2.14(1)), who must, as soon as reasonably practicable, send one of them to the

person appointed as administrator (r. 2.14(2)).

Costs where there is both a winding-up petition and an administration application

Where a company has been subject to both a winding-u petition and an administration application,

and either winding up or administration is ordered, the court has a discretion to order that the costs

of applying for the insolvency process that has not been put in place are to be paid as expenses of the

process that has been put into effect (Re Gosscott (Groundworks) Ltd [1988] BCLC 363; Irish Reel

Productions Ltd v Capitol Films Ltd [2010] EWHC 180 (Ch), [2010] Bus LR 854). The person applying for

the order must make out a case for it (see Unadkat and Co. (Accountants) Ltd v Bhardwaj [2006] EWHC

2785 (Ch), [2007] BCC 452 at [17]). When a winding-up order has been made there have been sharply

differing views on how the discretion should be exercised in respect of the costs of an administration

application. On one side it has been said that such costs should be allowed if the application was

made in good faith, reasonably and on professional advice (Re Gosscott (Groundworks) Ltd). On the

other side it has been said that the fact that an application has been made in good faith, reasonably

and on professional advice is not a reason for making the creditors pay for it (Re W. F. Fearman Ltd

(No 2) (1987) 4 BCC 141; EPIS Services Ltd v Commissioners of HM Revenue and Customs [2007] EWHC

3534 (Ch), LTL 30/4/3010).

LITIGATION IN WINDING UP

As far as possible, litigation by or against a company being wound up is to be conducted within the

winding-up proceedings. A claim against the company must be submitted to the liquidator who will

decide whether to accept it in whole or part, subject to appeal to the court. The Insolvency Act 1986,

ss. 212, 213 and 214 and sch. B1, para. 75, allow some claims of a company in liquidation to be brought

by application in the winding-up proceedings, with a consequent saving in court fees, and authorise

the company’s liquidator and other persons to make such an application.

Misfeasance proceedings

The Insolvency Act 1986, s. 212 and sch. B1, para, 75 provide that some claims by a company which is

being wound up may be pursued by an application in the winding-up proceedings. Applications under

these provisions are known as ‘misfeasance proceedings’ and they are an optional alternative to an

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ordinary claim. There are limits on which defendants and which causes of action may be pursed in

misfeasance proceedings.

By s. 212(1), the only persons against whom misfeasance proceedings may be taken under s. 212 are

persons who:

(a) are, or have been, officers of the company;

(b) have acted as liquidator or administrative receiver of the company; or

(c) are, or have been, concerned, or have taken part, in the promotion, formation or management

of the company.

The only causes of action which may be pursued in s. 212 misfeasance proceedings are those which

allege that the defendant has misapplied or retained, or become accountable for, any money or other

property of the company, or has been guilty of any misfeasance or breach of any fiduciary or other

duty in relation to the company (s. 212 (1)). Where the defendant has acted as liquidator of the

company, this includes any misfeasance or breach of duty in connection with the carrying on of his or

her functions as liquidator (s. 212(2)).

Schedule B1, para. 75, makes the same provision in relation to proceedings against a person who:

(a) is, or purports to be, the administrator of the company; or

(b) has been, or has purported to be, its administrator (sch. B1, para. 75(1)).

An application under s. 212 may be made by the official receiver, the company’s liquidator or any

creditor or contributory of the company (s. 212(3)). An application under sch. B1, para. 75, may be

made by any of those persons or by the company’s administrator (sch. B1, para. 75(2)), and may be

made if the company is in administration without being wound up.

The permission of the court must be obtained for an application:

(a) by a contributory under s. 212 (but not under sch. B1, para. 75) (s. 212(5));

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(b) against a liquidator or administrator who has been released or discharged from liability (s.

212(4); sch. B1, para. 75(6)).

If a claim in the name of a company in liquidation is brought against an officer etc. of the company,

the court may convert it into misfeasance proceedings by substituting the liquidator (or other

authorised applicant) for the company as claimant, under CPR, r. 19.2(4), and allowing consequential

amendments (Parkinson Engineering Services plc v Swan [2009] EWCA Civ 1366, [2010] Bus LR 857).

In Parkinson Engineering Services plc v Swan the claim was against a former administrator and the

court made the substitution after the expiry of the limitation period, as the claim could not properly

be continued because it was barred by the previous discharge of the administrator under what is now

the Insolvency Act 1986, sch. B1, para. 98, and that bar could be disapplied only in misfeasance

proceedings (sch. B1, para. 75(6)). It was crucial to the exercise of the power under CPR, r. 19.5(3)(b),

that the switch from Part 7 claim to misfeasance proceedings involved no change in the cause of action

or the facts to be asserted.

Fraudulent and wrongful trading

The Insolvency Act 1986, ss. 213 and 214, provide causes of action which can be asserted only in the

court of the winding up of a company, and only by an application by the liquidator. An application

under s. 213 may be made against any persons who were knowingly parties to the carrying on of any

business of the company with intent to defraud creditors (of the company or any other person), or for

any fraudulent purpose. An application under s. 214 may be made against a person if (s. 214(2)):

(a) the company has gone into insolvent liquidation (defined in s. 214(6));

(b) at some time before the commencement of the winding up of the company, that person knew

or ought to have concluded that there was no reasonable prospect that the company would

avoid going into insolvent liquidation; and

(c) that person was a director of the company at that time.

UNFAIR PREJUDICE PETITIONS

Statutory provision

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Section 994 of the Companies Act 2006 entitles a member of a company to apply to the court by

petition for an order giving relief in respect of conduct of the company’s affairs which is unfairly

prejudicial to the interests of its members generally or of some part of its members (including at least

the petitioner), or any actual or proposed act which is or would be so prejudicial,

Procedural rules

The Companies (Unfair Prejudice Applications) Proceedings Rules 2009 (SI 2009/2469) apply to all

proceedings under the Companies Act 2006, s. 994. The CPR apply to proceedings on an unfair

prejudice petition, with any necessary modifications, except so far as they are inconsistent with the

Companies Act 2006 or SI 2009/2469 (SI 2009/2469, r. 2(2)). The procedure provided by SI 2009/2469

follows the procedure for contributories’ winding-up petitions. An unfair prejudice petition may seek

a winding up by the court as an alternative remedy, though PD 49B, para. 1 says that it is undesirable

to do that as a matter of course. ‘The petition should not ask for a winding-up order unless that is the

relief which the petitioner prefers or it is thought that it may be the only relief to which the petitioner

is entitled’.

The requirement that an application under the Companies Act 2006, s. 994, must be made by petition

is imposed by statute and so the court has no power under the CPR to waive a failure to comply with

it (Re Osea Road Camp Sites Ltd [2004] EWHC 2437 (Ch), [2005] 1 WLR 760).

Form and contents of petition

The prescribed form for a petition under the Companies Act 2006, s. 994, is set out in the schedule to

Si 2009/2469 and is to be used with such variations, if any, as the circumstances may require (SI

2009/2469, r. 3(1)). The petition must specify the grounds on which it is presented and the nature of

the relief which is sought by the petitioner (SI 2009/2469, r. 3(2)).

The extensive powers of the court to make orders on an unfair prejudice petition are set out in the

Companies Act 2006, s. 996. The relief sought must be appropriate to the conduct of which the

petition complains (Re J. E. Cade and Son Ltd [1992] BCLC 213 at p. 223), though it need not be directed

solely towards remedying the particular things that have happened (Re Hailey Group Ltd [1993] BCLC

469 at p. 472). The court is required to make the order that is appropriate at the time of the hearing

(ibid. loc. cit.).

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If a winding-up order is asked for, the petition must comply with PD 49B on orders under the

Insolvency Act 1986, s. 127, sanctioning transactions by the company while the petition is pending.

The petition must state the names of persons on whom it is intended to serve the petition (known as

the ‘respondents’), one of whom will be the company itself.

There is no provision for verification of an unfair prejudice petition by affidavit or statement of truth.

Filing the petition and fixing a return day

An unfair prejudice petition must be delivered to the court for filing with copies for service on all the

respondents (including the company itself) named in the petition (SI 2009/2469, r. 3(2)). The court

will fix a hearing for a day (called the ‘return day’) on which, unless the court otherwise directs, the

petitioner and any respondent (including the company) must attend for directions to be given in

relation to the procedure on the petition (SI 2009/2469, r. 3(3)).

Service of the petition

The petitioner must, at least 14 days before the return day, serve a sealed copy of the petition on all

respondents named in the petition (including the company itself) (SI 2009/2469, r. 4). The applicable

rules on service are those of CPR, Part 6. If the petition also prays for a winding up, there must be

personal service in accordance with CPR, rr. 6.5(3) and 6.22(3).

Directions

SI 2009/2469, r. 5 requires the court, on the return day, or at any time after it, to give such directions

as it thinks appropriate with respect to the following matters:

(a) service of the petition, whether in connection with the venue for a further hearing, or for any

other purpose;

(b) whether particulars of claim and defence are to be delivered;

(c) whether, and if so by what means, the petition is to be advertised;

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(d) the manner in which any evidence is to be adduced at any hearing before the judge and in

particular;

(i) the taking of evidence wholly or in part by affidavit or witness statements or orally;

(ii) the cross-examination of any deponents to affidavits or witness statements;

(iii) the matters to be dealt with in evidence;

(e) any other matter affecting the procedure on the petition or in connection with the hearing

and disposal of the petition;

(f) such orders, if any, including a stay for any period, as the court thinks fit, with a view to

mediation or other form of alternative dispute resolution.

The registrar should consider directing the parties and/or their advisers to meet with a view to

narrowing the issues, identifying what issues are really important, what issues are really in dispute,

how those issues are to be resolved or proved, and resolving and narrowing any other matters which

in the context of the particular petition could reasonably be expected to be narrowed (Re Rotadata

Ltd [2001] 1 BCLC 122 at p. 127).

Interim orders

The court will grant interim injunctions to preserve the status quo if, but only if, departure from the

status quo might affect the remedy sought in an unfair prejudice petition (Callard v Pringle [2007]

EWCA Civ 1075, [2008] 2 BCLC 505). See, for example, Re a Company (no. 002612 of 1984) [1985]

BCLC 80; Re Sticky Fingers Restaurant Ltd [1992] BCLC 84; Re a Company (No. 003061 of 1993) [1994]

BCC 883; Incasep Ltd v Jones [2002] EWCA Civ 961, [2003] BCC 226. An interim injunction will not be

granted unless the court considers that the petition has a real prospect of success (Re X Ltd (2001) The

Times, 5 June 2001).

In proceedings on an unfair prejudice petition the court does not have jurisdiction to order an interim

payment under CPR, Part 25 (Re a Company (No. 004175 of 1986) [1987] 1WLR 585; Re a Company

(No. 004502 of 1988) [1991] BCC 234). The court will not make a freezing order against any party to

an unfair prejudice petition, unless it alleges what amounts to a cause of action against that party (Re

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Premier Electronics (GB) Ltd [2002] 2 BCLC 634). An interim injunction prohibiting the company from

paying a director remuneration which has not been authorised may be made without joining the

director as a party (Riener v Gershinson [2004] EWHC 76 (Ch), [2004] 2 BCLC 376).

A minority member of a company who is petitioning under the Companies Act 2006, s. 994, may also

be frustrating the holding of general meetings, by refusing to attend so that any meeting will be

inquorate, so as to prevent prejudicial resolutions being adopted. The majority may apply under s.

306 for an order convening a meeting with the usual quorum rules suspended. The court hearing the

s. 306 application will take into account the existence of s. 994 proceedings when deciding whether

to make an order under s. 306 (Re Sticky Fingers Restaurant Ltd; Re Whitchurch Insurance Consultants

Ltd [1993] BCLC 1359; Re Woven Rugs Ltd [2002] 1 BCLC 324).

Unlike a winding-up petition, it is not necessary to strike out an unfair prejudice petition where there

is a dispute about the petitioner’s standing: an unfair prejudice petition may be stayed to enable the

petitioner to establish standing (Re Starlight Developers Ltd [2007] EWHC 1660 (Ch), [2007] BCC 929).

Stay in favour of arbitration

The Court of Appeal has now upheld the effectiveness of an arbitration agreement which covers the

disputes giving rise to an unfair prejudice petition (Fulham Football Club (1987) v Richards [2011]

EWCA Civ 855, [2012] 2 WLR 1008, overruling Exeter City Association Football Club Ltd v Football

Conference Ltd [2004] EWHC 2304 (Ch), [2004] 1 WLR 2910, and disagreeing with the Northern Ireland

Court of Appeal in Re wine Inns Ltd [2000] NIJB 343). This means a party to the arbitration agreement

who is made a party to the proceedings on the petition can apply to the court under the Arbitration

Act 1996, s. 9, for proceedings on the petition to be stayed so that the matter can be dealt with by

arbitration instead of by the court. The Court of Appeal held that an arbitrator is capable of deciding

whether there has been unfair prejudice (as [77]). However, it is possible that in some cases an

arbitrator will not be able to order suitable remedies, particularly if they involve persons who are not

party to the arbitration agreement. In such a case it would be necessary to make an application to the

court to make suitable orders in the light of the arbitrator’s findings.

In the light of the decision in Fulham Football Club (1987) v Richards, it is likely that many private

companies will want to include arbitration agreements in their constitutions so that future disputes

will be settled by arbitration rather than by petitioning the court under the Companies Act 2006, s.

994.

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Costs

It is a misapplication of the company’s money to pay any costs of proceedings on an unfair prejudice

petition (other than as ordered by the court), except for those necessarily incurred in representing the

company as a separate person (Re Kenyon Swansea Ltd [1987] BCLC 514; Re Elgindata Ltd [1991] BCLC

959). The court may order the company to indemnify the petitioner for the costs of obtaining an order

in favour of the company as a separate person (Clark v Cutland [2003] EWCA Civ 810, [2004] 1 WLR

783). The company may provide a qualifying third party indemnity, as permitted by the Companies

Act 2006, s. 234, to a director who successfully defends an allegation of negligence, default, breach of

duty of trust contained in an unfair prejudice petition (Branch v Bagley [2004] EWHC 426 (Ch), LTL

10/3/2004).

The court will issue an interim injunction to prevent misapplication of the company’s assets on funding

a defence to a petition. It may also restrain expenditure on other proceedings started against the

petitioner which concern the same issues, if they were started in response to the petition (Pollard v

Pollard (2007) LTL 26/9/2007).

Court’s order

If the court is satisfied that the applicant’s petition is well-founded it is empowered by the Companies

Act 2006, s. 996(1), to make sure order as it thinks fit for giving relief in respect of the matters

complained of. More particularly, under s. 996(2), the court may:

(a) regulate the conduct of the company’s affairs in the future; this could include ordering an

alteration of the company’s memorandum or articles or preventing the company from making

any, or any specified, alteration to the memorandum or articles without the court’s

permission;

(b) require the company to refrain from doing or continuing an act complained of by the

petitioner or to do an act which the petitioner has complained it has omitted to do;

(c) authorise civil proceedings to be brought in the name and on behalf of the company by such

person or persons and on such terms as the court may direct;

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(d) require the company not to make any, or any specified, alterations in its articles without the

leave of the court;

(e) provide for the purchase of the shares of any members of the company by other members or

by the company itself and, in the case of a purchase by company itself, the reduction of the

company’s capital accordingly.

The court has jurisdiction to make orders against persons who are not members of the company or

who are not involved in the conduct complained of (provided they have been made parties to the

proceedings), but it is inconceivable that the court would order a person who was not a member of

the company to buy the petitioner’s shares (Re Little Olympian Eachways Ltd [1994] 2 BCLC 420).

The court has a power under s. 996(1) to make such orders as it considers will enable the company,

for the future, to be properly run, and for its affairs to be under the conduct of somebody who the

shareholders generally can be confident will conduct the affairs of the company properly (Re a

Company (No. 00789 of 1987) [1990] BCLC 384 per Harman J at p. 395, followed in Re Hailey Group

Ltd [1993] BCLC 459).

The rule that he who comes to equity must come with clean hands does not apply to unfair prejudice

petitions. In other words, a petitioner’s own misconduct is not in itself a reason for rejecting the

petition, though it may show that the petitioner was not unfairly prejudiced or may affect the remedy

given by the court (Re London School of Electronics Ltd [1986] Ch 211; Richardson v Blackmore [2005]

EWCA Civ 1356. [2006] BCC 276).

The most common order is that the majority shareholders must buy the petitioner’s shares.

Exceptionally, in Re Brenfield Squash Racquets Club Ltd [1996] 2 BCLC 184 the majority shareholder

was ordered to sell its shares to the petitioner.

If it is plain that the appropriate solution to the situation which the petitioner is complaining about is

sale of the petitioner’s shares, if other members of the company are willing to buy them, and if the

articles provide a procedure for determining the price to be paid on a sale from one member to

another, that procedure should be adopted, instead of petitioning under s. 994. A petition is

appropriate, for the purpose of obtaining the court’s valuation of the shares, if there is any risk that

the procedure provided by the articles will undervalue them (Re a Company (No. 00330 of 1991)

[1991] BCLC 597). However, if an offer is made which proposes a genuinely independent valuation,

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the court will strike out the petition as an abuse of process: the petitioner is not entitled to insist on

the court carrying out a valuation which can be performed more cheaply by an accountant (Re a

Company (No. 00836 of 1995) [1996] 2 BCLC 192).

There is a helpful discussion of what counts as a reasonable offer to purchase a petitioner’s shares in

O’Neill v Phillips [1999] 1 WLR 1092 at pp. 1107-8. An offer is not reasonable if the offeror cannot

finance it (West v Blanchet [2000] 1 BCLC 795). In many cases the petitioner contends that the value

of the shares has been diminished by the conduct complained of in the petition and some way has to

be found for a valuer to take this into account. If the value of the shares depends on the answer to a

question of law, the question should be left for the court to decide (North Holdings Ltd v Southern

Tropics Ltd [1999] 2 BCLC 625).

DIRECTORS’ DISQUALIFICATION PROCEEDINGS

STATUTORY PROVISIONS

Nature of a disqualification order

The Company Directors Disqualification Act 1986 (CDDA 1986) enables the civil and criminal courts to

protect the public by making disqualification orders which ban persons from acting as company

directors when it is shown that they are unfit to do so.

By CDDA 1986, s. 1(1), the main practical effect of a disqualification order is that the person against

whom the order is made must not, without leave of a court, be a director of a company or in any way,

whether directly or indirectly, be concerned or take part in the management of a company, for the

duration of the order. The person is also banned from being concerned or taking part, in any way,

whether directly or indirectly, in the promotion or formation of a company, from acting as receiver of

a company’s property or from acting as an insolvency practitioner.

A disqualification undertaking has the same effect as a disqualification order but is made without court

proceedings.

The acts which a disqualified person is prohibited from doing are listed in two paragraphs in s. 1(1),

but the only form of disqualification order which may be made is one disqualifying a person from doing

all the things listed: it is not possible to disqualify from only a selection of them (Official Receiver v

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Hannan [1997] 2 BCLC 473; R v Cole [1998] 1 BCLC 234; Re Adbury Park Estates Ltd [2003] BCC 696).

It is not possible to make a disqualification order limited to a particular class of companies, such as

public companies (R v Ward (2001) The Times, 10 August 2001). Disqualification orders are not

confined to individuals: companies may also be disqualified from being directors (Official Receiver v

Brady [1999] BCC 258).

Acting in contravention of a disqualification order is an offence triable either way (CDDA 1986, s. 13).

In addition a person who contravenes a disqualification order by being a director of a company, or

being concerned, whether directly or indirectly, or taking part, in the management of a company, may

be made personally liable for all debts and liabilities of the company incurred while so acting (CDDA

1986, s. 15(1)(a), (3)(a) and (4)). A person liable under s. 15 is jointly and severally liable for the debts

(whether under s. 15 or some other provision) (CDDA 1986, s. 15(2)).

In CDDA 1986, ‘company’ means not only registered companies, but all unregistered companies

capable of being wound up under part 5 of the Insolvency Act 1986 (CDDA 1986, s. 22(2) and (9)). This

includes partnerships (Insolvent Partnerships Order 1994 (SI 1994/2421)) and it is submitted that it

was wrong for Rattee J to suggest in Secretary of State for Trade and Industry v Barnett [1998] 2 BCLC

64 at p. 70 that a disqualified person could run a business in partnership with his wife. CDDA 1986 is

applied, with modifications, to limited liability partnerships by the Limited Liability Partnerships

Regulations 2001 (SI 2001/1090), reg. 4(2).

Grounds for disqualification

The vast majority of disqualification orders are made under CDDA 1986, s. 6, and this chapter will

concentrate on applications under s. 7 for orders under s. 6 and application under s. 8 (which have

many similarities to those under s. 7).

In ss. 6 to 9A, ‘director’ includes a shadow director (ss. 9E(5) and 22(4)) and ‘shadow director’ is

defined in s. 22(5) in the same way as it is defined in the Companies Act 2006, s. 251. The definition

of shadow director is discussed in Secretary of State for Trade and Industry v Deverell [2001] Ch 340.

CDDA 1986 also extends to directors and officers of building societies (s. 22A) and incorporated

friendly societies (s. 22B), to officers of insolvent partnerships (Insolvent Partnerships order 1994, art.

16 and sch. 8), and to members of limited liability partnerships (Limited Liability Partnerships

Regulations 2001 (SI 2001.1090), reg. 4(2)(g)).

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Purpose of disqualification under sections 6 and 8

In Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 Dillon LJ said, at p. 176:

It is beyond dispute that the purpose of CDDA 1986, s. 6, is to protect the public, and in particular

potential creditors of companies, from losing money through companies becoming insolvent when

the directors of those companies are people unfit to be concerned in the management of a company.

See also Re Lo-Line Electric Motors Ltd [1988] Ch 477; Re Westmid Packing Services Ltd [1998] 2 All ER

124 at p. 131. Protection is not necessarily limited to the British public (Re Westminster Property

Management Ltd (No. 2) [2001] BCC 305 at p. 358).

A further, related purpose is to raise standards of responsibility among those who make use of limited

liability (per Nicholls V-C in Secretary of State for Trade and Industry v Ettinger [1993] BCLC 896 at p.

899). This was described by Scott V-C in Re Barings plc [1998] BCC 583 at p. 590 as subsidiary to the

main purpose of protection of the public.

Section of CDDA 1986

Circumstances Court which may make order

Who may apply for order

Period of disqualification

s.5 Three convictions for failure

to file documents with

registrar

Convicting Court Court’s own motion Up to five years

s.6 Conduct while director of a

company which has become

insolvent shows unfitness

Secretary of State Up to 15 years

In Re Blackspur Group plc [1998] 1 WLR 422 the Court of Appeal said, at p. 426:

The purpose of [CDDA 1986] is the protection of the public, by means of prohibitory

remedial action, by anticipated deterrent effect on further misconduct and by

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encouragement of higher standards of honesty and diligence in corporate management,

from those who are unfit to be concerned in the management of a company.

See also per Sir Andrew Park in Re Morija plc [2007] EWHC 3055 (Ch), [2008] 2 BCLC 313, at [33]. Other

judges at first instance have taken raising standards to be the primary purpose of disqualification: see

Lawrence Collins J in Re Bradcrown Ltd [2001] 1 BCLC 547 at p. 550 (apparently misreading the

mention of it in Re Westmid Packing Services Ltd at p. 129 as a statement by the court of the law

whereas in fact it was only a summary of counsel’s argument) and Peter Smith J in Re J. A. Chapman

and Co Ltd [2003] EWHC 532 (Ch), [2003] 2 BCLC 206 at [9]. That this is the primary purpose may be

indicated by the rule that, if unfitness is proved, a disqualification order must be made under s. 6

(which requires a disqualification period of at least two years), whether or not the court thinks that

the defendant is a danger to the public (Re Grayan Building Services Ltd [1995] Ch 241).

The purpose of a disqualification order is not to mete out retribution for aggrieved creditors (Re

Cubelock Ltd [2001] BCC 523 at p. 536).

DISQUALIFICATION UNDERTAKINGS

Instead of applying to the court under CDDA 1986, s. 7 or s. 8, for an order disqualifying a person from

being a director, since 2 April 2001 it has been possible for the Secretary of State to accept from the

person a disqualification undertaking, if expedient in the public interest (ss. 7(2A) and 8(2A)). Instead

of applying under s. 9A for a competition disqualification order the OFT or a specified regulator may,

under s. 9B, accept a disqualification undertaking. A disqualification undertaking is an undertaking by

a person not to do any of the things which are prohibited by a disqualification order, for a specified

period of time. (ss. 1A and 9B). Sections 13 and 15 apply to disqualification undertakings as well as

disqualification orders, so that the penalties for breaching an undertaking are the same as for acting

contrary to a disqualification order.

Giving a disqualification undertaking because of inability to fund a trial is not the result of a violation

of the European Convention on Human Rights, art. 6(1), in the Human Rights Act 1998, sch. 1, and is

not a ground for setting aside the undertaking (Secretary of State for Trade and Industry v Davies

[2006] EWHC 299 (Ch), [2006] 2 BCLC 489).

The Secretary of State refuses to accept a disqualification undertaking unless it is accompanied by an

agreed statement of the facts which showed the person’s unfitness to be a director, and the Secretary

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of State is entitled to insist on such a statement (Re Blackspur Group plc (No. 3) [2001] EWCA Civ 1595,

[2002] 2 BCLC 263).

MAKING THE APPLICATION

Court to which application is to be made

An application under CDDA 1986, s. 7 for a disqualification order under s. 6 alleges:

(a) that the defendant is, or has been, a director or shadow director of a company (known as the

‘lead company’) which has at any time become insolvent (whether while the defendant was a

director or subsequently), and

(b) that the defendant’s conduct as a director or shadow director of the lead company (either

taken alone or taken together with conduct as a director or shadow director of any other

company – known as a ‘collateral company’) makes the defendant unfit to be concerned in

the management of a company.

For these purposes a company ‘becomes insolvent’ if (s. 6(2)):

(a) the company goes into liquidation at a time when its assets are insufficient for the payment

of its debts and other liabilities and the expenses of the winding up (s. 6(2)(a)); or

(b) the company enters administration (s. 6(2)(b)); or

(c) an administrative receiver of the company is appointed (s. 6(2)(c)).

For the purposes of s 6(2)(a), post-liquidation interest, either payable or receivable, cannot be taken

into account, but the liquidator’s remuneration, if properly approved, must be (Official Receiver v

Moore [1995] BCC 293).

The court to which an s. 7 application for a disqualification order must be made depends on the type

of insolvency procedure to which the lead company is subject when the proceedings commence, or

has been subject to the in the past.

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If the lead company is being, or has been, wound up compulsorily, the disqualification application

must be made to the court which is carrying out, or has carried out, the winding up (s. 6(3)(a)).

If the lead company is being, or has been, wound up voluntarily, the application must be made to a

court which has (or had) jurisdiction to wind it up (s. 6(3)(b)). The rules on jurisdiction in winding up

are set out in 79.8. The rules which determine which county court has jurisdiction (where paid-up

capital is £120,000 or less) are to be read with references to presentation of petition for winding up

replaced by references to the passing of the resolution for voluntary winding up (s. 6(3)(A)(a)). It is

submitted that when s. 6(3)(b) refers to a company which ‘has been wound up voluntarily’ it means a

completed voluntary liquidation, so that where a voluntary liquidation is succeeded by a compulsory

liquidation, s. 6(3)(a) applies.

If the lead company has never been in liquidation but has at any time been in administration or

administrative receivership, the disqualification application must be made to a court which has

jurisdiction to wind it up s. 6(3)(c)). In the rules which determine which county court has jurisdiction,

references to presentation of the petition for winding up are to be read as reference to the

appointment of the administrator or (as the case may be) the appointment of the administrative

receiver (s. 6(3A)(b)).

Proper claimant

An application under CDDA 1986, s. 7 or s. 8, must be made by the Secretary of State, who must

consider that it is expedient in the public interest that a disqualification order should be made.

Decisions on when to apply for disqualification orders are taken in the Disqualification Unit of the

Insolvency Service, which is an executive agency of the Department for Business, Innovation and Skills

(http://www.insolvency.gov.uk).

If the lead company in an application under s. 7 is being or has been wound up by the court, the

Secretary of State may direct the official receiver to make the application (s. 7(1)). If the lead company

has never been in compulsory liquidation (for example, if it is administration), the official receiver does

not have standing to make an application, which can only be made by the Secretary of State. The

court may order a substitution of claimant if proceedings are started by the wrong claimant (Re NP

Engineering and Security Products Ltd [1998] 1 BCLC 208).

Leave of the court after two years

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An application under CDDA 1986, s. 7, may be made without the leave of the court if it is made within

two years of the date on which the lead company became insolvent (s. 7(2)). This is the date when

one of the events mentioned in s. 6(2) occurred. If more than one of them occurred, it is the date

when the first of them occurred (Re Tasbian Ltd (No. 1) [1991] BCLC 54). An application is made when

the claim form is received by the court (PD 7A, para. 5.1; Secretary of State for Trade and Industry v

Normand [1995] 2 BCLC 297; Secretary of State for Trade and Industry v Vohora [2007] Bus LR 161). If

the court office is closed on the last day of the two-year period, the period is extended to the next day

on which the office is open (Re Philipp and Lion Ltd [1994] 1 BCLC 739).

When the two-year period has expired an application may be made only with the leave of the court

(S. 7(2)). Leave is applied for by application notice under CPR, Part 23, as amplified by PD Directors

Disqualification Proceedings, paras 17 and 19.

The two-year period is not properly described as a limitation period after which a person is immune

from a claim: the need to obtain the leave of the court should be seen as an additional condition which

applies after two years (Secretary of State for Trade and Industry v Davies [1996] 4 All ER 289 per

Millett LJ at pp. 298-9).

An application for leave after the two-year period must satisfy the court that leave should be granted

(Secretary of State for Trade and Industry v Davies at p. 298). According to Scott LJ in Re Probe Data

Systems Ltd (No. 3) [1992] BCLC 405 at p. 416, Hoffmann LH in Secretary of State for Trade and Industry

v McTighe [1994] 2 BCLC 284 at p. 287 and Millett LJ in Secretary of State for Trade and Industry v

Davies at pp. 296-7, in considering whether to give leave to make an application after two years the

court should take account of all relevant circumstances, including, but not limited to:

(a) the length of the delay,

(b) the reasons for the delay,

(c) the gravity of the charges against the defendant, and

(d) the degree of prejudice caused to the defendant by the delay.

An important factor in favour of granting leave is that disqualification proceedings are brought, not to

vindicate a private right, but to protect the public from the actions of a person alleged to be unfit to

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be a director of a company (Secretary of State for Trade and Industry v Davies per Millett LJ at pp. 296-

7).

The applicant must explain why the application for leave is necessary, which necessarily involves giving

reasons for the delay (Secretary of State for Trade and Industry v Davies at p. 299). However, there is

no rule that an application for leave will not be considered unless the applicant gives a satisfactory

reason for the delay: the satisfactoriness of the reason is just one of the factors to be taken into

account by the court when exercising its discretion (Secretary of State for Trade and Industry v Davies).

Warning notice

By CDDA 1986, s. 16(1), any person intending to apply to a county court of the High Court for the

making of a disqualification order must give not less than 10 days’ notice of that intention to the

person against whom the order is sought. An application made without giving the correct period of

notice is not a nullity (Secretary of State for Trade and Industry v Langridge [1991] Ch 402), but may

be an abuse of process, for which one possible sanction would be to strike out the claim (Re Finelist

Ltd [2003] EWHC 1789 (Ch), [2004] BCC 877 at [93]).

Summary ‘Carecraft’ procedure

The applicant for a disqualification order under CDDA 1986, s. 6 or s. 8, must prove the case against

the director – there is no procedure analogous to pleading guilty to a criminal charge (Re New

Generation Engineers Ltd [1993] BCLC 435 at p. 436). However, PD Directors Disqualification

Proceedings provides for the use of what has come to be known as the Carecraft procedure (it was

first used in Re Carecraft Construction Co. Ltd [1994] 1 WLR 172). This was described by Scott V-C in

Secretary of State for Trade and Industry v Rogers [1996] 1 WLR 1569 at pp. 1571-2 as follows:

an agreed statement of facts is placed before the court, no oral evidence is given (so no cross-

examination takes place), the court is informed of the bracket into which the parties agree

the disqualification should fall and the parties’ counsel address the judge on that basis. The

procedure enables the case to be disposed of expeditiously and with a substantial saving of

costs that would be incurred in a full-blown trial.

Use of this procedure does not mean that the judge must make the disqualification order for the

agreed period or within the agreed bracket. It is for the judge to decide what the appropriate order

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is in the light of the evidence presented. The judge must not speculate what might have been shown

by other evidence which the parties have agreed not to present (Re SIG Security Services Ltd [1998]

BCC 978). A judge who thinks, having seen other evidence which is no longer relied on, that it is a

more serious case than is revealed by the agreed statement of facts may adjourn the case for a short

period and invite the Secretary of State to reconsider, but otherwise must deal with the case on the

basis of the evidence put before the court by the parties (Secretary of State for Trade and Industry v

Rogers at pp. 1573-4). A judge who decides to impose a disqualification period materially different

from that agreed by the parties should give notice to them of that intention, so that they may

reconsider their positions (Re BPR Ltd [1998] BCC 259 per Rimer J at p. 260).

If the parties decide to invite the court to use the Carecraft procedure, they should inform the court

immediately and obtain a date for the hearing (PD Directors Disqualification Proceedings, para. 13.1).

The claim form (form N500) draws attention to the possibility of using the Carecraft procedure, but

not in terms intelligible to the lay defendant.

If the Carecraft procedure is to be used, the claimant must, unless the court directs otherwise, submit

a written statement of the agreed or unopposed facts, and specify the period of disqualification which

the parties agree those facts justify (PD Directors Disqualification Proceedings, para. 13.2). A range of

years may be specified (para. 13.2(2)). The statement should spell out the facts clearly, leaving no

room, no need, for filling in or interpretation by way of inference of secondary facts (Secretary of State

for Trade and Industry v Banarse [1997] 1 BCLC 653).

It is usual for the statement to be preceded by a statement of the basis on which it is made, in

particular, that it is made only for the purposes of a summary disposal of the application and cannot

be relied on if the court orders a full trial instead. The usual form of words is set out in Secretary of

State for Trade and Industry v Rogers at p. 1575 and was approved in Official Receiver v Cooper [1999]

BCC 115.

Unless the court otherwise orders, a hearing under the Carecraft procedure will be in private (PD

Directors Disqualification Proceedings, para. 13.4), but judgment will be given in public and the

statement of agreed or unopposed facts will be annexed to the disqualification order, if one is made

(para.13.5).

If the court refuses to make a disqualification order under the Carecraft procedure, it will give

directions for the hearing of the application (para. 13.6).

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FACTORS WHICH THE COURT CONSIDERS IN AN APPLICATION UNDER SECTION 6 OR 8

Unfitness must be proved

The court cannot disqualify a person under CDDA 1986, s. 6, unless it is satisfied that the person’s

conduct as a director or shadow director of a particular company – either taken alone or taken in

conjunction with conduct as director or shadow director of any other company – makes that person

unfit to be concerned in the management of a company. This means unfit to be concerned in the

management of companies generally, though not necessary every company in the country (Re Polly

Peck International plc (No. 2) [1994] BCLC 574; Re Barings plc (No. 5) [2000] 1 BCLC 523 at p. 535): it

is possible to give permission for a disqualified person to manage a particular company. If the court

does find that the defendant’s past conduct renders the defendant unfit, it must make a

disqualification order for at least two years, regardless of subsequent reform of character (Re Grayan

Building Services Ltd [1995] Ch 241; Re Migration Services International Ltd [2001] 1 BCLC 666 at p.

673). Subsequent reform of character may be taken into account when fixing the length of the

disqualification period.

On an application under s. 8, the court may, at its discretion, disqualify a defendant whose conduct in

relation to a particular company demonstrates unfitness to be concerned in the management of a

company. There is no minimum period of disqualification under s.8 but otherwise the principles which

the court applies in deciding cases are the same as for s. 6 (Secretary of State for Trade and Industry v

Hollier [2006] EWHC 1804 (Ch), [007] Bus LR 352 at [50] and [59]). The two sections are compared

and contrasted in Re J. A. Chapman and Co. Ltd [2003] EWHC 532 (Ch), [2003] 2 BCLC 206, at [2] to [9].

In Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 Dillon LJ said, at p. 176:

The test laid down in s. 6 – part from the requirement that the person concerned is or has

been a director of a company which has become insolvent – is whether the persons conduct

as a director of the company or companies in question ‘makes him unfit to be concerned in

the management of a company’. These are ordinary words of the English language and they

should be simple to apply in most cases. It is important to hold to those words in each case.

Evidence

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The matters by reference to which the defendant is alleged to be unfit (commonly known as the

‘charges’) must be specified by the claimant in a statement filed with the claim form (SI 1987/2023, r.

3(3)). Whatever other evidence is before the court, its reasons for making a disqualification order

must be limited to proved charges: this ensures the defendant knows what case has to be answered

(Re Deadluck Ltd [2000] 1 BCLC 148 at pp. 159 and 164-5; Re Cubelock Ltd [2001] BCC 523). Only

proved charges may be taken into account when setting the period of disqualification (Re Sevenoaks

Stationers (Retail) Ltd [1991] Ch 164 at p. 177). But other evidence may show the context in which

the proved misconduct occurred an may influence the court’s assessment of its gravity either when

deciding whether the proved charges demonstrate unfitness (Re Deadluck Ltd at pp. 159 and 164-5)

or at least in so far as it provides mitigation) when determining the period of disqualification (Re

Sevenoaks Stationers (Retail) Ltd at p. 177).

The r. 3(3) statement need not be treated like an indictment in a criminal trial. The court has a

discretion whether to allow the claimant to add or to alter the charges made in the r. 3(3) statement,

the paramount requirement being the defendant must know the charges that have to be met (Re

Sevenoaks Stationers (Retail) Ltd at p. 177; Re Stephenson Cobbold Ltd [2000] 2 BCLC 614; Kappler v

Secretary of State for Trade and Industry [2006] BCC 845).

Whether a defendant is unfit is a question of fact (Re Sevenoaks Stationers (Retail) Ltd at p. 176).

Determining that question:

involves the evaluation of the seriousness of the charges which have been proved and a

judgement of the trial judge as to whether, taking all the circumstances into account, including

all matters of mitigation and extenuation, the director is or is not unfit. (Re Hitco 2000 Ltd

[1995] 2 BCLC 63 at p. 65).

Charges must be viewed cumulatively, so that it is no defence to say that no individual instance of

misconduct merits disqualification (Re Barings plc (No. 5) [2000] 1 BCLC 523 at p. 535). Circumstances

which may be taken into account include the defendant’s health at the time of the alleged misconduct

(Re CEM Connections Ltd [2000] BCC 917; Secretary of State for Trade and Industry v Mitchell 2002 SLT

658). It is irrelevant that some other remedy has been or might be obtained for the misconduct (Re

Grayan Building Services Ltd [1995] Ch 241). General evidence of character is irrelevant (Re Dawes

and Henderson (Agencies) Ltd [1997] 1 BCLC 329) though it may be relevant in determining the period

of disqualification (Re Barings plc [1998] BCC 583 at p. 590; Re Westmid Packing Services Ltd [1998] 2

All ER 124 at p. 133).

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Parliament has established investigatory processes for providing the Secretary of State with reports,

information or documents on which an opinion may be based that it is expedient in the public interest

that a disqualification order should be made against a person (CDDA 1896, s. 8). It follows that the

Secretary of State may use the relevant report etc. as evidence in support of an application for a

disqualification order despite the rules against evidence of opinion and findings of fact (Re Barings plc

(No. 2) [1998] 1 BCLC 590; Re Barings plc (No. 5) [1999] 1 BCLC 433; Secretary of State for Business

Enterprise and Regulatory Reform v Aaron [2008] EWCA Civ 1146, [2009] 1 BCLC 55). This is so whether

the application is for disqualification under s. 6 or s. 8 (Secretary of State for Trade and Industry v

Ashcroft [1998] Ch 71). A copy of any report of inspectors appointed under the Companies Act 1985,

part 14, certified by the Secretary of State to be a true copy, is admissible in any legal proceedings as

evidence of the opinion of the inspectors in relation to any matter contained in the report (Companies

Act 1985, s. 441(1)). However, the rules against evidence of opinion and findings of fact apply to other

material, including other court proceedings (Secretary of State for Trade and Industry v Bairstow

[2003] EWCA Civ 321, [2004] Ch 1). In Secretary of State for Trade and Industry v Bairstow the conduct

of Mr Bairstow which was in issue in disqualification proceedings had also been in issue in a claim by

Mr Bairstow for wrongful dismissal which he had lost. It was held (following Hollington v F. Hewthorn

and Co Ltd [1943] KB 587) that the judgments given in the wrongful claim were not admissible

evidence of the facts found in that claim. It was also held that it was not an abuse of process for Mr

Bairstow to require the Secretary of State to prove those facts by admissible evidence. The test is

whether the relitigation (a) would be manifestly unfair to a party to the disqualification proceedings

or (b) would bring the administration of justice into disrepute. In this case it was clearly not unfair to

any party and it was necessary in the interests of justice for the Secretary of State’s serious charges to

be proved to the satisfaction of the court by legally admissible evidence.

For the purposes of the European Convention on Human Rights, art. 6 in the Human Rights Act 1998,

sch. 1, directors disqualification proceedings in civil courts under CDDA 1986, ss. 6 to 10, are civil rather

than criminal proceedings (DC v United Kingdom (application 39031.97) [2000] BCC 710). The

safeguards required to protect the defendant are therefore less than in criminal proceedings. In

particular, it may be allowable to use in evidence the defendant’s own admissions of wrongdoing

made under threat of punishment for not providing information to, for example, an insolvency office

holder under the Insolvency Act 1986, s. 235 (DC v United Kingdom; Official Receiver v Stern [2000] 1

WLR 2230). The European Court of Human Rights has so far accepted that it is fair to use compulsorily

obtained evidence in directors disqualification proceedings only where the evidence is not consented

and it is not a significant part of the case (DC v United Kingdom). The Court of Appeal has said that it

is generally best for the trial judge to decide questions of fairness, either at a pre-trial review or in the

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course of the trial, having regard to all relevant factors (Official Receiver v Stern [2000] 1 WLR 2230).

So far, the court has not accepted that hearing a claim for a disqualification order when the defendant

is unable to pay for professional representation, even in a complex case, is a breach of art. 6 (Secretary

of State for Trade and Industry v Davies [2006] EWHC 299 (Ch), [2006] 2 BCLC 489; Re City Truck Group

Ltd [2007] EWHC 350 (Ch), [2007] 2 BCLC 649).

The standard of proof is the civil standard of balance of probabilities, but the more serious the charges,

especially if they allege serious moral turpitude, the more the court will need the assistance of cogent

evidence (Re Living Images Ltd [1996] 1 BCLC 348 at pp. 355-6; Re Dominion International Group plc

(No. 2) [1996] 1 BCLC 572 at p. 576; Re Verby Print for Advertising Ltd [1998] 2 BCLC 23)/ it is not an

abuse of process to allege, in direct disqualification proceedings, misconduct that would constitute a

criminal offence, even though the criminal standard of proof is not required (Re Mea Corporation Ltd

[2006] EWHC 1846 (Ch), [2007] 1 BCLC 618).

A court hearing a director disqualification claim must consider:

(a) what the defendant did

(b) whether the defendant’s actions were due to the defendant’s lack of probity or incompetence

or both

(c) whether the case against the defendant is serious enough to warrant disqualification.

What the defendant did

The limitations on the conduct from which charges may be formulated are considered at 83.25 to

83.28.

The court must have regard to matters specified in CDDA 1986, sch. 1. It may take into account matter

not listed in sch. 1 (Re Bath Glass Ltd [1988] BCLC 329 at p. 332; Re Sykes (Butchers) Ltd [1998] 1 BCLC

110 at p. 125) and the fact that they are not in the schedule does not mean that they are less significant

than the matters that are in the schedule. Any allegation of unfitness must be considered on its merits

irrespective of whether it is in the schedule (Re Amaron Ltd [2001] 1 BCLC 562 at p. 568). The contrary

view accepted in Secretary of State for Trade and Industry v Goldberg [2003] EWHC 2842 (Ch), [2004]

1 BCLC 597 at [11], without reference to Re Amaron Ltd, must be wrong. In practice there are recurring

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themes in cases, notably the way in which defendants have financed trading while insolvent by using

money owed to unsecured trade creditors and involuntary creditors such as HM Revenue and

Customs. In Re Firedart Ltd [1994] 2 BCLC 340 Arden J said, at p. 351:

there are a number of mattes which if proved would generally lead me to the conclusion that a director

was unfit to be concerned in the management of a company. They include: trading while insolvent;

taking personal benefits over and above any proper remuneration; failing to keep proper accounting

records.

Arden J’s reference to taking personal benefits is echoed by Lindsay J in Re Polly Peck International plc

(No. 2) [1994] 1 BCLC 574, who said that any breach of duty designed to benefit the defendant who

owed the duty is likely to be regarded as serious enough to warrant disqualification, but a breach of

duty which was not intended to benefit the defendant might not warrant disqualification (see also, Re

Deaduck Ltd [2001] 1 BCLC 148 at p. 160). On failure to keep proper accounting records see per

Nicholls V-C in Secretary of State for Trade and Industry v Ettinger [1993] BCLC 896 at p. 900.

In Secretary of State for Trade and Industry v McTighe (No. 2) [1996] 2 BCLC 477 Morritt LJ said that

persistent failure to cooperate with the liquidator and the official receiver would demonstrate

unfitness.

Seriousness of case

In Re Grayan Building Services Ltd [1995] Ch 241 Hoffmann LJ said, at p. 253, that the court must

decide whether the defendant’s conduct,

viewed cumulatively and taking into account any extenuating circumstances, has fallen below

the standards of probity and competent appropriate for persons fit to be directors of

companies.

As the minimum period of disqualification under CDDA 1986, s. 6, is two years, a disqualification order

should not be made at all if the defendant’s misconduct is not serious enough to merit two years’

disqualification (Re Polly Peck International plc (No. 2) 1994 1 BCLC 574).

Although the mere fact that a defendant’s misconduct is neither dishonest nor contrary to the law

does not mean that it cannot render the director unfit (Re Deaduck Ltd [2001] 1BCLC 148 at p. 167),

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the courts have generally been more ready to disqualify for lack of probity than for incompetence. In

Re Lo-Line Electric Motors Ltd [1988] Ch 477 Browne-Wilkinson V-C said, at p. 486:

Ordinary commercial misjudgement is in itself not sufficient to justify disqualification. In the

normal case, the conduct complained of must display a lack of commercial probity, although

I have no doubt that in an extreme case of gross negligence or total incompetent

disqualification could be appropriate.

In Re MuNulty’s Interchange Ltd (1988) 4 BCC 533 Browne-Wilkinson V-C repeated that commercial

misjudgement does not demonstrate unfitness and went on to say that an application for a

disqualification order should not be made where all that is alleged is mere mismanagement. In Re

Sevenoaks Stationers (Retail) Ltd [1991] Ch 164, Dillon LJ said, at p. 184, that he did not think it was

necessary for incompetence to be ‘total’ as suggested by Browne-Wilkinson V-C in Re Lo-Line Electric

Motors Ltd, to render a director unfit: incompetence or negligence ‘in a very marked degree’ was

sufficient in the case before him. In Re Barings plc (No. 5) [1999] 1 BCLC 433 Jonathan Parker J, at pp.

483-4, reconciled the two approaches by saying:

Where ... [the claimant’s] case is based solely on allegations of incompetence ... the burden is

on [the claimant] to satisfy the court that the conduct complained of demonstrates

incompetence of a high degree.

On appeal in Re Barings plc (No. 5) [2001] 1 BCLC 523 the Court of Appeal, at p. 535, said that it wished

to emphasise what Jonathan Parker J had said. The Court of Appeal went on to suggest that it is

unnecessary to require an exaggerated degree of incompetence to justify the penalty of

disqualification, given that the court can give leave to act during a period of disqualification. But it is

surely better to adopt the view of Lindsay J in Re Polly Peck International plc (No. 2) that the court’s

power to give leave is not something to be taken into account when deciding whether to disqualify.

It is not right to deal with misconduct that is not serious enough to warrant the minimum period of

two years’ disqualification by disqualifying and then giving leave to act despite being disqualified: the

right course is not to disqualify at all. In Re Cubelock Ltd [2001] BCC 523 Park J said, at p. 536, that

‘the Court of appeal [in Re Barings plc (No. 5) did not to any appreciable extent diminish the level of

incompetence which would be required to justify a disqualification’. Jonathan Parker J’s formulation

has been followed in Re Bradcrown Ltd [2001] 1 BCLC 547 and Secretary of State for Trade and Industry

v Walker [2003] EWHC 175 (Ch), [2003] 1 BCLC 363. For examples of incompetence of such

seriousness as to amount to unfitness see Re Barings plc [1998] BCC 583 and Re Barings plc (No. 5).

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Statutory list of maters to be considered

When considering whether a person’s conduct in relation to a company makes the person unfit to be

a director, the court is required by CDDA 1986, s. 9, to have regard in particular to the matters

mentioned in part 1 of sch. 1 to the Act. These matters include:

(a) Any misfeasance or breach of any fiduciary or other duty by the director in relation to the

company (sch. 1 para. 1). A finding of breach of duty is neither necessary nor sufficient for a

finding of unfitness: a defendant may be found to be unfit though no breach of has been

proved; a defendant may be found not be unfit even though a breach of duty is proved (Re

Barings plc (No. 5) [2001] 1 BCLC 523 at p. 535).

(b) Any misapplication or retention by the director of, or any conduct by the director giving rise

to an obligation t account for, any money or other property of the company (sch. 1, para. 2).

(c) The extent of the director’s responsibility for any failure by the company to comply with

various accounting and publicity requirements of the Companies Act 2006 (CDDA 1986, sch.

1, paras 4 and 5).

Where the company has become insolvent, the court is to have regard in particular to the matters

mentioned in part 2 of sch. 1. These include:

(a) The extent of the director’s responsibility for the causes of the company becoming insolvent

(sch. 1, para. 6). Responsibility is to be assessed broadly and not by reference to legal concepts

of causation (Re Barings plc (No. 5) [2001] 1 BCLC 523 at p. 535).

(b) The extent of the director’s responsibility for any failure by the company to supply any goods

or services which have been paid for (in whole or in part) (sch.1, paragraph. 7).

The fact that particular matters are listed in sch. 1 does not mean that the court may not have regard

to other matters.

Taking unwarranted risks with creditors’ money

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In Secretary of State for Trade and Industry v Creegan [2002] 1 BCLC 99 it was held that unfitness is

not demonstrated merely by allowing a company to trade while knowing it to be insolvent: it must

also be shown that the defendant knee or ought to have known that there was no reasonable prospect

of meeting creditors’ claims. The phrase ‘taking unwarranted risks with creditors’ money’ is used in

some of the cases to describe this kind of misconduct (see Re Living Images Ltd [1996] 1 BCLC 348; Re

City Pram and Toy Co. Ltd [1998] BCC 537).

A policy of not paying on time creditors who do not press for payment may demonstrate unfitness,

especially where the money is used to finance trading while insolvent (Re Sevenoaks Stationers (Retail)

Ltd [1991] Ch 164). A non-payment policy may demonstrate unfitness even if it is not shown that the

defendant intended that the creditors would never be paid (Secretary of State for Trade and Industry

v McTighe (No. 2) [1996] 2 BCLC 477; Re Structural Concrete Ltd [2001] BCC 578), but the mere fact

that debts are routinely paid late may not show unfitness (Re Funtime Ltd [2000] 1 BCLC 247). A non-

payment policy may demonstrate unfitness if adopted while the company is solvent (Re Hopes

(Heathrow) Ltd [2001] 1 BCLC 575). Although it is often so-called Crown debts (especially value added

tax and employees’ national insurance and tax contributions) that are the subject of a non-payment

policy, the identity of the creditor is not the crucial factor demonstrating unfitness, and the court must

consider the significance of the non-payment policy and whether the defendant was taking unfair

advantage of the creditor’s forbearance (Re Sevenoaks Stationers (Retail) Ltd at p. 183; Re Amaron Ltd

[2001] 1 BCLC 562 at pp. 571-3).

Period of disqualification

In Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 Dillon LJ accepted, at p. 179, the following

guidelines for disqualification under s. 6:

(i) the top bracket of disqualification for periods over 10 years should be reserved for

particularly cases. These may include cases where a director who has already had one period

of disqualification imposed on him falls to be disqualified yet again. (ii) The minimum bracket

of two to five years’ disqualification should be applied where, though disqualification is

mandatory, the case is, relatively, not very serious. (iii) The middle bracket of disqualification

for from six to 10 years should apply for serious cases which do not merit the top bracket.

In a case under s. 2, the Court of Appeal decided that fraudulent trading for four years resulting in

losses of about £0.75 million was a middle-bracket offence meriting eight years’ disqualification (R v

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Millard (1993) 15 Cr App R (S) 445). In Secretary of State for Trade and Industry v McTighe (No. 2)

[1996] 2 BCLC 477, a case under s. 6, the Court of Appeal imposed disqualification for 12 years in a

‘particularly serious case’ in which a man had caused three companies successively to trade at the risk

of their creditors, ultimately leaving unpaid debts of well over £1 million. Over £½ million had been

misappropriated in a way that was ‘tantamount to theft’ and the director had failed to cooperate with

the liquidator or official receiver.

In Re Westmid Packing Services Ltd [1998] 2 All ER 124 there is an extensive review by the Court of

Appeal of the approach to be taken when determining the period of disqualification. The Court of

Appeal wanted the process to be kept simple and disapproved of extensive citation from previous

cases. The trial court should exercise its jurisdiction ‘in a summary manner’ (p. 135). The Court of

Appeal emphasised, at p. 132, that determining the length of a period of disqualification is little

different from determining the sentence in a criminal case:

That period of disqualification must reflect the gravity of the offence. In must contain

deterrent elements. That is what sentencing is all about, and that is what fixing the

appropriate period of the disqualification is all about.

The fact throughout the court has already decided to grant leave to act as a director during the period

of disqualification should not affect the length of the period. The period of disqualification is a matter

for the judge’s discretion, which, like any exercise of judicial discretion, must be decided in the light

of all relevant circumstances, which can include mitigating factors such as: ‘the former directors age

and state of health, the length of time he has been in jeopardy, whether he has admitted the offence,

his general conduct before and after the offence, and the periods of disqualification of his co-directors

that may have been ordered by other courts’ (at p.134).

Whatever other evidence is before the court, only proved charges may be taken into account, when

setting the period of disqualification (Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164), though

other evidence may show the context in which the seriousness of the proved charges is to be

evaluated (Re Deaduck Ltd [2001] 1 BCLC 148).

Costs

Although disqualification applications are brought in the public interest, costs are awarded on the

usual principle that the unsuccessful party will be ordered to pay the costs of the successful party

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(CPR, r. 44.3(2)). There is no principle that a defendant will be ordered to pay the costs of an

unsuccessful claimant if there were good reasons for bringing the claim (Re Southbourne Sheet Metal

Co. Ltd [1993] 1 WLR 244). There is also no rule that a successful claimant should be awarded costs

on the indemnity basis: costs are awarded on the standard basis except in special circumstances (Re

Dicetrade Ltd [1994] BCC 371). Indemnity costs were ordered in Secretary of State for Trade and

Industry v Blake [1997] 1 BCLC 728).

An official receiver who exercises his or her right of audience is a litigant in person for the purposes of

Litigants in Person (Costs and Expenses) Act 1975 (Re Minotaur Data Systems Ltd [1999] 1 WLR 1129).

If an application under CDDA 1986, s. 7 or s. 8, is discontinued because the Secretary of State accepts

a disqualification undertaking, the defendant will usually be ordered to pay the applicant’s costs,

unless the circumstances are such that the court should make another order (PD Directors

Disqualification Proceedings, para. 28).

Commencement of disqualification

Unless the court orders otherwise, the period of disqualification imposed by a disqualification order

starts at the end of the period of 21 days beginning with the date of the order (CDDA 1986, s. 1(2)).

The delay is to enable the disqualified person to resign directorships and so on (Secretary of State for

Trade and Industry v Edwards [1997] BCC 222, Re Cannonquest Ltd [1997] BCC 644 at pp. 648-9).

VARIATION OF DISQUALIFICATION UNDERTAKING

A person who has given a disqualification undertaking may apply under CDDA 1986, s. 8A, for an order

reducing or ending the period for which the undertaking is to be in force. The application may be

made to any court to which, if the undertaking had not been accepted, the Secretary of State could

have applied for a disqualification order (s. 8A(3)). The application must be made under CPR, Part 8,

using form N501 (PD Directors Disqualification Proceedings, para. 30.2). The Secretary of State must

be made the defendant to the application (para. 30.5), which must be served by the applicant, by first-

class post, on the Treasury Solicitor (para. 30.6). On the hearing of the application, the Secretary of

State must appear, in order to call the court’s attention to any relevant matters, and may give evidence

or call witnesses (CDDA 1986, s. 8A(2)). Paragraphs 29 to 34 of PD Directors Disqualification

Proceedings give full details of the procedure to be followed, which has much in common with the

procedure for applying for a disqualification order.

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Disqualification undertakings were created in order to avoid court proceedings, so variation of an

undertaking should be ordered only where circumstances have arisen since the undertaking was given

which could not have been foreseen or which were not intended to be covered by the undertaking

(Re INS Realisations Ltd [2006] EWHC 135 (Ch), [2006] 1 WLR 3433, at [39]-[40]). An application for

variation should not normally be made just because the undertaking was given without legal advice

or because other directors of the company were given shorter disqualification periods by the court (at

[43]).