Court considers effect of liquidation stay on regulatory action by the Financial Conduct Authority

The English Court has, for the first time, handed down judgment on whether the liquidation stay prevents the Financial Conduct Authority (the "FCA") from issuing a Warning Notice under sections 92 and 126 of the Financial Services and Markets Act 2000 ("FSMA") without first seeking leave from the Court.

Under section 130(2) of the Insolvency Act 1986 ("IA"), an automatic "liquidation stay" is applied once a company is placed into compulsory liquidation. This means that once a winding up order is in place, no "action or proceeding" may be proceeded with or commenced against the company or its property, except by leave of the Court and subject to such terms as the Court may impose.

The FCA in its regulatory role is empowered by sections 92 and 126 of FSMA to issue Warning Notices and Decision Notices where it intends to impose sanctions under sections 91 and 123 of FSMA for breaches of the Listing Rules and/or contravention of the Market Abuse Regulations ("MAR"), respectively.

In FCA v Carillion PLC (In Liquidation) [2020] EWHC 2146 (Ch), the Court concluded that the FCA's decision to issue a Warning Notice constituted an "action or proceeding" for the purpose of section 130(2) of IA. The FCA therefore required leave of the Court before it could proceed against Carillion, which was granted.

In coming to this view, the Court needed to balance the two competing statutory regimes. As ICC Judge Clive Jones acknowledged:

"on the one hand there is the public interest and importance in ensuring the FCA can fulfil its statutory duties notwithstanding insolvency of a party concerned. On the other hand, the liquidation needs to be carried out, realisations distributed to creditors and the company dissolved. There is potential tension between the two statutory regimes."

Background and FCA enforcement procedure

Carillion entered compulsory liquidation in January 2018, triggering the liquidation stay.

The FCA intended to issue a Warning Notice against Carillion for breaches of the Listing Rules and/or contravention of MAR. The application hearing was held in private and details of the allegations and content of the proposed Warning Notice are redacted in the judgment. This was to protect the privacy of individuals concerned who had not had the opportunity to make representations.

The enforcement process under sections 92 and 126 of FSMA involves the FCA (i) issuing a Warning Notice setting out the action it proposes to take (including the amount of any proposed penalty) and (ii) if it decides to take action, issuing a Decision Notice setting out that action. The decision to issue these notices is made by the Regulatory Decision Committee ("RDC"), a committee of the FCA Board. There is separation between the RDC, which has its own legal advisers and support staff, and FCA staff involved in conducting investigations and making recommendations to the RDC.

The recipient of a Decision Notice may refer the matter to the Upper Tribunal (Tax and Chancery Chamber). Thereafter there will be Final Notice, confirming either the substance of the Decision Notice (if no reference to the Upper Tribunal is made) or the determination of the Upper Tribunal.

In Carillion, the liquidator referred the FCA to the liquidation stay. The FCA applied for (i) a declaration as to whether the Court's leave was required for it to issue a Warning Notice under sections 92 and 126 of FSMA and (ii) if so, for such leave to be granted.

Does the FCA require leave of the Court before issuing a Warning Notice?

The Court held that issuing a Warning Notice under sections 92 and 126 of FSMA does constitute "proceedings" for the purpose of section 130(2) of IA. Leave of the Court was therefore required. In coming to this decision, the Judge considered the following points:

• The application of sanctions for breaches of the Listing Rules and/or contravention of MAR could have been left to the civil or criminal courts, in which case there would have been legal proceedings. Alternatively, the matter could have been left solely within the jurisdiction of the Upper Tribunal, which would have indisputably been "proceedings".
• Instead, parliament has entrusted the FCA and Upper Tribunal to conduct the proceedings. In the Court's view, "the nature of the decision and the process applied by the Upper Tribunal, as by the FCA/RDC, “cries out” as a “proceeding”".
• The decision made by the RDC and the Upper Tribunal is a determination of individual responsibility and liability. The process involves identifying the alleged breach, presenting the facts and supporting and opposing evidence, considering evidence and reaching a decision—all features of "proceedings".
• The nature of the decision-making process within FSMA is reflected by the use of the word "proceedings" when referring to the requirement to issue a Notice of Discontinuance (in section 389) and to the limitation period (in sections 93(6) and (7)).
• Whether Parliament intended these "proceedings" to fall within the ambit of section 130(2) of IA. As to this, the Judge observed: "It seems unarguable that the underlying purpose of section 130(2), the protection of the insolvent estate for all its creditors, applies. An immediate stay is required. The liquidator will need time to investigate the position before being able to respond to a Warning Notice or to permit the company to continue to make representations whether to the FCA Enforcement, the RDC or the Upper Tribunal depending upon the stage at which the liquidation occurs".
• The insertion of subsection 3A to section 130 IA was instructive of Parliament's intention. Subsection 3A expressly includes unilateral action by HMRC to enforce by deduction from accounts (under Part 1 of Schedule 8 to the Finance (No. 2) Act 2015) as an "action or proceeding". This demonstrates the type of decision and process Parliament intends to be covered.

The Judge observed that the stay was needed to achieve realisations for the benefit of the liquidation, and the absence of the stay may delay distribution and dissolution. In the Judge's view, it would be surprising to find that this particular statutory role of the FCA would not be subject to the control of the insolvency court for a company in liquidation.

Having determined that leave of the Court was required, the Court granted leave for the Warning Notice on the grounds of public interest. Leave was granted on the condition that further leave should be obtained before any penalty was imposed by the FCA.

Comment

Whilst the decision is limited to the issue of notice under section 92 and 126 FSMA, the FCA will be concerned about the wider implications.

The FCA submitted that there are some two hundred possible actions which it may take under FSMA to which this decision may be applied. Noting the potential wide ramifications, the Judge commented that it would have been preferable for the matter to have been listed before a High Court Judge. It is likely that the issue of the liquidation stay in the context of regulatory action will be before the courts again in the near future.

It is also likely that a similar broad approach will be taken by the Court in respect of administrations. The policy and objectives behind the moratorium for administration differs from the liquidation stay. However, the Carillion judgment commented that this will affect the operation of the discretion to grant leave, not the construction of the word "proceedings".