This article was written by Inga West, an assistant solicitor in our corporate recovery team, and first appeared in Vol. 15, No 2. 1999 Edition of Tolley's Insolvency Law and Practice.
The article looks at two recent cases: Re Powerstore (Trading) Ltd [1998] BCC 305 and Re Mark One (Oxford Street) plc Chancery Division 16.7.1998 (unreported). Both cases dealt with the same basic point, namely the options available to administrators and creditors at the end of an administration. Fortunately for creditors of companies in this position (and unfortunately for the government), the two judges came to the opposite conclusion.
The Facts
The facts in both cases were, for the purposes of this article, identical. They both involved companies in administration. One of the purposes set out in the original administration orders was a more advantageous realisation of the companies’ assets than would be effected on a winding up. This purpose had been achieved and all that remained in each case was for the administrators to bring the administration to an end and implement a procedure to distribute the realised assets to creditors. It was common ground that the correct procedure would be a form of liquidation, but the point under dispute was whether it should be a compulsory (or court-driven) liquidation or a voluntary liquidation. The shareholders in both cases had confirmed that they would co-operate to pass the necessary resolutions to achieve a voluntary liquidation if the creditors so wished.
Differences between compulsory and voluntary liquidations following administrations
In circumstances where a liquidation follows an administration, there are three main factors affecting the choice of compulsory or voluntary liquidation.
1. Formalities
Irrespective of which form of liquidation is eventually chosen, it is imperative that the liquidation follows on immediately upon the discharge of the administration order. The reason for this is the ‘relevant time’ for determining whether transactions can be attacked as preferences or transactions at an undervalue. If the liquidation follows immediately upon the discharge of the administration then the ‘relevant time’ during which the transaction must have taken place is six months (or two years in the case of connected persons) immediately preceding the date of the administration order. If, however, there is a gap between the administration and the liquidation, the ‘relevant time’ is the six months (or two years) immediately preceding the liquidation. As any such transaction is likely to have taken place (if at all) prior to the administration when the original management was still in control, it is important that the ‘relevant time’ precedes the administration rather than the liquidation. Therefore the liquidation must follow on immediately, with no gap.
In the case of a compulsory liquidation, this does not cause a problem because the judge making the order for discharge of the administration order will, at the same time, also make the order for winding up so the two events happen simultaneously.
Voluntary liquidations are not quite so easy because the person terminating the administration, i.e. the judge, is not the person who has the ability to put the company into voluntary liquidation, i.e. the shareholders. Both cases considered in this article confirmed that, in practice, this potential problem is overcome by making the order for discharge of the administration order conditional upon the passing of the shareholders’ resolutions to wind the company up.
2. Costs
The main difference between the two forms of liquidation is costs. Compulsory liquidation is substantially more expensive than voluntary liquidation, largely because of the fees payable to the government in a compulsory liquidation. The result is that if the liquidation is compulsory, there are fewer assets available to pay creditors. In one of the cases considered, Re Mark One (Oxford Street) plc [unreported judgment delivered on 16th July 1998], a compulsory liquidation would have cost at least £200,000 more than a voluntary liquidation. There is therefore a compelling reason why a voluntary liquidation is preferable to compulsory, provided the shareholders will co-operate.
3. Preferential Creditors
The third difference, and the reason why the two learned judges came to different conclusions, is the position of preferential creditors. If the compulsory liquidation follows immediately upon the discharge of the administration order, the date used to determine the preferential creditors is the date of the administration order. Preferential debts must be incurred 4, 6, or 12 months before this date, depending on the type of preferential debt.
If, on the other hand, the liquidation is voluntary, the Insolvency Act 1986 (the “Act”) says that the relevant date is the date of the shareholders’ resolution to wind the company up. This is necessarily at or near the end of the administration, not at the beginning. If the company ceased trading at some point during the administration, it will have ceased to incur preferential debts. Therefore the preferential creditors calculated by reference to beginning of the liquidation (i.e. the end of the administration) are likely to be substantially less than if they were calculated by reference to the date of the administration order. In Re Powerstore (Trading) Limited (1998) BCC 305, the difference was so great that there would have been no preferential creditors if the reference date was the end of the administration.
For obvious reasons, creditors who would be preferential in a compulsory liquidation will only consent to a voluntary liquidation if their preferential status can be preserved in a voluntary liquidation. In the two cases under consideration, the administrators, supported by the creditors, applied to court for directions that payments could be made to preferential creditors as though there was a compulsory liquidation, even though there was going to be a voluntary one.
Re Powerstore
This was the first of the two cases to be heard. The application was made under section 14(3) of the Act, which entitles an administrator to apply to court for directions in relation to any particular matter arising in connection with the carrying out of his functions. The administrators also invoked section 18(3), which provides that on the hearing of an application for discharge of the administration order, the court can make such consequential provisions as it thinks fit.
Lightman J recognised that the orders sought would be convenient for everyone (except perhaps the government) and clearly wanted to give the orders if at all possible. However, he felt unable to do so. He noted that several similar judgments had been given in cases before but was unable to find any reasoned arguments persuading him that they were right. The stumbling block, as Lightman J saw it, was that the court had no jurisdiction to make the orders sought.
The reasons for this were twofold. First, Lightman J held that section 18(3) and section 14(3) only confer power on the court to give directions to administrators, not future liquidators. It is not possible for the court to give an order for directions to administrators which binds future liquidators and upsets the statutory scheme of pari passu distribution. This point was not contested in the second case either.
The administrators had suggested that in the alternative, they could be directed either to pay the sums to the relevant creditors before the end of the administration, or that the sums could be paid to a third party in trust for the creditors’ benefit prior to handing over the remaining assets to the voluntary liquidators. Regrettably, Lightman J felt he could not give this order either because he could only give directions to the administrators to exercise their powers to advance the purposes for which the administration order was made. Here, the proposed payment was not to advance the purposes of the administration (which purposes had now come to an end) but for the purpose of a more advantageous method of distribution of assets.
Re Mark One (Oxford Street) plc
In this case, Jacob J had the benefit of fresh arguments which were not put to Lightman J. He did not therefore feel restricted to follow his learned colleague. Jacob J’s conclusions differed from those of Lightman J in two main respects.
- First, Jacob J did not think that section 14(3) and section 18 applications for directions were restricted to furthering the purposes of the administration. Instead they entitle an administrator to apply to court for directions in relation to any particular matter arising in connection with the carrying out of his functions. This would include an application arising at a time when the purposes of the administration order have either been achieved or have become incapable of achievement, so the power of the court to give directions under these sections is wider than for the purposes of the administration itself.
- Secondly, with the benefit of authority from the cases of Re Atlantic Computer System plc [1990]BCC 859 and Re Mirror Group Holdings Limited (1992) BCC 972, Jacob J held that, apart from the statutory general powers of an administrator, the court has general powers over an administrator as an officer of the court and can direct an administrator to do, or not do, certain things. So with the benefit of these additional arguments, Jacob J ordered the administrators to pay the money either into trust or direct to the creditors who would have been preferential in a compulsory liquidation. Therefore the preferential creditors were willing to consent to a voluntary liquidation and thereby save the extra costs associated with a compulsory liquidation. General comment Re Mark One has confirmed that following an administration, the court can direct the administrators to pay creditors who would be preferential in a compulsory liquidation even if the liquidation is voluntary. It is therefore possible to choose the cheaper exit route from administrations whilst still satisfying the concerns of the would-be preferential creditors following the main judgment. Jacob J commented that his judgment would cost the government a lot in missed fees, to which Counsel wryly responded that he thought the Chancellor had found other ways of paying off the national debt. Let’s hope he has. This article was written by Inga West, an assistant solicitor in the corporate recovery team at Cameron McKenna.
