Extension of the circumstances in which Insolvency Practitioners can use Section 236 powers - Directors' Disqualification Proceedings

In Official Receiver –v- Wadge Rapps & Hunt (a firm) and Anor [2003] UK HL49, a judgment which also dealt with the case of Re Pantmaenog Timber Co Ltd: Official Receiver -v- Meade-King (a firm) and Anor the House of Lords considered whether the Official Receiver could have recourse to the powers under Section 236 Insolvency Act 1986 for the sole purpose of obtaining evidence for use in disqualification proceedings against a director of an insolvent company.

Background

The Official Receiver had been appointed provisional liquidator of the Company and, pursuant to Section 7(1)(b) Company Directors Disqualification Act 1986 ("CDDA"), had been directed by the Secretary of State to bring proceedings against certain former directors of the Company.

To assist in the proceedings, the Official Receiver applied for orders under Section 236 against certain of the Company's former professional advisers. One of the directors objected to the production of the documents in question.

By the time the matter reached the Court of Appeal (where it was held that the Official Receiver was not entitled to an order pursuant to Section 236), the disqualification proceedings had been completed. Notwithstanding the fact that the outcome would have no effect on the substantive proceedings, the Official Receiver appealed to the House of Lords in order to determine the question as a matter of principle.

Decision

The House of Lords held that the powers conferred by Section 236 were conferred for the better discharge of the Official Receiver's wider statutory functions, both powers and duties, in relation to the company being wound up.

There is no express limitation in Section 236 on the purpose for which it may be invoked. The Court of Appeal's decision had been largely based on an assumption that the powers conferred by Section 236 may be invoked only to assist the liquidator in carrying out "his functions in the winding up" (italics added) and that these functions were limited to the collection, realisation and distribution of assets, and did not extend to proceedings under CDDA. The House of Lords did not accept this assumption.

Pursuant to Section 143(2) Insolvency Act 1986, a liquidator of a company in compulsory liquidation has a duty to provide such information and assistance as the Official Receiver may reasonably require for the purposes of "carrying out his functions in relation to the winding-up" (italics added).

The House of Lords held that the phrase "in relation to the winding-up" was wider than "in the winding-up". The liquidator's duties could not be limited to the collection, realisation and distribution of the company's assets. The provisions of the Insolvency Act 1986 and the CDDA form part of the same statutory scheme and must be read together and the language of Section 143 could be stretched to include the Official Receiver's functions under Section 7 CDDA to bring disqualification proceedings.

The consequence of the Court of Appeal's decision would be that, if a company had no assets worth recovering, neither the Official Receiver nor the officeholder would be able to invoke Section 236. A liquidator's functions include the investigation of the causes of the company's failure and the conduct of those concerned in its management; and it is in the public interest that such investigations are undertaken.

Moreover, pursuant to Section 236(1), the power to seek a Section 236 order extends to the Official Receiver, whether or not he is the liquidator of the company, ie whether or not he is responsible for the administration of the company's estate.

The House of Lords accepted that the sole limitation which is implicit in Section 236 is that it may be invoked only for the purpose of enabling the applicant to exercise his statutory functions in relation to the company which is being wound up and that these functions included the provision of information to the Secretary of State for the purpose of disqualification proceedings.

Comment

It is clear that the use of Section 236 proceedings is not limited to the purpose of collection, realisation and distribution of assets, and that the functions of a liquidator (at least in the case of a compulsory winding up) include the investigation of the causes of the company's failure and the conduct of the company's management.

The decision gives more clout to the power conferred by Section 236, particularly given that a respondent is not (necessarily) excused from complying with an order under Section 236 on the ground of self-incrimination (Bishopsgate Investment Management Limited –v- Maxwell [1993] Ch 1).

However, in this case, the House of Lords was concerned only with the issue of jurisdiction; it did not consider whether it would have been appropriate in the circumstances to have granted a Section 236 order. The courts are required to exercise discretion in considering applications pursuant to Section 236 and, must consider, among other things, whether an order would be oppressive.

Where an order is sought for the purpose of disqualification proceedings, the court may consider whether there could be a contravention of the respondent's right to a fair trial under Article 6 of Schedule 1 to the Human Rights Act 1998. In Re Westminster Property Management Limited [2001] 1 All ER 633, the Court of Appeal considered whether there may be such a contravention if statements made by a director pursuant to Section 235 Insolvency Act 1986 were used in disqualification proceedings. Although in that case, it was held that use of the statements would not necessarily breach Article 6, the court recognised that the Section 236 procedure is more formal and coercive and, implicitly, therefore may be more likely to be oppressive.