Re Floor Fourteen Ltd; Lewis -v- Commissioner of Inland Revenue & ors Court of Appeal (CD) 2 November 2000.
A recent case has drawn attention again to the need of liquidators and their advisers to ensure that the costs of any intended litigation by the liquidator against the officers of the company or others, e.g., involving s214 Insolvency Act 1986 (wrongful trading), s238 (transactions at an undervalue) or s 239 (preferences) are properly covered by e.g., creditor approval and insurance prior to commencement.
The case
Should the liquidator of an insolvent company be entitled to use the realised funds of the company for the commencement of proposed legal proceedings against the directors of that company? In other words, would the costs of the proposed proceedings constitute expenses of the voluntary winding up to be paid automatically in priority to the preferential creditors?
The Court at first instance found in favour of the liquidator on these questions, but the Court of Appeal has reversed that decision. It followed the established cases of M C Bacon Ltd [1991] Ch. 127 and Re Exchange Travel (Holdings) Ltd. (No. 3) 2 BCLC 579. It adopted a cautious approach because it had not been provided with sufficient information to enable it to decide whether to exercise an assumed discretion in opposition to the views of the preferential creditors. Those creditors would receive a dividend if the costs were not met out of the company's funds.
The Court pointed out that the liquidator was free to return to the Companies Court to pursue an application on fuller evidence to be put before the court.
For further information please contact Ruth Pedley at ruth.pedley@cms-cmck.com or on +44 (0)20 7367 2098 or Belinda Hackett at belinda.hackett@cms-cmck.com or on +44 (0)20 7367 2807.
