Section 236 and proofs of debt rarely mix - Bellmex International v British American Tobacco - 23rd February 2000 (Chancery Division)

This case is an interesting reminder to insolvency practitioners that section 236 of the Insolvency Act 1986 (which confers power on office-holders to force third parties to provide information about the company) is a fairly draconian power and can only be used in appropriate circumstances.

Mr Justice Evans Lombe held that while the powers contained in section 236 of the Insolvency Act 1986 could be used to deal with factual issues relating to a proof of debt by an alleged creditor, the circumstances in which this would in fact be possible would have to be such as to show a “clear necessity” for the order. In other words, the case would have to be exceptional.

Facts

In February 1998, Bellmex International was placed in creditors’ voluntary winding-up. British American Tobacco (Zimbabwe) (“BAT”) served a proof of debt on Bellmex’s liquidator in August 1998, arising from contracts for the supply of cigarettes.

The liquidator believed the contracts between BAT and Bellmex were “infected... with illegality, making those contracts unenforceable and justifying... the liquidator in rejecting the proof”. The nature of the illegality was that, in relation to a number of shipments of cigarettes BAT, on the relevant customs declaration forms, had stated that the cigarettes originated from Zimbabwe when in fact they had been manufactured and possibly physically exported from South Africa. Under the Lome Convention, cigarettes of Zimbabwe origin received beneficial treatment by the UK customs authorities, but the Convention did not confer similar treatment on cigarettes from South Africa. The liquidator contended that completing the customs form in this way created the illegality and made the contracts unenforceable.

However, rather than simply rejecting the proof, the liquidator applied under section 236 for an order that the BAT regional manager responsible for Africa attend for a private examination and that he deliver up all documents relating to BAT’s dealing with Bellmex.

In hearing the application the judge considered two questions: “first, whether it is appropriate to use the powers contained in section 236 to deal with the factual issues arising on a proof of debt; and, if the answer to that question is ‘it can be appropriate’, whether this is such a case where an order should be made”

The judge felt that there was substantial authority that in relation to applications brought against the background of proofs of debt, such orders are regarded as “on the extremity of the powers that a court might have to obtain evidence in advance from persons dealing with insolvent individuals and companies. Those orders should only be made when, in this case, the liquidator can show a clear necessity for the order.” In other words, the case would have to be exceptional on the facts. The judge imagined that situations of multiple proofs might meet this requirement.

However, on the facts of this case, the judge felt that at various stages the liquidator could have simply rejected the proof of debt and left it to BAT to bring evidence to justify their proof, and that therefore the application made by the liquidator under section 236 was unjustified.

If you have any queries in relation to this e-mail, please contact Inga West, an assistant solicitor in Corporate Recovery: imw@cms-cmck.com or 020 7 367