Cartwright & Anor v The Registrar of Companies

The primary issue on this appeal is:

This “conversion trigger question”, as it may be called, involves interpreting the provisions of paragraph 83 of schedule B1 to the Insolvency Act 1986 (“the IA 86”). The date on which that conversion in law occurs is referred to in this judgment as “the conversion date”. I shall set out the material provisions of paragraph 83 in paragraphs 25 and 27 below.

I have reached a different answer to the conversion trigger question from the judge. In my judgment, for the reasons given below, a conversion notice takes effect only on registration of that notice by the registrar, and not before.

There then arises a subsidiary question. That question is whether, if the term of office of an administrator would otherwise expire after filing the conversion notice but before the conversion date, it is in general automatically extended until that date. I would answer that question in the affirmative.

Before I give my reasons for these conclusions, I need to explain briefly the following matters:

An administration is a relatively informal method of dealing with the situation where a company is insolvent and wishes to prevent creditors from levying execution of its assets. An administration can give a company breathing space so that it can be reorganised or its business and assets realised in an orderly way. An administration usually commences with a court order setting out the purposes of the administration and appointing an administrator. The order for administration has the effect of imposing a bar on creditors’ claims against the company.

There are detailed provisions dealing with the administrator’s term of office. The appointment of the administrator ceases at the end of one year (paragraph 76(1) of schedule B1 to the IA 86). The court or the creditors can extend this period, though in the case of creditors they may only do so once for a period not exceeding six months (paragraphs 76(2) and 78 of schedule B1 to the IA 86). The period of the administrator’s term of office comes to an end if the administrator dies, resigns, ceases to be qualified to be an administrator or is removed from office by the court (paragraphs 87 to 89 of schedule B1 to the IA 86).

An administrator may, but need not, undertake a distribution of the assets to creditors. He will usually instead cause the administration to be converted into a liquidation for this purpose.

A liquidation of a company is usually a terminal process. It almost always leads to the distribution of all of the company’s assets and to its dissolution. The liquidator has to consider which claims can be proved in the liquidation. Liquidation may be voluntary or compulsory. A compulsory liquidation is one that results from an order for winding up by the court. Other forms of liquidation are known as voluntary liquidations. For a members’ voluntary liquidation, a company must be solvent. If it is insolvent the liquidation will be a CVL.

The date on which liquidation commences is important. On the commencement of a winding up, the company ceases to be the beneficial owner of its assets, which are then held on ambulatory trust for creditors and, if there is a surplus, for contributories: Ayerst v C & K Construction [1976] AC 167. There is no change of ownership of a company’s assets on the commencement of an administration.

There are other reasons why it is important to know on which date the commencement of a winding up occurs. Where there is a CVL and no administration, that date is the date of the passing of the resolution for winding up (section 86 of the IA 86). That date is then used for various purposes. For example, it is the date for the ascertainment of debts or liabilities which may be proved in the winding up (Rule 13.12 of the Insolvency Rules, which are made under the IA 86). It is also the date (“the relevant date”) used to calculate the antecedent period of four months for the purpose of establishing preferential claims in the winding up, such as the preferential claims of employees (section 387(3)(c) of the IA 86). The date of the commencement of the winding up is also used to mark the end of the specified period of time within which any transaction sought to be challenged in the liquidation as a transaction at an undervalue, or as a preference, must have occurred (section 240(3)(e) of the IA 86).

Conversion by notice under paragraph 83 provides a means of moving a company from administration into CVL. It is a streamlined process because it is unnecessary to hold the meetings of shareholders and creditors that are normally required for a CVL.

Where the conversion procedure is used, amendments to the IA 86 and the Insolvency Rules (“retrospective date provisions”) enable the earlier date of the start of the administration to be used instead of the date of the commencement of the liquidation for the purposes of certain provisions, such as those referred to in paragraph 11 above. Those provisions also help to reduce any injustice to creditors as a result of their having been unable to enforce their rights during the administration.

The facts of this case illustrate the practical importance of the retrospective date provisions for liquidators and creditors. Globespan carried on business as an airline operator. If the debts which are preferential in its liquidation are calculated on the basis that the relevant date is 17 December 2009, the date of the start of the administration, they will amount to £600,000. If the relevant date is the date of the commencement of the liquidation, the preferential claims will be different and almost certainly much smaller in amount as preferential debts include certain debts owed to employees and the administrators will have substantially reduced the number of its employees.

Thus all parties concerned in a liquidation following an administration need to know when precisely the conversion date occurs. Certainty is an important consideration for practitioners. They would no doubt prefer a result that achieves certainty in knowing when the conversion from administration to CVL has come into effect.

Those parties also need to know what happens if the term of office of the administrators comes to an end after the conversion notice is filed but before conversion occurs in law.

Before I turn to paragraph 83 of schedule B1 to the IA 86, I need to explain a little about the importance of the statutory requirements about filing documents, that is, sending documents, about important corporate events to the registrar, and the role of the registrar.

If people are to deal with confidence with corporate vehicles, there have to be rules for filing notices of the happening of important events affecting companies. Companies are usually incorporated with limited liability. The price of this privilege is that they are required by statute to reveal certain information about themselves, such as their annual accounts.

The function of collating this information and making it available to the public for inspection is performed by the registrar (section 1080 of the Companies Act 2006 (“the CA 06”)). The information maintained by the registrar is known as “the register” (section 1080(2)). Since 1 January 2007, the information is maintained in electronic form (section 1080(3)). It can be inspected online. The registrar has discretion as to the form of the register but all the information relating to any company must be capable of being retrieved together (section 1080(5)). The information maintained in relation to any particular company is known as that company’s “file”. The place where the files are kept for England and Wales is known as Companies House.

Part 35 of the CA 06 makes provision for the registrar. There are separate registrars for England and Wales, Scotland and Northern Ireland. Details of companies appear on the register for the jurisdiction in which their registered office is stated on registration to be situate (section 9 of the CA 06). The term “registrar” includes each of the registrars. One of the principal functions of the registrar is to ensure that documents which ought to be placed on the company’s file at Companies House are so placed. He or she must ensure, for instance, that no unnecessary material is put on the company’s file (see, for example, section 1074 of the CA 06). He or she must place a note on the register giving details of certain matters, such as the date on which a document is delivered to the registrar (section 1081 of the CA 06).

Companies have obligations to file certain documents, such as their annual accounts (see Part 10, CA 06). Insolvency office holders also have obligations to file documents with the registrar. In some cases, documents are not fully effective until they are filed and registered, as in the case of registrable charges (see Part 25, CA 06).

The registrar is subject to public law duties, which means that in general he or she must cause a document requiring registration to be so registered as soon as reasonably practicable. When Parliament requires the registrar to act more quickly, express provision is made. For example, under section 201 of the IA 86, the registrar must “forthwith” register the final account and return filed by a liquidator in a voluntary winding up so that the company is dissolved at the end of three months. By contrast, paragraph 4 of schedule B1 requires administrators to act “as quickly and efficiently as is reasonably practicable”. Administrators are officers of the court but they are not subject to public law duties and, therefore, it is appropriate to impose a duty on them to act reasonably quickly and efficiently.

In addition, the registrar has functions derived from the First Company Law Directive 68/151/EEC, which are now to be found in Directive 2009/101/EC. He or she must cause a notice to be placed, generally in the Gazette, of the receipt of certain notices (section 1077 of the CA 06). These notices include notice of the appointment of a liquidator (section 1078 of the CA 06). A company cannot in general rely on certain events against third parties unless those events have been “officially notified” (section 1079 of the CA06). These events include the appointment of a liquidator in a voluntary liquidation. “Official notification” means, in relation to liquidators, that they have published notice of their appointment in the Gazette. Section 109 of the IA 86 requires liquidators to do this within 14 days of their appointment.

I now turn to the provisions of paragraph 83 that have to be interpreted in this case.

As I have said, paragraph 83 introduces a streamlined process for an administrator to put the company into CVL by giving notice. However, certain statutory conditions for converting an administration into a CVL have first to be satisfied. These are set out in paragraph 83(1) of schedule B1 to the IA 86.

“83 (1)     This paragraph applies in England and Wales where the administrator of a company thinks—

(a)

that the total amount which each secured creditor of the company is likely to receive has been paid to him or set aside for him, and

(b)

that a distribution will be made to unsecured creditors of the company (if there are any).”

Those conditions were satisfied in this case. The company, Globespan Airways Ltd (“Globespan”) had been placed in administration by court order with effect (after a further order varying the appointment date) for a period of one year only from 10 am on 17 December 2009. Thus the administrators’ term of office would terminate just before 10 am on 17 December 2010. Towards the end of this period, the three administrators wished to convert the administration into a CVL. What paragraph 83 provided should then happen was that the administrators should give a conversion notice to the registrar:

“(3)

The administrator may send to the registrar of companies a notice that this paragraph applies.”

Paragraph 83 goes on to deal with the consequences of sending a conversion notice:

“(4)

On receipt of a notice under sub-paragraph (3) the registrar shall register it.

(5)

If an administrator sends a notice under sub-paragraph (3) he shall as soon as is reasonably practicable—

(a)

file a copy of the notice with the court, and

(b)

send a copy of the notice to each creditor of whose claim and address he is aware.

(6)

On the registration of a notice under sub-paragraph (3)—

(a)

the appointment of an administrator in respect of the company shall cease to have effect, and

(b)

the company shall be wound up as if a resolution for voluntary winding up under section 84 were passed on the day on which the notice is registered.”

It is relevant for the purposes of the arguments on paragraph 83 considered below to note that these provisions use several similar but distinct terms: "send", "receipt", "file" and "registration." There is no real difference between the time at which filing and receipt occur but otherwise these terms in my judgment denote distinct and different concepts.

It can also be seen from these provisions that the legal act of conversion from administration into liquidation is provided for by paragraph 83(6). If all goes according to plan, the conversion notice should trigger effective conversion. There will be a seamless transition from administration to CVL: there is no gap in which the powers of the directors revive or creditors are free to levy execution on the company’s assets.

In this case, things did not go according to plan. On 13 December 2010 the administrators signed a conversion notice (“the first conversion notice”) in the form prescribed for by paragraph 83 (Form 2.34B). The conversion notice stated that two of them were to be the liquidators of Globespan. The form did not, however, comply with all the notes on it because it failed to include the address for the liquidators, although this was of course the same as their address as administrators.

The registrar received the conversion notice on 14 December, and rejected it because it did not contain the address of the liquidators. It did, however, contain their address as administrators and thus the judge held that the first conversion notice complied with the IA 86 and should have been registered. The registrar does not appeal from the judge’s decision on that point.

Because the first conversion notice filed in respect of Globespan is now accepted to be valid in law, the details of the two further conversion notices which were given are less important. The registrar finally registered the third conversion notice on 4 February 2011. It was dated 6 January 2011 and stamped as received on 19 January 2011. However, if the administrators ceased to hold office on 17 December 2010, they had no power to file the second and third conversion notices. Moreover, if the first conversion notice was valid, they had no need to do so. If the first conversion notice had been duly processed by the registrar, then on the evidence that would normally have happened within about 3 days of 14 December 2010. The date on which the CVL commenced would be about two months earlier than that resulting from the registrar’s action.

In the event, the judge decided that the correct date for the commencement of the CVL was 14 December 2010 and that the register should be altered to show that date, which it now shows. It is his approach to the conversion trigger question that has given rise to debate in this case.

The judge came down in favour of holding that conversion took effect from the date of filing the conversion notice. Essentially the judge adopted a purposive approach to interpretation. He started from the proposition that the legislative purpose to be deduced from paragraph 83 of schedule B1 to the IA 86 was that there should be a seamless conversion from administration to CVL. The purpose of recording the changes in the public register was in his judgment subordinate to this. He considered that the interpretation that conversion took effect on subsequent registration would be "at the price of defeating the primary objective of gapless progression from administration to liquidation".

In addition, the respondents argued that, if the date of registration by the registrar (4 February 2011) was the correct date, paragraph 83 should be interpreted as extending the term of office of the administrator between the date of filing a conversion notice (in a form that obliged the registrar to register it) form and the actual conversion date. The registrar, for whom Ms L D’Cruz then appeared, opposed this submission. The judge also rejected this submission because there were specific provisions for extension of the administrator’s term of office in paragraph 76 of schedule B1. It was evident that the legislature had placed restrictions on the extension of the administrator's term of office.

The interpretation which the judge preferred was that the conversion date was the date on which the registrar received the conversion notice. The judge drew a broad comparison between paragraph 83 (3) and the Land Registration Act 2002 (though the respondents have not pursued this analogy on this appeal). From the judge’s decision, the registrar now appeals.

Mr James Eadie, for the Registrar, submits that, on both the ordinary and purposive interpretation of paragraph 83 of schedule B1 to the IA 86, a conversion notice does not take effect until the registrar has registered it: see in particular section 83(4). Indeed, he informs us that the Enterprise Bill, which introduced by amendment what is now schedule B1 into the IA 86, was the subject of a government amendment designed to produce the effect for which he contends. However, that legislative history does not relieve this court of its duty of ascertaining the true meaning of paragraph 83.

Mr Eadie also relies on the publicity provisions contained in sections 1077 to 1079 of the CA 06. He takes an entirely neutral line on the question whether the effect of filing a conversion notice is to extend an administrator’s term of office.

Mr Adam Goodison, for the respondents, submits that the judge was correct to interpret paragraph 83(4) as imposing a temporal obligation on the registrar to register the conversion notice forthwith so that it becomes effective immediately on receipt by the registrar. He notes that the obligation to give notice in section 83(5) arises “as soon as is reasonably practicable” after sending in the conversion notice. This, on his submission, supports the view that the conversion notice is effective to trigger the conversion of an administration into a CVL.

Mr Goodison further submits that the registrar’s interpretation leads to difficulty where the term of office of the administrator expires after the filing of the conversion notice but before its registration. On the registrar’s interpretation there is an interregnum if an administrator ceases to hold office in this period. The result of that would be that the company would cease to be in either form of insolvency procedure and control of its assets would revert to the directors. He submits that this is inconsistent with a seamless transition into insolvency. Accordingly, he submits that paragraph 83 should be construed as extending the administrator’s term of office, where he has served a conversion notice, until the conversion date.

In my judgment, a conversion notice takes effect when it is registered by the registrar and the conversion trigger date is thus the date of registration of the conversion notice. I have eight reasons for that conclusion.

First, in my judgment, the natural meaning of paragraph 83(4) is that a conversion notice does not take effect until it is actually registered. Paragraph 83(4) uses two different concepts: receipt and registration. Since different words are used, it must be assumed that different events are referred to. Moreover the natural meaning of receipt and registration is that they cover different events. Receipt requires delivery of the notice to the registrar. Registration of the notice requires a further act by the registrar. He or she has to place the key information from the form on the register of companies. The judge’s interpretation elides the concepts of receipt and registration.

Second, the judge’s interpretation also requires the word “registration” in paragraph 83(6) to be given a meaning which is not its ordinary meaning (by holding that conversion takes place on receipt). The same point applies here: in the opening phrase of paragraph 83(4), the word “receipt” is used in contradiction to “register” and thus as denoting a step that takes place before the act of registering the conversion notice. The word “registration” must therefore bear the same meaning in both sub-paragraphs. It must also bear a meaning which is different from receipt, and the most natural meaning to give it is the completion of the steps which the registrar needs to take to make the information in the notice available as part of Globespan’s file at Companies House.

Third, paragraph 83 should be interpreted with a view to achieving its statutory objectives where the wording permits. Those objects include achieving a streamlined conversion from an administration into a CVL. Normally a CVL begins with the passing of a members’ resolution for voluntary winding up (see section 86 of the IA 86). That is not the case where an administration is converted into a CVL. For that situation, special provision is made by paragraph 83(6).

To make conversion an attractive exit route from administration, the legislation must also achieve a seamless transition from administration into a CVL, that is, a conversion without any gap in which the powers of the directors can revive or in which the assets are outside the control of an insolvency office holder. This is achieved by paragraph 83(6). This provides for a simultaneous cessation of the administrator’s term of office and the commencement of a CVL. In other words the statutory objectives of the streamlined conversion route for exiting administration are achieved by an interpretation which gives paragraph 83(4) and paragraph 83(6) their ordinary meaning.

Fourth, the ordinary interpretation of paragraph 83(4) avoids a gap between the liquidator’s appointment and publication of it on the company’s file at Companies House and in the Gazette. On the judge’s interpretation the liquidator will be appointed before his name even appears on the company’s file. Publicity for the liquidator’s appointment is the obvious purpose behind official notification under section 1079 of the CA 06. Notice in the Gazette under section 1077 of the CA 06 occurs only when the conversion notice is registered. Thus the judge’s interpretation is in conflict with the policy behind the provisions of the CA 06 and IA 86, which provide for publicity to be given to the liquidator’s appointment.

Fifth, the date of registration will almost certainly be in fact subsequent to the date of receipt and that underscores the need to interpret paragraph 83 in a way that treats those dates as different. The time at which the registrar is to register the conversion notice is defined by his or her public law duties: paragraph 83 does not provide for a shorter time period. On the evidence, there will normally be an interval of about three days between the date of receipt and the date of registration.

Sixth, before a conversion notice is registered the registrar will perform some element of checking the information given. This improves the accuracy of the register. It may be assumed that the desire that this work should be performed is deliberate legislative policy. Thus the court should prefer an interpretation that allows this checking to take place before conversion takes place. In some statutory provisions, filing a document with the registrar is all that is required, such as where accounts have to be filed. In other situations the legislature has decided that mere filing is not enough. The work done by the registrar as part of the process of registration helps to ensure a higher standard of accuracy and completeness in the register. Challenges to the validity of conversion notices in the course of a liquidation would be most inconvenient: the work of the registrar is likely to minimise the risk of such challenges. Furthermore, completeness and accuracy so far as possible in the register is important for those dealing with limited liability companies.

Seventh, the process of registration normally only takes about three days and there is on analysis no practical difficulty of a level which would warrant giving the words of paragraph 83(6) a meaning different from their natural meaning. At first sight there appears to be the problem that the administrator cannot be certain on which date the form will actually be registered. However, the evidence shows that as a rule of thumb the registrar needs approximately three days to effect registration. The administrator can always check the state of the register (and thus whether registration has taken place) by viewing the register online. In addition, he can with a little forward planning in most cases avoid the difficulty that the conversion notice may be registered after he has ceased to hold office by filing in good time or by getting an extension from creditors as part of their approval of his proposals. Where that is not open to him, he can always go to the court.

Eighth, the obligation imposed on an administrator by paragraph 83(5) of schedule B1 to inform creditors that he has filed a conversion notice, and to file a copy with the court, as soon as he has done so, is consistent either with the judge’s interpretation or my own. On one reading it suggests that the conversion takes effect on filing the conversion notice. But, equally, it may be consistent with a desire on the part of Parliament that creditors should know about the process of moving the company from administration into CVL as soon as it has been started, rather than when it has been completed. That would be a rational policy reason for imposing the obligation even before the conversion had taken place.

It follows that this court must determine the date on which the conversion notice filed by the administrators of Globespan was actually registered. It is not enough that the registrar should have registered it at an earlier date. Actual registration occurred on 4 February 2011.

It was not the first conversion notice that the registrar registered, but the third. As such, it was not a valid conversion notice due to the termination of the administrators’ term of office by the date it was executed and filed. However, since the registrar had the choice of registering the valid first conversion notice, and indeed was under a statutory obligation to do so, in my judgment, the court should, in order to give effect to the intention of Parliament, treat his act of registering the third conversion notice as amounting in law to effective registration of the first conversion notice. Accordingly I would hold that, in registering the third conversion notice, the registrar was in fact fulfilling his obligation to register the first conversion notice. That conversion notice was executed and filed when the administrators were still in office. Thus, in my judgment, the conversion trigger date in the case of Globespan is 4 February 2011.

An administrator may file a conversion notice even though he will cease to be an administrator before the notice takes effect. In Re E-Squared Ltd [2006] 1 WLR 3414, David Richards J so held and in my judgment he came to the correct conclusion. He left open for future consideration the question now under consideration.

Unless the conversion notice extended their period of office, the administrators of Globespan ceased to be administrators on 17 December 2010. There would then be a gap between the time when the administration ended and the winding up began on 4 February 2011. This would mean that the retrospective date provisions would not apply. Thus, as already explained, the date for calculating preferential debts in this case would be 4 February 2011 rather than 17 December 2009. In addition, had it been appreciated at the time that there was a gap, there would also have been a loss of continuity of control of the assets, and creditors could have levied execution on the assets.

Although the question did not have to be decided on the judge’s interpretation, he expressed the view that paragraph 83 did not have the effect of extending the appointment of an administrator because paragraph 76(2) provided for the cases in which an administrator’s term of office might be extended. These provisions appear to provide for extensions of the administrator’s term of office on an exhaustive basis.

Moreover, the judge’s interpretation is supported by similarities in wording between paragraph 76(1) and paragraph 83(6)(a) of schedule B1. Paragraph 76(1), which provides for the appointment of an administrator to terminate (unless extended) at the end of one year uses the very same words as paragraph 83(6)(a), namely “the appointment of an administrator shall cease to have effect”.

However, notwithstanding paragraph 76(1), an appointment can clearly terminate before the end of the year if it has already terminated, for example, because the administrator has died or resigned. It follows that, under paragraph 83(6)(a), the term of office of an administrator can also end in those circumstances before the conversion date.

However, in my judgment, the administrator’s term of office is in general automatically extended if a conversion notice under paragraph 83 is duly filed for the following five reasons.

First, paragraph 76(1) is not a complete code for establishing the date on which an administrator ceases to hold office. It does not include a number of circumstances in which an administrator may cease to hold office: see, for example, paragraphs 83(6) and 87 to 89 of schedule B1. This makes it less likely that paragraph 76(2), dealing with extension of an administrator’s term of office, is to be interpreted as a complete code.

Second, paragraphs 76 and 83 are dealing with different subject matter and the achievement of the different statutory purpose of paragraph 83 is dependent, in the circumstances with which we are concerned, on the extension of the administrator’s term of office. Paragraph 76 is laying down general rules about cessation and extension of an administrator’s term of office. Paragraph 83 is dealing with the specific case of conversion of an administration into a CVL. The latter has a separate statutory purpose of facilitating a seamless conversion of an administration into a CVL. It would, moreover, be wholly contrary to Parliament’s aim of providing this seamless conversion to allow the possibility of termination of the administrator’s term of office, by effluxion of time, in the period between the filing of a conversion notice and its registration. A gap between administration and CVL would then appear. That would not be in the interests of creditors as it would lift the moratorium on actions against the company and revest control of the company in its directors and disapply the retrospective date provisions.

Third, it would in many instances be impractical for the administrator to apply to the court at short notice for an extension for the limited purpose of registration of a conversion notice, and it is difficult to see on what basis an extension in those circumstances would be refused.

Fourth, it was open to Parliament to impose an obligation on administrators to file a conversion notice sufficiently far in advance of the conversion date to avoid expiry of their term of office before the conversion date. Parliament not having taken this step, paragraph 83 is in my judgment open to the interpretation that by implication the term of office is automatically extended in appropriate circumstances.

Fifth, as Mr Goodison points out, paragraph 83(3) lends some, though not I think very great, support for my conclusion. Under paragraph 83(3), the conversion notice is to state that “this paragraph”, not just sub-paragraph (1) of paragraph 83, applies. That statement may be presumed to reflect Parliament’s view as to the effect of paragraph 83. The use of that language is some indication that, all other things being equal, paragraph 83 as a whole is to have priority over other provisions of schedule B1 to the extent that those provisions are inconsistent with it. That indication provides a measure of additional support for saying that paragraph 83(6)(a) can qualify the provisions of paragraph 76(1).

In those circumstances, in my judgment, an administrator’s term of office is by implication from the words of paragraph 83(6) extended by filing a conversion notice from the date on which it would otherwise expire by effluxion of time until paragraph 83(6) comes into effect on registration of the conversion notice. Like paragraph 76(1), this automatic extension is subject to the provisions of paragraphs 87 to 89. Accordingly the administrator’s term of office will come to an end if he resigns, dies, is removed from office by the court or ceases to be qualified to act before the conversion date occurs.

For those reasons I would allow this appeal. I would hold that, on the true interpretation of paragraph 83(6) of schedule B1 to the IA 86, the conversion date is the date on which the registrar registers the conversion notice. In the present case, that date was 4 February 2011. I would also hold that the term of office of the administrators was extended until that date. That date would also be the date on which the liquidation of Globespan commenced.

The consequence will be, if my Lords agree, that the information about Globespan maintained by the registrar at Companies House will have to be amended to show that the administration ended, and the liquidation simultaneously commenced, on 4 February 2011. On that basis, there would be no gap between the end of the administration and the commencement of the liquidation and thus the retrospective date provisions would apply.

I agree.

I also agree.