Nygate & Anor v E Squared Ltd

There are two applications before the court which raise the same issue, which is likely to arise in numerous other cases. Where administrators of a company have followed the statutory procedure for converting an administration into a creditors voluntary liquidation, but the notice sent by them to the registrar of companies is not registered by him until after the date on which the administration has ended, is the process nonetheless effective to put the company into liquidation?

One of the shortcomings of the statutory regime for administrations of insolvent companies, as it existed before the reforms introduced by the Enterprise Act 2002, was the lack of a simple procedure for converting an administration into a voluntary liquidation. The decisions in Re Powerstore (Trading) Ltd [1997] 1 WLR 1280 and Re Norditrack (UK) Ltd [2000] 1 WLR 341 provided practical solutions to some of the problems. The introduction of schedule B1 to the Insolvency Act 1986 setting out the new structure for administrations provided the opportunity to produce a simple process. This is contained in paragraph 83, which is headed “Moving from administration to creditors’ voluntary liquidation”. Omitting paragraph 83(2) which applies only to Scotland, sub-paragraphs 83(1) to 83(7) provide as follows:

These provisions envisage a simple, seamless procedure. First, if paragraph 83(1) applies, the administrator may send the relevant notice to the registrar of companies. As soon as reasonably practicable he must also file a copy of the notice with the court and send a copy to each creditor whose claim and address is known to him. Secondly, “on receipt” of the notice, the registrar of companies must register it. It is registration which causes the appointment of the administrator to cease to have effect and the company to be wound up as if a resolution for winding up had been passed on the day of registration. The status of the date of registration as the operative date is underlined by provisions in paragraph 83(8)(b) and (e), substituting the beginning of the date of registration for the time of passing the resolution for voluntary winding up in sections 86 and 129 of the Insolvency Act 1986.

Paragraph 83(6) envisages that the company will pass from administration to winding up without any hiatus. Paragraph 83 does not, however, seem to envisage that there might be a delay by the registrar of companies in registering the notice after its receipt by him, so that, although sent and received before the administrator’s appointment has automatically ceased to have effect under other provisions of the schedule, it is not registered by him until later.

Another of the reforms introduced into by schedule B1 was the imposition of tight limits on the duration of administrations. An administrator’s appointment ceases to have effect at the end of one year beginning with the date on which it took effect, unless extended by a court order or, subject to a limit of six months, by the consent of creditors: paragraph 76. A court order cannot be made after the expiry of the administrator’s term of office: paragraph 77(1).

In view of these time limits, it is to be expected that notice under paragraph 83 will be given close to the end of the administrator’s period of office. There is, however, nothing in paragraph 83 or elsewhere which requires notice to be given a minimum period before the end of that period.

The facts in the case of Sussex Pharmaceutical Limited are that administrators were appointed out of court and their appointment took effect on 31 January 2005. In April 2005 the meeting of creditors held in accordance with paragraph 51 of schedule B1 approved the administrators’ proposals, which included a continued realisation of the assets of the company and, if sufficient funds were realised to permit a distribution to unsecured creditors, the adoption of the procedure in paragraph 83 to place the company in voluntary liquidation, with the administrators becoming the liquidators. If there were insufficient realisations for a distribution, the procedure in paragraph 84 for dissolution without winding-up would be followed. These are typical of proposals approved by the creditors of many companies in administration.

Sufficient funds were realised to justify a distribution and so, on 27 January 2006, the administrators sent the appropriate notice under paragraph 83(3) to the registrar of companies. Its receipt was date stamped on 28 January 2006 but it was not registered until 1 February 2006. By then the administrators’ appointment had ceased to have effect under paragraph 76(1).

The facts in the case of E-Squared Limited are not materially different.

The concern as to the present status of these companies arises because the transition from administration to liquidation under the terms of paragraph 83(6) may be thought to require that the administrators are still in office on the date of registration and that, if they are not, registration is ineffective to place the company in liquidation.

It should first be noted that the terms of paragraph 83(6) do not expressly compel this conclusion. Paragraph 83(6)(b) provides that, on registration of the notice, the company shall be wound up. It is not subject to an express condition that this should apply only if the administrators are still in office.

In her helpful submissions, Miss Kyriakides pointed to a number of unfortunate consequences if paragraph 83 were read as requiring the administrators still to be in office at the date of registration of the notice. First, the notice was sent at a time when they were in office and had standing to send it. Secondly, they have, as required, filed a copy of the notice in court and sent a copy to creditors. Creditors are entitled to assume that the company has gone into liquidation. There is no provision for any other notice to creditors, and the normal requirements in the case of a creditors’ voluntary winding-up for notice in the Gazette and for a meeting of creditors do not apply: paragraph 83(8)(a), (d). Thirdly, instead of using the procedure intended to produce a simple and inexpensive transition to liquidation, it would be necessary to go through the full procedure of meetings of members and creditors. In the meantime there could be a period of weeks while the directors resumed responsibility for the company, even though it was insolvent. This would be so even though the creditors had approved the use of the procedure under paragraph 83 at their meeting to consider the administrators’ proposals. Fourthly, the former administrator might well act for a period as liquidator, without realising that his appointment had not taken effect.

These are all consequences which would tend to undermine the clear purpose of introducing paragraph 83. Moreover, it would mean that the administrators could not in practice use the full period of their appointment to carry out their duties, but would need to undertake the procedure under paragraph 83 sufficiently in advance to accommodate the possibility of delays.

It seems all the more unfortunate that these consequences should arise, on the facts of these cases, not because of any failing on the part of the administrators, but because the notice was not registered, as envisaged by paragraph 83, “on receipt” by the registrar of companies. The practical explanation for this may well be that documents lodged at the registrar’s office in London are sent to the main registry in Cardiff for registration.

In my judgment, these are all considerations which support the conclusion that, on its proper construction, paragraph 83(6) is to be applied in accordance with its express and mandatory terms, so that on registration of a notice sent by administrators while still in office the company shall be wound up. If by the date of registration the administrators have already ceased to hold office, paragraph 83(6)(a) will simply not have any effect. The particular circumstances of cases such as the present were not relevant for consideration by Blackburne J in Re Ballast Plc [2005] 1 WLR 1928 and nothing said by him in that case detracts, in my view, from this conclusion.

It must be acknowledged that, on other facts, it might be that the notice was not sent until too late to be received by the registrar before the administrators’ appointment ceased to have effect. Paragraph 83 could not be construed to produce a different result in such circumstances. Provided that the notice is registered by the registrar of companies, the critical point in my judgment is that it should have been sent by the administrator before his appointment had ceased to have effect.

I shall accordingly make a declaration that the company in each case before me was wound up on the date of registration of the relevant notice and that the liquidators of each company are its former administrators.

In reaching this conclusion, it has not been necessary to consider whether, by necessary implication, the effect of sending a notice under paragraph 83(4) is to extend the administrator’s appointment until registration of the notice. The fact that I have held that the companies in these cases have been wound up, even on the assumption that there is no such extension, does not mean that I have reached any view on that point. It might be of significance in other cases, for example in the application of time limits under section 240(3)(d) of the Insolvency Act 1986 for the purpose of proceedings under section 238 and 239: see Re Powerstore (Trading) Ltd [1997] 1 WLR 1280 at 1283-4.