Courts Plc (In Liquidation)

By this application the joint liquidators of Courts plc (“Courts”) seek (1) an order pursuant to section 176A(5) of the Insolvency Act 1986 (“the Act”) that section 176A(2) shall not apply so as to require a distribution of the prescribed part to unsecured creditors for £28,000 or less (“the qualified disapplication order”) and (2) an order (“the costs order”) that the court approve the joint liquidators’ costs of and incidental to the application and of dealing with the prescribed party generally in an amount not exceeding £37,000 in the event that I make the qualified disapplication order or in an amount not exceeding £62,000 in the event that I do not make the qualified disapplication order, such costs to be paid out of the prescribed part in accordance with rule 12.2(2) of the Insolvency Rules 1986 (“the Insolvency Rules”).

Section 176A of the Act provides, so far as material, as follows:

“(1)

This section applies where a floating charge relates to property of a company-

(a)

which has gone into liquidation,

(b)

which is in administration,

(c)

of which there is a provisional liquidator, or

(d)

of which there is a receiver.

(2)

The liquidator, administrator or receiver-

(a)

shall make a prescribed part of the company’s net property available for the satisfaction of unsecured debts, and

(b)

shall not distribute that part to the proprietor of a floating charge except in so far as it exceeds the amount required for the satisfaction of unsecured debts.

(3)

Subsection (2) shall not apply to a company if-

(a)

the company’s net property is less that the prescribed minimum, and

(b)

the liquidator, administrator or receiver thinks that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits.

(4)

Subsection (2) shall also not apply to a company if or in so far as it is disapplied by-

(a)

a voluntary arrangement in respect of the company, or

(b)

a compromise or arrangement agreed under section 425 of the Companies Act (compromise with creditors and members).

(5)

Subsection (2) shall also not apply to a company if-

(a)

the liquidator, administrator or receiver applies to the court for an order under this subsection on the ground that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits, and

(b)

the court orders that subsection (2) shall not apply.

(6)

In subsections (2) and (3) a company’s net property is the amount of its property which would, but for this section, be available for satisfaction of claims of holders of debentures secured by, or holders of, any floating charge created by the company.”

The only other statutory provision that I need refer to is rule 12.2(2) of the Insolvency Rules. This states that:

“The costs associated with the prescribed part shall be paid out of the prescribed part.”

The reason for this application is the belief of the joint liquidators that the cost of making a distribution to unsecured creditors whose claims are £28,000 or less will be disproportionate to the benefits.

The background to the application is briefly as follows. Courts is the holding company and ultimate parent company of a group of companies. It is also the direct holding company of Courts (UK) Limited which carried on business selling household furniture from 88 sites in the United Kingdom. Courts was placed into administration by order of the court on 30 November 2004 when Christine Laverty and Michael McLoughlin were appointed as joint administrators. They determined that Courts could not be saved as a going concern and, accordingly, sought by various disposals to realise the maximum value for the benefit of its creditors. The disposal process was completed in July 2007. Courts entered into liquidation (a creditors’ voluntary liquidation) on 30 November 2007 when Ms Laverty and Mr McLoughlin were appointed joint liquidators.

This application was prompted by the fact that, although very substantial realisations were made, the only amount that would be payable to unsecured creditors would be in respect of preferential claims and the prescribed part. Given the level of realisations the prescribed part, as calculated pursuant to the Insolvency Act (Prescribed Part) Order 2003, is £600,000 which is the maximum sum permitted by that Order.

It appears that Courts has 297 unsecured creditors (whom I will refer to simply as “the creditors”) who have submitted claims and who may therefore qualify for a distribution from the prescribed part. The claims total approximately £94 million. Thirty-seven of the creditors have very large claims. Thus, those submitted by HMRC and Courts’ pension scheme alone amount to 86% by value of all of the claims.

As I have mentioned, the joint liquidators consider that the benefits of making a distribution to those creditors with claims of £28,000 or less - they number approximately 260 - are outweighed by the cost of doing so.

The joint liquidators have calculated the sum of £50,000 to be the average overall cost of processing the creditors’ claims and making distributions in respect of them. This means that, applying rule 12.2(2) of the Insolvency Rules, there will be £550,000 available for distribution in respect of the prescribed part which in turn will result in a dividend to the creditors from the prescribed part of just under 0.6p in the £. This assumes that the value of those claims is £94 million. Assuming further that the £50,000 is divided equally between the 297 claims it follows, according to the figures, that the average cost of dealing with each claim will be fractionally over £168.

Based on those assumptions the joint liquidators have calculated that a creditor would have to have a claim admitted to proof in an amount in excess of £28,000 before the apportioned average claims handling cost of £168 per claim is exceeded by the likely dividend of 0.6p in the £. From this the joint liquidators reason that the cost of making a distribution to creditors whose claims are £28,000 or less will be disproportionate to the benefits to those creditors of making that distribution. From the details supplied of the creditors so far known to the joint liquidators, approximately 260 of Courts’ 297 odd creditors will fall into this category. The joint liquidators therefore seek what I have described as the qualified disapplication order, namely an order that I disapply the application of section 176A(2) to such creditors. The effect of so doing will be (a) to deny those creditors any distribution out of the prescribed part, (b) to save the costs of processing and making distributions out of the prescribed part in respect of those creditors and (c) to increase the dividend payable to the remaining creditors, that is to the 37 or so whose claims exceed £28,000. The joint liquidators contend that I have power so to order and that I should so order.

The average overall costs figure of £50,000 is, I understand, the approximate mid-point between an estimate of the processing and distribution costs in the event that I accede to this application and make the qualified disapplication order, namely £37,000, and an estimate of those costs in the event that I do not make that order, namely £62,000. These figures assume that I am willing to make an order approving the joint liquidators’ costs (whether for £37,000 or for £62,000 or in some other sum) so that the joint liquidators do not have to convene a meeting of creditors which they would otherwise have to do as there is no liquidation committee and they are not otherwise proposing to convene any further such meeting.

After listening to submissions by Mr David Allison, who represented the joint liquidators on the hearing of this application, I stated that I was not persuaded that I should make the qualified disapplication order although I was willing to make a costs order. I indicated that I would set out my reasons in writing. This I now do.

The first question is whether I have jurisdiction to make the order sought.

The power to disapply section 176A(2) is conferred by section 176A(5). Two conditions have to be fulfilled if the power to disapply is to be exercised. They are (a) an application by the liquidator (or other office-holder) to the court for an order under the subsection and (b) the willingness of the court to make the required order. The order, if made, is “that subsection (2) shall not apply”. The subsection therefore appears to envisage simply that subsection (2) is not to apply. It is on the face of it all or nothing. Subsection 176A(5) is not worded so as to enable the court to order that subsection (2) shall not apply “to the extent indicated by the order” (or words to that effect). This is in contrast to subsection (4) which provides that subsection (2) shall not apply to a company “if or insofar as it is disapplied by …”.

Mr Allison submitted that I should nevertheless construe the provision as if it were worded so that subsection (2) can be disapplied in part. He made the following points. First, section 176A(5) does not in terms state that the court must disapply section 176A(2) in its entirety. Second, the objective behind the introduction of section 176A - the setting aside of the prescribed part - is to benefit unsecured creditors of an insolvent company. Third, section 176A should be interpreted purposively so as to give effect to its objective. Fourth, the construction contended for by the joint liquidators enables the court to give effect to such objective. Fifth, the contrary construction (by which I understood that subsection (2) is either disapplied in its entirety or it is applied in its entirety) would frustrate Parliament’s objective in introducing the section. Sixth, in circumstances such as they exist in respect of Courts, an all or nothing approach would not benefit the unsecured creditors of an insolvent company.

The difficulty with the argument is in ascertaining what Parliament’s objective or intention was in introducing section 176A beyond making a sum available for an insolvent company’s unsecured creditors - the so-called prescribed part - in circumstances where the claims of floating charge holders would otherwise swallow up the available net property. The reason why, in my view, a correct understanding of the provision is that section 176A(2) applies either in its entirety or not at all and therefore why a literal reading of section 176A(5) is appropriate (with the result that I have no jurisdiction to make a qualified disapplication order) rests on two separate considerations, one general and the other particular.

The general consideration is the principle of pari passu distribution which underlies the treatment of unsecured creditors in an insolvent liquidation. Subject to the claims of preferential creditors, the company’s debts are to rank equally between themselves. See section 107 of the Act in the case of a voluntary liquidation and rule 4.181(2) of the Insolvency Rules in the case of a winding up by the court. This is so, however small the claims of some creditors may be as compared with others, and whatever the overall spread of claims may be. By contrast, the effect of the qualified disapplication order which the joint liquidators seek would be subject the prescribed part to a quite different regime. This would be to enable the 37 or so largest creditors to take the prescribed part in its entirety leaving the remaining 260 creditors to receive nothing. I am unable to discern any legislative intention that the power to disapply section 176A(2) conferred by subsection (5) should be capable of producing that result. Indeed, I would expect to see some strong indication in the Act or in the Insolvency Rules or in other admissible material before concluding that Parliament could have had such an intention in mind. My attention has not been drawn to any such indication or material. By contrast, where Parliament has intended to depart from the principle of pari passu distribution - for example, in the case or preferential debts - it has clearly so stated.

The particular consideration turns on the requirement which grounds an application under subsection (5), and thus the making of an order under it, that (in the words of subsection (5)(a)) “the cost of making a distribution to unsecured creditors would be disproportionate to the benefits…”. Rule 7.3A(2)(c) of the Insolvency Rules requires an applicant under section 176A(5) to swear an affidavit stating “the information substantiating the applicant’s view that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits …”. The court is not bound to accept that view and make the order. The court is entitled, indeed obliged, to apply a critical mind to the assertions in the affidavit. The assumption which underlies this application, as the joint liquidators’ evidence makes clear, is that it may be (and in the circumstances of this liquidation is) appropriate, when determining whether the cost of making a distribution would be disproportionate to the benefits, to assess “benefits” by reference to what the particular creditor can expect by way of distribution having regard to the assumed cost (based upon a rough overall average divided equally among all of the creditors) of processing that particular creditor’s claim and making payment of the dividend in respect of it.

It is to be noted, however, that in a liquidation, whether compulsory or voluntary, the liquidator’s expenses are paid out of the company’s assets in priority to the claims of the unsecured creditors. See section 115 of the Act in the case of a voluntary winding-up and rule 4.180(1) of the Insolvency Rules in the case of a compulsory winding-up. Or, as Mr Allison described it in argument, they are “top-sliced”. It is only the balance that is available for distribution among the company’s unsecured creditors. Subject to preferential debts, the other creditors share rateably between them what is available for distribution. The fact that, averaged out, the liquidator’s expenses of processing each claim equal or exceed the distribution to a particular creditor is irrelevant. The fact that the actual cost of processing a particular creditor’s claim may exceed the distribution to that creditor is likewise irrelevant. I discern nothing in the Act or the Insolvency Rules, and no other admissible material has been drawn to my attention, to indicate that where the prescribed part is involved Parliament intended to depart from this approach and treat the balance of cost and benefit on an individual creditor basis as a material consideration in the exercise of the power under section 176A(5) to disapply the operation of subsection (2). In short, I do not think that the approach adopted by the joint liquidators to the assessment of the balance between cost and benefit required by subsection (5)(a) is open to an applicant for an order under subsection (5)(b). This consideration, if correct, reinforces my view that the cost/benefit balance is to be approached treating creditors as a body and therefore that, as the wording of subsection (5) suggests, a disapplication order, if made, will only operate to disapply subsection (2) in its entirety.

Mr Allison nevertheless submitted that, inherent in the power to disapply subsection (2), is an acceptance by Parliament that the court can sanction a departure from the pari passu approach to distributions among unsecured creditors and the top-slicing of the liquidator’s expenses. He submitted therefore that I need not concern myself with considerations which apply to distributions among unsecured creditors where there is no question of a prescribed part.

But this begs the very question that the application has raised. It is only if the court is entitled to disapply the operation of section 176A(2) so that some creditors are enabled to share in the prescribed part while the others are left to receive nothing that this submission might have any force. If, however, the disapplication is on an all or nothing basis, there is no element of differential treatment as between unsecured creditors: either they share rateably in the prescribed apart or there is no prescribed part and everything goes to the floating charge holder. In short, Mr Allison’s further submission assumes what it sets out to prove.

In my view, therefore, the court has no jurisdiction to disapply the operation of subsection (2) in the way that I am invited to do.

But even if I am wrong and the jurisdiction exists, I am not willing to exercise that jurisdiction to provide the result sought by this application. As the figures in the present application indicate, a calculation of the average cost per creditor is at best an informed guess. Yet, based on that informed guess, will be, if I make the qualified disapplication order, the point where the threshold for payment lies and whether therefore a creditor will receive anything. If the average cost per creditor should turn out to be less, the threshold for payment will be correspondingly lower and more creditors could expect to qualify for payment. Then there is the consideration that a creditor with an undisputed claim for £27,999 which it has cost the joint liquidators little or nothing to process might justifiably feel aggrieved if he gets nothing when a creditor with a claim of £28,001 which has involved the joint liquidators in much time and expense in processing, gets something. That does not strike me as at all fair. Indeed, it strikes me as altogether arbitrary. These unfairnesses are inherent in the order I am asked to make.

For these reasons I was not willing to make the qualified disapplication order. For completeness, I should say that I do not accept an alternative submission set out in Mr Allison’s skeleton argument, but which he did not expand upon in oral argument, that in the event that I should determine that there is no jurisdiction under section 176A(5) to order a partial disapplication of subsection (2) I should nevertheless order that subsection (2) should not apply upon the joint liquidators undertaking to the court to distribute the prescribed part among creditors whose claims exceed £28,000. That would be to ask the court to sanction indirectly what it cannot do, or is not willing to do, directly.

That leaves only the question of the costs order. I am willing, as I indicated to Mr Allison at the conclusion of argument, to make the order sought. It will save the cost of convening a meeting of Courts’ unsecured creditors, estimated at £10,000. It follows from my refusal to make the qualified disapplication order that the costs order should be for an amount which involves processing all of Courts’ unsecured claims and not just those which exceed £28,000. I see no reason to disagree with the joint liquidators’ estimate of £62,000 for this task. I shall therefore specify an amount not exceeding £62,000 in the order sought.