International Sections Ltd, Re Insolvency Act 1986

This is an application by Nigel Price as joint Liquidator of International Sections Ltd (“the company”) to disapply section 176A of the Insolvency Act 1986.

The company was in the cold rolled section industry. In the second half of 2007, after over 10 years of apparently successful trading, it suffered financial problems as a result of bad debts and a general downturn in business. Liquidators were appointed on 7^th March 2008.

HSBC holds a floating charge and is owed around £22,000 in respect of the company’s overdraft. The two former directors of the company have guaranteed the company’s liability to HSBC up to £60,000, but their financial circumstances are not known. It seems to me that their position is irrelevant to the present application. I should not be influenced by either sympathy or emnity towards them. I should however record that they have co-operated with the Liquidators and that the Liquidators, who are of undoubted repute and independence, have no criticisms of their stewardship.

Under section 176A(2), the Liquidators are required, notwithstanding the floating charge, to make a prescribed part of the company’s net property available for the satisfaction of unsecured debts.

The Liquidators have realised in the present case net property of £18,655.46. There are 66 known unsecured creditors owed £230,613 in total.

Section 176A(3) disapplies subsection (2) if the company’s net property is less that the prescribed minimum (£10,000) and the relevant office holder thinks that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits.

As the net property exceeds £10,000 in the present case, subsection (3) does not apply.

Section 176A(5) is in the following terms:

It is clear that the ultimate arbiter where subsection (5) applies is the Court. In deciding whether to disapply subsection (2), the Court must be satisfied that the cost of making a distribution would be disproportionate to the benefits, and that it is right to disapply the section on that ground. The Court may well take the view, even where the cost of making a distribution would be disproportionate, that unsecured creditors should still receive the remaining crumbs. The position is thus in contrast with the position under subsection (3). If the relevant office holder once thinks, in a case where the net property is below the prescribed minimum, that the cost of making a distribution would be disproportionate to the benefits, subsection (2) is automatically disapplied. The office holder is not exercising a discretion. He is exercising a commercial judgment.

The “disproportionate” criterion is said to be met in this case because:

I was referred by Mr Morgan to Re Hydroserve Ltd [2008] BCC 175 and Re Courts Plc (in liquidation) [2008] BCC 817.

In Hydroserve, Rimer J in the case of an administration disapplied subsection (2) upon evidence that the costs of making the distribution would exceed the amount of the dividend, leaving creditors with approximately 1p in the £. However, an additional feature was that the major creditors (who were in the same group as the company in administration) were content to forego their dividend. As, however, the creditors had been told earlier that the prescribed part would be set aside for their benefit, Rimer J required a provision to be put in the order allowing creditors to apply to set it aside.

A similar provision giving creditors permission to apply is suggested in the present case, even though the unsecured creditors were told that no distribution in their favour was expected. I do not however think that it is right for the Court, in a case where it might otherwise be hesitant to make an order disapplying the section, to put its reservations to one side in return for the illusory comfort of a liberty to apply which in practice is never likely to be exercised. That was certainly not how Rimer J approached the matter, as he did not on the particular facts entertain any reservations about the appropriateness of the order he was asked to make.

In Re Courts Plc, it was held that there was no power in the court under subsection (5) to disapply subsection (2) in relation to some only of the creditors. In the course of so deciding, Blackburne J said at para [19]: “...the cost/benefit balance is to be approached treating creditors as a body...”. That suggests, albeit in a different context, that analysis of the benefit to individual creditors is not permissible, so that factors f and g in paragraph 10 above should be ignored.

In my judgment, the proper approach in this context too is to look at the benefits to creditors as a body. The Court should not be too ready to disapply the section because the dividend would be small. That, sadly, is often the case irrespective of the costs of making any distribution. In the present case, a significant albeit relatively small sum would remain for distribution once the costs are catered for. I do not think it would be right to deprive the unsecured creditors of what remains and I therefore decline to disapply subsection (2). I am not persuaded that the cost of making the distribution would be disproportionate to the admittedly small benefit to unsecured creditors and would not in any event exercise my power of disapplication as a matter of discretion. The disapplication of subsection (2) under subsection (5) should be the exception, and not the rule.

I should mention, by way of postscript, that there was some debate before me concerning the reference (in Rule 12.2 (2) of the Insolvency Rule 1986) to “costs associated with the prescribed part”, which are payable out of the prescribed part. The word “costs” contrasts with the expression “fees, costs, charges and other expenses” in rule 12.2(1), so that Rule 12.2(2) might be said not to extend to “fees” and “charges”, thus limiting the prescribed part’s susceptibility to anything other than disbursements in making the payments. This would be a surprising conclusion, and I am satisfied that there is nothing in the point. The difference in language is no doubt attributable to the legislative history: rule 12.2(2) was added in 2003, and its language reflects the terms of section 176A (itself a later addition under the Enterprise Act 2002), which refers to the cost of making the distribution. I have no doubt that “costs” in Rule 12.2(2) include the charges made by the Liquidator for his and his staff’s time referable to the distribution, including identifying who the creditors are, and the amount of their debts. As Mr Morgan put it, it could not have been intended that the prescribed part creditors should be able to benefit from the work of a liquidator without bearing the expense of him so doing. In my judgment, the reference to “costs” in Rule 12.2(2) is a shorthand reference to the more general “fees, costs, charges and other expenses”contained in Rule 12.2(1).