Warwick & Anor (Joint Liquidators)

This is my extemporary judgment in the matter of Border Counties Farmers Limited (in members’ voluntary liquidation), case number 2738 of 2017. This is the hearing of an application, issued on the 4^th August 2017, by Mr Daryl Warwick and Mr Mark Ranson, the joint liquidators of the company, for directions pursuant to section 112 of the Insolvency Act 1986 in respect of two matters: (1) whether a distribution should be made to the personal representatives of deceased and/or dissolved members of the company, and (2) what should be done with the unclaimed distributions of untraced members of the company.

The evidence in support is contained within the witness statement of Mr Daryl Warwick, dated the 24^th July 2017, together with exhibit DW1. That witness statement is supplemented by the helpful written skeleton argument of Mr Richard Tetlow (of counsel) dated the 10^th August 2017. Mr Tetlow appears for the Applicants as joint liquidators of the company. No one else appears at the hearing of this application because no one else has been served with it.

In short, the application revolves around what the liquidators should do regarding monies held for distribution to members of the company, which is a company limited by guarantee and not by shares. The company was incorporated as long ago as 1918 as a company limited by guarantee. It operated primarily as an insurance business to the local farming community until about the summer of 2010. At that time, the company ceased to operate as an insurance business and began to operate solely as an investment company holding a number of properties, the company having sold its insurance business.

During the period that the company had operated its former insurance business, it had been a term of that insurance that upon taking out insurance with the company, the policy holder was automatically admitted as a member of the company, with 25 pence of the insurance premium being allocated as a subscription fee. That membership automatically expired at the end of the second financial year following the date that the policy was taken out.

In or around the summer of 2012 it was proposed by the company’s directors to crystallise the company’s membership by reference to the members’ list at the time of the sale of the insurance business. At that time there were 1,992 members of the company.

On the 24^th August 2012, the company adopted new articles of association by special resolution. In or around May 2015, the company’s directors decided to wind the company down and to realise its assets following a sale of those assets. On the 14^th August 2015, the company was placed into members’ voluntary liquidation, with Mr Warwick and Mr Ranson being appointed as the company’s joint liquidators. At that time, all of the company’s assets had been sold and, pursuant to the crystallisation of the membership in 2012, there were understood to be 1,992 members.

All known creditors have now been paid in full. All matters have now been dealt with in the liquidation save for the issue as to the distribution of the company’s surplus assets. On the 31^st May 2016, the joint liquidators declared a distribution of surplus funds to members of £1,135,440, equating to a sum of £570 per member, and they sought to effect payment of the same. On that day, the liquidators wrote to all members enclosing a cheque for the sum of £570 apparently due to each member. The majority of those cheques have been cashed without any issue arising, However, there remain un-cashed cheques amounting in total to £143,070, representing 251 members.

Those cheques remain un-cashed for various reasons but may be divided into two broad, or seven more narrow, categories. The first represents un-cashed cheques and/or untraced members, comprising 187 members and representing £106,590 in total. 98 cheques have been returned, 86 letters enclosing cheques remain unanswered or unaccounted for, 2 members have responded but have not yet cashed their cheques and 1 unsighted member has not found it possible to cash the cheque paid to him and it has not otherwise proved possible to transfer any sum of money to that individual.

The second category is that of members (or former members) who have ceased to be such. That category comprises 64 members, representing £36,480. There are 47 individuals who have apparently passed away, 4 partnerships which have apparently been dissolved, and 13 companies (or groups of companies) which have been dissolved.

The liquidators seek the Court’s guidance under section 112 of the Insolvency Act as to, first, how to proceed in relation to the “untraced” category and, more particularly, whether to pay those monies into the Insolvency Services Account, to the traced members, or to anyone else; secondly, how to proceed in relation to the other category of deceased or dissolved former members; and, thirdly, whether or not the Court requires there to be any further service or representation in relation to the application on the issues. The liquidators are, necessarily, neutral in the matter although Mr Tetlow, on their behalf, has provided helpful assistance to the Court as to the applicable law and the potential practical avenues available.

The first matter I need to address is the need for service of this application on any party, or for further representations, before the Court proceeds to address the application under section 112. On this issue, the liquidators are entirely neutral and have indicated that they will abide by any directions from the Court.

The liquidators recognise that it might be appropriate for notice to be given to individual personal representatives and for argument to be heard by them; but they also bear in mind that the overall sums in the second category total only £36,480 and that taking such steps would diminish that sum. They also invite the Court to note that no express request for representation has been received following the progress report which set out the intention to make the application.

I am satisfied that appropriate notice of the circumstances giving rise to this application has been given to all potentially interested parties. The efforts in that regard are set out at paragraphs 16 and 40 of Mr Warwick’s supporting witness statement.

In summary, advertisements had been placed in the Farmers Weekly, the Hexham Courant and the Cumberland News on the 8^th July 2016 alerting members to the proposed distribution. Those advertisements had been preceded by a letter advising members of a meeting of creditors in respect of the members’ voluntary liquidation on the 16^th September 2015, the advertisement of the winding up resolution and the appointment of the liquidators in the London Gazette on the 20^th October 2015, notice of the intended dividend being placed in the London Gazette on the 15^th April 2016, and a distribution letter on the 31^st May 2016.

Following the advertisement in the papers on the 8^th July 2016, a letter was sent to the recipients of the un-cashed cheques on the 19^th September 2016. Also a progress report was sent to all members on the 9^th December 2016, once again detailing the situation in respect of the un-cashed cheques.

At paragraph 41, Mr Warwick expresses the joint liquidators’ opinion that they have taken all reasonable steps to bring the distribution to the attention of the members and all members have had sufficient opportunity to cash cheques paid to them. Despite the joint liquidators’ efforts to bring the dividend to these members’ attention, the company still holds a substantial sum in respect of unclaimed dividends.

As regards the deceased and dissolved members, the dividend payable to each of them is only £570. In my judgment, it would not be appropriate, in those circumstances, to require the joint liquidators to incur the costs of writing to the personal representatives of deceased members, or notifying those who might be interested in any dissolved partnership or company, of the present application. That would, it seems to me, involve the joint liquidators in incurring costs out of all proportion to the potential benefit to any individual deceased or dissolved member, or their successors.

Mr Tetlow has taken me through the relevant statutory provisions and the relevant provisions in both the company’s articles and any applicable model articles. The position in regard to deceased or dissolved members is set out at paragraphs 20 to 38 of Mr Warwick’s witness statement, and at paragraphs 20 through to 43 of Mr Tetlow’s written skeleton argument.

By section 107 of the Insolvency Act 1986, after satisfaction of the company’s liabilities, the company’s assets:

“shall (unless the articles otherwise provide) be distributed among the members according to their rights and interests in the company.”

The issue that has arisen is as to whether the estates of members who are deceased or dissolved are entitled to receive a distribution and, if not, what should happen to the distribution share that had been allotted to them?

Section 250 of the Insolvency Act 1986 provides that, for the purposes of any provision in the First Group of Parts (relating to company insolvency and company winding up):

“a person who is not a member of a company but to whom shares in the company have been transferred, or transmitted by operation of law, is to be regarded as a member of the company, and references to a member or members are to be read accordingly.”

Mr Tetlow has pointed out, as has Mr Warwick, that that definition is considerably wider than the definition of “member” for the purposes of the Companies Act. Pursuant to section 112 of the Companies Act 2006, the definition of the term is limited to the subscribers to the memorandum and those who have agreed to become members and whose names are entered in the register of members.

The provision in section 250 of the Insolvency Act 1986 is clearly designed to include the transferees of shares under unregistered transfers and the personal representatives of deceased members and others to whom shares have been transmitted by operation of law. That provision, however, has no application in the present case because the company is not one limited by shares but by guarantee. There is no share capital and therefore, it seems to me that there is no scope for the wider application of section 250 of the Insolvency Act 1986.

There is also nothing in the articles of association of the company, or the applicable model articles, which gives any wider meaning, for the purposes of this company, to the definition of member than that provided by section 112 of the Companies Act 2006. The position would therefore appear to be that by section 107 of the Insolvency Act 1986, the funds are to be distributed among the members of the company according to their rights and interests in the company. Section 250 has no application because it is directed at shares, and not membership of a company limited by guarantee, and therefore it has no application to the circumstances of the present case.

The company’s articles make no provision for what is to happen on the death or dissolution of a member of the company, and make no provision for the transfer of membership on such an event. A member is defined as having the same meaning as in section 112 of the Companies Act 2006. Mr Tetlow is aware of no statutory provision or authority dealing with any deemed transfer of membership of a company limited by guarantee on the member’s death or dissolution.

In those circumstances, and given the absence of any express provision on transfer, or the effect of death or dissolution, it seems to me that membership of the company ceases on that event and does not pass to the successors of the deceased or dissolved member. As a matter of proper construction, it seems to me that death or dissolution will terminate membership, and the deceased or dissolved member ceases to be entitled to share in any distribution of the company’s assets in accordance with section 107.

For the reasons I have given, it seems to me that section 250 of the Insolvency Act does not affect the position because it has no application in the case of a company limited by guarantee rather than one having a share capital. Mr Tetlow then poses the question: if that is correct, and death or dissolution terminates membership, what if the member ceased to exist after liquidation? Does a post-liquidation deceased or dissolved member lose his, or its, right to participate in the dividend?

In my judgment, the answer is that on liquidation the right to participate in any eventual dividend crystallises. That, it seems to me, is the consequence of section 86 of the Insolvency Act 1986 which provides that:

“A voluntary winding up is deemed to commence at the time of the passing of the resolution for voluntary winding up.”

The only other possible crystallisation date is the date of declaration of any distribution to members in accordance with section 107. That, however, would produce what it seems to me would be an entirely arbitrary result, and the more natural point at which the nature of the membership changes is the date of liquidation, and commencement of the winding up, as set out in section 86.

In my judgment, the identity of those persons amongst whom the company’s assets are to be distributed, according to the members’ rights and interests in the company, crystallises on the commencement of the winding up; and the members, for the purposes of section 107, are to be ascertained as at the date of the company winding up rather than at the time of the declaration by the liquidators leading to the physical distribution of the company’s assets.

If that is right, then it seems to me that only those deceased members, or dissolved companies or partnerships, which died or were dissolved after the commencement of the winding up, should be entitled to participate in the distribution. The liquidators will need to establish, either from any identified personal representatives, or from searches at the probate registry, on what date individual members passed away and, in particular, whether before or after the company’s entry into members’ voluntary liquidation. On the basis of that information, the liquidators will be able to determine whether any deceased or dissolved members should participate in the distribution.

In my judgment, it would be appropriate, in the case of deceased and dissolved members, to identify a long stop date before which any further information is to be provided in response to further enquiries or advertisement by the joint liquidators.

That leaves the position of the untraced and unresponsive members. As I have already indicated, extensive efforts have been made to communicate with, and to trace, members on the original list of members held by the company. Apart from the three members who have responded to the liquidators but have either not cashed their cheques or have found themselves unable to do so, 86 members have failed to respond at all; and in the case of a further 98, correspondence has been returned to the joint liquidators.

The joint liquidators recognise that, on the conclusion of the liquidation, the proceeds of those unclaimed dividends could be paid into the Insolvency Services Account to be held pending any application by a creditor for payment of what is owed to them under regulation 32 of the Insolvency Regulations 1994. One option therefore, in relation to these monies, would be simply to conclude the liquidation and, upon such, to pay the monies into the Insolvency Services Account.

This aspect of the matter is addressed at paragraphs 39 to 45 of Mr Warwick’s witness statement, and paragraphs 12 through to 19 of Mr Tetlow’s skeleton argument. The concern on the part of the liquidators however is that, particularly given the numerous attempts to contact those members to date, such sums, which amount to the majority of the un-cashed cheques, totalling some £106,590, will simply, and in all likelihood, remain unclaimed. As such, the joint liquidators have invited the Court to consider whether it might be in order for the monies to be redistributed amongst the known members.

The liquidators recognise that, notwithstanding the previous attempts to make contact, a further chance for reclaiming the dividends from the untraced members should perhaps be given. Provision could be made for a final notice period of (say) a number of months during which those members could claim the dividend, failing which the sums would be redistributed. If the Court were minded to take that route, the liquidators are said to have some concerns regarding the costs of contacting each untraced members by post again, and the Court might take the view that advertisement would be adequate notice.

The other option would be for the liquidators simply to hold the monies for an indefinite period pending any claim for them, which would be impracticable. A similar approach could be adopted in relation to the two members who have been traced but have not yet cashed their dividend. In relation to the one individual to whom it has not been possible to make payment, a further attempt to do so could be undertaken.

Mr Tetlow has raised the question whether the Court would have jurisdiction under section 112 of the Insolvency Act 1986 to direct that the proceeds of un-cashed cheques should be redistributed amongst the known members. In my judgment, he is right to raise that question. Section 112 (1) provides that:

“The liquidator or any contributory or creditor may apply to the court to determine any question arising in the winding up of a company, or to exercise, as respects the enforcing of calls or any other matter, all or any of the powers which the court might exercise if the company were being wound up by the court.”

Under subsection (2):

“The court, if satisfied that the determination of the question or the required exercise of power will be just and beneficial, may accede wholly or partially to the application on such terms and conditions as it thinks fit, or may make such other order on the application as it thinks just.”

I share Mr Tetlow’s concerns as to whether section 112 is sufficiently wide to enable the Court to order the redistribution of monies to persons who would not otherwise be entitled to them. It seems to me that that would run counter to the provisions of section 107, which provides that, unless the articles otherwise provide, the company’s assets are to be distributed among the members according to their rights and interests in the company. It does not seem to me that section 112 permits the Court to make any adjustment to the rights and interests of the members in the company.

In my judgment, it would be appropriate for the liquidators to write a further, and final, letter to those who have either failed to cash their cheques, or in relation to whom letters have so far been returned, giving them one final period of time within which to ask for a further cheque to be sent to the member. After allowing a reasonable time for that to be done, it seems to me that the appropriate course then is to pay any remaining monies into the Insolvency Services Account.

In the case of the two members who have been traced but have not cashed their cheques, that will give them further opportunity to do so. In the case of the unsighted member who has been unable to accept payment, a further attempt should be made to see whether there is someone to whom, or some account into which, the cheque can be paid. Failing that, it seems to me that the monies will have to be paid into the Insolvency Services Account.

So far as the costs of this exercise are concerned, I have no doubt that it was appropriate for the joint liquidators to make this application in all the circumstances, and the costs, and the costs of implementing any consequential directions, ought to be payable as an expense of the liquidation. It also seems to me that it would be appropriate to authorise the joint liquidators to obtain a transcript of this extemporary judgment as an expense of the liquidation so that it can be made available to any member who may, in the future, wish to challenge the Court’s decision.

The order should include provision for anyone who is notified of this order to apply to vary it or to set it aside within 14 days after notice of the order. The letters that I have suggested should be sent out should include a copy of the order as an attachment.