Case Study and Comment by our Insolvency Litigation Solicitors: Administration or Winding-Up? Section 127 of the Insolvency Act, 1986
This case study begins by asking the following question, in relation to a case where we are the insolvency solicitors to the proposed administrators of an insolvent company:
“Is the Court, on the application of a Company, obliged to make an Administration Order in relation to that Company, where all the requirements for doing so are met by the applicant Company?”
The simple answer is a resounding NO, as was confirmed by the order of his Honour Judge Simon Barker QC in determining the application of Trafficflow Management Ltd (‘the Company’), which sought an Administration Order to be made in relation to it.
This article looks in more detail at the Judge’s decision to make a Winding-Up Order instead, which followed heavy emphasis by the Court on section 127 of the Insolvency Act, 1986. We conclude by asking for the opinions of other insolvency specialists, in such circumstances and in relation to their experience of the effectiveness of section 127 of the Insolvency Act 1986.
What are the Jurisdictional Requirements that have to be Met for the Court to be in a Position to Make an Administration Order?
They are set out in paragraph 11 of schedule B1, namely:
- The Company is or is likely to become unable to pay its debts (paragraph 11 (a)); and
- The Administration Order is ‘reasonably likely’ to achieve the purpose of administration (paragraph 11 (b)).
On the fact of this case it was common ground that those jurisdictional requirements were met.
However….on the particular facts of this case, the Court expressed significant concerns about the amount and frequency of payments out of the company bank account in the period of six months leading up to the making of the application for an Administration Order. (The Winding-Up Order was made at a second hearing, after the Judge had at the first hearing of the Company’s application ordered further evidence from the Company.)
The Learned Judge expressed those concerns against a background where HMRC had by the time of the application to the Court for the making of an Administration Order, already presented a Petition to the Court for the making of a Winding-Up Order, in relation to the Company.
The Court was thus faced with making the Administration Order or putting the Company into Compulsory Liquidation.
Section 127 of the Insolvency Act 1986 was at the Centre of Things
The Court, having carefully considered the available evidence, expressed a very significant concern that the advantage conferred by section 127 of the Insolvency Act 1986, would be lost upon the making of an Administration Order, in relation to payments made since the date of presentation of the Winding-Up Petition. The Petition would be dismissed by operation of law if an Administration Order were made.
Section 127 of the Insolvency Act 1986 provides:
‘(1) In a winding up by the court, any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding up is, unless the court otherwise orders, void.
(2) This section has no effect in respect of anything done by an administrator of a company while a winding-up petition is suspended under paragraph 40 of Schedule B1.’
The Court, in order to preserve that section 127(1) right, was minded to thus make a compulsory Winding-Up Order rather than an Administration Order.
Significant legal argument took place on the respective merits and advantages of each Insolvency procedure, both generally and in relation to these particular facts.
The Court felt that on the facts of this particular case, the making of a Compulsory Winding-Up Order was the right way forward and made that Order.
Interestingly, the Court recognised that very important and significant investigatory work in relation to the Company had already been undertaken by the proposed Joint Administrators of the Company, in the 3 – 4 weeks of their involvement with the Company.
The Judge recognised that the benefit of that work (undertaken before and between the two hearings, at the direction of the Court) and knowledge should not be lost as it was clearly advantageous for the Office Holders, who were to become Joint Liquidators, to be able to get on and continue their work with that acquired knowledge of the Company and its Directors as quickly as possible, for the benefit of creditors.
With the considerable assistance of the Official Receiver who was in Court at this, the adjourned hearing of the application for an Administration Order to be made (at the request of the Court), that concern was met.
A Compulsory Winding-Up Order was made in relation to the Company with the proposed Administrators (with the invaluable assistance of the Official Receiver) being appointed (within 3 hours) as Joint Compulsory Liquidators in relation to the Company. That happened after telephone consultation by the Official Receiver with the largest creditors in the case.
Comment by our Insolvency Litigation Solicitors
This outcome can be seen to represent a very pragmatic and sensible way forward for the Company and its creditors, with the Court, unusually, inserting a recital into the Winding-Up Order as follows:
‘AND UPON the court expressing its appreciation to the proposed administrators and their legal representatives responsible for the thorough and helpful material presented to the court in the course of and in support of the application.’
This outcome was clearly an unusual one but it is a stark reminder that the Court is never a rubber stamping exercise in such situations and that judicial intervention can and will be made where the Court considers that appropriate.
Request for the Opinions of Other Insolvency Professionals
The Court having placed heavy emphasis on section 127 in making the Winding-Up Order, our team of insolvency solicitors, headed by Neil Davies, would be interested to learn the opinions of others, in such circumstances and in relation to their experience of the effectiveness of section 127 of the Insolvency Act 1986.
Simply contact us or email us on firstname.lastname@example.org with your thoughts.
For the record, the professional advisers involved in this case are:
- Proposed Administrators and now Joint Compulsory Liquidators of the Company: Simon Campbell and Carl Jackson of Quantuma, Southampton.
- Solicitors to the proposed Administrators: Neil Davies & Partners, Birmingham.
- Counsel to the proposed Administrators and the Company: Louis Doyle, Kings Chambers, Manchester.