Sanction for the bringing of legal proceedings by a liquidator in compulsory liquidation

by Azra Malik, Director of Simple Resolve limited.

Case

Allen and another, Re Longmeade Ltd (in liquidation) [2016] EWHC 356 (Ch) (25 February 2016) (Bailii)

The judgment is interesting because of its factual background, rather than any unique point of novelty in the decision itself: The main point of interest is the clear and concise statement by the court of the principles by which liquidators and perhaps administrators should conduct themselves when taking decisions where no sanction is required, and the role the court plays in supervising the exercise of such powers.

Until the introduction of changes made by the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015) with effect from 26 May 2015, a liquidator of a company in compulsory liquidation had to obtain the sanction of the court or the liquidation committee before taking certain actions, including bringing legal proceedings on behalf of the company.

The leading authority on the role of the court in providing any required sanction was Re Greenhaven Motors Ltd (in liquidation) [1999] 1 BCLC 635: the court held that, where sanction of the court was required, the court would give weight to the views of an impartial liquidator, but the decision was ultimately that of the court. The court would take into account the interest of the creditors, but might discount the views of creditors influenced by superfluous considerations. What is superfluous will I suspect be a matter of fact and law.

Where no sanction of the court was required, and the matter came before the court, Re Greenhaven Motors Ltd providesthat the court, generally, rely on the liquidator’s commercial judgment as to what was in the best interest of the insolvent estate, unless there was bad faith or the decision was one which no reasonable liquidator could take.

Section 168(2) of the Insolvency Act 1986 (IA 986) provides that a liquidator may summon a general meeting of the creditors to ascertain their wishes, but there is no statutory obligation on him to do so, unless one-tenth in value of creditors request. However, aggrieved creditors are given a right to apply to the court under section 168(5) of the IA 1986.

Consistency of approach in liquidation and administration

The power of administrators to act without sanction, either of the court or creditors, has been considered in various cases including Re T&D Industries plc [2000] 1 WLR 646; here the court provided clarity, it said that it does not see its function as that of supplanting of the administrator’s commercial judgment and decisions save where there are factors such as unfairness or a wrong understanding of the law. However, the court, on occasion has been prepared to provide administrators with comfort by formally sanctioning their exercise of powers in connection with complex compromises involving difficult legal issues.

Therefore, the approach of the courts in liquidation cases where there is no requirement for sanction and in administration cases is principally analogous. It seems that in both situations the court will defer to the reasonable commercial decisions of the appointed insolvency office-holder.

Please email Azra on enquiries@simply-resolve.com if you would like to find out more.

Azra Malik (Solicitor) is Director of Simple Resolve Limited and is qualified Mediator and Arbitrator specialising in Corporate contractual matters as well as Employment law and Civil and Commercial litigation.

Please be advised that all views expressed in these posts are those of the author and not of James Rosa Associates ltd.