What happens to a company at the end of an administration is a question that probably only keeps insolvency anoraks up at night.
There are a limited number of potential options, with the rescue of the company as a going concern being the number one objective to which all administrators aspire. However, more often than not, an administration will end with the company entering liquidation or, where the company has no property to permit a distribution to creditors, the dissolution of the company.
Process for conversion from administration to CVL
The Insolvency Act 1986 (the Act) provides a simple regime for companies in administration to move to creditors’ voluntary liquidation by the administrators filing a notice with the registrar of companies (see paragraph 83 of Schedule B1 to the Act). Upon registration of the notice, the appointment of an administrator shall cease to have effect and the company shall be voluntarily wound up from the date of registration, with the administrators usually remaining in office as liquidators of the company. However, there are two conditions which must be satisfied for administrators to utilise the procedure in paragraph 83 to move to CVL: firstly, the secured creditors must have been paid (or will be paid) in full and, secondly, the administrators must anticipate making a distribution to unsecured creditors (otherwise than from the prescribed part).
The second of these conditions is the one which often proves problematic. If there are no funds available for distribution to unsecured creditors, but the company’s affairs are not concluded and therefore dissolution is premature, the administrators are forced to make a court application to bring the administration to an end under paragraph 79 of Schedule B1 (usually on the basis that the purpose of the administration cannot be achieved) and simultaneously seek a winding up order and their appointment as liquidators under section 140 of the Act. However, compulsory liquidation brings with it substantial statutory costs which may prove prohibitive in a liquidation with a limited pool of assets. Administrators are therefore keen to convert to CVL wherever possible.
This very issue of conversion to CVL and what constitutes a distribution to “unsecured creditors” came before the High Court recently in the case of Hobson v OAS Realisations (2022) Ltd [2024] EWHC 1491 (Ch).
The facts
The former joint administrators of a company (OAS Realisations (2022) Limited) applied to court for declarations regarding the validity of the company’s move from administration to CVL and their appointment as liquidators. The administrators had completed a pre-pack sale of the business upon their appointment in March 2022. From the sale proceeds, the administrators held sufficient funds to pay a dividend of 59.1p in the pound to HMRC in its capacity as secondary preferential creditor, but insufficient funds to make a distribution to any ordinary unsecured creditors. Following advice from their solicitors that HMRC fell within the definition of an “unsecured creditor”, the administrators concluded that they were entitled to convert the administration to CVL under paragraph 83 of Schedule B1. The notice was duly registered by the registrar of companies and the administrators were appointed as liquidators. Following concerns raised about their interpretation of a requirement for payment to be made to “unsecured creditors” in order to validly convert to CVL, the administrators applied to court for declarations as to the validity of their appointment.
The decision
The High Court judge held that the determining factor as to whether HMRC could be considered an “unsecured creditor” was whether it held security as defined by the Act. While HMRC holds a secondary preferential status in respect of certain tax debts (which means it is entitled to be paid in priority to other unsecured creditors), as it does not hold any security in respect of its debt it could properly be construed as an “unsecured creditor” for the purpose of paragraph 83 of Schedule B1. Further, the conditions of paragraph 83 are satisfied where “the administrator thinks that a distribution will be made to unsecured creditors” (see paragraph 83(2) of Schedule B1). Relying on advice from their solicitors, the administrators considered HMRC to be an unsecured creditor and therefore thought that a distribution would be made to unsecured creditors, which enabled the conversion from administration to CVL. The court therefore held that the company had properly converted to CVL and the liquidators’ appointment was valid.
Comment
The decision in this recent case is surprising and somewhat problematic. The judge no doubt had sympathy with the administrators and sought to achieve a pragmatic outcome to avoid the difficulties that could arise following an invalid move to CVL and the lapse of the administration. However, to construe a preferential creditor as an “unsecured creditor” in this way creates a number of inconsistencies with the interpretation of that term as it is applied under the Act. For example, where administrators seek to extend the term of administration by consent under paragraph 76 of Schedule B1, the Act distinguishes between circumstances where the consent of secured and unsecured creditors is required, and circumstances where only secured and preferential creditor consent is required. It will be interesting to see how the caselaw around this point develops in circumstances where administrators will often be inclined to pursue the ‘easy’ route to CVL (as set out in paragraph 83) and therefore seek to rely on this authority where HMRC falls only as a (secondary) preferential creditor in the administration.
Tim Carter
Lucy Trott