B e f o r e :
ICC JUDGE AGNELLO KC
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Between:
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(1) NOAL SCSp ( a Luxembourg private equity fund)(formerly called Novalpina Capital Partners 1 SCSp) (2) OEGH HOLDINGS S.a.r.l. (3) NOAL LUXCO S.a.r.l.
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Applicants
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- and -
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(1) NOVALPINA CAPITAL LLP ( in members voluntary liquidation) (2) ROBERT HORTON (3) ANTHONY MURPHY ( as liquidator of Novalpina Capital LLP) (4) STEPHEN GODERSKI ( as former liquidator of Novalpina Capital LLP) (5) OB PARALLEL VII ( BVI) LIMITED (6) STEFAN KOWSKI
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Respondents
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Mr Stephen Davies KC and Mr Jack Watson (instructed by McDermott Will and Emery LLP) for the Applicants
Mr Matthew Weaver KC (instructed by Cripps LLP) for the First and Third Respondents
Ms Felicity Toube KC, Ms Sri Carmichael and Ms Charlotte Ward (instructed by Humphries Kerstetter LLP) for Mr Stefan Kowski, a third party subsequently joined as the Sixth Respondent to the proceedings
Hearing dates: 11-14 February 2025, 3 April 2025
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HTML VERSION OF JUDGMENT
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Crown Copyright ©
ICC Judge Agnello KC:
Introduction
- On 10 May 2023, the First Respondent (NCL) was placed into members voluntary liquidation (MVL) pursuant to section 89 of the Insolvency Act 1986 ('the IA 86'). In November 2023, the Applicants notified the liquidator of their claim as creditors of NCL, which was the subject of proceedings in Luxembourg. Subsequently, the Applicants applied to the court to remove and replace the liquidator and for a direction that NCL be converted into a creditors voluntary liquidation (CVL) pursuant to section 95 IA 86. At the hearing on 15 November 2024, Chief ICC Judge Briggs directed the hearing of preliminary issues raising issues relating to the MVL regime and the treatment of the Applicants' claim as a creditors.
- The preliminary issues require the determination of two main issues :-
(1) What is the test applicable in relation to the conversion of a MVL into a CVL pursuant to section 95 IA 86 – does this require the debts to be paid in the 12- month period specified in section 89 IA 86 or is it a balance sheet insolvency test; and
(2) Is the Applicants' claim a debt in accordance with the IA 86 and the Insolvency Rules 2016 ('the IR') and how is it to be treated in relation to the test for conversion from MVL to CVL.
- For current purposes, it is important to note that whilst the issues raised refer to whether NCL was 'insolvent', it is agreed by all parties that the reference to insolvency is a reference to the test set out in sections 89 and 95 IA 86. This is a particular test rather than the application of more general principles located in other sections of the IA 86. The use of the word 'insolvent' as used in general terms may be somewhat misleading because this judgment and the determination of the preliminary issues relates to what is set out in sections 89 and 95 IA 86, even though these of course are not to be construed in isolation from the rest of the IA 86. As will become clear in this judgment, sections 89 and 95 create a particular test and this judgment deals with this.
Outline
- The judgment is set out as follows:-
A. Evidential issues and background
(1) Evidential issues – the lack of CPR Part 35 expert evidence permission
(2) Factual background
B. What is the test applicable in relation to the conversion of a MVL into a CVL pursuant to section 95 IA 86 – does this require the debts to be paid in the 12 months period specified in section 89 IA 86 or is it a balance sheet insolvency test
(3) Law - The MVL statutory regime and related statutory provisions
(4) Submissions made on the MVL test and discussion (excluding meaning and treatment of 'creditor')
(5) The role of the liquidator in section 95 IA 86
(6) The summary assessment of the Applicants' claim carried out by Mr Murphy
C. Is the Applicants' claim a debt and how is it to be treated in relation to the test for conversion from MVL to CVL
(7) The issue of creditors – determination of 'creditors' for the purposes of section 89 and 95 IA 1986
(8) Discussion of the treatment of the Applicants' claim as a provable debt
(9) Is the Applicants' claim a contingent liability?
(10) Is the Applicants' claim a 'disputed debt/disputed actual debt' and, if so, how is such a claim to be treated for the purposes of IR 14.1, 14.2 and other Rules in the IR?
(11) The treatment of a provable debt which has not been admitted or determined by the adjudication process
(12) Are the Applicants required to establish for the purposes of this application and the preliminary issues their claim as creditors on a balance of probabilities ?
D. The Preliminary Issues answered
(13) Conclusion – Replies to the specific preliminary issues questions
A. Evidential issues and background
(1)Evidential issues – lack of Part 35 permission as to expert evidence and other issues
- There were included in the evidence before me several reports from foreign law experts, in particular experts as to Luxembourg law as well as German law. As I made clear at the start of the hearing before me, there had been no application seeking permission pursuant to Part 35 of the CPR. The provisions of Part 35 had not been complied with. No explanation was provided as to why, in the event that any of the parties considered that expert evidence was necessary for the determination of the preliminary issues, the relevant rules were not complied with. No party sought to make any application before me at the start of the hearing for permission to rely on the expert evidence which had been filed. The expert evidence was in any event unnecessary. It relates to the Respondents' case that the Applicants were required before me to establish their claim as creditors in a sort of trial or final determinative hearing.
- Before me, Mr Kowski, the Sixth Respondent, NCL (the First Respondent) and Mr Muphy, the Third Respondent, relied on each other's submissions in opposing the case being made by the Applicants. Counsel very sensibly divided up the submissions. References in this judgment to the Respondents therefore refers to only these three Respondents. The other Respondents formed no part of the preliminary issue hearing before me.
(2)Factual Background
- The First Applicant is a Luxembourg private equity fund formerly known as Novalpina Capital Partners I SCSp (now NOAL SCSp) ('the Fund'). The Fund was set up in 2017 by Mr Stefan Kowski, Mr Bastian Lueken and Mr Stephen Peel. Treo GP is now the general partner of the Fund. The Second and Third Applicants, being OEGH Holdings S.a.r.l. (OEGH) (a wholly owned subsidiary of the Third Applicant) and NOAL Luxco S.a.r.l. ('Luxco') are subsidiaries of the Fund. Two of OEGH's subsidiaries were Maximux Bidco S.a.r.l. and Maximux BidCo S.a.r.l. which I shall refer to as the BidCos. They were incorporated on 12 October 2020 for the purpose of purchasing a group of companies that operated a gambling business ('Maxbet'). Treo GP replaced the former general partner, Novalpina Capital Partners 1 GP Sarl (Novalpina GP) on 27 August 2021.
- NCL is an LLP incorporated in England and Wales. Its designated members are Mr Stefan Kowski and Novalpina Capital Group S.a.r.l. (which is in liquidation in Luxembourg). In August 2021, Novalpina GP was removed as general partner of the Fund and Treo GP appointed in its place. Before that removal, NCL was appointed as an investment advisor to Luxembourg Investment Solutions S. A. being the Fund's alternative investment fund manager in Luxembourg in respect of funds such as the Fund. According to unchallenged evidence, there is a requirement under Luxembourg law that a Luxembourg alternative investment manager be appointed and accordingly LIS, NCL Novalpina GP and Novalpina Capital Managemnet Inyernational LLP ( now dissolved) ( 'NCMI') entered into an investment advisory agreement originally dated 14 November 2017, subsequently amended and restated on 14 November 2018.
- In around April 2021, as a fund investment, the Fund acquired 'Maxbet', a gambling business. NCL and Novalpina Capital Investment Management LLP ( NCMI) (now dissolved) advised upon the acquisition as investment advisors. The Applicants' claim arises from the due diligence carried out by NCL and in particular in relation to what was a deliberate removal of references to a Mr Mirilashvili in the due diligence reports which had been prepared.
- The Applicants' case is that NCL and Mr Kowski deliberately concealed information which showed significant uncertainty about the identity of the ultimate beneficial owner of Maxbet. According to the Applicants, the anti- money laundering and know your client obligations of the Fund meant that it was required to have certainty as to the identity of the ultimate beneficial owner. They assert that this is particularly the case as Maxbet, a gambling operation, operated in a highly regulated industry. The Maxbet share purchase agreement contained an express warranty that the UBO was a Cyprus national, a Mr Vladimir Sadovskii. Almost all the references in the draft due diligence reports to Mr Mirilashvili, an Israeli-Georgian businessman with historical business interests in Russia, had been removed. The references to Mr Mirilashvili, according to the Applicants, indicated a real and serious possibility that Mr Sadovskii was not the true ultimate beneficial owner of Maxbet. In the first version of one of the due diligence reports, that of Rodl & Partner ('Rodl'), it described Mr Mirilashvili as, 'presumed UBO' (ultimate beneficial owner) and also stated as follows:-
"ln the opinion of the analysts actually the shareholding in the company is owned not by V.G. Sadovskiy, but by M.M. Mirilashvili (based on an arrangement between the two), Sadovskiy himself is neither a director nor a shareholder in any of the Russian companies. Moreover Mr. Sadovskiy didn't travel outside of Russia last 12 months". ….Mikhail Mikhailovich Mirilashvili could be a UBO of the Group of Companies. He is a Russian businessman, owned St. Petersburg's biggest network of casinos …"
- Those references to Mr Mirilashvili were removed in the final version of the Rodl report. Other reports from Control Risks also had references to Mr Mirilashvili removed save for one single reference). The Applicants rely on what they assert is the heavy involvement of NCL and Mr Kowski in relation to the due diligence reports including meetings with the attorneys, Weil, email communications and a series of WhatsApp messages between Mr Kowski and Mr Maxim Pasik, the agent to the seller of Maxbet, including the following question asked by Mr Kowski to Mr Pasik, "Who was the owner of Maxbet before MM [Mr Mirilashvili] bought it?"
- The Applicants' case is that they relied upon the due diligence reports and that the transaction would not have proceeded had they been aware of the information which had been removed which they assert demonstrated a real uncertainty as to the identity of the ultimate beneficial owner.
- Mr Kowski denies the involvement alleged and also denies that he (or NCL) removed the references or acted so as to have the references removed. He asserts that Weil, the attorneys acting on behalf of the Fund, OEGH, Luco and the Bidcos, were responsible for the alterations. He asserts on his behalf and on behalf of NCL, that the Bidcos had provided powers of attorney to the attorneys to deal with the due diligence and other issues. They assert that regardless of what the Bidcos knew, the legal principle of attribution applies and accordingly the Bidcos are unable to assert the claim. It is also asserted that in any event that information which was deliberately removed was irrelevant to the acquisition and no claim in damages is sustainable.
- NCL was placed into members voluntary liquidation on 10 May 2023 by a resolution passed by its designated members. The declaration dated 10 May 2023 was signed and sworn pursuant to section 89 IA 86. The liquidators appointed were Stephen Goderski (the Fourth Respondent) and Peter Hart of PKF Littlejohn Advisory Limited. Mr Hart resigned on 30 August 2024 with the notification of his resignation appearing at Companies House on 4 September 2024.
- The sworn declaration of solvency dated 10 May 2023 provided in accordance with section 89 IA 86, was sworn by Mr Kowski and Mr Jean-Marie Stoffel, a representative of Novalpina Capital Group SARL. The statement states that NCL held, as at that date, £58,996 cash in bank and receivables in the sum of £275,916. The statement stated that there were unsecured liabilities in the sum of £8,400 due to Novalpina Capital Management International LLP as well as legal fees in relation to the DOS swearing of £2,000 and 'provision-fees to recover receivables' in the sum of £137,958. This provided a total surplus of £148,358. No sums were provided in relation to the estimated costs of winding up and nil was also placed in relation to the estimated amount of interest accruing until payment of debts in full. The sworn statement stated that after making, '...a full enquiry into the affairs of this company, and that, having done so, we have formed the opinion that this company will be able to pay its debts in full together with interest at the official rate within a period of 12 months, from the commencement of the winding up '. No reference was made to the Applicants' potential claim.
- In October 2023, the Applicants commenced proceedings in Luxembourg against Mr Kowski and NCL seeking damages for negligence in the course of due diligence conducted prior to the acquisition of Maxbet. The claim asserts what is said to be a significant damages claim arising out of the concealment of information in the course of the due diligence/recommendations process undertaking for the purposes of the Fund's investment in the Maxbet business. According to the evidence filed before me, this first Maxbet claim was withdrawn by notice dated July 2024. There is a second Maxbet claim issued. Mr Kowski is challenging the withdrawal notice, but there is no evidence as to the outcome of that challenge. In December 2023, the first Maxbet claim was notified to Mr Goderski, as NCL liquidator. The proofs of debts filed claimed a total of £247,600,253.92. The value of the damages claim asserted by the Applicants (in Maxbet 2) varies in number, from the sum placed in the original proof of debt, to the sum claimed of £287 million to a lessor sum in the region of €14,400,000 as set out in the letter from the Applicants' instructing solicitors dated 15 August 2024.
- Mr Goderski's annual progress report to 9 May 2024 was filed on 12 July 2024. This covered the 12-month period stipulated in the sworn declaration dated 10 May 2023. The statement of affairs prepared as part of the report established that in so far as the Applicants were creditors, there were insufficient sums available as at the date of the report (being more than 12 months since the commencement of the liquidation) to pay any creditor. There was a shortfall in relation to the expenses which were to be paid in the liquidation. Mr Goderski stated that he was taking advice as to whether to convert the MVL into a CVL. He stated as follows:-
'In December 2023, the Joint Liquidators received 5 Proofs of Debt Forms totalling £247,600,253.92. All of these claims are subject to the determination of a Luxembourg Court. Accordingly, the Joint Liquidators intend to take a position of neutrality and accept the outcome that the court determines. To adjudicate upon these claims prior to the Court hearing would be prejudicial. These claims are currently held. The Joint Liquidators have engaged Brucher Thieltgen & Partners ('Bruchers'), a firm of solicitors based in Luxembourg, who have extensive knowledge of this matter and these claims. Bruchers has, to date, provided the Joint Liquidators with initial advice on the validity and merits of these claims. The matter is therefore ongoing'
- Further down in the report, the Joint Liquidators state that they had instructed Taylor Rose MW to provide them with an initial opinion on whether it would be correct to convert the MVL to a CVL following receipt of the proof of debt claims totalling £247,600,253.92 in December 2023.
- As set out in the report, none of the receivables in the sum of £275,916 had been realised in the 12-month period since the commencement of the MVL. All the Joint Liquidators had at that stage realised was the cash at bank in the sum of £56,161.10 and a sum of £16, 218 realised from Novalpina Capital Group SARL. The total expenses which had been incurred to the 9 May 2024 totalled £89,960.27 with an estimate of £107,328.30 said to be needed for 'closure'. The report states that the estimated future time to be incurred by the Joint Liquidators is difficult to calculate because it is anticipated that legal claims in Luxembourg may not be resolved for 3-5 years and the level of involvement by the Joint Liquidators had yet to be confirmed. The report stated that the legal fees in relation to the claims in Luxembourg were being paid by Novalpina Capital Partners I Group GP S.a.r.l. ( 'Novalpina Group GP')
- At the 12 months date (10 May 2024), the Joint Liquidators had assets in their hands in the total sum of £72,620.62 which included a modest sum for bank interest. The estimated future realisations were stated to be the outstanding £275,916 and further bank interest. The report sets out that the receivables 'may be categorised as being invoice disputes rather a debtor'. A total of £67,223.58 related to sums paid to a connected company which two out of the three founding members believe were not made in accordance with the partnership agreement and accordingly those sums should be repaid to NCL. The balance of the receivables sum, being the sum of £208,692.12, are payments made by NCL to a firm of solicitors which two out of the three partners in the partnership consider was not for the benefit of the partnership. The report states that the receivables are all disputed and that the liquidators have engaged solicitors to pursue the claims. The report states, 'Accordingly, given both receivables are disputed, the estimate to realise value is currently uncertain.'
- The only known creditor listed as a creditor in the sworn annual progress report was NCMI, which the report states was dissolved on 4 October 2022. Accordingly, the Joint Liquidators did not expect to receive a claim from the LLP which was dissolved before the sworn statement made pursuant to section 89 IA 86.
- Thereafter, the members took steps to remove Mr Goderski as liquidator. He was removed on 2 September 2024 and on 20 September 2024, Mr Murphy was appointed a liquidator. According to the Applicants, they were unaware of the removal. There is no real explanation provided for the removal of Mr Goderski and the appointment of Mr Murphy. The Applicants assert that the removal and replacement of the liquidator was clearly as a result of Mr Goderski indicating that he was minded to convert the MVL into a CVL. This is denied by Mr Kowski.
- In the Maxbet 2 proceedings which have been issued in Luxembourg. The Applicants are the only claimants, with the Fund claiming as an assignee of the Bidcos' alleged claims. The defendants to Maxbet 2 claim are Mr Kowski and NCL. That claim was served in July 2024 and that included service upon Mr Goderski, as liquidator of NCL. The claim therein remains essentially identical to Maxbet 1. Maxbet 2 is being defended by Mr Kowski and also, it appears, NCL. It appears from the evidence, NCL's defence to Maxbet 2 is being funded by Mr Kowski as it is clear that NCL has insufficient assets to pay for advice or the costs of defending the claim.
- The outcome of the preliminary issue will have no effect in the Luxembourg proceedings. The Respondents did not assert before me that any determination by me will prevent those Luxembourg proceedings from continuing or that any determination by me would necessarily have an effect upon those proceedings.
- On 3 December 2024, Mr Robert Horton was appointed as an additional liquidator by me, on an application made by the Applicants.
B. What is the test applicable in relation to the conversion of a MVL into a CVL pursuant to section 95 – does this require the debts to be paid in the 12-month period pursuant to in section 89 IA 86 or is it a balance sheet insolvency test
(3)Law - The MVL statutory regime and related statutory provisions
- Liquidations (also known as winding up) are divided into three types, being (1) a MVL, (2) a CVL and (3) a compulsory liquidation, being winding up triggered by an order of the court. Many of the provisions set out in the IA 86 and the IR apply to all three types whilst other provisions relate to one or more specific type of liquidation. Part IV of IA 86 in the First Group of Parts, sets out the provisions relating to the 'Winding Up of Companies Registered under the Companies Acts'. Section 84 IA 86 sets out that a company can be wound up voluntarily by either an ordinary resolution-
'(a) when the period (if any) fixed for the duration of the company by the articles expires, or the event (if any) occurs, on the occurrence of which the articles provide that the company is to be dissolved, and the company in general meeting has passed a resolution requiring it to be wound up voluntarily; or
(b) if the company resolves that it be wound up voluntarily.
- Section 89 IA 86 is the trigger for a MVL. It is a particular type of voluntary winding up which is for only those cases where the statutory declaration pursuant to section 89 IA 86 has been executed. All other cases where a declaration has not been made will be a CVL. Such cases may well cover cases where the company can pay its debts but not during the required period of 12 months or less, for example, where the directors are uncertain as to whether the relevant receivables will be capable of realisation in the 12-month period, or where there are proceedings against the company and the directors are uncertain whether the company will be able to pay in full the sums which may be outstanding under that litigation which itself may not have terminated prior to the expiry of the specific period.
- Section 90 IA 86 sets out the distinction between these two types of liquidations as follows, being, 'A winding up in the case of which a directors' statutory declaration under section 89 has been made is a "members' voluntary winding up" and a winding up in the case of which such a declaration has not been made is a "creditors' voluntary winding up".
- The provisions relating to members' voluntary winding up are located in Chapter III of Part IV, being sections 89 – 96 IA 86, whilst those relating to creditors' voluntary winding up are located in Chapter IV, being sections 97 – 106 IA 86.
- I need to set out the MVL statutory regime in more detail, the test of insolvency applicable thereto and in particular what the liquidator needs to consider and determine in section 95 IA 86. The relevant sections are sections 89, 90, 92A, 95 and 96 IA 1986:-
'Section 89 - Statutory declaration of solvency.
(1) Where it is proposed to wind up a company voluntarily, the directors (or, in the case of a company having more than two directors, the majority of them) may at a directors' meeting make a statutory declaration to the effect that they have made a full inquiry into the company's affairs and that, having done so, they have formed the opinion that the company will be able to pay its debts in full, together with interest at the official rate (as defined in section 251), within such period, not exceeding 12 months from the commencement of the winding up, as may be specified in the declaration.
(2) Such a declaration by the directors has no effect for purposes of this Act unless—
(a) it is made within the 5 weeks immediately preceding the date of the passing of the resolution for winding up, or on that date but before the passing of the resolution, and
(b) it embodies a statement of the company's assets and liabilities as at the latest practicable date before the making of the declaration.
(3) A copy of the declaration shall be delivered to the registrar of companies before the expiration of 15 days immediately following the date on which the resolution for winding up is passed.
(4) A director making a declaration under this section without having reasonable grounds for the opinion that the company will be able to pay its debts in full, together with interest at the official rate, within the period specified is liable to imprisonment or a fine, or both.
(5) If the company is wound up in pursuance of a resolution passed within 5 weeks after the making of the declaration, and its debts (together with interest at the official rate) are not paid or provided for in full within the period specified, it is to be presumed (unless the contrary is shown) that the director did not have reasonable grounds for his opinion.'
92A.— Progress report to company
(1) Subject to [section 96] 4 [...] 5 the liquidator must—
(a) for each prescribed period produce a progress report relating to the prescribed matters; and
(b) within such period commencing with the end of the period referred to in paragraph (a) as may be prescribed send a
copy of the progress report to—
(i) the members of the company; and
(ii) such other persons as may be prescribed.
(2) A liquidator who fails to comply with this section is liable to a fine
95.— Effect of company's insolvency.
(1) This section applies where the liquidator is of the opinion that the company will be unable to pay its debts in full (together with interest at the official rate) within the period stated in the directors' declaration under section 89.
(1A) The liquidator must before the end of the period of 7 days beginning with the day after the day on which the liquidator formed that opinion—
(a) make out a statement in the prescribed form as to the affairs of the company, and
(b) send it to the company's creditors.
(4A) The statement as to the affairs of the company shall [...] —
(a) in the case of a winding up of a company registered in England and Wales, be verified by the liquidator by a statement of truth;
(4B) The company's creditors may in accordance with the rules nominate a person to be liquidator.
(4C) The liquidator must in accordance with the rules seek such a nomination from the company's creditors.'
- The CVL regime is the other type of voluntary liquidation sharing many features with the MVL regime. Section 100 IA 86 deals with the appointment of the liquidator in a CVL. The company may nominate a person to be liquidator at the company meeting, but in so far as the creditors nominate a different person, then, in accordance with section 100(2), the nominee of the creditors will be appointed.
- Both sides referred me to the history of the legislative provisions, starting with the Joint Stock Companies Act 1856 which created voluntary winding up. Section 67 of the Companies Act 1928 provided that creditors should have the right to nominate the liquidator unless the directors made a declaration of solvency that, "they have made a full inquiry into the affairs of the company, and that having so done they have formed the opinion that the company will be able to pay its debts in full within a period not exceeding twelve months from the commencement of the liquidation". This was continued in section 230 of the Companies Act 1929.
- The Report of the Committee on Company Law Amendment (1945) Cm 6659
(known as the Cohen Report) stated at paragraph 144, "We think that the declaration of solvency should be made at a meeting of the directors held before, but within 35 days of the date of, the meeting at which the resolution for the winding-up of the company is passed (page 95, III (a)). The declaration should be accompanied, in our view, by a statement of affairs in the form set out in Appendix C, estimating the assets and liabilities (pages 95-6, III (b)). The liquidator in a members' voluntary winding-up should be bound at any time when he thinks the declaration unlikely to be fulfilled and, in any event, at the expiration of one year from the date of the commencement of the winding-up if the debts of the company have not been paid within that period, to summon a meeting of the creditors (page 96, IV)." The recommendation made by the report creating a new section 235A was that, "If the liquidator is at any time of the opinion that the company will not be able to pay its debts in full within the said period, or if the winding -up continues for more than one year, and the debts of the company have not been paid or provided for in full within one year (sic) he shall forthwith summon a meeting of the creditors and shall lay before them a statement of the assets and liabilities of the company".
- These recommendations were largely adopted in the Companies Act 1947 and then incorporated into the Companies Act 1948. Section 283 of the Companies Act 1948 stated, '[directors]… make a statutory declaration to the effect that they have made a full inquiry into the affairs of the company, and that, having so done, they have formed the opinion that the company will be able to pay its debts in full within such period not exceeding twelve months from the commencement of the winding up as maybe specified in the declaration'.
- In my judgment, one of the fundamental distinctions between the two types of voluntary liquidations is the role of creditors in the CVL regime. In the MVL regime, the members dominate because the creditors have no interest after they have been paid their debts. In the CVL regime, the creditors effectively control many aspects of the regime including the choice of liquidator. No party sought to argue against the differences between the two types of voluntary liquidations.
- Chapter V sets out the provisions which are applicable to both kinds of voluntary winding up, being sections 107 to 116. Section 107 IA 86, applicable to both types of voluntary winding up, deals with the distribution of company's property when it is in voluntary winding up, being, 'Subject to the provisions of this Act as to preferential payments, the company's property in a voluntary winding up shall on the winding up be applied in satisfaction of the company's liabilities pari passu and, subject to that application, shall (unless the articles otherwise provide) be distributed among the members according to their rights and interests in the company.' The powers of a liquidator in both types of winding up are set out in section 165 IA 86 which refers to Schedule 4, parts 1 and 3. Section 165(5) states that the liquidator shall pay the company's debts and adjust the rights of the contributories amongst themselves.
- The order of application of the assets in the hands of the liquidator (MVL or CVL) is therefore as follows:-
(1) The expenses of the winding up, including the liquidator's remuneration (section 115 IA 86);
(2) The preferential debts as defined by sections 386, 387 and Schedule 6 as stipulated in section 175 IA 86;
(3) Any preferential charge on goods distrained that arises under section 176(3) IA 86;
(4) The company's general creditors;
(5) Any debtors or other sums due from the company to its members qua members (section 74(2)(f) IA 86);
(6) The members in accordance with their respective rights and interest (section 107 IA 86).
- Chapter VI deals with the provisions relating to winding up by the Court, being sections 122 to 160 IA 86. Section 122 IA 86 deals with the circumstances in which a company may be wound up by the court. For current purposes, there are two relevant jurisdictional bases, being:-
'(1) A company may be wound up by the court if-
(a) the company has by special resolution resolved that the company be wound up by the court,…
(f ) The company is unable to pay its debts.'
- Section 123 provides, for the purposes of section 122 (1)(f) IA 86, the definition of inability to pay debts. For current purposes and in order to deal with the submissions raised by Mr Kowski, the following are the relevant parts of section 123:-
(1) 'A company is deemed unable to pay its debts-
(a)if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company's registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or
(b)if, in England and Wales, execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part, or….
(e)if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due
(2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.'
- A key aspect of all types of winding up is that it is the first step in the process leading to the dissolution of the company. It is therefore unsurprising, as I deal with in more detail below, that the definition of creditor is wide and has been widely construed. Once the affairs of the company have been dealt with by the liquidator, including any distributions, steps are taken for the dissolution of the company. The company ceases to exist and creditors' claims which have not been dealt with are incapable of resolution or claim against the dissolved company. Again none of these general premises are really in issue as between the parties.
(4)Submissions made on the MVL test and discussion
(1) What is the relevant test of 'insolvency' for the purposes of section 89 and 95 IA 1986
- Ms Toube KC on behalf of Mr Kowski submits that section 95 refers to the balance sheet insolvency test. She refers me to section 123(2) (as part of section 122(1)(f)) as the applicable test in relation to compulsory winding up by the court and submits properly construed, this is the test to be applied in section 95. Her other main submission is that even if the insolvency test is not the balance sheet test, the company is solvent because the debt of the Applicants is disputed. She submits that the Applicants have to establish before me at this hearing their debts on a balance of probabilities and they have failed to establish their debt. Effectively she invites me to determine whether the Applicants are creditors by determining the validity of their debts itself. The Respondents also rely upon an assessment carried out by Mr Murphy placing a value of zero on the Applicants' claims.
- In relation to the construction of section 89 and 95 IA, Ms Toube KC submits that an MVL can last more than 12 months in cases where the assets have not been realised or where the debts have not been paid in full. There may be illiquid assets which require longer than 12 months to realise. She submits that so long as the company has sufficient assets to be able to meet its liabilities, then it can properly remain in MVL for a period exceeding 12 months. Accordingly, she submits that the provisions do not oblige the debts of the company to be paid in the 12-month period (or the shorter period specified in the section 89 declaration). She submits that the correct test, despite the wording expressly used in section 89(1) and section 95, is the insolvency balance sheet test. It is this test, she submits, that a liquidator needs to apply in relation to section 95, namely is the company solvent on a balance sheet basis rather than whether the debts can be paid in full with interest thereon in the 12-month period. This construction accords with the overall insolvency definitions used in the IA 86 applicable to winding up.
- Reliance is placed on section 92A IA 86, applicable to both MVLs and CVLs . Under that provision, progress reports must be provided for each prescribed period which, pursuant to IR 18.7(2), must cover the first 12-month period and each subsequent period of 12 months. She submits this contemplates a scenario where a MVL will last for more than 12 months as annual reports are required at annual intervals. She notes that section 92A is subject to section 96, which sets out the effect of the conversion from members' to creditors' winding up. The winding up converts into a creditors' voluntary winding up from the date on which the creditors nominate a person to be liquidator in accordance with section 95, or the procedure by which such a nomination is to be made, concludes without a nomination having been made. As from that date, the liquidation has effect as if the directors' declaration pursuant to section 89 had not been made.
- Mr Weaver KC, on behalf of Mr Murphy, submitted that the words used in the provision are important and that the words used in sections 89 and 95 IA 86 do not support a construction that the debts had to be paid in the specified period not exceeding 12 months. He submitted that the words 'will be able to pay its debts in full …' does not mean that they have to be paid in full before the end of the specified period. Mr Weaver provides no assistance with when exactly the debts should be paid or capable of being paid, under his construction of the provisions.
- The further argument raised in relation to a balance sheet test for the purposes of section 89 and 95 IA 86 relates to the use in section 89(4) to the words, 'provided for'. Section 89(4) states that a director who makes a declaration of solvency without reasonable grounds is liable to a penalty. As is set out above, section 89(5) states that there is a presumption that the director did not have reasonable grounds for his opinion, if 'its debts (together with interest at the official rate) are not paid or provided for in full within the period specified'. Ms Toube submits that the reference in section 89(5) to debts being 'provided for' applies equally to the construction of the remainder of section 89 itself and additionally, to the construction of section 95. Effectively she submits that section 95 relates to whether the debts have been paid or provided for in full. This supports the argument that the court considers and applies the balance sheet insolvency test set out in section 123 IA 86 for the purpose of determining whether a MVL should be converted into a CVL.
- Section 89(1) creates, in my judgment, a very clear and precise test for the statutory declaration, being can the director form the opinion that the company will be able to pay its debts in full, together with interest at the official rate within such period not exceeding 12 months from the commencement of the winding up (as is specified in the declaration). If the director can form this opinion, then he can make the statutory declaration. The criminal sanction set out in section 89(4) demonstrates the serious nature of the declaration to be made and the care which director/directors need to take when carrying out the full inquiry into the company's affairs. The obligation upon the directors to make a full inquiry into the company's affairs is clearly, in my judgment, designed to ensure that the directors identify all the company's debts and obligations, which would include those which the company may dispute, or are contingent or prospective.
- Section 95 IA 86 is part of the MVL regime. Section 95 expressly refers to what I have called the section 89 test, namely, will the company be able to pay its debts in full including interest thereon within the 12 month period (or the lessor specified period not exceeding the 12 month period). This is not a test as to whether the company is balance sheet solvent. In my judgment, in accordance with sections 107 and 115, this must mean, effectively, is the company able to pay its debts in full with the interest required thereon after it has discharged the expenses in the winding up in accordance with section 115. If the expenses have not been paid and there is a creditor, even with a relatively modest debt, then the company will need to be converted into a CVL. The expenses issue was not disputed save of course to the submission that NCL was not insolvent and that the Applicants' claim was actual but disputed, or disputed, and had been valued at zero by Mr Murphy carrying out a summary assessment.
- The current wording located in sections 89(4) and (5) IA 86 existed in the predecessor legislation. There is, in my judgment, a clear distinction as between the criminal offence created and the presumption which applies if the company is placed into insolvent liquidation in the first five weeks of the MVL. The latter uses the clear wording set out in section 89(1) IA 86, being making a declaration without having reasonable grounds for the opinion that the company will be able to pay its debts in full, together with interest, in the period specified. The presumption states that if the company is placed into a creditors' or compulsory liquidation in the first five weeks after the making of the resolution and the debts including interest thereon have not been paid or provided for, then the directors did not have reasonable grounds for their opinion. The presumption creates a different test in that it requires the debts not to have been paid or provided for in the first five weeks. This recognises that the debts would not necessarily have been paid in the first five weeks and what the presumption relies upon as an alternative is that the debts have not been provided for, because, for example, the assets will not cover the liabilities in full. The test therefore created in section 89(5) is different from the test set out in section 89(1) and section 95. It is applicable to a specific aspect of the criminal sanction. It only applies the presumption to cases where the liquidation occurs in the first five weeks. In my judgment, its purpose is to ensure that if a company is placed into liquidation in the first five weeks and the debts have not been paid, no presumption will arise if those debts have been provided for. It does not, in my judgment, have any bearing upon the clear words used in both sections 89(1) and 95 where there is no use of the words, 'provided for' as part of the test. Section 95 uses the clear language set out in section 89(1) and contains no reference to the presumption in section 89(5).
- In my judgment, it is apparent that the statutory declaration is not a reference to either the cash flow insolvency test or to the balance sheet insolvency test. A company can be balance sheet solvent but unable to pay its debts as or when they fall due and in particular be unable to pay its debts in full within a period not exceeding 12 months. If a company needs to realise a significant asset in order to pay its debts in full and there is considerable uncertainty as to how long it will take to realise the asset, then, in my judgment, that company is unable to go into a MVL. That is because the members will be unable to swear in the declaration that the debts will be paid in the 12-month period.
- Equally, a company may be able to pay its debts as and when they fall due, but be potentially unable to pay all its debts in full in the relevant 12-month period. This may be the case in relation to contingent or prospective claims which may not fall due for a period of time. The test set out in section 89 is therefore a specific test which may have some similarities to the cash flow test, but actually asks a different question relating to whether the company will be able to pay its debts in full with interest thereon in the relevant period not exceeding 12 months. It does not ask if the company is able to provide for the payment of those debts in the 12-month period.
- The IA 86 does not use the balance sheet test in relation to voluntary winding up, either for MVL or CVL. Either the directors are able to swear the declaration pursuant to section 89(1) or the company will be placed into CVL. A company is only entitled to enter into a MVL if the directors have sworn that the strict criteria set out in section 89(1) is met. In so far as the section 89 test cannot be met during the specified period not exceeding 12 months, then the MVL must be converted into a CVL. If a company has not paid its debts in full within the 12-month period, then the MVL needs to be converted into a CVL. This is because the company will be insolvent in accordance with sections 89 and 95 IA 86.
- In my judgment, it is clear that a MVL can last for more than 12 months, providing the debts and the interest thereon have been paid in full within the 12-month period. It is clearly a requirement, in my judgment, that the debts and interest be paid in full during the specified period not exceeding 12 months. That is what is set out in section 89(1) IA 86 and also the question which the liquidator needs to ask himself in section 95 IA 86. Clearly in cases where the debts and interest have been paid in full during the first year, the MVL continues. The reference to section 92A really takes this issue no further beyond making it clear that there is an ongoing annual requirement in MVLs to produce a progress report which is sent to the members. It is not sent to creditors of the company.
- The clear reading of section 89(1) IA 86 is also therefore supported by the fact that section 92A IA 86 does not require progress reports to be sent to the creditors. Creditors are to be paid during the first 12 months and the requirements to send reports in a MVL arises at the end of the first 12 months. This reflects the prime interest of the members. Clearly as creditors have been paid in full, they lack any interest in the MVL thereafter. If Ms Toube is correct in her submission that the test is one of balance sheet insolvency, then creditors who have not been paid during the 12 months would not receive the reports sent to members pursuant to section 92A or effectively be able to monitor under the provisions of the IA 86 and the IR, the progress of the MVL. That is inconsistent to the approach taken in CVLs, whereby creditors receive annual progress reports and have the ability to seek to replace the liquidator with someone else without having to make an application to court. This demonstrates the creditors' interest in a CVL which does not exist in a MVL.
- In my judgment, giving a purposive construction to the provisions, sections 89 and 95 require the payment of the debts in full before the expiry of the 12-month period. The intention was not to create a type of liquidation for companies who are balance sheet solvent. The legislative intention behind section 89 IA 86 is to create an alternative type of liquidation for those companies who are able to pay their debts within a specified period not exceeding 12 months. The wording in section 95 IA 86 , which mirrors that in section 89 IA 86 states that the opinion of the liquidator is, '…the company will be unable to pay its debts in full (together with interest…) within the period stated in the directors' declaration'. The purpose behind section 95 IA 86 is to require the conversion of the MVL into a CVL when at the end of the 12-month period or at an earlier specified time, it is clear that the debts have not been paid and cannot be paid prior to the expiry of the 12-month period. The liquidator asks himself whether the company will be able to pay its debts in full by the end of the 12 month period.
- I agree with one of the examples provided by Mr Davies KC. If a company entered MVL on the basis that a particular debt owing to the company was due to be realised before the expiry of the 12-month period, but, unexpectedly, the debtor then refused to pay, the liquidator would have to convert the MVL into a CVL. The test is not, is the company solvent, but can the debts be paid within a specified period. The Respondents' submission would logically assert that in this example, the company can remain in MVL because the company is balance sheet solvent. However, that simply does not accord with the clear wording used or the purposive approach. As the history of these provisions demonstrate, the legislative test has always been one relating to being able to pay the debts in full within the 12-month period.
- I was referred to the Court of Appeal decisions in Re Danka Systems PLC [2013] EWCA Civ 92 as in some way supporting a balance sheet test and/or demonstrating that creditors did not need to be paid in the 12-month period. In February 2009, the company was placed into MVL at a time when it had both crystallised and contingent claims under tax indemnities provided by it to Ricoh Group of companies. In March 2009, the liquidators gave notice to the creditors that they proposed to make a final distribution to creditors pursuant to the IR 86 4.182A (now IR 14.36) requiring the creditors to prove their debts by 28 April 2009. The company had in excess of US$ 66 million as an estimated surplus even taking into account the total potential liability to Ricoh. On 22 April 2009, Ricoh set out details of the tax liabilities with an estimate of the maximum value of the contingent claims. Ricoh requested that the liquidators defer taking any further steps in the liquidation until the Ricoh claims were quantified (effectively awaiting the outcome of the various tax enquiries in different countries). It invited the liquidators to ring fence a sufficiently large reserve prior to any distribution to other creditors and members.
- The liquidators' position was that they were obliged to value any contingent claims under Insolvency Rules 1986, IR 86 4.86 (now IR14.14). The liquidators refused the request to defer and also to make a reserve. The liquidators determined and valued the contingent claims setting out their reasons and conclusions in a letter. The issues before the court on the directions application issued by Ricoh argued that the liquidators should be required to make a retention of £11 million until either the contingent claims of Ricoh had crystallised by as certain date (being the seven year indemnity period). There was also a dispute relating to the valuation of the contingent claims themselves and part of the directions given related to factual and expert evidence in relation to the claim.
- It does appear that the liquidators had effectively paid the debt to Ricoh in accordance with their assessment of the contingent claim. It is clear from the facts that the liquidators had ample reserves to pay even the worse case scenario.
- The actual decision related to the retention argument and the deferment sought by Ricoh. The Court of Appeal held that pursuant to section 107 IA 86, the rights of the members to the surplus only arose once the company's liabilities to its creditors were satisfied so the members came last. A creditor was not obliged to prove its claim but the liquidator would then give notice pursuant to IR 86 4.128A, to proceed to place a value on contingent and uncertain claims. This provision enabled the liquidator to then make distributions to creditors. The liquidator was not obliged to set aside a fund to meet those contingent claims in full and the claims of contingent creditors fell to be satisfied through the valuation of their claims under IR86, r 4.86. The valuation of contingent claims remained open to variation in the light of subsequent events right up to the completion of the liquidation in accordance with section 107 IA 86.
- Lord Justice Patten stated at paragraph 43:-
' It seems to me that any valuation of a contingent liability must be based on a genuine and fair assessment of the chances of the liability occurring. The very concept of valuing a contingency implies the need to make an assessment of how likely are the chances of the event occurring. The liquidator must therefore use his own expertise and that of any relevant advisors to make a realistic estimate of the likelihood of the Infotec companies sustaining the tax liabilities. Where some material change in the relevant factual position occurs it must be taken into account. But the liquidator is not, in my opinion, required simply to wait and see.'
- The case is illustrative of the operation of a MVL. The liquidators sought the proofs of debt from the creditors early on and also determined the value of the contingent liabilities. The case provides, in my judgment, no assistance or support for a balance sheet test. In Danka Systems, the issues relating to the construction of section 89 and 95 were not before the Court of Appeal (or the lower court).
(5)The role of the liquidator in relation to section 95 IA
- Section 95 IA 86 requires the liquidator to consider whether the company will be able to pay its debts in full including interest within the specified period not exceeding 12 months. The Respondents submit that the liquidator is afforded a wide discretion in determining whether the company is solvent or insolvent in relation to section 95. Reference is made to the principles in Re Edennote Ltd, Tottenham Hotspur plc v Ryman [1996] 2 BCLC 389, being the court will only interfere with an act of the liquidator if he has done something, 'so utterly unreasonable and absurd that no reasonable man would have done it'. The court reviews the discretion exercised but will not interfere with it save in those limited circumstances.
- In my judgment, the opinion of the liquidator sought in section 95 is whether the company will be able to pay the debts in full with interest before the expiry of the specified period, meaning does the liquidator consider that it has sufficient realisations or liquid assets to be able to pay the debts in that time scale. The provision does not give the liquidator a power or discretion, in my judgment, to prolong the duration of the MVL if the liquidator is of the opinion that the debts and interest will not be paid in the relevant period, but that they can be paid at some later, unspecified date. The provision does not provide the liquidator with such a discretion. The opinion of the liquidator, in my judgment, relates to the liquidator assessing whether the debts can be paid in the 12-month period. He is required to assess whether that can occur during a time before the expiry of the 12-month period. In so far as the 12 months period has expired, as is the case here in relation to issues 2 and 3, then in my judgment, the role of the liquidator is extremely limited.
- The Respondents submitted that in assessing the section 95 IA 86 test, the court should apply a hindsight test and take into account the existence of a funding agreement now said to be in place where Mr Kowski is willing to fund expenses and also that a VAT refund has been received. The statute does not, in my judgment, allow for a liquidator to apply any different test than the one set out in section 95. That test is to be carried out at the relevant time, being either before the expiry of the 12-month period, or at the expiry of the 12-month period. That follows from the wording used in section 95 IA 86. This is clear from a purposive approach to these provisions. Section 89 IA 86 provides for a sworn declaration that the company can pay its debts within the period not exceeding 12 months. Section 95 provides the consequences of the terms of the declaration not being fulfilled. There is no entitlement to retain a company in a MVL when it is unable to meet the commitment made by the section 89 declaration.
- In my judgment, the test does not allow for post events to be taken into account. Such an approach would cause the section 95 test to be applied differently depending upon whether the liquidator considered his obligations pursuant to section 95 at the correct time and cases where the liquidator failed to carry out the test at that time. This, in my judgment, lacks coherence as an approach. A diligent liquidator would carry out his section 95 obligation and would ask himself the question before the expiry of the 12-month period and convert the MVL into a CVL if he reached the opinion that the debts could not be paid. Alternatively, such a liquidator could wait until the actual expiry of the 12-month period to see, for example, if further realisations became available prior to the expiry of the 12-month period thereby enabling the debts to be paid. If they were not so paid in the 12-month period, then the liquidator must take steps to convert the MVL into a CVL. A liquidator who considered the issue many months after the expiry of the 12 months would, on the Respondents' submissions, be able to benefit from payments or realisations made after the expiry of the 12-month period enabling the company to remain in MVL contrary to the express working set out in both sections 89 and 95 IA 86. There is no justification for such a differing approach to the test set out in section 95 IA 86.
- In my judgment, Mr Goderski failed to correctly apply the section 95 test at the relevant time before he was removed as liquidator. His report refers to him taking advice on the issue. In his evidence as well as in the submissions made on his behalf, Mr Murphy considers that the balance sheet test is applicable to section 95 and he applied this test to his consideration of the issue. He also applied the post dated events to his assessment as well as his own assessment as to the value, if any, of the Applicants' claim. In the current case, no liquidator actually carried out his section 95 obligation at the relevant time. The correct test is whether the debts can be paid in full with interest thereon in the 12-month period and the test needs to be carried out at the relevant time. Accordingly, Mr Murphy proceeded on a legally incorrect basis. This is not an exercise of discretion issue.
(6)The summary assessment of the Applicants' claim carried out by Mr Murphy
- Mr Weaver submitted that in carrying out the test in section 95 IA 86, the liquidator also has the power to assess the validity or otherwise of the liabilities. Accordingly, he submits that a liquidator can assess the merits of an disputed actual debt or disputed debt and thereby leave out of the liabilities which should be paid within the 12 months period. This is what Mr Murphy has done. He stated in his first witness statement that if appointed, he would need to review the Maxbet 2 claim in detail and take advice on the merits. Mr Murphy refers in his first witness statement to two reports he said he considered which placed a value on the merits at 15% or less than 10%. He states that the opinions, 'provide the background to my ultimate decision as to whether to attribute any value to the Applicants' claims against NCL for the purposes of determining the solvency of NCL'. According to Mr Murphy, he took legal advice and attributed a value of zero to the Applicants' claim. No explanation is provided before me as to the procedure adopted by Mr Murphy in carrying out the assessment.
- Mr Weaver did not identify any statutory provision or case law which provides for the liquidator to have such a power to assess the validity or otherwise of a 'disputed debt' or an 'actual disputed debt'. The IR contain the provisions relating to creditors proving their debts, including the provisions relating to the adjudication of proofs of debts and the appeal process carried out by the court. All parties before me accept that Mr Murphy did not seek to carry out the adjudication process set out in the Insolvency Rules. Re Danka Systems, which I have referred to above, sets out the procedures to be taken by liquidators in this regard. Mr Murphy did not follow the adjudication process set out in the IA 86 and the IR.
- Mr Weaver submits that Mr Murphy is being in some way unfairly attacked and that he carried out this non-statutory summary type assessment of the Applicants' debt because the Applicants refused to engage with Mr Murphy's invitation to allow him to go through the statutory process to adjudicate on the debt. Despite Mr Weaver's submissions, I do not consider that the letter dated 30 October 2024 from Mr Murphy's solicitors a genuine attempt to launch an adjudication process. That letter expressly required that the Applicants to supply, by 1 November 2024, documents or information in support of the proofs. In my judgment, there is really no justification for such an unrealistic time limit being placed on the submission by the Applicants of documents and information in support of their claim. Mr Murphy was well aware that the Luxembourg proceedings were complex and that a request for documents and information with such a short deadline was unrealistic. The letter provides no explanation as to why such a short deadline was imposed. By this stage, the 12 months period for the payment of debts had expired.
- Mr Weaver relies on a power provided to the liquidator to assess the debt in for the purposes of section 95 IA 86. No such power was identified before me either in the IA 86 or in the IR, or under any case authority. Section 95 IA 86 does not provide for the liquidator to carry out such an exercise. Such a power is unnecessary under the statutory scheme which contains the relevant applicable Rules. The operation of the winding up provisions require the directors to have made a full inquiry into the company's affairs. The wording used in section 89 makes it clear that the purpose is to identify all the debts of the company. Those debts are required to be paid in full before the expiry of the 12-month period. In cases where there has been a failure to identify a debt, that debt will also have to be paid. That is the effect of sections 89 and 95 IA 86.
- If the new debt needs to be valued or adjudicated upon, then, as I set out below, the IA 86 and the IR set out the procedure which needs to be followed to adjudicate on that debt, if necessary. Re Danka Systems demonstrates the application of the IA 86 and IR in this respect. As the IA 86 and IR set out the applicable powers and rules, there is, in my judgment, no justification to seek to construe section 95 IA 86 as providing to a liquidator some additional unnecessary power to carry out a summary type assessment as Mr Murphy has done. Such an assessment forms no part of the statutory scheme and cannot be relied upon by the Respondents.
- In my judgment, Mr Murphy's approach and assessment demonstrates, (1) an error in the application of the correct statutory test set out in section 95, and (2) his carrying out of an assessment as to the value of the claim outside the powers set out in the IA 86 and IR. It is not a test of solvency. Mr Muphy assessed the Applicants' claim under some summary non-statutory procedure and valued it at zero because he considers that it has no value. He has carried out that exercise without any input or involvement from the Applicants as well as outside of any powers given to him under the IA 86 or IR.
- Once the 12-month period has expired and the debts have not been paid in full with interest thereon, then the liquidator is, in my judgment, compelled to convert into a CVL.
C. Is the Applicants' claim a debt and how is it to be treated in relation to the test for conversion from MVL to CVL
(7)The issue of creditors – determination of 'creditors' for the purposes of section 89 and 95 IA 1986
- There is no dispute that the debts which need to be paid pursuant to section 89 and 95 IA 86 are not limited to those which are set out in the sworn declaration submitted pursuant to section 89. In so far as other debts or liabilities emerge outside the scope of the section 89 declaration, then in my judgment, these will need to be paid alongside those which have been identified by the directors in their declaration. The evidence shows that the Applicants sent the Joint Liquidators notification of their claim in November 2023. This was based on the Maxbet 1 claim. Thereafter the proofs of debt based on Maxbet 2 were sent in July 2024. Even though Maxbet 2 claim was sent after the expiry of the 12-month period, this, in my judgment, makes no difference. If the claim exists, then its date of notification makes no difference as to whether it needs to be dealt with as part of the liquidation. The Respondents did not submit that the date made any difference in so far as the debt exists as is defined in the relevant rules set out below.
- Aligned to the section 89(1) IA 86 test is the need to ascertain what constitutes a debt by a creditor for the purposes of sections 89 and 95. The provisions relating to the definition of creditor and what constitutes a debt provable in the relevant insolvent (or solvent) estate are located in Part 14 of the Insolvency Rules 2016. These provisions govern claims and distributions to creditors in moratorium, winding up and bankruptcy. There is no distinction between the application of Part 14 to MVLs or CVLs.
- The relevant provisions are as follows:-
14.1.—
(1) This Part applies to decision procedures in respect of a moratorium under Part A1 of the Act, administration, winding up and bankruptcy proceedings.
(2) The definitions in this rule apply to decision procedures in respect of a moratorium under Part A1 of the Act, administration, winding up and bankruptcy proceedings except as otherwise stated.
(3)"Debt" , in relation to decision procedures in respect of a moratorium under Part A1 of the Act, winding up and administration, means (subject to the next paragraph) any of the following—
(a) any debt or liability to which the company is subject at the relevant date;
(b) any debt or liability to which the company may become subject after the relevant date by reason of any obligation incurred before that date;
(c) any interest provable as mentioned in rule 14.23;
...
"dividend" , in relation to a members' voluntary winding up, includes a distribution;
"provable debt" has the meaning given in rule 14.2; and
"relevant date" means—
...(c) in the case of a winding up which was not immediately preceded by a winding up, the date on which the company entered administration,
(4) For the purposes of any provision of the Act or these Rules about moratoriums under Part A1 of the Act, winding up or administration, any liability in tort is a debt provable in the moratorium the winding up or administration, if either—
(a)the cause of action has accrued at the relevant date; or
(b)all the elements necessary to establish the cause of action exist at that date except for actionable damage
(5) For the purposes of references in any provision of the Act or these Rules about moratoriums under Part A1 of the Act, winding up or administration to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent, or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion; and references in any such provision to owing a debt are to be read accordingly.
(6) In any provision of the Act or these Rules about moratoriums under Part A1 of the Act, winding up or administration, except in so far as the context otherwise requires, "liability" means (subject to paragraph (4)) a liability to pay money or
money's worth, including any liability under an enactment, a liability for breach of trust, any liability in contract, tort or bailment, and any liability arising out of an obligation to make restitution.'
14.2(1) All claims by creditors except as provided in this rule, are provable as debts against the company or bankrupt, whether they are present or future, certain or contingent, ascertained or sounding only in damages.
(2) The following are not provable–
(a) an obligation arising under a confiscation order made under–
(i) section 1 of the Drug Trafficking Offences Act 1986,
(ii) section 1 of the Criminal Justice (Scotland) Act 1987,
(iii) section 71 of the Criminal Justice Act 1988, or
(iv) Parts 2, 3 or 4 of the Proceeds of Crime Act 2002;
(b) an obligation arising from a payment out of the social fund under section 138(1)(b) of the Social Security Contributions and Benefits Act 1992 by way of crisis loan or budgeting loan.
(c) in bankruptcy–...
(4) The following claims are not provable until after all the claims of creditors have been paid in full with interest under sections 189(2) (winding up), section 328(4) (bankruptcy) and rule 14.23 (payment of interest)–
(a) a claim arising by virtue of section 382(1)(a) of the Financial Services and Markets Act 2000 (restitution orders), unless it is also a claim arising by virtue of sub-paragraph (b) of that section (a person who has suffered loss etc.); or
(b) in administration and winding up, a claim which by virtue of the Act or any other enactment is a claim the payment of which in a bankruptcy, an administration or a winding up is to be postponed.
(5) Nothing in this rule prejudices any enactment or rule of law under which a particular kind of debt is not provable, whether on grounds of public policy or otherwise.'
- IR 14.1 defines what constitutes a 'debt' and IR 14.2 identifies what is a provable debt. It sets out the rules relating to what constitutes a provable debt or liability in relation to winding up as well as other insolvency procedures. In accordance with IR 14.1(3), debt is widely defined as (a) any debt or liability to which the company is subject at the relevant date, (b) any debt or liability to which the company may become subject after the relevant date by reason of any obligation incurred before that date. Relevant date for the purposes of the winding up is the date when the company went into liquidation (here being May 2023). Rule 14.1(4) deals with a liability in tort and states that such a liability is provable if the cause of action has accrued at the relevant date or all the elements necessary to establish the cause of action exist at that date except for actionable damage.
- IR 14.1(5) demonstrates the width of what is provable by stating, 'it is immaterial whether the debt or liability is recent or future, whether it is certain or contingent, or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion.' IR 14.1(6) further expands the definition of liability by stating, that, 'a liability to pay money or money's worth, including any liability under any enactment, a liability for breach trust, any liability in contract tort or bailment and any liability arising out of an obligation to make restitution'.
- The width and breadth of claims which are provable in a solvent or insolvent estate is well known and established. IR 14.2 states that all claims, save as provided in the rule, 'are provable as debts against the company or bankrupt, whether they are present future, certain or contingent, ascertained or sounding only in damages'. None of the specific exemptions to a claim set out in 14.2(2) and (3) to being a provable debt are applicable in this case. Equally, the type of claim which arises in the current case does not fall under the definition of being a postponed debt under 14.2(4). None of this is contested by the Respondents.
- The claim of a creditor in an estate is relevant at various stages of a liquidation. As demonstrated by IR 14.1, the status of a creditor having a provable debt/liability enables the creditor to participate in the decision procedure and/or a meeting of creditors. This occurs even in cases where the debt is disputed by the debtor company. In appropriate cases, the office holder will seek to adjudicate on the claims which have been submitted as being provable debts in an estate. IR 14.14 requires the office holder to place an estimated value on a debt which does not have a certain value because it is subject to a contingency or for any other reason. That value becomes the amount provable in the case of that debt for the time being.
- Both Respondents reject that the Applicants' claim is a contingent claim and submit that this is a disputed actual debt and that Mr Murphy is entitled to carry out some form of non-statutory summary assessment as I have dealt with above. On the evidence, it is clear that no liquidator carried out a IR 14.14 assessment placing an estimate on the debt. IR 14.14 states as follows:-
'Rules 14.14 (1) In the case of a decision procedure in respect of a moratorium under Part A1 of the Act, an administration or in a winding up, the office-holder must estimate the value of a debt that does not have a certain value because it is subject to a contingency or for any other reason.
(2) The office-holder may revise such an estimate by reference to a change of circumstances or to information becoming available to the office-holder.
(3) The office-holder must inform the creditor of the office-holder's estimate and any revision.
(4) Where the value of a debt is estimated under this rule or by the court under section 168(3) or (5), the amount provable in the case of that debt is that of the estimate for the time being.'
- IR 14.3 – 14.8 set out the rules relating to proving a debt and the adjudication procedure. The adjudication rules set out the procedure for a creditor seeking to establish its claim and the role of the office holder in that procedure. The relevant provisions are set out below:-
'14.3 (1) A creditor wishing to recover a debt must submit a proof to the office-holder unless–
(a) this rule or an order of the court provides otherwise; or
(b) it is a members' voluntary winding up in which case the creditor is not required to submit a proof unless the liquidator requires one to be submitted.
...'
- As is set out in IR 14.3(b), in a MVL, creditors do not have to submit proofs of debts unless the liquidator asks them to do so. In my judgment, this demonstrates another difference between the MVL and the CVL regime. The directors are required to go through an extremely careful and vigorous process so as to identify all the debts of the company for the purposes of the sworn declaration in section 89(1) and to be able to swear that those debts can be paid in the 12-month period. Therefore, it is anticipated that the liquidator will be provided with the details of those debts so that he can deal with the claims and make the payments. That is what the directors have asserted can be done during the 12-month period. In the current case, the notification of the claim arose after the sworn declaration and a proof of debt was submitted by the Applicants.
- The IR set out the process for proving and adjudication of proofs as well as the important process enabling a creditor to challenge the decision of the office holder.
'Rule 14.4 (1) A proof must–
(a) be made out by, or under the direction of, the creditor and authenticated by the creditor or a person authorised on the creditor's behalf;
(b) state the creditor's name and address;
(c) if the creditor is a company, identify the company;
(d) state the total amount of the creditor's claim (including any value added tax) as at the relevant date, less any payments made after that date in relation to the claim, any deduction under rule 14.20 and any adjustment by way of set-off in accordance with rules 14.24 and 14.25;
(e) state whether or not the claim includes any outstanding uncapitalised interest;
(f) contain particulars of how and when the debt was incurred by the company or the bankrupt;
(g) contain particulars of any security held, the date on which it was given and the value which the creditor puts on it;
(h) provide details of any reservation of title in relation to goods to which the debt relates;
(i) provide details of any document by reference to which the debt can be substantiated;
(j) be dated and authenticated; and
(k) state the name, postal address and authority of the person authenticating the proof (if someone other than the creditor).
(2) [Substantiating document] Where sub-paragraph (i) applies the document need not be delivered with the proof unless the office-holder has requested it.
(3) [Office-holder may require other evidence] The office-holder may call for the creditor to produce any document or other evidence which the office-holder considers is necessary to substantiate the whole or any part of a claim.'
14.5 Costs of proving
Unless the court orders otherwise–
(a) each creditor bears the cost of proving for that creditor's own debt, including costs incurred in providing documents or evidence under rule 14.4 (3);
(b) in an administration or winding up, costs incurred by the office-holder in estimating the value of a debt under rule 14.14 are payable out of the assets as an expense of the administration or winding up;
...
14.7— Admission and rejection of proofs for dividend
(1) The office-holder may admit or reject a proof for dividend (in whole or in part).
(2) If the office-holder rejects a proof in whole or in part, the office-holder must deliver to the creditor a statement of the office-holder's reasons for doing so, as soon as reasonably practicable.'
- IR 14.7 (1) states that an office holder may admit or reject a proof of debt for dividend purposes. In cases where there is no prospect of a dividend, it is generally difficult to justify or consider that an office holder would seek to adjudicate upon proofs of debt. IR 14.5(b) states that the costs incurred by the office holder in estimating the value of a debt in relation to IR 14.4 are payable out of the assets as an expense in the winding up. Accordingly, it would be extremely unusual for any adjudication to take place unless the liquidator had assets which would cover the expenses of the winding up as well as producing a dividend.
- Importantly, the IR also deals with the creditor's entitlement to appeal the rejection of its proof of debt.
'14.8— Appeal against decision on proof
(1) If a creditor is dissatisfied with the office-holder's decision under rule 14.7 in relation to the creditor's own proof (including a decision whether the debt is preferential), the creditor may apply to the court for the decision to be reversed or varied.
(2) The application must be made within 21 days of the creditor receiving the statement delivered under rule 14.7(2).
(3) A member, a contributory, any other creditor or, in a bankruptcy, the bankrupt, if dissatisfied with the office-holder's decision admitting, or rejecting the whole or any part of, a proof or agreeing to revalue a creditor's security under rule 14.15, may make such an application within 21 days of becoming aware of the office-holder's decision.
(4) The court must fix a venue for the application to be heard.
(5) The applicant must deliver notice of the venue to the creditor who delivered the proof in question (unless it is the applicant's own proof) and the office-holder.
(6) The office-holder must, on receipt of the notice, file the relevant proof with the court, together (if appropriate) with a copy of the statement sent under rule 14.7(2).
(7) After the application has been heard and determined, a proof which was submitted by the creditor in hard copy form must be returned by the court to the office-holder.
14.11— Exclusion of proof by the court
(1) The court may exclude a proof or reduce the amount claimed–
(a) on the office-holder's application, where the office-holder thinks that the proof has been improperly admitted, or ought to be reduced; or
(b) on the application of a creditor, a member, a contributory or a bankrupt, if the office-holder declines to interfere in the matter.
(2) Where application is made under paragraph (1), the court must fix a venue for the application to be heard.
(3) The applicant must deliver notice of the venue–
(a) in the case of an application by the office-holder, to the creditor who submitted the proof; and
(b) in the case of an application by a creditor, a member, a contributory or a bankrupt, to the office-holder and to the creditor who made the proof (if not the applicant).'
The nature of the appeal process set out in IR 14.8
- In so far as the court is seized of an appeal in relation to a rejection/admission of a proof of debt, the burden of establishing the claim remains on the creditor who is appealing the rejection (see Nimay Foods quoted below). Whilst the word 'appeal' is used, the case also makes it clear that this is not a true 'appeal'. Effectively, the court determines, on a final basis, whether the creditor has established its claim as a creditor and the quantum of the claim.
- The appeal proceedings can take the form of a trial, with the court directing disclosure, exchange of witness statements and cross examination. This is clear from Nimay Foods, but also an earlier case of Ecology Support Services ltd v Hellard [2017] EWHC 160 where the appeal against the rejection of the proof was dealt with by the Judge as an insolvency express trial, under the relevant pilot. There is, in my judgment, little difference in many cases between a trial of the appeal from the rejection and a trial arising in normal court proceedings. This is unsurprising because the court will make a final determination as to the existence of the claim and its quantum. Much will depend upon what is in dispute and in particular whether factual evidence and cross examination is necessary for the determination of the issues.
- In cases where there are proceedings pending in another court, the insolvency court seized of the appeal pursuant to IR 14 can stay the adjudication appeal proceedings until after the determination of those other court proceedings. That is of course a matter for the court hearing the appeal. When asked by me, Ms Toube agreed that on appeal from the adjudication of the Applicants' claim, the Court was likely to stay the appeal process until after the determination of the Luxembourg proceedings. This demonstrates the flexibility of the appeal process as well as the fact that it is a final determination by a Court frequently after what may well be a trial on the facts and issues after full disclosure and cross-examination. Such an approach would also prevent some type of inconsistent decision taken in relation to proceedings which are ongoing in another jurisdiction and where no party has sought to have the same stayed on the grounds of forum non conveniens.
- As I have already stated, no steps have been taken in the current case by Mr Murphy relating to the adjudication of the debt in accordance with the IR. In my judgment, a similar approach needs to be taken by the office holder in adjudication as in cases of assessment of the value of a contingent debt. The passage set out above from Danka Systems applies with equal force. There must be a genuine and fair assessment. Such steps require the following from the office holder as set out in Nimat Hala Food Limited [2020] EWHC 734 ( Ch) :-
'14. Where the conduct complained of relates to a decision made on a proof of debt, the court will take account of the duties imposed upon an office holder to investigate the proof. It has long been the law that an office holder is under a duty to examine every proof and consider the validity of the debt which is sought to be proved: Re Home and Colonial Insurance Co [1930] 1 Ch 102 . He should require satisfactory evidence that the debt on which the proof is founded is a real debt: Re Fraser, ex parte Central Bank of London [1892] 2 QB 633 , CA. And the obligation is not negated even where the proof is based on a judgment: Re Van Laun, ex p Chatterton [1907] 2 KB 23 , CA.'
- That case relates to whether the office holder should be personally liable for some or all of the costs of the appeal against his decision to reject the proof of debt. However, the above paragraph is a useful reminder of the serious nature of the exercise. Mr Murphy's evidence is that he rejected the claims of the Applicants as creditors because he relied upon two reports from Brucher as to the merits of the claims and thereafter reached his assessment that no value could be attributable to it. Neither report actually asserted that the claim had no merit. Instead, both reports gave a small percentage on the issue of merits. No adjudication process pursuant to the IR has been commenced by the current liquidator, no proper rejection of the claim has been provided to the Applicants and no appeal from his decision is capable of being made under the IR.
(8)Discussion of the treatment of the Applicants' claim as a provable debt
- The Applicants assert that their claim is a provable debt under IR 14.1 and 14.2 and that it is in the nature of a contingent liability. The facts relied upon arose before the date of the MVL but as yet there has been no determination by the Luxembourg Court. It is clearly, they submit not a claim which lacks merit or can be said to be obviously bad and therefore capable of rejection. Even if it is not a contingent liability, it remains a provable debt as they assert it is valued at more than £1 and accordingly, the MVL needs to be converted into a CVL. They assert that there is no need in the current case to place an estimated value on the claim under IR 14.14 because as there is a clear shortfall in sums available to pay the expenses as at the expiry of the 12 month period, a claim of even £1 would oblige the MVL to be converted into a CVL. The Applicants submit that their claim is a prospective or contingent liability and as such, a value must be attributed to it. From the values placed upon the claim which I have set out above, it is clear that even 10% in value would result in a substantial value being placed upon the claim.
- The Respondents assert that the Applicants' claim is an actual debt rather than a contingent liability, that it is disputed and that Mr Murphy has assessed its value at zero such that the Applicants are not creditors of NCL for the purposes of the IR 86 and IA. The Respondents also assert that it is for the Applicants to establish their claim on a balance of probabilities, which they have failed to do. Accordingly, the Respondents submit, NCL has not failed to discharge its debts and can remain in MVL rather than convert into a CVL. Mr Murphy assessed its value at zero after carrying out his non statutory summary assessment.
(9)The nature of the claim for the purposes of the MVL-
Is the Applicants' claim a contingent liability ?
- In my judgment dated 3 December 2024 as to the jurisdiction of the court to appoint an additional liquidator, I stated that the Applicants' claim was a contingent liability. As that issue had not been argued before me, I specifically reserved the issue, in so far as necessary, to a later date.
- In Re Nortel Networks [2010] BCC 706, Mr Justice Norris considered the characterisation of various claims as part of the application made before him seeking permission to continue with the proceedings against the companies in administration. The Unite union, on behalf of the employees argued that the claims being made were not provable debts until after a judgment had been made in favour of the employees by a Tribunal or Court. Accordingly, the union submitted that the court should grant to the employees permission to continue the proceedings as against the joint administrators. The proceedings were stayed due to the existence of the moratorium which came into force due to the administration orders. The moratorium also prevented the commencement of proceedings. The Judge considered the nature of a claim for breach of contract by the former employees of the company alleging breach of the notice requirements. The Judge held that this was a contingent liability for the payment of money to which the company was subject to as at the date of the administration. If the administrators had terminated the contracts in breach of their terms and the company was liable to pay compensation then the compensation was a debt because the company has become subject to the liability after the date of administration by reason of a contractual obligation incurred before the date.
- A further claim brought by the employees was a claim for compensation for unfair dismissal. The Judge considered that this claim was a contingent liability for the payment of money to which the company was subject at the date of the administration. If the joint administrators had operated the dismissal procedure unfairly then the employment tribunal would be directed to make an award of compensation for unfair dismissal. The compensation was for a post-administration breach of duty to which the company has become subject after the date of administration by reason of a statutory obligation incurred before that date.
- Both these claims were being defended by the joint administrators who did not accept liability for either of these two claims. Both of them were characterised by the Judge as being contingent liabilities of the company. The characterisation did not alter by reason of the claims being defended and being disputed and defended by the company. The liability depended upon the finding in the tribunal or court.
- At paragraph 25, the Judge stated as follows:-
'25. First, the nature of the claim. If the joint administrators intend to make a distribution then any person claiming to be "a creditor" may submit a claim to recover his "debt". In my judgment each of the present claims is either a debt or liability to which the company is subject at the date of administration, or a debt or liability to which it becomes subject after the date of administration by reason of an obligation incurred before that date.
(a) The expenses claim is a straightforward claim in debt. It was an accrued liability for the payment of money to which the company was subject at the date of the administration. The fact that it is pursued by an employee is irrelevant. The employee is in the same position as a supplier who was unpaid at the date of administration. Mr Khan did not pin his argument on the fact that this claim is being advanced in the tribunal rather than (say) the county court.
(b) The breach of contract claim alleging breach of the notice requirements is also a debt. It was a contingent liability for the payment of money to which the company was subject at the date of administration. If the joint administrators have terminated the contracts in breach of their terms and the company is liable to pay compensation then the compensation is "a debt"
because the company has become subject to the liability after the date of administration by reason of a contractual obligation incurred before that date.
(c) The claim for compensation for unfair dismissal is also (on the material and arguments deployed before me) a "debt". It was a contingent liability for the payment of money to which the company was subject at the date of administration. If the joint administrators have operated the dismissal procedure unfairly then (given that the claimants want money and not
reinstatement) the tribunal is directed to make an award of compensation for unfair dismissal;
and that compensation for post-administration breach of duty is a liability to which the company has become subject after the date of administration by reason of a statutory obligation incurred before that date.
(d) The claims for compensation in respect of unlawful discrimination also fall to be treated in the same way, and are likewise "debts".
- The Joint Administrators were clearly intending to defend these claims. In other words, they were disputing the claims. Despite that, the claims were characterised by Mr Justice Norris as being contingent claims and not falling into some category of 'disputed debts'. As is set out in paragraph 34, where the Judge dealt with an argument relating to the exercise of judicial discretion, as follows:-
'34. So much for the nature of the claim: but Mr Khan also advanced a submission based on the nature of the decision. He submitted that because the joint administrators were intending to contest the present claims the actual existence of a provable debt would depend upon the exercise of judicial discretion. He equated "exercise of a discretion" with a determination of factual issues and legal argument. He submitted that that made the case different from Re Armstrong Whitworth Securities Co Ltd [1947] Ch. 673 (in which the conclusion was reached that four workmen who had suffered pre-liquidation accidents but had made post-liquidation claims had, at the date of the winding up, "contingent claims"). I reject this argument. The exercise of judicial discretion is a process entirely distinct from judicial adjudication. The point was made in Re T&N Ltd [2005] EWHC 2870 (Ch); [2006] 1 WLR 1728. David Richards J. was invited to consider Glenister and cases like it and held (at [65]):
"I accept the submission that these cases are not in point to the issue as regards future asbestos claims. There is no element of discretion as regards such claims. If the ingredients of the tort of negligence … are established, the claimants are entitled to damages. They do not depend on an exercise of discretion by the court."'
- In Nortel GmbH ( in administration) and relates companies, In re Lehman Brothers International (Europe ) (in administration ) and related companies [2013] UKSC 52, the Supreme Court considered whether a financial support direction and/or contribution notice given under the moral hazard provision in the Pensions Act 2004 constituted a provable debt when issued against a company in administration. As is clear from the first instance judgment, the Pensions Regulator's proceedings seeking a financial support direction was opposed, at least by the Lehman Brothers companies. The Nortel companies asserted a lack of jurisdiction issue as their dispute to the claims. The Supreme Court rejected a restrictive view of risk and contingent liability, expressly overruling earlier cases of Glenister v Rowe [2000]Ch 76 and R.(Steele) v Birmingham City Council [2005] EWCA Civ 1824. These cases had been distinguished by Mr Justice Norris in Re Nortel Networks Ltd (see paragraphs 27 to 33 of his judgment).
- Lord Neuberger held that the issue was whether the potential liability arising pursuant to the Pensions Act 2004 could be said to be a liability which arose, 'by reason of any obligation incurred before' the insolvent event. In so far as it could be said to arise by reason of an obligation incurred before the insolvency event, then in his Lordship's view, this would enable it to be a provable debt pursuant to what is now IR 14.1(3)(b), being, 'any debt or liability to which the company may become subject after the relevant date by reason of any obligation incurred before that date'.
- In relation to a liability which arose by reason of a contract entered into prior to the insolvency event, this presented no difficulty according to his Lordship. At paragraph 74, his Lordship stated, 'The contract , in so far as it imposes any actual or contingent liabilities on the company can fairly be said to impose the incurred obligation'. In relation to where the liability arises outside of a contract, the position is, according to his Lordship, less straightforward but obligations can arise other than in relation to a contract, including tort. In adopting a wider and more flexible concept of provable debt, Lord Neuberger stated as follows at paragraph 77:-
'However, the mere fact that a company could become under a
liability pursuant to a provision in a statute which was in force before the
insolvency event, cannot mean that, where the liability arises after the
insolvency event, it falls within rule 13.12(1)(b). It would be dangerous to
try and suggest a universally applicable formula, given the many different
statutory and other liabilities and obligations which could exist. However,
I would suggest that, at least normally, in order for a company to have
incurred a relevant obligation under rule 13.12(1)(b), it must have taken,
or been subjected to, some step or combination of steps which (a) had some legal effect (such as putting it under some legal duty or into some legal relationship), and which (b) resulted in it being vulnerable to the specific liability in question, such that there would be a real prospect of that liability being incurred. If these two requirements are satisfied, it is also, I think, relevant to consider (c) whether it would be consistent with the regime under which the liability is imposed to conclude that the step or combination of steps gave rise to an obligation under rule 13.12(1)(b)'
- Lord Neuberger then referred to the case of Re Sutherland decd [1963] AC 235. This case is also relied upon by the Respondents in support of their submission that the Applicants' claim is not a contingent liability. As set out by Lord Neuberger in Nortel:-
'78 When deciding whether a particular state of affairs or relationship is
sufficient to amount to the incur[ring] of an obligation, by reason of
which the liability arose, considerable assistance can, I think, be gained
from the majority decision in In re Sutherland, decd [1963] AC 235. That
case was concerned with whether an arrangement was within the expression
contingent liabilities in section 50 of the Finance Act 1940. As Lord Reid
explained at p 247, at the relevant date,
"the position of the company . . . was that, by applying for and
accepting allowances in respect of these ships, it had become bound by
the statute to pay tax under a balancing charge when it ceased to use these
ships in its trade, if the moneys which it received for them exceeded any
expenditure on them which was still unallowed."
79 In those circumstances, the majority concluded that the obligation
was a contingent liability as at the relevant date. Lord Reid said, at p 248:
"if an Act says I must pay tax if I trade and make a prfit, I am not
before I begin trading under a contingent liability to pay tax in the event of
my starting trading. In neither case have I committed myself to anything.
But if I agree by contract to accept allowances on the footing that I will
pay a sum if I later sell something above a certain price I have committed
myself and I come under a contingent liability to pay in that event."
- At paragraphs 81-82, his Lordship considered the nature of a contingent liability as follows:-
'81 It is true that in In re Sutherland, the House of Lords was concerned
with the meaning of contingent liabilities in the context of estate duty,
whereas these appeals are concerned with the meaning of obligation from
which a contingent liability derives in insolvency legislation. It was
suggested that the reasoning of Lord Reid should not, therefore, be relied on
here. I do not agree. Lord Reid gave a characteristically illuminating and
authoritative analysis of an issue of principle. It appears to me that the issue
of (i) what is a contingent liability and (ii) what is an obligation by reason of
which a contingent liability arises, are closely related. In In re Sutherland the
House had to decide whether what a company had done was sufficient, in
Lord Reid's words, to have committed [it]self to a contingent liability. As
I see it, that is much the same thing as having incurred an obligation from
which a contingent liability may arise, for the purposes of rule 13.12(1)(b).
82 I note that the approach to contingent liabilities adopted in In re
Sutherland was considered helpful in two cases concerned with insolvency
law decided by judges experienced in the field: Pennycuick J In re SBA
Properties Ltd [1967] 1 WLR 799, 802—803, and David Richards J in In reT & N Ltd [2006] 1 WLR 1728, paras 48—61. In the latter case, the judge
pointed out, at para 61, that the case before him was, as these cases are, inone important respect a stronger case than In re Sutherland, because
the majority did not regard as decisive that the liability to pay the
balancing charges would arise only as a result of the company's own
choice to sell the ships. In this case there is no question of volition.
83 The reasoning of Lord Reid, and of Lord Guest, in In re Sutherland
self-evidently supports the argument that the potential FSD regime liabilities
in the present cases fall within rule 13.12(1)(b), even where the FSD is not
issued until after the relevant insolvency event. More specifically, if one asks
whether those potential liabilities of the Target companies in these two
appeals satisfy the requirements suggested in para 77 above, it appears to me
that the answer is yes.'
- Lord Sumption dealt with the cases which were overruled by the Supreme Court in this way, at paragraph 136 (10 lines down)
'The reasoning of these cases has recently been applied to other claims said to
represent contingent liabilities: see R (Steele) v Birmingham City Council
[2006] 1 WLR 2380. There are a number of problems about these cases.
One of them, as it seems to me, is the absence of any real attempt to analyse
the effect of the statutory scheme in creating an obligation to meet a liability
contingently on some specified event. In the earlier cases, this can perhaps be
regarded as the legacy of the older principle which admitted only contractual
debts to proof. But that consideration cannot explain the more recent decisions.
In my view they were wrongly decided. In the costs cases,I consider that
those who engage in litigation whether as claimant or defendant, submit
themselves to a statutory scheme which gives rise to a relationship
between them governed by rules of court. They are liable under those rules to
be made to pay costs contingently on the outcome and on the exercise of the court's discretion. An order for costs made in proceedings which were begun before the judgment debtor went into liquidation is in my view provable as a contingent liability, as indeed it has been held to be in the case of arbitration proceedings: In re Smith; Ex p Edwards (1886) 3 Morr 179. In both cases, the order for costs is made against someone who is subject to a scheme of rules under which that is a contingent outcome. The fact that in one case the submission is contractual while in the other it is not, cannot make any difference under the modern scheme of insolvency law under which all liabilities arising from the state of affairs which obtains at the time when the company went into liquidation are in principle provable. Of course, an order for costs like many other contingencies to which a debt or liability may arise, depends on the exercise of a discretion and may never be made. But that does not make it special. It is not a condition of the right to prove for a debt or liability which is contingent at the date when the company went into liquidation that the contingency should be bound to occur or that its occurrence should be determined by absolute rather than discretionary factors.'
- Ms Toube submitted that the Applicants' claim was not a contingent liability based on two cases relied upon by her. In neither of those two cases did the Judges expressly deal with the passages referred to above from the two Nortel cases nor were those cases referred to them. In Hunt v Singh [2023] BPIR 1351, Marylebone Warwick Balfour Management Ltd provided management services to the Marylebone Warwick Balfour Group PLC and other companies in the group. In 2000, BDO recommended a 'conditional share scheme' designed to enable head office staff to receive payments without the company incurring liabilities to HMRC (the scheme). The company operated the scheme from 2002 until 2010. A number of similar schemes had been marketed and set up. HMRC indicated its intention to raise assessments for the PAYE and NIC which it said was due from the company. Assessments for the period 6 April 2022 until 5 April 2006 were issued in July 2008. HMRC also issued proceedings as a means of preserving its rights whilst it pursued litigation relating to the issues which arose from the operation of the scheme and similar ones.
- The company refused offers made by HMRC that the company pay the outstanding liabilities which would stop the interest thereon running and thereafter, in the event that HMRC were unsuccessful in the litigation, the sums paid would be returned. HMRC were successful in its litigation. The company's liability in relation to PAYE and NIC during the period it operated the scheme exceeded £36 million. The issue on the appeal before the court related to whether the creditor's duty under Sequana had arisen in circumstances when the company was insolvent but its insolvency was due to a tax liability which the directors wrongly believed had been avoided by the valid tax avoidance scheme entered into by the company.
- At paragraph 47, Mr Justice Zacaroli stated as follows:-
'The fact that the Company disputed that anything was due to HMRC
does not change the fact that it was insolvent. A disputed liability is not a
contingent liability. At the time (i.e. throughout the relevant period) there
either was an actual liability to HMRC or there was not: see, for example,
Integral Memory PLC v Haines Watts [2012] EWHC 342 (Ch), per Richard
Sheldon QC, sitting as a deputy High Court Judge, at para 32. In fact, as is now know, there was an actual liability.'
- Neither of the Nortel cases, being the Supreme Court or the decision of Mr Justice Norris were referred to the Judge in Hunt v Singh. In my judgment, the facts of this case as well as the characterisation of the claim are also very different from the case before me. On its facts, there was a clear liability which arose by reason of the assessments which had been raised by HMRC. Those assessments, in my judgment, created the liability. They may have been disputed but the assessments already existed as a liability because an assessment is a liability to pay the sums assessed by way of a tax liability. In the case before me, the liability depends upon the outcome of the Luxembourg proceedings along the same lines as set out in the judgment of Mr Justice Norris in Nortel Networks.
- In Integral Memory PLC v Haines Watts [2012] EWHC 342 ( Ch) the Judge, Richard Sheldon QC, heard an appeal from an order of Master Matthews granting summary judgment to the Defendant under Part 24 on the basis that the claim was time barred. The claim brought by the Claimant against the Defendant, a firm of accountants, was based on negligence, breach of contract and misrepresentation. The Defendant had been engaged by the Claimant to provide tax advice in connection with a discretionary bonus scheme which it was asserted would legitimately avoid national insurance payments. Thereafter, the Claimant had been advised that this type of tax avoidance scheme would fail if taken to the Commissioners which meant that the Claimant had a liability to HMRC.
- The issue relating to limitation arose from the pleaded case of the Claimants that the Defendant had an ongoing duty to advise as to the validity of the scheme and it had failed to do so. In considering the issues of when the liability to HMRC arose and whether there was a contingent liability, the Judge stated as follows :-
'28.The Claimant submits that the primary limitation period in tort commenced when it accepted the relevant liability to pay £104,096.34 on 30 October 2009 following HMRC's revised settlement proposal. Prior to that date, the liability for the relevant interest was, it is said, contingent on HMRC succeeding or failing in a tax tribunal, settling the litigation or on the acceptance by the Claimant of liability.
29. The cause of action for negligence in tort is not complete until the claimant incurs loss or suffers damage in respect of which the duty was owed. The Claimant's submissions confuse the question of whether loss or damage has been incurred with the quantification of loss. I consider that it is clear beyond doubt that the loss or damage had been incurred by the Claimant, for the purposes of its claims in tort, before 11 May 2005. Although dealt with succinctly by the Deputy Master in his judgment (see paras 22 – 24), I consider that he reached the correct conclusion. I should nevertheless elaborate in the light of the arguments which were developed before me.
31. Mr Khan submitted that, until the settlement was reached in October 2009, the liability of the Claimant to HMRC was purely contingent. ...
32.However, the argument in my view breaks down on the premise which it is based. The Claimant's liability to pay interest on the unpaid NIC to HMRC was in no relevant sense contingent. A contingent liability is a liability which, by reason of something done by the person bound, may or may not arise depending on the happening of a future event (see Re Sutherland deceased). A classic example of a contingent liability is potential liability under a policy of insurance, which will only occur if an (insured) event occurs. That was not the position in the present case. There was either an actual liability to pay NIC and interest on arrears or there was not. The existence of such liability is not contingent on HMRC succeeding or failing in a tax tribunal (or a court) as submitted by Mr Khan. All the tribunal or court is deciding is whether or not there is an actual liability. Likewise a settlement of such litigation (at least in this case) for the reasons I have given is premised on there being such actual liability. The fallacy of Mr Khan's argument is demonstrated by his
submission that where a debt is incurred but disputed, and court proceedings follow, the liability is contingent until the court gives judgment in favour of the creditor (or there is a settlement). That submission is clearly wrong.'
- There are a numbers of factual features in this case which differ from what is before me. Firstly, in Integral Memory, there was an actual liability in relation to the NIC. That is clear from the judgment. The argument before the Judge related to the interest which was charged by reason of the failure to pay the NIC. The proceedings which had been issued related to the interest accrued. The Judge stated, 'the Claimant's liability to pay interest on the unpaid NIC to HMRC was in no relevant sense contingent.' Confusingly, later in the same paragraph, the Judge asserted that, 'There was an actual liability to pay NIC and interest on arrears or there was not'. In my judgment, the learned Judge's argument related to the interest on the arrears rather than what was on the facts of that case, a clear liability in existence relating to the NIC payments which were due. These were based on assessments. No reference was made in the Integral Memory case to the earlier case of Mr Justice Norris of Nortel Networks. The Supreme Court decision post-dated Integral Memory.
- Ms Toube submits these two cases support her submission that the Applicants claim is an actual disputed debt because effectively the Luxembourg court will determine whether there is an actual liability. She submits that the claim cannot therefore be a contingent liability relying on Integral Memory.
- The above passages from Re Nortel Networks (Norris J) and Nortel/Lehman (Supreme Court) provide, in my judgment, support for the position that the Applicants' claim is a contingent liability. In a case where the outcome of proceedings is awaited, in my judgment, the claim is a contingent liability. That accords with what is set out above and determined by Mr Justice Norris in Nortel Networks. It also follows from the judgment in Nortel/Lehman in the Supreme Court and in particular the passage from the judgment of Lord Sumption. In Nortel/Lehman in the Supreme Court, unlike in Nortel Networks or T& N Ltd (referred to in both cases), the obligations arose from a statutory obligation, but that obligation to provide 'financial support' required a determination by the Regulator's Determination Panel. That determination was then referable to the Upper Tribunal when a full hearing (effectively a trial) would take place. Lehman Brothers had stated that it would defend the determination proceedings. Unless the Regulator was successful before the Upper Tribunal, no financial support direction was enforceable.
- In the current case, the outcome depends upon the decision in the Luxembourg proceedings. No exercise of discretion is necessary in that either the Luxembourg court will determine that the Applicants' claim succeeds on the facts and the law or it will dismiss the claim. It would make no sense that a costs liability is held to be a contingent liability but the actual claim being made under those proceedings is not held to be a contingent liability because it is disputed. The costs liability is in my judgement likely to be equally as disputed as the claim itself. The passages from the judgment of Mr Justice Norris set out are clearly applicable.
- In my judgment, it makes no difference that the Luxembourg proceedings were commenced after NCL went into liquidation. The contingency relates to the outcome of the proceedings. If NCL is successful in its defence in the Luxembourg proceedings, then the contingency has not occurred. If the Applicants are successful, then the contingency has occurred. As stated by Lord Sumption, '…under the modern scheme of insolvency law under which all liabilities arising from the state of affairs which obtains at the time when the company went into liquidation are in principle provable.'
- In my judgment, based on the two Nortel cases, which were not cited to the respective Judges who heard those Hunt v Singh and Intergral Memory, the Applicants' claim is a contingent liability. The two cases relied upon by the Respondents are both cases, in my judgment, where there was a clear debt, arising from HMRC assessments which had already been issued. In the current case, the Luxembourg proceedings are defended. The liability will only arise when the contingency occurs, being a successful determination by the Luxembourg court in favour of the Applicants. In so far as it is a contingent claim, then it stands to be dealt with in accordance with IR 14.14. This has not been done in this case. No liquidator has carried out an assessment based on the claim being a contingent liability.
- In any event, had an estimated value been given in accordance with IR 14.14, in my judgment, that would not have been a zero value. On that basis, I agree with Mr Davies that any value being placed upon the Applicants' claim means that NCL was unable to discharge the debt at the expiry of the 12-month period. It is, in my judgment, highly unlikely that a liquidator carrying out a proper and careful assessment of the contingent liability with access to NCL's books and records would have placed a value of only £1 or been able to value the contingent liability at zero. The merits assessment of the two reports relied upon by Mr Murphy in carrying out his summary assessment which he valued at zero did not actually value the merits at zero. The first report valued the merits at 15% merits and the second at less than 10%. In neither report is there evidence that Brucher or Mr Murphy considered the books and records of NCL in relation to a claim which clearly, in my judgment, would depend on factual disputes as well as legal issues. Additionally, any valuation of the claim as a contingent liability would be open to challenge by the Applicants. That is clear from Re Danka Systems Ltd.
- The financial position of NCL as at the expiry of the 12-month period was such that it had insufficient realised assets to be able to discharge its expenses. Accordingly, as the Applicants' claim is a valid contingent claim with a value, in my judgment, well in excess of £1, the liquidator should have formed the opinion that NCL was unable to pay its debts at the end of the 12-month period and he should have taken steps to convert the MVL into a CVL.
(10)Is the Applicants' claim a disputed debt or disputed actual debt and if so, how is such a claim to be treated for the purposes of IR 14.1, 14.2 and other rules
- In the event that I am wrong in my analysis that the Applicants' claim is a contingent liability and valued well in excess of £1, in my judgment, the characterisation of the claim as a disputed actual debt ( or a disputed debt) does not assist the Respondents.
- The Applicants' claim is, in my judgment, a provable claim pursuant to IR 14.1 and 14.2. The Respondents do not dispute this analysis. I have set out above the way provable debts are to be dealt with under the IR. In my judgment, the IR sets out clear comprehensive rules as to the determination of creditors' provable claims. In the current case, the liquidator (Mr Goderski) did not seek to adjudicate upon the Applicants' proofs of debt prior to the expiry of the 12-month period. In my judgment, even if that process had been commenced, it is unlikely that the adjudication process could have been commenced and dealt with, including the likely appeal process, before the expiry of the 12- month period.
- Mr Murphy took office after the expiry of the 12 month period. As I have set out above in the section entitled 'the liquidator's role in relation to section 95', he then carried out a non statutory summary assessment of the Applicants' claim. It is, in my judgment, an invalid and incorrect way of seeking to assess the Applicants' claim and cannot be relied upon as having in some way dealt with the Applicants' claim thereby creating a value of the claim at zero.
- The IR set out the adjudication rules. The Respondents accept that this adjudication process was not carried out by Mr Murphy. They complain that the Applicants should have agreed that Mr Murphy should carry out the adjudication of their claim instead of threatening to injunct the liquidator if he carried out the adjudication process in relation to the claim. In some way, they assert that it is the Applicants' fault that Mr Murphy carried out his non-statutory summary assessment instead of a proper adjudication under the IR with the important appeal process.
- These points are not relevant. In my judgment, as I have stated above, had any of the liquidators sought to adjudicate upon the claim under the IR, the appeal process would not have been completed by the expiry of the 12 months period or even at any of the dates identified in the preliminary issues. As I have stated above, bearing in mind the existence of the Luxembourg proceedings, a court would be extremely likely to have stayed the appeal process pending the outcome of the Luxembourg proceedings. Even if in some way Mr Kowski had persuaded the court to hear the appeal process, despite the existence of the Luxembourg proceedings and the risk of differing outcomes from two sets of parallel proceedings, the appeal process proceedings would have involved, disclosure, witness statements and cross examination of the witnesses. Disclosure of the books and records of NCL as well as disclosure of electronic documentation are clearly important as is cross examination of the witnesses. The appeal process would have clearly exceeded the period of 12 months, or whatever period was left once the claim had been notified to the liquidator.
(11)The treatment of a provable debt which has not admitted or determined by the adjudication process
- In my judgment, such an 'actual disputed' or 'disputed' debt cannot be dismissed or be made the subject of some non-statutory summary assessment as carried out by Mr Murphy. The debt remains a provable debt and needs to be taken into account. It has not been paid before the expiry of the 12-month period. In so far as the adjudication process has yet to be completed by the end of the 12-month process, then the liquidator cannot reach the view that the debts can be paid before the expiry of the 12 months process. This follows from the test set out in sections 89 and 95 IA 86. The debt cannot be paid in the 12-month period if it cannot be adjudicated upon within that period. There is no provision which allows such a provable debt to be ignored or rejected in the way Mr Murphy sought to do. By placing NCL in MVL, the members accepted that there needed to be compliance with the requirements set out in section 89 IA 86, namely that all debts would be paid in the 12-month period. If the value of a debt cannot be determined in the 12-month specified period, then it cannot be paid in that period.
- The voting rules in relation to a decision procedure in the IR provide support for the position that even disputed debts will be given weight until they have been adjudicated upon. As set out in IR 15.33(3), a creditor whose debt is disputed is entitled to vote at a decision procedure subject to the chair marking their vote as 'objected to'. The sub-rule states 'If the convenor of the chair is in any doubt whether a claim should be admitted or rejected, the convenor or chair must mark it as objected to and allow votes to be cast in respect of it, subject to such votes being subsequently declared invalid if the objection to the claim is sustained'. The approach in this regard is well known from Re A Debtor ( No 222 of 1990) , ex p Bank of Ireland [1992] BCLC 137 where Mr Justice Harman stated ( at page 145) :-
'The chairman has the power to admit or reject; his decision is subject to appeal; if in doubt he shall mark it objected to and allow the creditor to vote...
On that basis the chairman must look at the claim; if it is plain and obvious that it is good he admits it, if it is plain and obvious it is bad he rejects it, if there is a question, a doubt, he shall admit it but mark it objected to.'
- A challenge can thereafter be made by way of an appeal process to the court pursuant to IR 15.35 in which the Court will consider the case very much along the same lines as an appeal from a rejection under the adjudication process as described above. The process may be called an appeal, but it is dealt with as being a true determination of the creditor's claim, including the ability to direct disclosure and cross examination of witnesses. None of this is disputed by the Respondents, save that they submit that the approach to be taken in the current case is different because the current case is not concerned with voting entitlements. The approach to the claim at the voting stage lends support, in my judgment, to the claim not being valued at zero by the application of some other type of non-statutory summary assessment or simply by reason of it not having been adjudicated upon by the time the liquidator needs to make his decision under section 95. That argument does not accord with the way the IA 86 and the IR deal with creditors' claims both for voting purposes and also for adjudication purposes.
- The above analysis is also supported by considering the structure and purpose of having two types of voluntary liquidation. By placing NCL into a liquidation process, the members accepted that the LLP/company was no longer trading and effectively was going to be dissolved. It no longer had any purpose for remaining in existence as a corporate entity. There is effectively no difference in the end objective for either a MVL or CVL. The company will cease to trade, the directors will no longer be in control, a liquidator will be appointed and the company will cease to exist after its dissolution. In those circumstances, there is effectively no difference in the status of a company which has been placed in liquidation whether it be a MVL or a CVL.
- The obligation to convert a MVL into a CVL must be viewed as simply part of the overall liquidation process. If members have selected to place a company into a MVL that is because a sworn declaration has been made relating to the ability of the company to pay its debts within a period not exceeding 12 months. If the members were in some doubt because there were already proceedings in existence between the company and a claimant who asserted under those proceedings a substantial damages claim against the company, then in my judgment, the company would be unable to execute the sworn declaration necessary pursuant to section 89. This would be the case even if the company, in the above example, was heavily contesting the claim and it was disputed.
- Mr Kowski's real complaint here is that he seeks to retain NCL in a MVL because he does not want the Applicants to be in control of the CVL process. As made clear before me, Mr Kowski does not believe that the Applicants have valid claims against him or NCL and clearly does not want the Applicants to have access to the books and records or control of NCL. In my judgment, that complaint provides no legal basis for NCL to remain in a MVL. In my judgment, had the existence of that claim been brought to the attention of the members in May 2023, NCL would have been unable to enter into a MVL. This is because the members would have been unable to determine the value of the Applicants' claim through either the Luxembourg proceedings (which had not as yet commenced) or through the adjudication process in the 12-month period. On the evidence before me, NCL had extremely limited assets available to meet its debts and it was certainly unable to meet its debts in the 12-month period in so far as any value is placed on the Applicants' claim. It was unable to pay its expenses.
- If the Respondents were correct in their arguments, a company could remain in MVL due to the liquidator having assessed the claim at zero despite that claim being pending in Luxembourg. The liquidator's assessment does not prevent the Luxembourg proceedings continuing. No one before me submitted that (1) the determination of either Mr Murphy of his non-statutory summary assessment or (2) the balance of probabilities establishment of the claim, would be binding on the Luxembourg Court. If the Applicants were thereafter successful in the Luxembourg proceedings then the liquidator would convert the MVL into a CVL. That would be at a time many years from now. During this time, there would be no progress reports to creditors and no investigations carried out by the liquidator in relation to the business and affairs and dealings of NCL. This construction has serious consequences for a case where there are substantial assets in the MVL. Effectively in such a case, the members would seek distributions to themselves because the creditors' claim had been rejected based on some assessment carried out by the liquidator outside of the IA and IR. That to my mind is another reason as to why the Respondents' submissions relating to being able to effectively carry out a summary assessment is incorrect in law.
- The statutory scheme set out needs to be followed. It makes no difference that the Applicants' claim was notified after the commencement of the MVL. The investigation which is required to be carried out by the directors so to identify all the claims and debts of a company is designed to enable all claims to be dealt with. The section 89 process should enable all creditors' claims to be identified. In a very limited number of cases, further creditors' claims may be notified to the liquidator. Such late notification does not allow for the company to remain in a MVL for a longer period whilst an adjudication process is carried out. The IA 86 and the IR do not provide for any different approach to the MVL regime due to notification of creditors' claims after the date that the company went into a MVL.
(12)Are the Applicants required to establish for the purposes of this application and the preliminary issues their claim as a creditor on a balance of probabilities
- The Respondents submitted that the Applicants were required to establish their claims as a creditor of NCL before me. Reliance was placed by the Respondents upon what they assert is the statutory scheme in insolvency whereby a company should not be placed into an insolvency process by a creditor, unless that creditor can prove its claim on a balance of probabilities. This submission is an alternative to the submissions which I have rejected that in the case of an actual disputed debt, that the liquidator can carry out a non-statutory summary assessment and value the Applicants' claim at zero, or that the Applicants are not contingent creditors.
- The Respondents submit that actual disputed and contingent creditors have no standing to instigate a formal insolvency process. The Respondents submit the the conversion to a CVL requires alignment with what they assert is the approach to insolvency processes instigated by creditors, being winding up petitions and administration applications. They submit that a winding up petition cannot be presented if the debt is disputed. Reliance is placed upon section 122(1)(f) and 123 IA 86. They submit that a creditor is required to establish its claim as a creditor on the balance of probabilities or there is no entitlement for it to obtain a winding up order.
- That is, in my judgment, a somewhat summary way to describe the way a court deals with winding up petitions. A creditor does not need to establish its claim as a creditor when it issues its winding up petition. There is no requirement for the creditor to prove its debt beyond setting out the particulars of the debt in the petition. In cases where the petition is preceded by a statutory demand, the debtor can apply for an injunction restraining the creditor from presenting the petition. In those injunction proceedings, the burden is upon the debtor to establish that the debt is disputed on grounds which are substantial. Where the petition has been issued and proceeds to a court hearing, the company can file a notice of opposition and evidence in support thereof and assert that the debt is disputed on grounds which are substantial. So I do not accept that the burden is upon a creditor, in relation to a winding up petition, to establish that its debt is due and owing and not capable of being disputed. That will depend upon whether the debtor company seeks to contest the petition.
- In a contested hearing, the petitioning creditor will file evidence seeking to establish that there are no real grounds for disputing the debt. The test relates to being able to defeat the argument that the debt is disputed on substantial grounds. In the event that the debtor company establishes that the debt is disputed on substantial grounds, then the creditor cannot proceed to obtain a winding up order. The Respondents submit the same test applies in the current case, namely that the Applicants must establish their claim as creditors before the MVL can be converted into a CVL.
- Reliance is also placed upon applications made for administration orders. Contingent creditors can issue administration applications but such a creditor needs to establish that the company is insolvent. Accordingly, the Respondents submit that there is equally a requirement for the Applicants to establish before me to the required standard that they are creditors of NCL. The Respondents submit that this is essential in relation to a conversion from a MVL to a CVL because a CVL is an insolvency process.
- In my judgment, the approach in relation to winding up petitions does not assist. It relates to a different type of liquidation and a different type of test than the one before me. Equally the approach in relation to administration applications is also a different type of liquidation process which applies a different insolvency test.
- NCL is already in liquidation. The conversion from MVL to CVL is governed by section 95 which states in the event that the liquidator forms the opinion that the debts and interest thereon cannot be paid in the 12-month period, the MVL is to be converted into a CVL. An administration application requires the issue of insolvency to be determined. No such requirement appears in relation to the conversion from MVL to CVL because the test is different. The question being asked is not whether NCL is insolvent but the question is whether it has paid its debts in full in the 12-month period of the MVL.
- The short answer to this point is that the statutory scheme for a MVL and its conversion into a CVL does not include such a requirement for a creditor to establish its claim as a creditor. None is set out in the statutory scheme relating to MVLs. NCL is already in liquidation which is a process which leads to the same end (dissolution) regardless of whether it is a MVL or CVL. The conversion arises because the company has not been able to pay its debts before the expiry of the 12-month period. That is not the insolvency test set out in sections 122 and 123 IA. It is not the test applied in relation to administration applications.
- By way of example, a company may have sworn a declaration pursuant to section 89 IA 86 on the basis that it believed at the time that it would be able to realise its properties for which it already had purchasers. Those sales did not materialise in the 12-month period. The company may well be balance sheet solvent but as it had failed to pay its creditors in the 12-month period, a liquidator would be required to convert the MVL into a CVL. This example fits in with the overall analysis of the differences between a MVL and a CVL. The key is not whether the company is solvent, but whether the company has paid or will be able to pay its debts within a specified time period. Accordingly a creditor questioning the failure of a liquidator to convert is not required to establish its claim based on different types of insolvency processes.
- There is no support for this submission of the Respondents either in any case law or in relation to the statutory provisions. The relevant provisions in relation to MVL and conversion into CVL do not require, in my judgment, a creditor of a disputed debt to establish its claim on a balance of probabilities before NCL can be converted into a CVL.
.
- There is therefore no need for me to consider the submissions relating to the actual claim and whether on the evidence before me, the Applicants have discharged the burden of proof. That is not the relevant test. On the evidence before me, there is no doubt that the Luxembourg proceedings are real and substantive. The Respondents may consider the claim lacks merit, but it is clear that this case is one which requires both extensive disclosure, complex legal submissions and cross examination of witnesses. At the relevant date, being at the end of the 12-month period, NCL was unable to pay its expenses and there was no funding agreement in place. It had not paid its debts either because (1) a proper value had not been placed upon the Applicants' claim as a contingent claim pursuant to IR 14.14, or (2) no adjudication of the claim had been carried out in the time available including the outcome of any appeal therefrom. The conversion from MVL to CVL therefore follows.
D. The Preliminary Issues answered
(13)Conclusion - Replies to the specific questions raised by way of preliminary issues
- Issue 1 - Whether NCL was insolvent when it went into MVL on 10 May 2023 and, if so, whether the declaration under s.89 IA 1986 was correctly made.
NCL was insolvent in accordance with the test set in section 89 IA as at the time that the company was placed into MVL. Its debts, being the Applicants' contingent liability, vastly exceeded its assets which were capable of being realised in the 12-month period. Moreover, the expenses of the MVL had not been correctly taken into account or the costs of dealing with the valuation of the Applicants' claim as a contingent liability. The assets to be realised were unlikely to be realised in the 12-month period and even if so realised, would not have produced sufficient asset realisations to pay the expenses as well as the significant claim of the Applicants. In the event that the Applicants' claim is not a contingent liability, but an actual disputed debt and not falling within IR 14.14, then NCL was still not able to pay its debts in the 12-month period. This is because the claim was not capable of being adjudicated upon including any appeal therefrom prior to the expiry of the 12 months period. Payment of the debt could not therefore be made within the 12-month period. However, on the evidence before me, it is not possible to establish if the declaration was correctly made.
- There is a specific determination sought relating to whether the declaration was correctly made. As I stated in the hearing, there was insufficient evidence before me relating to the knowledge of Mr Kowski or others as to the existence of the Applicants' claim as at the time that the statutory declaration was sworn. The Applicants presented no evidence as to knowledge and accordingly, that part of issue 1 results in a negative answer in so far as it relies upon the knowledge of those executing the statutory declaration at the time. Clearly had the directors been aware of the Applicants' claims (regardless of whether proceedings had already been issued in Luxembourg) then the declaration was not correctly made by them.
- Issue 2 -Whether NCL was insolvent or had become insolvent for the purposes of s.95 by 2 September 2024 (when Mr Goderski was removed from office).
The date selected here, being 2 September 2024, was after the expiry of the 12 months period. It is clear from the progress report of Mr Goderski, NCL was unable to pay its debts in the 12-month period. The evidence demonstrates that NCL was unable to pay its expenses at expiry of the 12-month period and equally was clearly not able to pay its debts, whatever value was placed on the Applicants' claim for these purposes. If the Respondents are correct and the claim is an actual disputed debt, then the debt was not paid at the expiry of the 12-month period because the adjudication process had not been carried out. Accordingly, the company was insolvent on the basis of the test set out in section 95 IA 86.
- Issue 3 - Whether NCL was insolvent for the purposes of s.95 as at 15 November 2024.
The date selected here, being 15 November 2024, is well after the expiry of the 12-month period. What is set out in issue 2 applies equally here. NCL was unable to pay its debts in full at the expiry of the 12-month statutory period which had expired on 9 May 2024. Accordingly, the company was insolvent on the basis of the test set out in section 95 IA 86 at the later date of 15 November 2024.
- Issue 4- If the answer to (1) and/or (2) and/or (3) is yes, with what consequence? In particular, whether the MVL should be converted into a CVL in accordance with ss.95 and 96 and/or whether ss. 95 and 96 have been triggered.
Issue 5 - If so, who should be appointed as (and/or who should nominate) the liquidator.
- Having determined issues 1 – 3 on the basis that NCL had not paid its debts and interest thereon before the expiry of the 12-month period, the consequences of that determination is set out in section 95 IA 86. The MVL should be converted into a CVL. Ms Toube submitted that in some way this conversion needed to be carried out by Mr Murphy. In my judgment, that is not necessary. There has been a failure by Mr Goderski and Mr Murphy to apply correctly the test set out in section 95. As the 12-month period has expired, and based on what I have set out above, the statutory provision requires the MVL to be converted into a CVL. Both Mr Murphy and Mr Horton are liquidators of NCL. In the circumstances, I can direct, in so far as necessary for both of them or one of them to take such steps as are necessary so as to convert the MVL into a CVL. For the reasons set out below, it seems appropriate in this case to direct that Mr Horton carry out such steps as are necessary for the conversion. I therefore direct that the MVL be converted into CVL by Mr Horton. I will hear the parties as to the precise steps which may be necessary.
- In relation to issue 5, being who should be appointed as liquidator in relation to the CVL, it seems to me that it is simply not appropriate to nominate or allow Mr Murphy to continue as liquidator. This is because, on the evidence before me, he is clearly not the choice of the creditors, being the Applicants. In a CVL, it is the creditors who select the liquidator. That is clear from the statutory provisions I have set out above. It may well be, as submitted before me, the appointment of Mr Horton as liquidator in the CVL will be challenged by Mr Kowski on the basis that he disputes the Applicants' status as creditors. That threatened challenge does not prevent the appointment of Mr Horton as the choice of the Applicants as creditors from being effective until any such challenge is made and is successful.
- In determining that Mr Murphy is not to be appointed as liquidator in the CVL, I do not deal with the very serious allegations raised in the Applicants' application seeking to remove and replace Mr Murphy. These issues have not been dealt with by me. That would require another hearing on another day. It appears that no such hearing is necessary. As I have determined that the MVL needs to be converted into a CVL then it is the Applicants who select the liquidator and it is clear they do not want to retain Mr Murphy.
- As Mr Horton was appointed by me as an additional liquidator, he will remain as liquidator in the CVL. It seems to be unnecessary for a meeting to be held for the appointment of the liquidator under the relevant provisions. Mr Horton will have to deal with the Applicants' claim and in particular how to deal with their claim which has not as yet been adjudicated upon. I raise this issue, not so much to provide any directions to Mr Horton, but to emphasize that on the particular facts of this case, Mr Horton may have to apply to the court for directions. As Mr Horton is separately represented, I will hear him in relation to whether there are further directions sought by him at this stage.