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OUTER HOUSE, COURT OF SESSION
[2006] CSOH 75
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P33/06
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OPINION OF LORD DRUMMOND YOUNG
in note by
NEIL HAMMOND GEDDES and JONATHAN MARK BIRCH
in the petition of
NEIL HAMMOND GEDDES, JONATHAN MARK BIRCH
and others
for an order to
wind up AGM CASUALWEAR LIMITED
under the
Insolvency Act 1986
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Petitioner: Bowie; Tods Murray
16 May 2006
[1] On
6 November 2001 the court ordered
that AGM Casualwear Limited should be wound up under
the provisions of the Insolvency Act 1986.
The present noters, Mr. Neil Geddes and Mr. Jonathan Birch, were appointed joint
liquidators. They are both licensed
insolvency practitioners. They had
previously acted as joint supervisors of a voluntary arrangement that had been
entered into between the Company and its creditors under Part 1 of the
Insolvency Act 1986. After their
appointment as joint liquidators the noters entered
upon the duties of their office and proceeded with the winding up of the
Company. The winding up has not yet been
concluded.
[2] At
the date of their appointment the noters were both
directors of Numerica PLC, an insolvency
practice. They were both based at its Manchester regional office. On 1 June 2005 BDO Stoy
Hayward LLP, another insolvency practice, acquired Numerica
PLC's regional offices in Bristol, Manchester and Southampton.
The contractual terms governing the acquisition
provided that the businesses and assets of those three regional offices should
be transferred to BDO. The
winding up of AGM Casualwear Limited formed part of the work in progress
acquired by BDO.
[3] Following
the transfer of Numerica PLC's Manchester business to BDO, the first noter proposes to retire from practice, and will
accordingly relinquish his insolvency permit.
The second noter has left the business
acquired by BDO and has joined another insolvency practice, Vantis
PLC. As a result of the transfer and
their subsequent retirement or resignation from BDO's
business, the noters no longer have access to the
files and papers in the winding up of the company. The insolvency managers to whom
responsibility for the day-to-day progress of the winding up is delegated have
been transferred into the employment of BDO.
In these circumstances the noters consider it
necessary to resign from their office as joint liquidators of AGM Casualwear Limited, to be replaced by partners of BDO. The present note has been presented to achieve
that end. Its prayer requests the court
to remove each of the noters as joint liquidator of
the company and to appoint two other licensed insolvency practitioners, Mr.
Dermot Power and Mr. David Hill, as joint liquidators in their place. Both of those individuals are partners in
BDO. The note was intimated and
advertised in the Edinburgh Gazette, but was not served on the creditors of the
company.
[4] The
resignation of a liquidator and the appointment of a successor is governed by the Insolvency Act 1986 and the Insolvency (Scotland) Rules 1986 (SI 1986/1915). Section 172(6) of the Act provides that a
liquidator may, in the circumstances prescribed in the Rules, resign his office
by giving notice of his resignation to the court. The prescribed circumstances are specified in
rule 4.28(3), which is in the following terms:
"[T]he liquidator may only proceed under this Rule on
the grounds of ill health or because:
(a)
he intends
ceasing to be in practice as an insolvency practitioners; or
(b)
there has been some conflict of interest or change of
personal circumstances which precludes or makes impracticable the further
discharge by him of the duties of the liquidator."
In the present case those conditions
are clearly satisfied in respect of both of the noters. The first noter
intends to cease practice as an insolvency practitioner, and the second has
left the firm responsible for the winding up; that makes impracticable the
further discharge by him of the duties of liquidator.
[5] The
Act further provides, in 174(4)(c), that a liquidator who resigns office will
obtain his release from such time as may be prescribed; thereafter, in
accordance with section 174(6), the liquidator is discharged from all liability
in respect of the winding up and his conduct as liquidator. The procedures that are contemplated when a
liquidator wishes to resign are found in rules 4.28 and 4.29. Rule 4.28(1) states
that, before resigning his office under section 172(6), the liquidator shall
call a meeting of creditors for the purpose of receiving his resignation. Rule 4.28(2) makes detailed provision
regarding the notice summoning the meeting; the notice is to be accompanied by
an account of the liquidator's administration of the winding up, including a
summary of his receipts and payments.
Rule 4.29(3) provides that, if the liquidator's resignation is accepted,
he shall forthwith after the meeting give notice of his resignation to the
court. Rule 4.29(4) provides that
meeting of creditors may grant the liquidator his release from such date as
they may determine. Rule 4.29(5)
contemplates that the meeting may appoint a successor as liquidator.
[6] Rule
4.29(6) provides as follows:
"If there is no quorum present at the meeting summoned
to receive the liquidator's resignation, the meeting is deemed to have been
held, a resolution is deemed to have been passed that the liquidator's
resignation be accepted, and the creditors are deemed not to have resolved
against the liquidator having his release."
In that event note is made in the
Rules for the appointment of a new liquidator.
That is obviously unsatisfactory, although the problem can be dealt with
using the court's inherent powers at common law: see paragraph [11] below. It was submitted on behalf of the noters that the situation contemplated by rule 4.29(6) was
likely to occur in cases where the winding up has been continuing for a number
of years. In such a case the ordinary
creditors will normally have realized at a fairly early stage that they are
unlikely to obtain any dividend, and at that point it is likely that they will
lose interest in the further conduct of the liquidation. In my opinion that
submission seems inherently probable.
[7] It
was further submitted that the procedures contemplated by rules 4.28 and 4.29
are themselves complex and costly, and that that is particularly significant
where an insolvency practitioner holds office in a large number of
liquidations. I was informed that that
is the case with the present noters, and indeed it is
usual for a licensed insolvency practitioner to hold a large number of offices
simultaneously. In my opinion the
procedures do appear unsatisfactory, in three respects. First, the procedures are likely to involve
significant expense, especially where a large number of liquidations are
involved. Secondly, the procedures
contemplate the summoning of a meeting when it is obvious that a quorum is
unlikely and that the resignation will be accepted by default. Thirdly, where default occurs, there is no
provision for appointing a successor.
[8] In
England the Insolvency Rules 1986 (SI 1986/1925) contain
provisions that correspond to the Scottish rules 4.28 and 4.29. The unsatisfactory nature of those provisions
has been recognized for a number of years.
The High Court has provided a remedy by permitting applications to be
made directly to the court for the removal of one insolvency practitioner and
his replacement by another. The relevant
jurisdiction of the court is summarized by Neuberger J. in Re Equity Nominees Ltd, [2000] BCC 84, as follows (at 86F-H):
"The High Court has jurisdiction to remove insolvency
practitioners from multiple offices in a single application and, where
appropriate, to appoint replacements for them.
That jurisdiction is well established.
See, for instance, per Knox J. in Re
Bullard and Taplin Ltd [1996] BCC 973, and per Blackburne J. in Re A & C Supplies Limited [1998] BCC 708. ...
So far as liquidations are concerned, where a company
is in compulsory liquidation the court may remove the liquidator from office
under s. 172(2) of the Act, and appoint a replacement liquidator following such
removal, pursuant to s. 168(3) of the Act: see per Harman J. in Re Parkdawn Ltd
(unreported, 15 June 1993), and Bullard
at p. 974D-G."
That jurisdiction is, however,
discretionary in nature. Neuberger J.
discussed that discretion as follows (at 87B-H):
"So far as discretion is concerned, the Rules address
the question of when and how a liquidator or trustee in bankruptcy may seek to
resign, and they provide procedures for such resignation. The Rules provide for the office-holder to
call a meeting of creditors to receive his resignation, and they require him to
provide creditors with what is in effect an account of his stewardship. The creditors have an opportunity of deciding
whether to accept his resignation, and, if they do so, of appointing a new
office-holder in his place. ...
Nevertheless the courts have been willing to bypass these procedures and to
make orders removing an insolvency practitioner from multiple offices and to
appoint an appropriate replacement from the same firm in the following
circumstances:
(1) where the office-holder has retired due to ill-health ...;
(2) where the office-holder's
partnership was dissolved and his business taken over by another firm which was
based in different towns from the dissolved firm ...;
(3) where the office-holder was expelled
from a partnership and could not manage on his own ...;
(4) where the office-holder has retired
from the partnership from which he had practised ....
... In determining
whether a removal and replacement order should be made, i.e. whether the
"short-cut procedure" under the Act should be adopted rather than the "normal
procedure" under the Rules, the courts have asked whether the convening of the
meetings required by the Rules would serve any useful purpose
.... If the court is satisfied
that they would not serve any useful purpose, or are unlikely to serve any
useful purpose, it has adopted what proceeds to be the practical and sensible
approach of avoiding the expense of the statutory resignation procedure ..."
In
Re Equity Nominees Ltd, Neuberger J. followed the "short-cut procedure",
and permitted the applicant, who acted as trustee in bankruptcy, liquidator or
supervisor in respect of 43 different insolvencies, to obtain an order removing
him from office in each case and appointing a substitute office-holder.
[9] In
my opinion the policy considerations that underlie the English cases are
equally applicable in Scotland; they are the factors identified at
paragraph [7] above. For that reason I
consider that it would be desirable, if possible, to adopt a similar procedure
in Scotland.
The basis of the English jurisdiction is found in sections 168(3) and
172(2) of the Insolvency Act. Section
172(2), which applies to Scottish liquidations, is in the following terms:
"Subject as follows, the liquidator may be removed
from office only by an order of the court or by a general meeting of the
company's creditors summoned specially for that purpose in accordance with the
rules."
Sufficient cause must obviously be
shown if the court is to exercise the power conferred by that subsection. Nevertheless, where a liquidator cannot
effectively perform the duties of his office, that is
manifestly sufficient cause for his removal. In the present case, the noters
have left or are about to leave the firm of insolvency practitioners that is
responsible for the conduct of the Company's liquidation. That will prevent them from performing the
duties of their office. For this reason
I am satisfied that sufficient cause has been shown for their removal.
[10] The
second statutory provision founded on in the English cases is section 168(3)
of the Insolvency Act. That subsection
cannot be founded on in Scotland, because section 168 is only applicable
to companies that are being wound up by the court in England and Wales.
Subsection (3) provides that the liquidator may apply to the court for
directions in relation to any particular matter arising in the winding up. There is no corresponding statutory provision
applicable to Scotland.
Nevertheless, a liquidator is an officer of the court: Millar, 1890, 18R 179. As such he has an inherent power to apply to
the court for directions as to the performance of his functions, or for
authority to follow a particular course of action. The court has a corresponding common law
power to regulate the conduct of the liquidator, and to pronounce such orders
as are necessary to ensure that the winding up, which is under its control, is
carried out properly and efficiently. Those common law powers are at least as wide
as the English statutory power, and their existence may well explain the
absence of any statutory provision in Scotland.
[11] In
my opinion the foregoing common law powers can be used in an appropriate case
to replace a liquidator who has been removed from office; it is obvious that
the conduct of the winding up requires a liquidator, and any failure in the
office must be remedied. Indeed, if the
procedure in rule 4.29(6) were followed, with the result that the liquidator's
resignation was deemed to have been accepted by the creditors, the only
procedure available for appointing a new liquidator would appear to be an
application to the court, presumably by the resigning liquidator. On this basis I am of opinion that the
procedure that has been adopted in English cases such as Re Equity Nominees Ltd can competently be followed in Scotland; the court has statutory power to
remove a liquidator and a common law power to appoint a replacement.
[12] The
next question is whether the power should be exercised in any particular
case. This is significant, because there
is a statutory procedure available to enable a liquidator to resign and, at
least if a quorum of creditors appears at the meeting convened for the purpose,
to appoint a replacement. The existence
of similar statutory procedures has not prevented the English courts from
intervening, but they have done so on a discretionary basis, in the manner
described by Neuberger J. in Re Equity
Nominees Ltd. The basis on which the
English court is willing to act appears to be as follows. First, there must be a good reason for the
liquidator's ceasing to act as such.
Neuberger J. enumerates various specific cases that have been considered
by the English courts, but I think that it is possible to draw the general
conclusion that any sufficient reason for the liquidator's ceasing to act will
be enough. Secondly, the court must
consider whether the convening of the meetings required by the Rules would serve
any useful purpose. If the court is
satisfied that the meetings would not serve any useful purpose, or are unlikely
to serve any useful purpose, the view has been taken that the practical and
sensible approach is to avoid the expense of the statutory procedures. In my opinion these considerations are
equally applicable in Scotland; consequently the Scottish court
should follow a similar approach.
[13] In
the present case it is clear in my view that there is a sufficient cause for
the noters' ceasing to act as joint liquidators, in
that they have both left or are about to leave the firm that is responsible for
the conduct of the winding up; thus the first requirement is satisfied. I am equally of opinion that the convening of
the meeting required by rule 4.28 would not serve any useful purpose in the
present case, with the result that the second requirement is satisfied. I was informed by counsel for the noters that, where a winding up as been continuing for a
number of years, it is unlikely that a quorum will be achieved at the meeting,
because the ordinary creditors realize that they are unlikely to obtain any
dividend and lose interest in the conduct of the liquidation. In the present case the winding up has been
in existence for more than four years, and I have no reason to doubt that
counsel's submission is accurate. For
that reason I think it unlikely that convening the meeting would serve any
useful purpose.
[14] In
certain of the English cases in this area the court's order has been granted
subject to conditions that, in broad terms, the retiring liquidator should
notify creditors of the court's order and that creditors should be authorized
to apply within a specified period to vary or discharge that order; that was
the procedure followed by Neuberger J. in
Re Equity Nominees Ltd. In two
earlier cases, Re Sankey
Furniture Ltd, ex parte Harding, [1993] 2 BCLC
594, and Re Crickhowell
Construction Ltd, Chadwick J. and Rimer J.
respectively imposed a further condition that the liquidator should send creditors
copies of his receipts and payments accounts.
In other cases, however, no such conditions have been imposed. These include the decision of Jacob J.
in Re Diamond Computer Systems Ltd,
10 March 1997, that of Lightman J. in Re Steena Metals
Ltd, 17 July 1997, that of Laddie J. in Re Baillie Construction Co. (1985) Ltd, 20 July 1998, and that of Blackburne J. in Re A
& C Supplies Limited, supra. The
argument in favour of the latter course is that the main purpose of this type
of order is to save costs, and if significant conditions are imposed a very
substantial proportion of the financial benefit will be lost. That will of course represent a loss to the
creditors. In addition, in most such
cases all that happens is that one partner in a well-established firm of
insolvency practitioners is replaced by another such partner. All of the partners in such firms will
normally be covered by professional indemnity insurance, and in those
circumstances there seems little danger to creditors. The argument that has found favour in the
cases were conditions have been imposed is that the creditors are entitled to
be given notice of the change of liquidator and to have the right to object
because those were rights that they would have enjoyed if the procedures in the
Insolvency Rules had been followed. If
that procedure is not followed the creditors can be said to be prejudiced.
[15] In
my opinion any such prejudice is largely illusory. Before the court pronounces an order for the
removal of a liquidator and the appointment of a replacement its must be
satisfied both that there is good reason for adopting such a course and that
convening the meeting required by rule 4.28 would not serve any useful
purpose. The latter requirement, in
particular, will normally be satisfied only if the court concludes that the
ordinary creditors are no longer taking any significant interest in the
liquidation. If that is the case,
however, I cannot see any substantial benefit from notifying those creditors
that the court proposes to change the liquidator and giving the creditors a
right to object. Any such course would
involve substantial expense. In
addition, it would be artificial in my view to fail to recognize that the
conduct of a liquidation is normally carried out by a
firm of insolvency practitioners; virtually all of the day-to-day
administration will be delegated to managers, and not carried out by the
liquidator personally. In these
circumstances, where the effect of the court's order is merely to replace one
partner in a firm of insolvency practitioners with another partner, or a
partner in that firm's successor, the likelihood of prejudice is minimal. In this connection it is material that the
partners in such firms are normally covered by professional indemnity insurance. For all these reasons I am of opinion that it
should not normally be necessary to impose any special conditions regarding
notification of the court's order to creditors or giving creditors leave to
object to the order. There may be exceptions, but at least in cases where one
partner in a well-established firm of insolvency practitioners is replaced by
another partner, or a partner in a successor firm of equal standing, I cannot
see that any useful purpose would be served by imposing conditions. In the present case, I do not think it
necessary to impose any such conditions.
[16] For
the reasons stated above, I have pronounced an interlocutor removing the noters as joint liquidators of the company and nominating
and appointing Mr. Power and Mr. Hill as their successors. I have appointed Mr. Power and Mr. Hill to
give notice of their appointment to the Registrar of Companies within seven
days, and found the expenses of the application to be expenses in the liquidation. I have confined notification of the
interlocutor to an advertisement in the Edinburgh Gazette, to appear within 28
days of the date of the interlocutor.
