Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2017] CSOH 72

P266/17

NOTE BY LADY WOLFFE

In the petition of

ULTIMATE INVOICE FINANCE LIMITED

Petitioner

for an Administration Order in respect of

MCC BUILDING SERVICES LTD

Petitioner:  Ower;  Morton Fraser LLP

Respondent:  No appearance

2 May 2017

Introduction

• [1]The petitioner is an invoice finance company specialising in the provision of finance to small and medium-sized businesses.  The petitioner entered into a debt purchase agreement with MCC Building Services Ltd (“the Company”).  At the same time, the Company granted a floating charge in favour of the petitioner over its whole property comprised in its property and undertaking.
• [2]The Company has since become insolvent.
• [3]The petitioner in this case seeks an administration order in respect of the Company.  Reference is made in the petition to paragraphs 3, 11, 12, 13, 42 and 44 of Schedule B1 to the Insolvency Act 1986 (“the Schedule” and the “Act”, respectively) and to rule 2.3 of the Insolvency (Scotland) Rules 1986 (“the Rules).  The specified purpose for which the administration order is sought under paragraph 3 of the Schedule is for the realisation of property in order to make a distribution to one or more secured or preferential creditors, as provided for in paragraph 3(1)(c).
• [4]However, by reason of the recent appointment of a provisional liquidator to the Company by Dunfermline Sheriff Court at the instance of the Company’s directors, an application made without notice to the petitioner, the petitioner is precluded by paragraph 17(a) of the Schedule from appointing an administrator.  It therefore applies to the Court for this purpose. Had no provisional liquidator been appointed, the petitioner would have been able to make an out-of-court appointment under paragraph 14 of the Schedule.
• [5]The petitioner referred in the petition to the fact of the appointment of the provisional liquidator.  However, it was apparent from the submissions to the court that there was a degree of uncertainty as to the interaction between the administration order sought from this court and the liquidation proceedings in the sheriff court, and as to the rules to be applied and the appropriate orders to be granted.  As it was stated in statement 6.1 of the petition:

  “That the Company is unable to pay its debts. A petition has been presented to wind up the Company. In the circumstances, an insolvency procedure in relation to the Company is inevitable. It therefore requires to be determined whether the Company should enter liquidation or administration. The sheriff […] cannot make an order for the winding up of the Company pending the determination of this petition.”

   

• [6]The purpose of this Note is to address these issues.

   

   

  The Provisions Governing Appoint of an Administrator Where Company in Liquidation

• [7]There are several routes by which a company may be placed in administration upon the appointment of an administrator.  A floating charge holder may do so in terms of paragraphs 14 to 21 of the Schedule.  A company or its directors may also appoint an administrator in certain circumstances, in accordance with paragraphs 22 to 34 of the Schedule.  Further, the persons specified in paragraph 12(1) of the Schedule may also apply to the court for appointment by the court of an administrator.  The application made by the petitioner does not fall within any of the foregoing provisions.  Rather, an application for an administration order in circumstances where the company is in liquidation is one of the “special cases” provided for in paragraphs 35 to 39, and in particular in paragraph 37, of the Schedule, which governs an application by the holder of a floating charge for a court‑appointed administrator.
• [8]It should be noted that, unless the court directs otherwise (under paragraph 13(2)(a)), the appointment of the administrator takes effect on the making of the administration order: paragraph 13(2)(b), and as applied to this type of special case by paragraph 37(3)(c) of the Schedule.  Further, upon the making of the administration order, the court shall inter alia discharge the winding-up order (paragraph 37(2)(a)); it shall make provision for such matters as may be prescribed (paragraph 37(3)(b)); and it shall make other consequent provision (paragraph 37(3)(c)).  Finally, it should be noted that rules 2.5 to  2.7 of the Rules provide as follows:-

  “2.5— Application where company in liquidation

  (1) Where an administration application is made under paragraph 37 or 38, the petition shall contain, in addition to those averments required in an application under paragraph 12, averments in relation to—

  (a) the full details of the existing insolvency proceedings, including the name and address of the liquidator, the date he was appointed and by whom; and

  (b) the reasons why administration has subsequently been considered appropriate,

  and shall be accompanied by a copy of the order or certificate by which the liquidator was appointed and by such other documents as the petitioner considers might assist the court in determining the application.

  (2) Where an administration application is made under paragraph 37, the petition shall contain, in addition to the averments required by paragraph (1) above, averments as to the basis upon which the petitioner is qualified to make an appointment under paragraph 14and shall be accompanied by a copy of the instrument or instruments by which the relevant floating charge was created, including any relevant instrument of alteration, and by such other documents as the petitioner considers might assist the court in determining the application.

   

  2.6 Expenses

  If the court makes an administration order, the expenses of the petitioner, and of any other party whose expenses are allowed by the court, shall be regarded as expenses of the administration.

   

  2.7 Administration orders where company in liquidation

  Where the court makes an administration order in relation to a company which is in liquidation, the administration order shall contain consequential provisions, including–

  (a) in the case of a liquidator in a voluntary winding up, his removal from office;

  (b) provisions concerning the release of the liquidator, including his entitlement to recover expenses and to be paid his remuneration;

  (c) provision for payment of the costs of the petitioning creditor in the winding-up;

  (d) provisions regarding any indemnity given to the liquidator;

  (e) provisions regarding the handling or realisation of any of the company's assets under the control of the liquidator; and

  (f) such other provisions as the court shall think fit.”

   

• [9]No reference was made in the petition to paragraph 37 of the Schedule or to rules 2.5 to 2.7 of the Rules and the petitioner had no particular position in relation to the effect of the making of any administration order on the liquidation proceedings in the sheriff court, or on the rights of the provisional liquidator or any other party derived from that process. While initially in oral submissions it was suggested that the provisional liquidator might have consented to act speculatively, it was accepted that the petitioner had no firm knowledge in respect of that issue.
• [10]The petitioner did not refer to any reported case on these provisions or to their counterpart under the English Insolvency Rules or to any English cases.  It would seem that these provisions have generated very little case law.
• [11]The provisions of the Schedule of course apply in England and Wales, as well as in Scotland. I note, however, that the procedure under the English Insolvency Rules (“the English Rules”) for the appointment of an administrator differs from the procedure in Scotland,  not least because there is provision in the English Rules for the use of affidavits and for appearance or representation by inter alios any person appearing to have an interest. Rules 2.6 and 2.7 of the Rules are broadly, but not exactly, mirrored in rules 2.12(3) and 2.13 of the English Rules. In practice, this may mean that at this stage in the proceedings there is more information placed before the courts in England or, at least, that there is greater certainty in relation to the information that is placed before the courts.

   

  Interaction Between the Administration Order and the Liquidation Proceedings

• [12]It respectfully seems to me that when faced with an application such as that in the present case, the court is under an obligation to preserve so far as possible any rights and obligations that might have accrued in the liquidation proceedings, notwithstanding that those proceedings are effectively halted or brought to an end upon the making of the administration order.  Given the legislative purposes of the administration procedure, there would be little utility in postponing the commencement of the administration order (as appears possible under paragraph 13 of the Schedule) to enable these rights and obligations to be ascertained in the context of the liquidation proceedings. One of the questions in this case was how, in practical terms, to preserve these matters notwithstanding the appointment of the administrator.
• [13]It is clear that where an administration order is made, one of the effects is that the liquidation proceedings must be dismissed: paragraph 40(1)(a).  Where that order is made under paragraph 37(2), the winding up order is discharged: paragraph 37(2)(a) of the Schedule. What the petitioner was unclear about, or expressed no view upon, was how any ancillary matters should be addressed. The ancillary matters include the discharge of the provisional liquidator, her entitlement to recover expenses and remuneration, any costs payable to the petitioner in the winding up or, indeed, any order in respect of the intromission or realisation of the company’s assets under the control of the provisional liquidator. I granted an adjournment to enable Counsel appearing before me to obtain some information in relation to these matters.
• [14]Upon resuming the hearing, it was confirmed that the principal assets of the Company were its book debts. It was asserted, and assumed for the purposes of the hearing, that the petitioner had acquired these under the debt purchase agreement. (I express no view on the efficacy of any transfer of title of the Company’s debts.)  It was also confirmed that there was no indemnity and that, contrary to the earlier submission, the provisional liquidator had not accepted the appointment on a speculative basis, but had accepted appointment on (it was said) certain assurances on the part of the directors that a fund of money held in a bank account would be available to meet her expenses. By reason of the bank exercising set off, that fund was no longer available. It was explained that the provisional liquidator had incurred expenses of about £2,000 and had accrued fees of about £5,000 to £7,000. She did not wish to participate in the administration proceedings at this stage, it being explained that she was essentially neutral on the question of whether an administrator should be appointed.
• [15]I was satisfied that the requirements for the appointment of an administrator were met and that that form of insolvency procedure was preferable to a liquidation. Having regard to the terms of paragraph 37 of the Schedule and rules 2.6 and 2.7 of the Rules, I was also satisfied that I had jurisdiction to reserve meantime the ancillary matters referred to above, insofar as it was appropriate to do so, in these proceedings. These include the matters of the release of the provisional liquidator and her expenses and remuneration. It would be premature to make any order in relation to those matters at this stage and any order should not prejudice any third party right (eg to seek a due accounting by the provisional liquidator in respect of her intromissions prior to any release or discharge).

   

  Payment and Priority of the Expenses and Remuneration of the Provisional Liquidator

• [16]One of the concerns expressed on behalf of the petitioner was the priority (if any) of the expenses and remuneration of the provisional liquidator, or the source of the funds or assets from which these might be paid. Its position, as I understood it, was to preclude payment out of any assets or debts to which it said it had title or to resist recognition of any priority being accorded to the provisional liquidator’s expenses or remuneration in the context of the administration.
• [17]In my view this was not a matter that could properly be determined without further information, and without the involvement of the provisional liquidator, if she chooses to seek to recover  any expenses or remuneration, or to be granted a discharge qua  provisional liquidator.  For aught yet seen, the provisional liquidator may seek to recover her expenses and remuneration.  The terms of rule 2.6 of the Rules would also appear to confer a sufficiently broad discretion on this court in respect of determination of that matter, including the issue of priority, if the provisional liquidator falls within the meaning of “any other party whose expenses are allowed by the court” under rule 2.6 of the Rules.  Albeit based on the English Rules, the approach of Briggs J in the case of Irish Reel Productions Ltd v Capitol Films Ltd [2010] EWHC 180 Ch; [2010] Bus L R 854 provides some support for this view. However, in the absence of any submission on these matters, it is right that I reserve these issues pending any further motion and express no concluded view meantime.
• [18]The interlocutor I have issued reflects the terms of this Note.