Scottish Sheriff Court Decisions

SHERIFFDOM OF LOTHIAN AND BORDERS AT EDINBURGH

Case No: L72/04

11^th December 2009

[1] This matter concerns a note in the liquidation of Redmount Properties Limited ("Redmount") at the instance of Robert Caven, the liquidator thereof ("the liquidator"). The note is brought pursuant to section 204 of the Insolvency Act 1986 ("the 1986 Act") which, read short, sets out the procedure for the early dissolution of a company. Although, ultimately, the liquidator did not insist upon the note, as this is but one of a number of such notes, I consider that it is appropriate that I should set out my view as to the correct interpretation of this section in order to give some guidance as to further procedure in this court.

[2] The relevant parts of section 204 are as follows:-

"(1) this section applies where a winding up order has been made by a court in Scotland.

(2) if after a meeting or meetings under section 138... it appears to the liquidator that the realisable assets of the company are insufficient to cover the expenses of the winding up, he may apply to the court for an order that the company be dissolved.

(3) where the liquidator makes that application, and the court is satisfied the realisable assets of the company are insufficient to cover the expenses of the winding up and it appears to the court appropriate to do so, the court shall make an order that the company be dissolved in accordance with this section.

(4) a copy of the order shall within 14 days from its date be forwarded by the liquidator to The Registrar of Companies, who shall forthwith register it; and, at the end of the period of three months beginning with the day of the registration of the order, the company shall be dissolved."

[3] There does not appear to be any reported authority as to the interpretation of this section. There are two Practice Notes issued by the Court of Session (no.4 of 1992 and no.1 of 2009). There is no equivalent Practice Note in this Sheriffdom or, to my knowledge, in any other Sheriffdom. As far as I am aware, with the exception of a brief existence in section 77 of the Insolvency Act 1985, section 204 of the 1986 Act, was, in effect, a new provision introduced by the 1986. (As to the background see the commentary to section 204 in Scottish Current Law Statutes). Section 204 applies only to Scotland. The equivalent provisions applying to England are contained in sections 202 to 203 of the 1986 Act.

[4] Section 204(1) begins by providing that, as a condition of making an order, there should first be a winding up order made by the court. Once a winding up order is made there then follows a meeting of creditors as provided by section 138. At the stage of the winding up order, the court appoints an interim liquidator. One of the purposes of the first meeting of creditors is to appoint a liquidator. Section 204(2) does refer to "meeting or meetings". I read that as referring to those parts of section 138 which anticipate meetings both of creditors and contributories although only meetings of creditors may take place (section 138(4)). Section 204(2) goes on to provide that "if after a meeting... under section 138 it appears to the liquidator that the realisable assets are insufficient as to cover the expenses of the winding up, he may apply to the court for an order that the company by dissolved." Section 204(3) provides that if the court is satisfied that the realisable assets of the company are insufficient to cover the expenses of the winding up and it appears to the court to be appropriate to do so, the court shall make an order that the company be dissolved in accordance with the section.

[5] In order to interpret the section it is relevant to consider what would happen if the provisions of the section did not apply. In short, the liquidation would continue in the ordinary course as laid down by the 1986 Act, the insolvency rules and those parts of the Bankruptcy (Scotland) Act 1985 ("the 1985 Act") where they are applied, with modifications, to corporate insolvency. In general terms, the liquidator will ingather and realise the assets of the company all for the benefit of the creditors. You will either report to committee of inspection or, if no such committee has been formed, to the court at the end of the relevant accounting period (usually 6 months) in accordance with the modified provisions of sections 52 and 53 of the 1985 Act. The latter provisions allow scrutiny of the liquidator's intermissions as liquidator. In particular, the court (if there is no committee of inspection) will appoint a reporter whose function it is to report to the court on the liquidator's intermissions and to recommend suitable remuneration for him.

[6] In my opinion, section 204 provides two conditions upon which the court must be satisfied before an order for early dissolution can be granted. Firstly, that the realisable assets of the company must be insufficient to cover the expenses of the winding up. Secondly, it must appear to the court appropriate to make an order for early dissolution. One of the more difficult issues is the point at which such an application may be brought. In my opinion, section 204(2) provides for an application being made after what I will describe as the section 138 meeting. In other words, it anticipates that, once the meeting has taken place, the liquidator should have sufficient information to make a judgement as to realisable assets of the company in relation to the expenses of the liquidation. It seems to me that the mischief that this section seeks to deal with is to prevent a protracted process which, ultimately, proves fruitless because there are not sufficient assets to pay for the expenses of the winding up itself, let alone to pay monies to any class of creditors. However, the section recognises that sufficiency of funds is not the only criterion for the making of an order. There may be circumstances whereby the liquidation ought still to proceed. I do not think it is either possible or desirable to speculate as to all such circumstances. However, there may be issues as to the conduct of the Directors, the trading history of the company or the whereabouts of asset which make pursuit of the liquidation the correct course of action. It is no doubt because of the variety of circumstances that the statute provides such a general test, namely that it is "appropriate" to make such an order.

[7] As I have said, an application pursuant to section 204 comes after a section 138 meeting. The issue in this case is how long after such a meeting? In this note, as in many others, the application is brought a considerable time after the commencement of the winding up. In some cases, the period of time is measured in years. Most applications, as in the present, ask the court to dispense with audit of the liquidators intermissions, to exoner and discharge him of his whole actings, to authorise him to retain such funds that he has towards his unaudited fees, to make an order for dissolution of the company and for an order for intermation to creditors. The Insolvency regime established by the relevant statutory provisions sets out a regime for the conduct of liquidations and the supra attendance of liquidators. If I were to allow this, and many of the other applications put before me, it would amount to a wholesale bypassing of the statutory regime by allowing liquidators to remain in post, conduct there duties for months of years and then apply to the court for approval of their actings and circumstances where the court is unable to make any judgement as to whether it is appropriate to do so. Now I hasten to add that there is no suggestion of impropriety of any kind in this, or indeed in any other matters put before me. However, I cannot approve of a practice which appears to me entirely at odds with the legislative structure. I appreciate that there may be genuine commercial motives which lie behind the practice which has evolved, but such commercial practices must yield to clear statutory procedures.

[8] Although perhaps not directly relevant to this note, I do detect what I can best describe as a certain reluctance on the part of many liquidators to report to the court (where there is no committee of inspection) in accordance with the accounting period. Now I hasten to add that is not necessarily the case in this Note. It is a matter upon which Lord Glennie has had occasion to comment in proceedings in the current Court of Session (Thomas M Burton [2008] CSOH 75). I should add that, since Lord Glennie issued his opinion, although Parliament has extended the accounting period in sequestration cases to two months, it has specifically made no alteration to the equivalent corporate regime (paragraph 44 Schedule 1 to the Bankruptcy and Diligence etc. (Scotland) Act 2007 and paragraph 3(1)(i) the Bankruptcy and Diligence etc. (Scotland) Act 2007 (Commencement No. 3 Savings and Transitionals) Order 2008). I can see that the requirement for regular reporting can prove commercially burdensome but, so long as it remains the law, liquidators are, in my opinion, obliged to apply with it. In the course of his opinion in Burton, paragraph [14] Lord Glennie did observe that there are mechanisms open to liquidators to apply to the court for a less rigorous regime. All I will say is this, if they do not do so, it would be unwise for liquidators to rely upon the court being prepared to exercise its powers pursuant to section 63 of the 1985 Act on any regular basis.

[9] Returning to section 204, in my opinion, for such an application to succeed the court must have sufficient information before it in order to decide whether an order should be made. Such an application should be made shortly after the section 138 meeting and before the expiry of the first accounting period. The application should provide details as to the realisable assets of the company and some information again which to measure what may be the expenses of the winding up. It may be the former are so negligible as to make any comparisons self evident. There must also be sufficient information as to allow the court to conclude that it is "appropriate" to order an early dissolution. As I have said, it is not possible or desirable to seek to remunerate all the relevant factors. The court will know little, if anything, as to the affairs of the company. At the least, I would want to know the state of knowledge of the creditors as to the application and whether the liquidator is aware of any facts which might make it inappropriate to order an early dissolution. (The provisions of section 202(2)(ii) are instructive). If the court is minded to grant the application it cannot, in my opinion, approve the liquidators actings and exoner or quit and discharge him for the simple reason that it will have no information to allow it to do so. The structure of the section does not anticipate the liquidator having intermitted to any material extent with the assets of the company, if indeed at all. All the court can do is sanction the liquidators release.

[10] On the facts of this case the liquidator was appointed (jointly) in August 2004. Accordingly, this application comes some 5 years after that date. In my opinion, on any construction of section 204, it would not be appropriate to invoke that procedure on the facts of this case. It is unnecessary for me to go into all the detail as to what has happened between those two dates other than to repeat there is no suggestion of any impropriety whatsoever on the part of the liquidator in the conduct of the liquidation.