Scottish Sheriff Court Decisions

SHERIFFDOM OF LOTHIAN AND BORDERS AT EDINBURGH

L165/09

NOTE

by

SHERIFF WILLIAM HOLLIGAN

in the cause

Mhc CONSTRUCTION LIMITED (in liquidation), a company incorporated under the Companies Acts and having its registered office at First Floor, Quay 2, 139 Fountainbridge, Edinburgh, EH3 9QG and KEITH V ANDERSON, the Liquidator thereof

Act: Grant

EDINBURGH 27th April 2010.

The Sheriff having resumed consideration of the cause refuses the application.

1. I have a summary application for early dissolution of Mhc Construction Limited (in liquidation) ("the company") brought pursuant to section 204 of the Insolvency Act 1986 ("the 1986 Act"). The application is brought by the liquidator. In common with many such applications, the application was prepared by the liquidator. Mrs Grant, solicitor, appeared on behalf of the liquidator. When I first considered the application I made it known that I was not prepared to grant the application as, on the basis of the information before me, I did not consider that I could do so. I stated that I was prepared to be addressed upon the application. Mrs Grant was instructed and duly appeared. She moved me to grant the craves of the application.

2. Mrs Grant quite candidly and properly accepted that the application was not well prepared. The submission eventually put before me bore little relation to the original application. I hasten to add that I am not singling out the liquidator in this application for particular criticism. I regret to say that many applications put before the court are often less than ample. The craves sought by the liquidator are: to dispense with the necessity of service or intimation of the application; to dispense with a remit to an independent accountant for a report on the liquidator's intromissions; to authorise the liquidator to retain the balance of funds in his hands together with any accrued interest thereon to account of his remuneration; to make an order in terms of section of 204 of the Insolvency Act dissolving the company from the date of the order and to ordain the liquidator to intimate to all creditors who have lodged claims the terms of the orders to follow. The plea in law is to the effect that "The liquidator having fulfilled the duties of his office to date and now being in a position to close the liquidation, the necessary order should be pronounced as craved". As will become clear, it is difficult to see how such a plea in law can accord with the terms of section 204 of the 1986 Act.

3. The history of this matter, as considerably amplified by Mrs Grant, is as follows. The company was a construction company. On 30th September 2002 the members of the company passed a resolution to wind it up. The liquidator was appointed by a meeting of creditors, also said to have taken place on 30th September 2002. From an early point in the liquidation it was apparent there was also going to be a large deficiency: ordinary creditors were not expected to receive a dividend; as at September 2002 it was anticipated that preferential creditors would receive up to seventy three pence in the pound. There was lodged at the bar an inventory of productions containing a copy of a report to creditors headed "30/9/03 to 29/9/07". It narrates (at paragraph 4.3) steps to taken to realise certain assets and the liquidator's views as to the prospects of further recovery. Without going into the detail of the sums involved, the report of September 2007 disclosed that ordinary creditors could expect to receive nothing and preferential creditors only one pence in the pound. As I read it, the statement disclosed an estimated final outcome of, approximately, assets of £12,000 or thereby and a deficiency to ordinary creditors of £114,161. I set out these figures mainly to illustrate, in general terms, the scale of the liquidation. Again, in very general terms, the sums held by the liquidator as at September 2007 amounted to some £5,500. The application states that the creditors were notified of the liquidator's intention to seek a dissolution pursuant to section 204. Mrs Grant accepted that this averment was wrong. There was nothing in the September 2007 report to that effect. It did say that ordinary creditors would not receive any dividend.

4. Mrs Grant next turned to the question of the liquidator's fee. Numbers 2 and 3 of the inventory set out the liquidator's time and charge out summary. For the period 30th September 2002 to 2nd April 2007 the total sum amounts to £7,924.40. On a separate set of documents there is a further set of figures covering the period from 3rd April 2007 to 30th November 2007 bringing out a sum of £720. The total for the 2 periods is accordingly £8,644.40. I was told that November 2007 was the point at which a decision had been made to take the matter no further. Mrs Grant also accepted that it was at November 2007 that this liquidation should have been brought to an end. That nothing was done was "an oversight". I do not think that can be correct because I was also told that for the period from December 2007 to September 2009 time charges amounting to £3,500 were incurred by the liquidator's staff. The liquidator does not seek to recover any of these charges. Accordingly, in summary there were now assets held by the liquidator amounting to £5,500 and costs of £8,600. There was thus an insufficiency of assets as set out in section 204. Mrs Grant produced a letter from the liquidator dated 17th March 2010 stating that he was not aware of any circumstances which would make it inappropriate for the court to make an order pursuant to section 204.

Decision

5. The issue in this case, as argued before me, is the correct interpretation of section 204 of the 1986 Act. I have already expressed a view on the construction of the section in another decision (Redmount Properties Ltd (in liquidation) 11th December 2009 unreported). As I understand her submission, Mrs Grant did not dispute that section 204 sets out a two stage test: (1) that the realisable assets of the company are insufficient to cover the expenses of the winding up; (2) it is appropriate for the court to make an order that the company be dissolved. Mrs Grant also accepted that the application, as lodged, was inadequate to allow the court to form a view on these matters. However, in the light of the additional material now put before me, it was submitted that I ought to grant the craves of the application.

6. One of the main issues argued before me was whether there is any time limit within which applications pursuant to section 204 ought to be brought. As the issue appears to have assumed some importance and was argued before me it is appropriate that I should set out my conclusions somewhat more extensively than I did in Redmount Properties.

7. I start by setting out the relevant parts of section 204. The head note to section 204 states "Early Dissolution (Scotland)".

"(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, 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 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 3 months beginning with the day of the registration of the order, the company shall be dissolved.

(5)        The court may, on an application by any person who appears to the court to have an interest, order that the date at which the dissolution of the company is to take effect shall be deferred for such period as the court thinks fit".

Subsections (6) to (8) are concerned with the consequences of a failure to comply with certain notification requirements and are of no importance to the matters at issue. The section is clearly designed to deal with a winding up by the court. The liquidation before me is a creditors' voluntary liquidation. Section 204 is involved pursuant to section 112 by reference to the decision in this court of EX1 Limited (in liquidation) (23rd July 2003, unreported). The latter decision held that it is competent to rely upon section 204 in a voluntary liquidation. I proceed upon that basis.

8. Returning to the section itself, Mrs Grant submitted that the head note "Early Dissolution" is a misnomer. The words "if after a meeting" in section 204(2) meant any time after a meeting. Although the equivalent English provision was also headed "Early Dissolution" it contains the words "at any time" (section 202(1)). Mrs Grant referred to volume 12 of the Stair Memorial Encyclopaedia at paragraph 1138 Interpretation of Statutes etc and Bennion, Statutory Interpretation (5^th edition) at paragraph 255, both of which deal with the status of headings in construing statutory provisions . All I need say is that, in short, headings may be of limited help in construing the substantive statutory provision if the principal provision has a plain, literal meaning which may be at odds with the heading itself, in which case the main provision will rule. In order to decide whether the heading is indeed a misnomer it is necessary to look more closely at the section and the context in which it is placed.

9. One rather obvious question is to ask what would be the position in the absence of section 204 and what function does section 204 serve? Mrs Grant did refer to a number of the relevant statutory provisions in the 1986 Act as they apply to liquidations such as the present. In short summary, the conventional creditors' voluntary liquidation begins with the relevant meeting (section 98); the appointment of a liquidator (section 100); annual meetings (if the liquidation is not sooner completed) (section 105); the final meeting of creditors prior to dissolution (section 106); the release of the liquidator (section 173); and the dissolution of the company (section 201). Throughout the conduct of the liquidation the company the liquidator is subject to the rules as to accounting periods (rule 4.68 of the Insolvency (Scotland) Rules 1986). There is also an elaborate procedure laid down as to liquidator's remuneration and recovery of his outlays (rule 4.32).

10. Given the procedure I have outlined above, the question is how section 204 applies. On any view, section 204 provides another route to dissolution. Mrs Grant was unable to refer me to any authority dealing with interpretation of this section (or section 202) other than Redmount Properties. Before I turn to section 204 itself, it is, to a limited extent, helpful to look at sections 202-3 which provide a mechanism for "Early Dissolution" in England although I hesitate to draw too much from the English provisions, conscious as I am that English procedure is different from that in Scotland. Mrs Grant is correct to say that the application may be made "at any time". However, I think that provision needs to be considered in its context. Unlike section 204 it is only the official receiver who may make such an application and not a liquidator. I do not speculate as to the relationship between the official receiver and liquidator. The official receiver is a public officer whose salary is paid by the state (section 399 of the 1986 Act) which a liquidator in Scotland clearly is not. It also appears that there is no court involvement in section 202 procedure. Notice is given to the registrar of companies and if there is no further procedure the company is dissolved. Section 202(3) requires prior intimation of the application for an early dissolution to be made creditors and contributories. No such express provision applies in Scotland. The effect of section 202(4) is to give the official receiver a release from his duties whereas in Scotland the section makes no such direct provision. I referred in my decision in Redmount Properties to the commentary on section 204 contained in the Current Law Statutes. The problem which section 202 set out to address is described in the commentary. The section followed a recommendation contained within the Cork report (Final Report of the Review Committee on Insolvency Law and Practice 1982, Cmnd 8558, paras 649-651). As I understand it, the purpose of this section is to enable the official receiver to bring his responsibilities to an early end in cases where he discovers that the realisable assets of the company are insufficient to cover the expenses of the winding up. The commentary goes on to note the number of companies which enter liquidation with no or so few assets as to be practically worthless. The section allows the official receiver to bring his responsibilities to an early end and to proceed with an early dissolution of the company, subject to certain safeguards provided for in section 203. Accordingly, the purpose of the sections is to allow the liquidation to be brought to an early end in circumstances where there are no or few assets and there is nothing as to the conduct of the company's affairs which warrants further investigation. If these circumstances exist the official receiver may proceed straight to a dissolution of the company. Viewed in that way it seems to me that there is no misnomer. Dissolution takes place at a point much earlier than it would have done and without protracted procedure.

11. Section 204 introduced into Scottish procedure an equivalent to that laid down in sections 202-3. Notwithstanding the procedural differences, it does appear to me that the legislative purpose of the two regimes is the same although the route by which it is achieved is different. Application is made to the court. If it is satisfied that the two conditions set out in section 204 are satisfied then it "shall" grant the application. One matter which seems to be causing concern is the point of which an application may be made. Read short, in Redmount Properties, at paragraph 9, I expressed the view that an application "should be made shortly after the section 138 meeting". I have set out at some length how I understand the equivalent English provisions to operate and it seems to me consistent with such an interpretation that applications in Scotland should be made at such an early point in the proceedings. That seems to me to be the purpose of the provisions. I did not and do not say that such applications can only be made at that point or, to put it another way, that an application made after such a point would be incompetent. The point at which the application is made will, along with other relevant circumstances, be a factor for the court to consider in deciding whether it is "appropriate" that the order be granted.

12. On the facts of this case, the liquidation has been in train since 2002. Since 2007 very little of value, if anything, appears to have happened. Given what I have described as the legislative purpose of section 204, on any view it seems to me that this application falls short of the paradigm case which this section envisages. However, as I have said, it does not of itself render the application incompetent. I assume that throughout the years the liquidator has complied with the procedures laid down for the conduct of a creditors' voluntary liquidation. I also assume that there has been no formal, final meeting nor have the liquidator's fees and outlays been approved either by the court or a committee of inspection. Accordingly, on the facts of this case the principal issues are that the creditors have not been told that the liquidator intends to seek an early dissolution and hence his release, to which they are entitled to object. The procedure also obviates the necessity for the liquidator to have his fees and outlays dealt with as they would have otherwise been. I say that because the liquidator seeks a dispensation from audit of his fees and for the authority to set the balance of funds against his fees and outlays, accepting that there will still be a shortfall. Read strictly, the only power conferred upon the court by section 204 is to make an order that the company be dissolved in accordance with this section. It says nothing as to the liquidator's fees and outlays. I assume that the matter of his release follows from other provisions contained within the 1986 Act. The English provisions are similarly silent as to fees and outlays, perhaps on the basis that (and I accept that upon this I may be wrong) only the official receiver may make the application. As he is a public official and remunerated as such there may be no need to make such cater for payment of his fees. Mrs Grant referred me to Practice Note number 1 of 2009 of the Court of Session which, partly in conjunction with Practice Note number 4 of 1992, deals with applications for early dissolution in that court. Previously it appears to have been the practice to obtain from the Auditor of Court a report concerning the liquidator's proposed remuneration before deciding the application. Such a remit is now no longer mandatory. Such a practice has not, to my knowledge, been followed in this court. My enquiries disclose that the Joint Auditors of Court in this court have never been asked to audit the fees and outlays of a liquidator and I think it is appropriate to say that they hold out no such expertise to do so. However, implicit in the Practice Notes is an assumption that the court has the power to authorise the liquidator to retain funds towards his fees and outlays. Given that this is the practice of the superior court I proceed upon the basis that this court has a similar power to do so. The obvious difficulty is that this court does not have the option of referring the matter to the Auditor of Court for an opinion.

13. The net result of what I have set out above is as follows. Whatever exactly is meant by "the expenses of the winding up" in section 204(3), on any view the realisable assets of the company are insufficient to cover them and thus the first part of the statutory test is satisfied. In relation to the second part, the liquidation has been running since 2002, the creditors have not been informed of the liquidator's intention to seek an early dissolution and to seek an allocation of funds in the way set out above and consequently obtain his release. I am not in a position to say whether the creditors would have any objection to the proposed course of action. Furthermore, I am not in a position to say whether the sums sought by way of remuneration, having regard to what was done, are appropriate. I hasten to say I do not say that they are not. However, I do not consider that I am in a position to judge that on the face of the figures alone. Had the liquidation continued on its ordinary course, I would have had the benefit of report from an independent reporter. I am also of the view that, consistent with my construction of section 204, the length of time the liquidation has been running is a factor to consider in this matter. Assuming the regularity of procedure over the years, there is little left to complete the liquidation and those final steps in the liquidation do have some importance. Accordingly, on the facts of the case put before me I am not inclined to the view that it is appropriate that an order pursuant to section 204 should be made.