Publication

Who can apply to rescind a winding-up order?

Insolvency Intelligence 2009, 22(10), 145-147

Joseph Curl

In the matter of F & B Ltd (petition number 15380 of 2009, not yet reported) was an application before Chief Registrar Baister that raised some interesting points relating to locus standi to make an application to rescind a winding-up order.  In particular, a possible lacuna in the insolvency regime was identified concerning the capacity of an administrator to apply to rescind a winding-up order made by mistake.  The Chief Registrar indicated that this point may well be revisited in his forthcoming redraft of the Practice Direction on Insolvency Proceedings.

The facts were these.  A petition was presented by Her Majesty's Revenue and Customs to the Companies Court on 18 June 2009.  The petition was listed to be heard on 12 August 2009.  Before the petition could be heard, the holder of a qualifying floating charge exercised its right pursuant to para.14 of Sch.B1 to the Insolvency Act 1986 (“Act”) to appoint administrators.  Administrators were duly appointed in the Leeds District Registry on 6 August 2009.  As a consequence of the appointment of administrators, the usual moratorium applied. This meant that there was no jurisdiction for the court to make a winding-up order once the administrators had been appointed.  The administrators attempted to communicate the fact of their appointment to the Revenue.  Thinking that word of their appointment had got through, the administrators elected not to attend the hearing of the petition on 12 August.  Unfortunately there had been a breakdown in communication and word had not in fact reached the appropriate place.  A winding-up order was consequently made by the court.

It is absolutely clear from the statutory provisions concerning the administration moratorium that the court did not have the power to make a winding-up order on the Revenue's petition at the hearing on 12 August 2009.  Paragraph 40(1)(a) of Sch.B1 to the Act provides that a petition “shall be dismissed on the making of an administration order in respect of the company”. Where (as in F & B Ltd) administrators are appointed by a qualifying floating chargeholder pursuant to para.14 of schedule B1, para.40(1)(b) provides that a petition “shall be suspended while the company is in administration”.  Any residual room for doubt is removed by para.42(3) which states that when a company is in administration “[n]o order may be made for the winding up of the company.” 

Upon realising what had happened, the administrators immediately took steps to seek rescission of the winding-up order.  The usual procedure during term time is for an application to rescind to be heard at the end of the next available winding up list.  However, owing to the vacation there was to be no hearing of the winding up list for over two weeks.  This was too long to wait because the administrators had successfully negotiated a sale of the business of F & B Ltd on favourable terms to a purchaser who was in funds and eager to complete.  The purchaser was not prepared to wait and had made clear that he would walk away if the sale was not completed by 19 August 2009.  Immediate rescission was essential to allow the sale to complete and preserve as much value as possible.  The appropriate provision dealing with rescission is r.7.47 of the Insolvency Rule 1986 (Rules).  Rule 7.47 states:

“(1)      Every court having jurisdiction under the Act to wind up companies may review, rescind or vary any order made by it in the exercise of that jurisdiction. 

…

(4)        Any application for the rescission of a winding-up order shall be made within 7 days after the date on which the order was made.”   

On the face of it, this appears an attractively wide provision.  However, on delving further matters are less straightforward than the plain wording of r.7.47 might indicate.  This is because the Practice Direction on Insolvency Proceedings[1] (“Practice Direction”) raises an issue concerning the administrators' locus standi to apply to rescind.  While the Rules are silent as to standing to apply, para.7.2 of the Practice Direction states:

“Applications [under rule 7.47] will only be entertained if made (a) by a creditor, or (b) by a contributory, or (c) by the company jointly with a creditor or with a contributory.”   

Given that the winding-up order should never have been made, it was open to the administrators to argue that they were “the company” for these purposes.  However, the administrators were unable to arrange a joint application as required by para.7.2.  While the Revenue had provided a letter stating that it did not object to the administrators’ application, it had refused to play an active part.  No other creditor willing to participate in an urgent joint application could be identified.

The administrators were in a difficult position. On the face of it, it seemed extraordinary that properly appointed administrators apparently did not have standing to apply to rescind in circumstances where no winding-up order should have been made in the first place.  The leading cases on r.7.47 were not terribly encouraging as to the degree of latitude that might be expected. It was held by Blackburne J in Re Dollar Land (Feltham) Ltd[2] that notwithstanding the widely drafted power under r.7.47, the jurisdiction to rescind is to be exercised with caution. H.H. Judge Colyer QC (sitting as a judge of the High Court) decided in Re Piccadilly Property Management Ltd[3] that in order for rescission to be granted,

“very cogent reasons need to be demonstrated by an applicant and…there must also be no cogent reasons for not making the order.” 

As to the specific issue concerning locus standi to apply, in Re Mid East Trading[4] Evans-Lombe J accepted the liquidator’s submission “that only a party able to appear on the petition to wind up the company has locus standi to apply to rescind it under r.7.47(1)”. Although not strictly inconsistent with para.7.2 of the Practice Direction, this finding does not tell the whole story.  While it is correct that only a party able to appear at the hearing of the petition is able to apply to rescind pursuant to r.7.47, para.7.2 does not permit any party who was able to appear at such a hearing to apply.  Instead, the parties are exhaustively and expressly restricted to a creditor, a contributory or the company jointly with a creditor or contributory.  As things are drafted at the moment, standing to apply to rescind in para.7.2 is definitely not the same as standing to appear on the hearing of a petition.  Rule 7.53(1) provides that members (as well creditors and contributories) may participate in company proceedings, which would include appearing on a petition.  By contrast there is no provision for a member to apply to rescind in para.7.2. Furthermore, the requirement in para.7.2 that any application to rescind involving “the company” must be a joint application shows again that standing to be heard on a petition and standing to apply to rescind are not coterminous.  It is interesting that the finding of Evans-Lombe J concerning standing in Re Mid East Trading Ltd is related in the books without the apparent tension with para.7.2 of the Practice Direction having been picked up.[5]

Despite the uncertainty as to whether or not they even had standing to apply, an urgent application to rescind was nevertheless made by the administrators of F & B Ltd on 18 August 2009.  Chief Registrar Baister heard the application the following day.  The Chief Registrar immediately raised the point that in his preliminary view the administrators did not have standing to make the application for the reason anticipated by the administrators.  The administrators advanced the following submissions:

•           While it was correct that the company was not acting jointly with a creditor or contributory, it had to be the case that para.7.2 of the Practice Direction presupposed that the winding-up order sought to be set aside was a regular order.  The winding-up order that formed the subject matter of the application was not a regular order because it had been made by the court without jurisdiction.  Had the court been properly informed, the order could not have been made.

•           It could not have been the intention of the draftsman of the Practice Direction to leave a company in this position without a remedy.

•           In any event the Practice Direction was only a practice direction and not a statute or binding authority and could be departed from.

On the basis that the Act and the Rules made no express provisions as to standing, Chief Registrar Baister indicated that it appeared to him that the provision in the Practice Direction was tantamount to the Practice Direction purporting to restrict the statutory regime.  The Chief Registrar held that it ought to be open to the court to rescind of its own motion where it happened to spot that an error like this had been made.  If that was the case, then it must also be able to rescind where an error was drawn to its attention.  Consequently Chief Registrar Baister was content to make the order sought by the administrators.  Rescission was granted and the petition dismissed at 15.15.  The administrators completed the sale of the business before close of banking hours the same day.

It is not far-fetched to envisage that this situation will occasionally arise.  Once a petition is on-foot, this pressing fact will tend to focus minds.  Steps to place a company into administration may well be precipitated by presentation of a petition.  The nearer the commencement of administration is to the date scheduled for the hearing of any petition, the more likely it is that word of the administrators’ appointment will not reach the petitioner.  Obviously, the primary course for an administrator in such a situation is to appear before the court on the hearing of the petition and make sure that the Registrar is aware of his appointment.  In the majority of cases this is what will happen.  However, things can get overlooked, particularly where administrators are appointed close to the eleventh hour before the hearing of a petition.  Where everything happens at the height of the holiday season, such an oversight is even more likely.  Given the clear possibility of the occasional oversight, it is submitted there is perhaps a case to be made that the restrictive wording of para.7.2 of the Practice Direction should be amended.

One possible alternative means by which an administrator might ground standing to apply suggests itself.  An administrator who found he needed to apply to rescind could swap hats and make an application as a creditor (ie a creditor for his fees).  However, while it is strictly speaking the case that an administrator would be a creditor in such circumstances, it is possible that a registrar might not find such chicanery a particularly attractive means of grounding standing.  It is submitted that amendment to para.7.2 of the Practice Direction would be a better solution (if one is required) than attempting to ground standing by such technical footwork.

Quite apart from the standing of administrators to apply, para.7.2 of the Practice Direction also lends itself to ambiguity given its reference to “the company” having standing to do things after a winding-up order has been made.  One must infer from the context and the necessity to inform the Official Receiver (who is the liquidator once a winding-up order has been made) that “the company” for these purposes means the company acting by those who were in control prior to the making of the winding-up order.  However, once the winding-up order has been made and the Official Receiver is in office as liquidator, is it consistent and coherent to characterise an application made by pre-liquidation officers as being made by “the company”?  If so, for how long do the pre-liquidation officers retain standing as “the company”?  Rule 7.47(4) and para.7.1 of the Practice Direction both provide that an application to rescind must be made within seven days of the date of the winding-up order.  However, there is authority to permit the extension of this period in appropriate cases.[6]  So when does this half-life for “the company” end?  It is submitted that such ambiguity has the capacity to create uncertainty.  This ought to be avoided whenever possible in the insolvency regime.

What form might an alternative wording for para.7.2 take?  One possible approach would be to adopt and adapt the language used in Re Mid East Trading Ltd and provide that an application may be made by “any party that might have been heard at the hearing of the petition.”  This is the wording that is repeated in an uncontroversial manner in a number of sources.  The effect of such an amendment would be for potential applicants to derive locus standi from the capacity or office held at the point in time immediately prior to the making of the winding-up order.  This makes sense given that the application itself is concerned with seeking to re-establish the state of affairs that prevailed before the order was made.  The immediate countervailing argument to such a liberal regime is that an unsuccessful application by “the company” (ie its pre-liquidation officers) would see costs falling to be paid by the liquidation estate and eat into the assets available for creditors. Disappointed directors might be tempted to make desperate or hopeless applications. However, if this objection can be overcome, then it is submitted that there may be a case for a re-appraisal of standing to apply to rescind a winding-up order.

Chief Registrar Baister indicated at the hearing of F & B Ltd's administrators’ application to rescind that he considered the apparent tension between para.7.2 of the Practice Direction and r.7.47 to be an interesting point and that his forthcoming redraft of the Practice Direction may well take account of it.  It will be interesting to see what develops.  In the meantime, it appears that the conclusion for practitioners for the time being is that in certain circumstances where rescission is clearly warranted, administrators may be able to show that they have standing to make an application to rescind pursuant to r.7.47, notwithstanding the strict letter of para.7.2 of the Practice Direction.