administration to liquidation: dodgy conversions?
The recent decision of the Court of Appeal in Re Globespan
Airways Ltd will be welcomed by insolvency practitioners, both
for resolving a narrow point of law but also because of the fact
that the Court of Appeal adopted a pragmatic approach in dealing
with a technical issue that had the potential to generate
unnecessary uncertainty.
Paragraph 83 schedule B1 Insolvency Act 1986
makes express provision in appropriate circumstances for an
administration to be converted into a creditors' voluntary
liquidation (CVL). This is achieved by the administrators
sending a notice in the prescribed form to Companies
House. So far so simple, but this procedure begs the
question of whether the conversion takes place when the notice is
received at Companies House or, inevitably a few days later, when
the notice is placed on the company's file. In many cases the
delay will make little difference, but what if the administration
ends during the intervening period, given that the appointment of
administrators automatically expires at the end of an initial
period of 12 months or a previously determined period of
extension? Does this mean that by the time the conversion
notice is registered there is nothing left to convert, or at the
very least there is a period of time when the company is neither in
administration or liquidation but back under the control of its
directors?
Where an administration is successfully
converted to a CVL by a conversion notice then creditor claims will
be calculated by reference to the date of the preceding
administration rather than the subsequent liquidation. This
is of particular importance for employee claims since, to the
extent that these are paid as preferential debts, this will only be
in respect of claims that accrued in the period of 4 months prior
to the relevant date so that, if this is the commencement of a
subsequent liquidation, these claims are unlikely to be
preferential. This was an issue that arose in
Globespan itself.
When the Globespan case was
considered in the High Court by Mr Justice Briggs, he concluded
that the conversion took place when the notice was received by
Companies House, rather than when it was subsequently registered,
thus avoiding the possibility of the hiatus period referred to
above. Whilst this did achieve the desired certainty for
insolvency practitioners about when conversion took place, the
decision was not welcomed by Companies House who felt that, as a
matter of principle, a company's legal status should be determined
by the registration of the conversion notice rather than its
receipt. Companies House therefore sought the view of the
Court of Appeal.
Lady Justice Arden gave the judgment of the
Court of Appeal. In her view it is sufficient that a
conversion notice has been executed and received by Companies House
whilst the administrators are still in office. In this
respect, she approved the first instance decision of Mr Justice
David Richards. However, in order to give effect to the
underlying statutory purpose of achieving a seamless conversion
from administration to CVL and to preserve the date of the
administration as the relevant date for the calculation of claims
and for other purposes, Lady Justice Arden also decided that if a
conversion notice has been validly filed then, even if the
administrator's appointment would otherwise expire prior to the
date of registration, there will normally be an automatic extension
of the term of office until the notice is in fact registered.
Hopefully this decision of the Court of Appeal
will stiffen the resolve of the lower courts to adopt a purposive
approach when they are confronted with similar anomalies which
could give rise to unintended, impracticable or uncommercial
consequences. The recent litigation about the validity of the
appointment of administrators, which is yet to be considered by the
Court of Appeal, springs to mind in this respect.
