Is HMRC An Unsecured Creditor For Paragraph 83(1)(b) Sch B1 IA 1986 Purposes?

Following a recent High Court judgment, Stephens Scown's specialist Insolvency and Restructuring team have proved that it is possible to convert administration to a Creditors' Voluntary Liquidation (CVL) when the only unsecured creditors are preferential ones. The case clarified the interpretation of the term unsecured creditor in the context of paragraph 83(1)(b) Sch B1 1986 and provides authority that the term includes preferential creditors who do not hold security.

Background

OAS Realisations (2022) Limited (formerly known as Open Administration Systems Ltd (the Company) entered administration on 3^rd March 2022. In early 2023 the Administrators were contemplating pursuit of a misfeasance claim against the Company's directors, but the anticipated realisations of the claim would only enable HM Revenue & Customs (HMRC) to receive a dividend on its Category 2 preferential claim. The Company had no secured creditors and no Category 1 preferential claims.

It was noted that the summary remedy against directors contained in section 212 Insolvency Act 1986 (IA 1986) was only available in liquidation. Therefore, if any claim was to be commenced against the directors by the Administrators, it would have to be made under Part 7 of the Civil Procedure Rules, (instead of under the Insolvency (England and Wales) Rules 2016), with its attendant costs and delays. This militated against an extension of the period of administration under paragraph 76 of Schedule B1 IA 1986.

Legal advice was taken by the Administrators from Stephens Scown's Insolvency and Restructuring team on whether the Company could convert to a CVL in the above circumstances. As HMRC held no security for its claim it was "unsecured" within the meaning of section 248(a) IA 1986, and pursuit of the misfeasance claim would enable a distribution to be made. The Administrators therefore had reason for thinking that paragraph 83 of Sch B1 IA 1986 was engaged.

On 14^th February 2023 the Administrators gave notice to the Registrar of Companies to move the Company from administration to CVL and the notice was registered on 21^st February 2023. On that date the Company the Applicants' appointment as joint administrators of the Company ceased to have effect, and the Applicants' appointment as joint liquidators of the Company took effect under paragraph 83 Sch B1 IA 1986.

What followed

The misfeasance claim settled at the pre-action stage but whilst this was taking place, the case was chosen at random as the subject of a review by the Applicants' annual external quality control assessor. The assessor expressed the view that the Applicants' appointment as liquidators was invalid. It was stated that notice under paragraph 83 Sch B1 IA 1986 was not capable of being given in a case where the only creditor to receive a distribution had preferential status and no security, as opposed to a creditor who held no security and whose claim did not have preferential status.

To clarify the position, the Applicant Liquidators applied to the Court under section 112 IA 1986 for a declaration on the validity of their appointment as liquidators. As an alternative to the primary position that their appointment as liquidators was valid, the Applicants sought an order that they be retrospectively appointed as administrators of the Company with effect from 3^rd March 2023. This was the date when the administration appointment would have originally expired had notice to convert to CVL not been given. (The Applicants applied as creditors of the Company in respect of unpaid remuneration from holding office as Administrators).

Key Points

In a judgment handed down on 17^th June 2024, His Honour Judge Paul Matthews held that the Applicants' appointment as liquidators was valid. (The administration application then fell away).

The Judge's reasoning followed the original advice to the Applicants. If Parliament had intended to distinguish between sub-types of unsecured creditor in paragraph 83(1)(b) Sch B1 IA 1986 it is likely to have done so and used words similar to those used in paragraph 65(3) Sch B1 IA 1986. This prevents a distribution to, '... a creditor of the company who is neither secured nor preferential' without the Court's permission. Accordingy, as HMRC held no security for its debt, and would received a distribution, paragraph 83 Sch B1 IA 1986 was engaged.

His Honour Judge Matthews then proceeded to consider the meaning of the term 'thinks' as set out in paragraph 83(1) of Sch B1 IA 1986. Referring to the decision of Lewison J (as he then was) in Unidair plc v Cohen [2005] EWHC 1410 (Ch), the Judge said at paragraph 13:

'In line with what Lewison J said in paragraph 71 of his judgment, it is not required that the administrator should reasonably think that the conditions are satisfied. It is necessary only that there should be a thought process to that effect. But I have no doubt that, given the clear wording of the definition in section 248 of the Act, and in light of the advice of their solicitor, the leader of the specialist insolvency and restructuring team at his firm, the administrators in this case had reasonable grounds for taking the view that they did.'

The following points arise from the judgment:

1. The case provides clarification on the interpretation of the term unsecured creditor in the context of paragraph 83(1)(b) Sch B1 1986 and that it extends to preferential creditors who do not hold security.
2. That an administrator need only 'think' that the matters set out in paragraph 83(1)(a) and (b) will be satisfied in order to give notice, namely that there is a prospect of those conditions being met and not a rigid certainty. This may increase the circumstances where the paragraph 83 procedure and avoid remaining in administration when moving to CVL is preferable.
3. The decision clarifies that administrators faced with claims against directors, but where the realisations of such claims may only enable a dividend to be paid to preferential creditors, can now use paragraph 83 to move to creditors' voluntary liquidation. This avoids the need for:
4. • extending the administration (whether by creditor consent or court order) and issuing a claim using Part 7 of the Civil Procedure Rules; or
   • petitioning the Court for an order that the company to be wound up and the administrators to be appointed as liquidators.

The issue fee on a Part 7 claim of over £10,000 but less than £200,000 is 5% of the sum claimed, with claims of £200,001 upwards being fixed at £10,000. By way of contrast the fee to issue a claim using the summary remedy is £109 irrespective of size. In addition, the paragraph 83 Sch. B1 IA procedure enables a swift and simple move to liquidation as opposed to the delay between presentation and the hearing of a winding-up position.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.