Hobson and another v OAS Realisations (2022) Ltd (formerly known as Open Administration Systems Ltd) (in creditors’ voluntary liquidation) [2024] EWHC 1491 (Ch)
- 17 June 2024
The case revolved around the validity of a notice that initiated the transition of OAS Realisations (2022) Ltd from administration to creditors’ voluntary liquidation (‘CVL’). The joint administrators of the company, anticipating they could only pay a dividend to a preferential creditor (HMRC) and not to ordinary unsecured creditors, filed this notice at Companies House.
Background
With the administration period ending, the administrators concluded that it was more suitable for the company to move from administration to CVL. The solicitors acting for the administrators advised that they were entitled to convert to CVL by sending the Registrar of Companies a notice under paragraph 83(3) of Schedule B1 of the Insolvency Act 1986 (‘IA86’) on the basis that a preferential creditor was an ‘unsecured creditor’ for the purposes of paragraph 83(1) of Schedule B1 of the IA86, by reference to the statutory definitions in section 248 of the IA86.
Following the conversion to CVL, the liquidators were advised by an external compliance reviewer that they believed the solicitors’ interpretation of ‘unsecured creditor’ was incorrect and therefore their appointment as liquidators was invalid.
Decision
The root of the matter was the interpretation of ‘unsecured creditor’ within the context of the IA86. The court needed to determine if a preferential creditor, and specifically HMRC as secondary preferential creditor, fell under this definition, thereby allowing the move to CVL.
The court referred to the definition in section 248 of the IA86, which provides that ‘”secured creditor” in relation to a company means a creditor … who holds in respect of his debt a security over property of the company, and “unsecured creditor” is to be read accordingly’. It concluded that, unless the context otherwise requires, an unsecured creditor is a creditor who does not hold security and therefore includes a preferential creditor. These statutory words apply to all types of preferential creditor, including HMRC. The judge considered that the context of paragraph 83 does not require the meaning of unsecured creditor to be restricted to non-preferential unsecured creditors.
If this were wrong, the judge noted that paragraph 83 applies where the administrator ‘thinks’ a distribution will be made to unsecured creditors. While this did not necessarily require that the administrator ‘reasonably’ thinks the conditions are satisfied, in this case the administrators had relied on legal advice and the wording of the statutory definition was clear, so the administrators did have reasonable grounds for taking the view they did.
Consequently, the court declared the notice filed by the administrators as valid, and therefore legitimising the company’s transition from administration to CVL.
Thoughts of the Regulatory Professional Bodies (ICAEW, IPA and ICAS) (15 October 2024)
The collective thoughts are as follows:
- “under the section 248 of IA86 definition, a preferential claim is an unsecured claim; and
- there could be cost savings in doing so, in terms of progress reporting (fewer are needed) and an administration could need a court extension which could be expensive.
Equally we wouldn’t have significant concerns if the distribution was made through the administration, but would expect the IP to have considered the costs, particularly if that approach resulted in the need for an extension by court.
As ever though, we’d expect an IP to document their thought process / rationale for their decisions.”