PART 2
March 2011
MATTERS FOR WHICH SANCTION IS REQUIRED - COMPANIES
29.14 Matters for which sanction is required – companies
So far as a liquidation is concerned, the majority of the acts for which the official receiver, as liquidator, is required to obtain sanction are listed in a schedule to the Act [note 1]. There is also one in an Insolvency Regulation [note 2]. These provisions can be viewed by clicking the links in the notes page to this Part.
29.15 The Legislative Reform (Insolvency) (Miscellaneous Provisions) Order 2010 (the ‘modernisation’ changes)
Certain of the provisions relating to the seeking of sanction (see paragraph 29.14) were affected by the ‘modernisation’ changes to the insolvency legislation brought into force in April 2010 [note 3]. Particularly, the requirement to seek sanction for certain acts was removed for cases where the winding up order was made on or after 6 April 2010 [note 4].
Where a requirement to seek sanction was removed, this is noted in the relevant paragraph below.
Annex 3 to this chapter sets out the schedule of the Act listing those matters which require sanction (see paragraph 29.14) as it existed before the modernisation changes (and, therefore, which applies to those cases where the winding-up order was made before 6 April 2010).
29.16 Sanction – examples of actions for which the official receiver requires sanction
With one exception (paragraph 29.27, which gives an example of when sanction is not required), the following paragraphs provide examples of the types of acts for which the official receiver, as liquidator, will require sanction.
29.17 Paying any class of creditors in full
With the exception of preferential creditors (see paragraph 36A.108), it is a rare occurrence that the official receiver will be in a position to pay a class of creditors in full and sanction is not required to pay preferential creditors in full as there is a duty under the Act to do so [note 5].
It is not thought that sanction in these circumstances is intended to be sought when, following the successful realisation of assets, the ordinary unsecured creditors, for example, can be paid in full although on a narrow technical assessment of the situation, this would appear to be so. A better interpretation of the application of this requirement would be when the general rule of distribution that creditors are paid in proportion to the level of their debt is departed from, when, for example, small consumer-type creditors are paid in full with the consent of the other, larger, unsecured creditors. In official receivers’ cases, this is only likely to occur with the permission of the court.
In addition, there are other classes of creditors that rank above unsecured creditors (see Chapter 36A, Part 6) and, though the incidence of these type of creditors is low (and the incidence of these creditors being paid in full even rarer), sanction would be required were any of these classes to be paid in full [note 6].
29.18 Compromise or arrangement with creditors
In some cases there may be a dispute as to the amount owed by the company. In cases where there is to be no dividend this will effectively be an academic point, but in cases where there are assets for distribution it may be necessary for the official receiver, as liquidator, to come to an arrangement with a creditor in order to deal with his/her claim and proceed with a distribution to creditors [note 7].
It is also possible that the official receiver, as liquidator, may have to adjudicate upon a claim even though it cannot be paid in a liquidation following the existence of third party interests (e.g. an insurance claim). Such adjudication may require compromise and would require sanction [note 8].
29.19 Compromise in respect of assets (only for cases where the winding-up order was made before 6 April 2010)
Where there are dealings between a company and a third party, the liquidator and that third party may agree for the matter to be dealt with by way of compromise. For example, the official receiver, as liquidator, may agree to give up a claim to some item of property in exchange for the writing-off of a company debt [note 9].
Where the winding up order was made on or after 6 April 2010 it is not necessary to seek sanction for a compromise of this type [note 10].(see paragraph 29.15).
29.20 Compromise in respect of book debts (only for cases where the winding-up order was made before 6 April 2010)
It may be the case that a book debtor of the company is unable to settle a debt in full immediately. In such case, it may be appropriate for the official receiver, as liquidator, to negotiate a deferred repayment of the debt – perhaps at a premium, or to accept a lower sum to avoid, potentially fruitless, recovery action. Such compromise would require sanction [note 11].
Where the winding up order was made on or after 6 April 2010 it is not necessary to seek sanction for a compromise of this type [note 12] (see paragraph 29.15).
29.21 Compromise in respect of calls on contributories (only for cases where the winding-up order was made before 6 April 2010)
Where the official receiver, as liquidator, is making a call on contributories (see Chapter 31.10, paragraphs 31.10.41 to 31.10.47), he/she may wish to compromise on the time allowed to make the payment, or on the amount due [note 13].
Where the winding-up order was made on or after 6 April 2010 it is not necessary to seek sanction for a compromise of this type [note 14] (see paragraph 29.15).
29.22 Taking security for the discharge of a debt (only for case where the winding-up order was made before 6 April 2010)
Where a book debtor is unable to repay his/her debt to the company immediately, the official receiver, as liquidator, may consider taking security over an asset of the debtor until the debt is repaid [note 15]. It would normally be expected that the debtor pay the costs of arranging the security, though, in practice, this would simply be added to the debt he/she is owed.
Where the winding-up was made on or after 6 April 2010 it is not necessary to seek sanction for a compromise of this type [note 16] (see paragraph 29.15).
29.23 Bringing or defending legal proceedings
Sanction is required where the official receiver, as liquidator, wishes to bring (see paragraph 29.24) or defend (see paragraph 29.25) legal proceedings in the name of the company [note 17].
When making an application to bring or defend legal proceedings, the official receiver, as liquidator, should particularly consider how he/she is to deal with the potential of (adverse) costs (for example, by way of a conditional fee arrangement or an indemnity from creditors).
29.24 Bringing legal proceedings
In most cases, the official receiver, as liquidator, will be seeking to bring (rather than defend) legal proceedings (commonly referred to as a right of action) and, for the reasons given in paragraph 31.9.129 of Chapter 31.9, the bringing of legal proceedings is not normally the best way to deal with such a right. Instead, as explained in that paragraph, alternative courses of action such as settlement or assignment are usually more appropriate.
29.25 Defending legal proceedings
An example of a situation where an official receiver, as liquidator, may wish to defend a claim is where the company is being sued for breach of contract. The contract will be property of the company, and, assuming that the claimant has been given leave to proceed with the claim (see Chapter 9, Part 6), it may be beneficial to the overall position of the company to defend the claim, if the official receiver receives advice that the claim is without merit. This would normally only be applicable where there were assets to distribute and the defeat of the breach of contract claim would reduce the overall liabilities leading to a higher pro-rata payment to the other creditors.
In any case, the best way to proceed may be by way of a settlement of the claim (for which sanction is also needed [note 18]).
29.26 Accepting, for the sale of property of the company, payment at a later date (a sale ‘on credit’) (for cases where the winding up order was made after before 6 April 2010 only)
It is possible that the official receiver, as liquidator, may wish to come to an arrangement whereby property of the company is sold with payment being made at a later date [note 19]. In reality, it is difficult to envisage a situation where this would be the most appropriate way to act as there would always be the risk that payment would not then be forthcoming.
A situation where such an arrangement is common is in the assignment of a right of action (see Chapter 31.9, Part 6) where the assignee is without funds to pay for the assignment up front and will, instead, enter into an arrangement where the right of action is assigned for a share of the winnings (see paragraph 31.9.107).
Where the winding-up order was made after 6 April 2010 it is not necessary to seek sanction for a compromise of this type [note 20] (see paragraph 29.15).
29.27 Employing solicitors does NOT need sanction
The official receiver does not need sanction to employ solicitors to provide legal advice (including legal advice in connection with the bringing or defending of a legal action) [note 21].
29.28 Bringing proceedings to challenge a transaction at an undervalue, a transaction defrauding creditors, a preference, wrongful trading or fraudulent trading
The vast majority of legal actions to make antecedent recoveries are brought by Moon Beever under the contract to deal with antecedent recoveries (see Chapter 31.4A, Part 1). The procedure for seeking sanction for this type of action [note 22] is led by the contactor (see paragraph 31.4A.16) and is therefore different to the procedure for seeking sanction otherwise (see paragraph 29.7).
Sanction to take action to enforce an order restoring the position following a successful application in regards to an antecedent recovery (see, for example, paragraph 31.4A.54) will be required as this would constitute the bringing of legal proceedings (see paragraph 29.24).
29.29 Carrying on the business of the company for its beneficial winding up
It is rare that the official receiver, as liquidator, would seek to continue the business of a company in liquidation and, instead, the appointment of an insolvency practitioner to act as liquidator in place of the official receiver should be the preferred option. The considerations for the official receiver when making a decision whether to continue the business of the company are covered in Chapter 62.
Where the official receiver, as liquidator, finds it necessary to operate a local bank account in connection with ongoing trading (rather than the Insolvency Services Account – see Chapter 36, Part 9), he/she will require sanction for this also [note 23].
[Back to Part 1 – Sanction – general points and applying for sanction] [On to Part 3 – Matters for which sanction is required – bankruptcy]