Re N T Gallagher & Son Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Peter Gibson |
| Judgment Date | 26 March 2002 |
| Neutral Citation | [2002] EWCA Civ 404 |
| Docket Number | Case No: CHBKI/2001/1557/A2 |
| Court | Court of Appeal (Civil Division) |
| Date | 26 March 2002 |
[2002] EWCA Civ 404
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
COMPANIES COURT
His Honour Judge Howarth
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Justice Peter Gibson
Lord Justice Ward and
Lord Justice Dyson
Case No: CHBKI/2001/1557/A2
Mr. Antony Zacaroli (instructed by Messrs DLA of Manchester) for the Appellants
Mr. Martin Pascoe (instructed by Messrs N J Goodman & Co of Altrincham) for the Respondents
Lord Justice Peter Gibson (giving the judgment of the court):
This appeal gives rise to the question whether trusts which are created by a voluntary arrangement in respect of a company ("CVA") are brought to an end by the termination of the CVA through the company going into liquidation. There have been a number of decisions of the High Court on this and the like question in respect of an individual voluntary arrangement ("IVA") brought to an end by a bankruptcy order being made. Not all the decisions are consistent with each other. This is the first occasion on which this question has come before this court for determination.
The statutory provisions
The Insolvency Act 1986 ("the Act") introduced new provisions designed to make it simpler for companies and individuals in financial difficulties to enter into arrangements with their creditors which would be binding on dissentient creditors if a sufficient majority approved the proposed arrangement. By the Insolvency Act 2000 amendments have been made to those provisions but they have yet to come into force.
The applicable provisions for CVAs are contained in Part I of the Act. By s. 1 a CVA may be proposed to the company and its creditors by the directors of the company, not being one for which an administration order is in force or which is being wound up. The Act also contemplates that a CVA may be proposed by the administrator of a company for which an administration order is in force or by the liquidator of a company which is being wound up. In each case the proposal must be one for a composition in satisfaction of the company's debts or a scheme of arrangement of its affairs, and it must provide for some qualified insolvency practitioner, called "the nominee", to act in relation to the CVA, either as trustee or for the purpose of supervising its implementation.
Ss. 2, 3 and 4 set out the procedures to be followed when the directors make a proposal: the nominee submits to the court a report stating whether meetings of the company should be summoned to consider the proposal, and, unless the court otherwise directs, the nominee summons those meetings; the meetings decide whether to approve the CVA with or without modifications. By s. 5 (2) the approved CVA binds every person who, in accordance with the Insolvency Rules 1986 ("the Rules"), had notice of, and was entitled to vote at, the meeting whether or not he was present or represented at the meeting, as if he were a party to the CVA. Thus the CVA, if approved, operates as a form of statutory contract to which even dissentients and non-voters receiving notice of and entitled to vote at the meeting are treated as parties. S. 6 provides for challenges to the CVA to be made through applications to the court. Where a CVA has taken effect, the person who carries out the functions conferred as the nominee is known as the supervisor (s. 7 (2)). Any creditor or other person dissatisfied with any act or omission of the supervisor may apply to the court which may give the supervisor directions (s. 7 (3)). The supervisor may himself apply to the court for directions and is included among the persons who may apply for a winding up or administration order (s.7 (4)).
Part I of the Rules applies to CVAs. By r. 1.3 (1) the directors are required to include in their proposal a short explanation why in their opinion a CVA is desirable and give reasons why the company's creditors may be expected to concur with the CVA. R. 1.3 (2) prescribes what must be contained in the directors' proposal. It must include a statement of the company's assets and the extent to which particular assets are to be excluded from the CVA (para. (a)), a statement of the company's liabilities and the manner in which they are to be dealt with by the CVA (para. (c)), the proposed duration of the CVA (para. (e)), the manner in which funds held for the purposes of the CVA are to be banked, invested or otherwise dealt with pending distribution to creditors (para. (k)), and the manner in which funds held for the purpose of payment to creditors, and not so paid on the termination of the arrangement, are to be dealt with (para. (l)). R. 1.19 (1) provides that for any resolution to pass at the creditors' meeting approving any proposal or modification there must be a majority in excess of three-quarters in value of the creditors present in person or by proxy and voting on the resolution.
By r.4. 21A (introduced by way of amendment in 1987):
"Where a winding-up order is made and there is at the time of the presentation of the petition in force for the company a voluntary arrangement under Part I of the Act, any expenses properly incurred as expenses of the administration of the arrangement in question shall be a first charge on the company's assets."
It is to be noted that r. 4. 21A only applies to compulsory liquidations. There is no corresponding provision for a voluntary liquidation.
The provisions for IVAs are contained in Part VIII of the Act. They differ from the provisions for CVAs in some respects, but there is much similarity, mutatis mutandis, between the IVA provisions and the CVA provisions in the respects to which we have drawn attention. By s. 264 (1)(c) the supervisor or any other person bound by the IVA is empowered to present a petition for bankruptcy. S. 276 (2) provides:
"Where a bankruptcy order is made on a petition under s. 264 (1)(c), any expenses properly incurred as expenses of the voluntary arrangement in question shall be a first charge on the bankrupt's estate."
As with r.4. 21A the limits on the applicability of this provision are to be noted. It does not apply where bankruptcy is the consequence of a petition under any paragraph of s. 264 (1) other than (c).
Part 5 of the Rules applies to IVAs. R. 5.3 provides what should be contained in the debtor's proposal for an IVA in terms similar to the provisions in r. 1. 3 for CVAs. R. 5.18 (1) is in terms similar to r. 1. 19 (1).
Unless inferences drawn from r. 4. 21A in relation to CVAs and from s. 276 (2) in relation to IVAs provide the answer to the question stated in para 1 above, it is not in dispute that the statutory provisions do not state the effect of a liquidation or a bankruptcy order on trusts created by a CVA or IVA respectively.
The facts
The Appellants, Malcolm Shierson and Michael Horrocks, are the liquidators of NT Gallagher & Son Ltd. ("Gallagher"). Gallagher was incorporated on 26 October 1990. It was engaged in civil engineering works and cabling contracts. Its principal customer was Mercury Communications Ltd. ("Mercury") with whom Gallagher had a cabling contract. In March 1995 Mercury alleged that Gallagher had repudiated that contract. Gallagher promptly commenced proceedings against Mercury, claiming £2,340,000 for sums due under the contract and damages for breach of contract. Mercury ceased to make payments to Gallagher which in consequence came under increasing financial pressure. The directors of Gallagher put forward a proposal for a CVA.
In the introduction to the proposal the directors said:
"We feel that a Voluntary Arrangement would be of benefit to the creditors of the Company because they would have a much better prospect of being paid their debts under a Voluntary Arrangement rather than if the Company went into Liquidation, Administration or Administrative Receivership. The reasons for this are as follows:—
i) We believe the appointment of an Administrative Receiver, Liquidator or Administrator would have a detrimental effect on the collectability of the Company's book debts.
ii) A Voluntary Arrangement would permit the Company to continue to trade and prosecute its claim against [Mercury].
iii) A Voluntary Arrangement would enable the Company to continue as a going concern and to provide suppliers with the opportunity to conduct further business with the Company in the future and to preserve the employment of some 340 people in the business."
In paras. 4.11 and 4.12 of the proposal the directors said that the amount the creditors would receive would depend on the success of the litigation against Mercury, and the directors believed that there was a greater likelihood of success if the Company continued to trade; it was therefore proposed that the Company continued to trade, agreeing credit terms with suppliers where possible and continuing to pay its employees and direct labour sub-contractors in the usual way and on the due dates. In para. 4.13 it was stated that the cash flow forecast indicated that the Company would be able to fund its short term trading from its own resources.
The details of the proposal included the following:
"11(a) It is proposed that all the assets of the Company are to be included in the Voluntary Arrangement, and, with the exception of stock are to be retained by the Company for the purpose of the fulfilment of the Arrangement.
11(b) The Company's bank overdraft is being reduced as are credit lines from suppliers. In order for the Company to be able to continue to trade and to offer the best chance of recovery of...
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