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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

05 OCT 2009

Insolvency Act 1986 sections 127, 212, 214, 239 and 241 considered - Phillips & Anor v McGregor-Paterson [2009] EWHC 2385 (Ch)

Mr Justice Henderson, a Chancery Division (situated in the St Thomas More Building) judge, has handed down his judgment in Phillips & Anor v McGregor-Paterson [2009] EWHC 2385 (Ch). The judgment includes a thorough judicial examination of a number of Insolvency Act 1986 provisions, including:

"(a) section 127 (which avoids dispositions of a company's property after the commencement of the winding up);

(b) section 212 (which provides a summary remedy for misfeasance by directors which may be invoked in the course of the winding up of a company);

(c) section 214 (which provides a remedy for wrongful trading before the commencement of the winding up); and

(d) sections 239 to 241 (which enable the court to avoid, or grant appropriate relief in respect of, certain preferences given or transactions at an undervalue entered into in periods of up to two years before the onset of insolvency)."

The case concerned a company that became insolvent and which subsequently went into the liquidation procedure and claims by the liquidators against a former director (represented by Mrs Jane Giret QC) of the company for sums of £54,700, £155,500 and £50,050 respectively. The judgment contains an interesting technical point discussion that was raised by Mrs Giret on behalf of the director. The judge notes,

"I must first deal with two technical points taken by Mrs Giret on behalf of the defendant.

21. The first, and potentially more significant, point is that the liquidators have brought their claim by way of a standard claim form in the Chancery Division of the High Court pursuant to Part 7 of the CPR, and not by way of an ordinary application under Part 7 of the Insolvency Rules 2006. Mrs Giret submits that the liquidators' claims against Mr McGregor-Paterson are clearly claims under the Insolvency Act 1986, and are therefore insolvency proceedings to which the procedural code in Part 7 of the Insolvency Rules applies. Chapter 1 of Part 7 applies to any application made to the court under the 1986 Act or under the Insolvency Rules themselves, subject to three immaterial exceptions. Rule 7.2(1) defines, for the purposes of Chapter 1, and except in so far as the context otherwise requires, "originating application" as meaning an application to the court which is not an application in pending proceedings before the court, and "ordinary application" as meaning any other application to the court. By virtue of rule 7.2(2), "[e]very application shall be in the form appropriate to the application concerned". In the present case there are pending proceedings before the court, namely the winding up proceedings, so the liquidators' application should have been made by an ordinary application in those proceedings.

22. Mrs Giret goes on to submit that the present proceedings are fatally and irremediably flawed, because of the liquidators' failure to use the form of application prescribed by Parliament for insolvency proceedings. She prays in aid by way of analogy the decision of Pumfrey J in In Re Osea Road Camp Sites Ltd [2004] EWHC 2437 (Ch), [2005] 1 WLR 760, where he held that the requirement in section 459(1) of the Companies Act 1985 that a member of a company "may apply to the court by petition" where he seeks to establish unfair prejudice in the conduct of the company's affairs was a mandatory requirement that any such proceedings be commenced by way of petition, and accordingly where such relief was sought by a claim form and particulars of claim the proceedings were in the wrong form and had to be struck out. In reaching this conclusion Pumfrey J considered, and rejected, a submission that the use of the wrong form was merely an error of procedure which could be cured by CPR Rule 3.10, which provided then (as it still does now):

"Where there has been an error of procedure such as a failure to comply with a rule or practice direction –
(a) the error does not invalidate any step taken in the proceedings unless the court so orders; and
(b) the court may make an order to remedy the error."

23. Pumfrey J held that, as a matter of construction, the words "error of procedure" in CPR Rule 3.10 relate only to errors in the procedure established by the CPR themselves, and are not apt to relate to requirements imposed by some other statute. As he said in paragraph 15 of his judgment:

"Failure to use the prescribed route to commence proceedings in relation to unfair prejudice does not seem to me to be merely an error of procedure. It seems to me to be a failure to use the mechanism provided for the purpose."

24. By way of contrast, Mrs Giret also referred me to the decision of Mr Justice Evans-Lombe in Re Continental Assurance Co of London Plc (in liquidation) (No.2) [1998] 1 BCLC 583. In that case the company had been placed in creditors' voluntary liquidation, and the liquidators issued an application against the directors seeking various orders under the Insolvency Act 1986. They made their application in the form of an ordinary application, rather than as an originating application, and the directors applied for the application to be struck out for procedural irregularity. The Judge held that the proceedings should have been started by originating application, because in a creditors' voluntary winding up, unlike a compulsory winding up, there was no existing insolvency proceeding within rule 7 in which the application could be made: see his judgment at 586g-587b. However, he went on to hold that the irregularity could, and on the facts of the case before him should, be cured pursuant to rule 7.55 of the Insolvency Rules, which is headed "Formal defects" and provides as follows:

"No insolvency proceedings shall be invalidated by any formal defect or by any irregularity, unless the court before which objection is made considers that substantial injustice has been caused by the defect or the irregularity, and that the injustice cannot be remedied by any order of the court."..."

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