The liquidation of Sahaviriya Steel Industries UK Limited (SSI), the company which until very recently operated a major steelworks in Redcar has been making national headlines. Those headlines have naturally focused on the loss of some 2,000 jobs and the blow to heavy industry in the UK.
However, the attempts of SSI to save the steelworks and to buy more time to negotiate it with its creditors is reflected in a limited public judgment of Judge Pelling QC, sitting in the High Court on 29 September.
That judgment offers a helpful reminder to IPs and companies facing winding-up petitions that it is possible to make commercially sensitive applications to the court in private in a restructuring context and of the issues that a court will consider.
In this article:
Hewden Stuart Limited presented a winding up petition against SSI on 14 September 2015. The effect of such a petition is that, unless the court orders otherwise, any payment made by the subject of the petition was issued at court is automatically void by operation of section 127 of the Insolvency Act 1986.
SSI made three applications to the court for validation orders. Those applications sought to allow the company to make payments from its bank account to assist the company in continuing to trade.
At the time all of the applications were made, SSI was attempting to restructure its finances or otherwise negotiate the sale of part of the business in order that the coke and power business could be preserved as a going concern.
In order to execute one of these plans, SSI was applying for permission to expend funds on meeting:
the cost of purchasing coal in order to keep the coke ovens in operation
its wage bill
incidental expenditure in connection with those operations, including professional fees for its various advisors
As the solicitors representing one of SSI's largest suppliers and creditors, we know that the Company restricted those applications what it considered were the most pressing creditors and was unwilling to make more widespread applications.
By default, court hearings in England and Wales are heard in public in accordance with the principles of open and visible justice. However, where the subject of a hearing involves confidential information and publicity would damage that confidentiality, the hearing may be heard in private, pursuant to Rule 39.2 (2) (c) of the Civil Procedure Rules.
In relation to the first two hearings on 21 and 25 September 2015, the judge held that if the two applications were to succeed, it was necessary for SSI to set out in detail the nature of its plans to save the business and the gravity of the situation should SSI enter into liquidation. SSI's evidence was obviously commercially confidential and to permit such material to be disclosed at a public hearing would have damaged that confidentiality and might impact adversely on the delivery of the rescue attempts. The judge further held that having the hearings in public would not have been in the interest of anyone, including, but not limited to, the unsecured creditors of SSI.
By the time of the third application on 29 September 2015, due to the surrounding publicity (including various announcements from SSI), the judge decided that it was no longer tenable to continue to hear the applications for validation orders in private.
The judge applied the long established principles in the leading case of Re Gray's Inn Construction Co Ltd, when deciding whether to grant the validation orders:
where a company is insolvent, its assets must be distributed to its creditors pari passu and the purpose of s 127 is to preserve assets to allow such a distribution
there may be occasions when it may be beneficial to allow a company to dispose of assets or continue its business after the presentation of a winding up petition
when considering whether to make a validation order, the court must always to its best to ensure that the interests of unsecured creditors will not be prejudiced.
Having considered the evidence the judge made validation orders allowing SSI to continue trading. Unfortunately, shortly after the third application, SSI was unable to restructure its finances not find a buyer for the coke and power business. Unusually, given the size of the business and the issues involved, the company entered into liquidation (rather than administration) on 2 October 2015 and the Official Receiver was appointed as liquidator, subsequently supported by special managers appointed from PwC.
It is clear that SSI took active steps in order to try and save the business and part of that was seeking and being granted validation orders to continue running the business even after a winding-up petition was presented against it. Reviewing the payments made following the presentation of the petition is an important consideration for office holders and directors as these payments are void unless validated by the court. As a result, liquidators often seek the repayment of monies paid to creditors who have not obtained validation orders.
This case is a useful reminder to insolvency practitioners who are providing advice to directors and their companies, that should an application need to be made at court, this can be done so in private to protect commercially sensitive information (for example, where there is the possibility of a pre-pack deal this could significantly assist the company). However, as this case illustrates, the court will only do this to the extent that it is necessary and will do all it can to ensure open justice is preserved: in this case, this involved a limited judgment being released, and the third hearing being held in public, once confidentiality had been lost.
It is also a timely reminder that whilst the courts do allow retrospective applications for validation orders, the better course for both companies facing petitions (and creditors) is to seek a validation order prior to a company entering into liquidation.