In Duffy v Mederco (Cardiff) Ltd 2021 EWHC 386 Ch the court had to consider for the first time the issue as to the date that insolvency proceedings were deemed to be opened in circumstances where it was asked to make a retrospective administration order after the end of the EU-UK transition period backdated to a date prior to the end of the transition period.
On 17 January 2019 the company was placed into administration by a QFCH under paragraph 14 of schedule BI, such that the term of the administration would have ended on 17 January 2020. Prior to expiry the administrators obtained consent from the secured creditor in accordance with the provisions of paragraph 78 of Schedule B1.
However, as the expiry of the extended term approached the administrators realised that they required a further extension to allow them to complete the sale of the company’s main assets in the form of land and buildings. As such they applied for and obtained an order on 1 December 2020 extending the term of the administration until 17 January 2022.
Subsequently, it came to the attention of the administrators that there were creditors with the benefit of equitable liens over the company’s assets and that by virtue of section 248(1)(b)(i) of the IA86 such creditors amounted to secured creditors. As such, consent from these creditors ought to have been obtained to the first extension. Because consent from these creditors had not been obtained, the original extension was invalid. The administrators therefore applied to court. It isn’t clear from the judgment what relief they sought but in his judgment HH Judge Davis-White QC lists the following issues that needed to be determined.
- Could the Court make a retrospective administration order?
- Could the court extend the period of administration with retrospective effect, either from January 2020 or from January 2021?
- If not, could the court now make two administration orders with retrospective effect, one to take effect on 17 January 2020 and one from 17 January 2021?
- If not, could and should the court now make a retrospective administration order to take effect at a date no earlier than a year before the date of any order now made?
- If the Court should make an administration order with retrospective effect, what are the appropriate recitals to any order given that the United Kingdom had left the European Union and the transitional period had ended?
The judge found that it was possible to make a retrospective administration order relying upon previous authorities on this point but that such order should not take effect for a date mote than 364 days earlier, otherwise the order would have expired before the date of the order granting it and there would be no-one capable of applying for a further extension (administrators themselves not being included in the list of persons with standing to apply for an administration order under paragraph 12 of Schedule B1). The judge rejected the proposition that it was possible for the court to retrospectively extend the period of administration after the period had expired as this ran contrary to the wording of paragraph 77(1)(b) of Schedule B1 which expressly prevents the court from making an order to extend the term of an administration after expiry of the term.
Also relying upon previous authorities and the wording of paragraph 77(1)(b) the judge also felt it was inappropriate to make two orders extending the term of the administration, the first from 17 January 2020 and the second from 21 January 2021.
The solution the judge found was to make an administration order backdated to 24 February 2020 being 364 days prior to the date of the order. He was satisfied that the conditions for an administration order were met as at that date in that the company was insolvent and the administrators were creditors of the company by virtue of the work they had undertaken during the initial period of the administration from 17 January 2019 until 16 January 2020. He then went on the find that it was appropriate to extend the administration to 17 January 2022. There would be a period of 1 month between the expiry of the original term of administration and the commencement of the retrospective administration when the company was not in administration and the administrators were not in office. Judge noted that during this period the administrators could rely on paragraph 104 of schedule B1 which provides that an act of an administrator is valid despite any defect in his appointment, and equitable arguments in respect of his remuneration during this period.
Given that the order was made in February 2021, after the end of the UK-EU Transition period, an issue then arose as to when the proceedings were deemed to have been opened. This was relevant to the wording of the recitals to the order.
For proceedings that were opened before the expiry of the transition period (i.e. before 11.00pm on 31 December 2020), the EU Regulation on Insolvency Proceedings 2015 (the EU Regulation) will continue to apply unamended and the administration order must contain the wording specified in Rule 3.13(1)(h) and (i) IR 2016. These are statements that the court is satisfied as to whether the EU Regulation does or does not apply and where the court is satisfied that the EU Regulation does apply, whether the proceedings are main, secondary or territorial proceedings.
At the end of the transition period, the EU Regulation (as amended by the Insolvency (Amendment) (EU Exit) Regulations 2019 (the 2019 Regulations)) was imported into English law by the European Union Withdrawal Act 2018 (EUWA). The EUWA took snapshot of EU law that already applied in the UK because of its EU membership as at 31 December 2020 and incorporated that into English law. The effect of the 2019 Regulations is that in the case of a company incorporated in the UK, where proceedings are opened after the end of the transition period, jurisdiction to open insolvency proceedings applies irrespective of whether the company's centre of main interest is in the UK.
In these circumstances, the order must contain the wording of Rule 3.13 as amended by the 2019 Regulations.
Paragraph 59 of the 2019 Regulations amends R3.13(h) and (i) so that they read as follows:
(h) a statement that the court is satisfied either that the EU Regulation as it has effect in the law of the United Kingdom does not apply or that it does;
(i) where the EU Regulation does apply, a statement whether the proceedings are COMI proceedings or establishment proceedings.
In this case the judge did not hear full argument as to the date when the insolvency was deemed to be opened but decided that it could potentially cause chaos were he to make an order with retrospective effect in February 2021 which had the effect of deeming the insolvency proceedings to have been opened in February 2020 if in the meantime main proceedings had been opened in an EU member state.
The judge therefore held that the order took effect on the date that it was made and not the retrospective date from which the order took effect and as such the recital to the order should contain the amended wording in Rule 3.13(1)(h) and (i) as set out above. As such the proceedings were COMI proceedings under the 2019 Regulations rather than main proceedings under the EU Regulation.
There is no new law here with regard to the grounds relied upon in making the retrospective order and then extending it, but this is the first time the court has had to consider the effects of making such an order where the relevant timeframe spans the end of the transition period. There was no protracted argument on the point and it remains to be seen whether the court would reach the same conclusion in circumstances where there was an argument over the its jurisdiction.
An equitable lien is a form of equitable charge that can arise in a variety of ways. An example would be where a purchaser pays for an asset but the asset is not transferred to them. The purchaser would acquire an equitable lien in these circumstances to prevent unjust enrichment of the vendor. The lesson for administrators is therefore to ensure they make detailed enquiries to ascertain the identity of all potentially secured creditors and not to assume that it is sufficient to conduct a search at Companies House and HM Land Registry.