Since the introduction of Schedule B1 of The Insolvency Act 1986 there has been a clear “waterfall” of objectives that an Administrator must achieve in order for the company to be eligible to be placed into Administration.
It is a regular occurrence that the Administrator may feel that the company needs to move to Creditors’ Voluntary Liquidation (CVL) but the rules only permit this in very specific circumstances.
However, a recent ruling has been handed down by the High Court in relation to conversion to CVL after administration in a case where the judge held that a company had properly converted to CVL despite a dividend only being paid to HMRC as a secondary preferential creditor.
Here we look at the process for conversion to CVL and the potentially controversial decision in the recent case of Hobson v OAS Realisations (2022) Ltd.
What is the process for conversion from administration to CVL?
The Insolvency Act provides a simple regime for companies in administration to move to CVL by the administrators filing a notice with the registrar of companies.
Upon registration of the notice, the appointment of an administrator ceases to have effect and the company is voluntarily wound up, with the administrators usually remaining in office as liquidators of the company.
There are two conditions which must be satisfied for administrators to use this procedure:
- The secured creditors must have been paid (or will be paid) in full.
and
- The administrators must anticipate making a distribution to “unsecured” creditors.
The issue of conversion to CVL and what constitutes a distribution to “unsecured creditors” came before the High Court recently in the case of Hobson v OAS Realisations (2022) Ltd.
What were the facts in Hobson v OAS Realisations (2022) Ltd?
This case concerned an application by the joint administrators of OAS Realisations (2022) Ltd for declarations regarding the company’s transition from administration to CVL.
The administrators had completed a pre-pack sale of the business in March 2022.
From the sale proceeds, the administrators held sufficient funds to pay a dividend of 59.1p/£ to HMRC in its capacity as secondary preferential creditor, but insufficient funds to make a distribution to any ordinary unsecured creditors.
The administrators argued that they were entitled to convert the administration to CVL because HMRC fell within the definition of an “unsecured creditor”.
After concerns were raised about their interpretation of a requirement for payment to be made to “unsecured creditors” in order to validly convert to CVL, the administrators applied to court for declarations as to the validity of their appointment.
What did the Court decide?
The High Court judge held that the determining factor as to whether HMRC could be considered an “unsecured creditor” was whether it held security as defined by The Insolvency Act.
While HMRC holds a secondary preferential status in respect of certain tax debts which mean it is entitled to be paid in priority to other unsecured creditors, as it does not hold any security in respect of its debt it could properly be construed as an “unsecured creditor”.
Further, the conditions of The Insolvency Act are satisfied where “the administrator thinks that a distribution will be made to unsecured creditors”.
The court therefore held that the company had properly converted to CVL despite a dividend only being paid to HMRC as a secondary preferential creditor in the sum of 59p/£.
Our thoughts
Commenting on this decision, Jason Elliott, Head of Business Recovery at Cowgills said:
“Whilst strictly speaking “Preferential” creditors do not hold security and are therefore by very definition “unsecured” the Insolvency Act does specifically, and for very good reason, categorise them separately, and the distinction is very important in circumstances concerning other consents required during an administrators period in office.
“Lumping HMRC into the unsecured creditors category for this purpose has the unfortunate knock on effect of creating several inconsistencies within The Insolvency Act.
“Were I cynical, I would be expecting administrators to forthwith regularly pursue the “simple” route to converting companies into CVL simply by relying on a payment to HMRC as preferential creditors. I would be very surprised if this isn’t addressed quickly.”
If you have any queries on the above, please don’t hesitate to get in touch with our expert team.
