High Court allows appeal against deferral of dissolution

High Court allows appeal against deferral of dissolution

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In what is believed to be the first reported decision on this issue, the High Court has allowed an appeal under section 205(4) of the Insolvency Act 1986 (IA 1986) against a decision of the Secretary of State to defer the dissolution of a company in liquidation.

A link to the judgement can be found here.

The facts

Mr Kumar was the sole director and shareholder of Border Control Solutions Limited (Company) which had entered liquidation in 2018. The Official Receiver (OR) had initially sought the deferral of the Company’s dissolution on the basis that further time was required to conduct investigations into the Company’s affairs. The Secretary of State granted the OR’s deferral application in November 2020 so that the Company’s dissolution would be deferred until May 2025, rather than taking place in February 2021.  

As matters progressed, it became clear that the OR’s investigations would be concluded earlier and during the course of 2021, meaning the prolonged period of the deferral was no longer necessary.  

Mr Kumar sought to challenge the period of the deferral as it was causing him difficulties establishing a new business – this was on the basis that the continuing period of the deferral suggested that investigations were continuing, giving rise to negative inferences as to Mr Kumar’s conduct as a director of the Company. This, in turn, Mr Kumar argued, was proving problematic, particularly in relation to raising finance for his new business.  

The OR did not oppose the appeal since all investigations had been concluded and there was no intention to bring disqualification proceedings against the appellant. However, the OR had no statutory or administrative power to alter the period of the deferral or lift this in its entirety.

The Insolvency Act 1986

Section 205(3) IA 1986 provides that:
The Secretary of State may, on the application of the official receiver or any other person who appears to the Secretary of State to be interested, give a direction deferring the date at which the dissolution of the company is to take effect for such period as the Secretary of State thinks fit.

Section 205(4) IA 1986 provides that:
An appeal to the court lies from any decision of the Secretary of State on an application for a direction under subsection (3).

The decision 

Who has standing to make an application?
Section 205(4) IA 1986 does not set out which parties have standing to bring an appeal against the Secretary of State’s decision to defer dissolution. The court was therefore required to consider whether Mr Kumar had the requisite standing in the circumstances. The court confirmed that the relevant test was whether the appellant had a “legitimate interest” in the relief being sought. Given that Mr Kumar was the sole director and shareholder of the Company, and the deferral was causing him significant difficulties, the court held that he had sufficient standing to bring the appeal.

What factors are relevant to the court’s decision?
Section 205(4) IA 1986 similarly does not prescribe the factors that the court should have regard to within the context of an appeal, or the basis upon which such an appeal may be brought. However the court confirmed that it was clear that CPR Part 52 would apply to any appeal under Part 12 of the Insolvency (England & Wales) Rules 2016 (“IR 2016”), and that IR 12.62 imposes time limits on appeals against decisions of the Secretary of State and OR.  

The court noted that while the time limit for appealing the decision had already expired, the appellant had demonstrated good reason for not bringing the appeal in advance of the deadline of 30 November 2020 (including the fact that he did not even become aware of the deferral itself until December 2020). On this basis, the court held that the time limit for appealing the deferral decision should be extended. 

What is the scope of an appeal under section 205(4) IA86?
CPR r.52.21(1) provides that an appeal is limited to a review of the relevant decision unless a practice direction provided for a different category of appeal or the court considered it would be in the interests of justice to hold a complete hearing in respect of the matter. As the decision in this case was taken by a government representative, without notice to the appellant and without affording him the opportunity to make representations on his own behalf, the court held that it was in the interests of justice that a rehearing take place during which Mr Kumar could admit his own evidence. The court also confirmed that permission to bring the appeal was not required under CPR Part 52 or any provision of the IA 1986 or IR 2016.

In allowing the appeal, the court held that the deferral should be lifted in its entirety as it was causing the appellant significant hardship. In the court’s view, the period of the deferral was unnecessarily long, was no longer serving any useful purpose (as the OR had already concluded its investigations in any event) and the relief being sought would not prejudice any other party. It was therefore ordered that the deferral period should be immediately brought to an end and the Company dissolved as soon as practicable.

Tim Carter, co-head of the restructuring and insolvency team at Stevens & Bolton comments that:

The court’s decision in this case is helpful in that it clarifies certain parameters of the appeals process pursuant to section 205(4) IA 1986 in what appears to be the first reported decision on this issue. However, the court will still be required to determine, on a case-by-case basis, what constitutes a “legitimate interest” for the purposes of ascertaining a party’s standing to bring an appeal in the first place. While the position was relatively clear on this aspect in the instant case, this might perhaps be a less straightforward task for the court to consider in other circumstances. 

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