When is an insolvency proceeding not an insolvency proceeding - the use of Part 7 claims

When is an insolvency proceeding not an insolvency proceeding - the use of Part 7 claims

Further extension to Covid-related insolvency restrictions: practical implications for debtors and creditors

Insolvency proceedings are typically launched by an administrator or liquidator during an insolvency process. The nature of modern insolvency litigation, including the market for assigning causes of action to third parties, has somewhat muddied the waters on how and where to commence proceedings. Two recent cases provide some valuable insight into the High Court’s approach.

Although the remit for insolvency applications is broad, many claims - such as debt claims owed to the insolvent company - should in fact be commenced via a Part 7 claim form pursuant to the Civil Procedure Rules (CPR).

Re Taunton Logs

A claim was brought by the administrators (and continued by the subsequent liquidators) of the company. They were claiming an unpaid balance due from the company’s shareholders in respect of shares issued by the company. Nothing in the company’s constitution permitted the issue of shares at less than nominal value and any money payable to the company under its constitution was a debt of the company. The shareholders argued that the true nature of the claim was not to call up unpaid capital but a simple debt claim - and that the insolvency proceedings were a nullity.

The court held that the claim was nothing to do with making calls on uncalled capital and was in fact a simple debt claim. Therefore the use of an insolvency application notice was inappropriate and the claim should have been issued as a Part 7 claim. However the correct parties had been joined, there was no prejudice or abuse of process and it was deemed that this amounted to an error of procedure which was capable of cure. Therefore, the court exercised its discretion not to declare the proceedings a nullity and ordered that, subject to payment of the Part 7 court filing fee, the proceedings could continue as if they had been commenced under Part 7.

Manolette Partners Plc v Hayward and Barrett Holdings Ltd

In Manolette, the applicant (which was not an insolvency office-holder) launched misfeasance actions under section 212 of the Insolvency Act 1986 (IA86) against the directors (the third and fourth respondents), as well as an application for the assignment of certain transaction avoidance provisions (including section 423) under IA86 against all four respondents. It was argued that the misfeasance claims should have been brought under Part 7 of the CPR because the applicant lacked the relevant standing (for example, as a liquidator would have had) to bring the claim via an insolvency application. They sought an order requiring payment of the correct Part 7 fee in order for the claim to continue.

It was noted in the judgment that, where a company is the claimant and the claim will involve questions of fact, the appropriate originating process is a claim form N1 under Part 7 of the CPR. It held that whilst the liquidators were able to bring section 212 proceedings under the insolvency application procedure, an assignee did not have the same jurisdiction and should issue under Part 7. Distinctly, a section 423 claim whether made by a liquidator or assignee is not an insolvency proceeding and should always be brought under Part 7.

However, and following Re Taunton Logs where there is no abuse of process, but merely an error of procedure, the court may make such order as it thinks fit when exercising its discretion under the procedural rules. Consequently, the court allowed the claims to continue on payment of the appropriate Part 7 court issue fee.

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

These cases provide helpful insight in how the courts are likely to approach so-called "hybrid" claims. Practitioners will be heartened to see that the courts are not striking out claims that otherwise are valid but for having been launched incorrectly.

The substantial difference in the court filing fee (with insolvency applications generally being far cheaper than Part 7 claims) cannot be evaded. The court will, in every likelihood, order the payment of the appropriate filing fee in order for incorrectly launched proceedings to continue. Care though should always be taken when determining a litigation strategy – the courts may take a dim view of "lazy" insolvency applications made with little thought as to the correct procedure. Per Chief ICC Judge Briggs, launching what should be Part 7 proceedings as insolvency proceedings "does not promote a convenient or sensible or economical use of court resource".

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