OUTER HOUSE, COURT OF SESSION

 

[2006] CSOH 75

 

P33/06

 

 

 

 

 

 

 

 

 

 

 

OPINION OF LORD DRUMMOND YOUNG

 

in note by

 

NEIL HAMMOND GEDDES and JONATHAN MARK BIRCH

 

in the petition of

 

NEIL HAMMOND GEDDES, JONATHAN MARK BIRCH and others

 

for an order to wind up AGM CASUALWEAR LIMITED

under the Insolvency Act 1986

 

 

ญญญญญญญญญญญญญญญญญ________________

 

 

Petitioner: Bowie; Tods Murray

 

 

16 May 2006

 

[1] On 6 November 2001 the court ordered that AGM Casualwear Limited should be wound up under the provisions of the Insolvency Act 1986. The present noters, Mr. Neil Geddes and Mr. Jonathan Birch, were appointed joint liquidators. They are both licensed insolvency practitioners. They had previously acted as joint supervisors of a voluntary arrangement that had been entered into between the Company and its creditors under Part 1 of the Insolvency Act 1986. After their appointment as joint liquidators the noters entered upon the duties of their office and proceeded with the winding up of the Company. The winding up has not yet been concluded.

[2] At the date of their appointment the noters were both directors of Numerica PLC, an insolvency practice. They were both based at its Manchester regional office. On 1 June 2005 BDO Stoy Hayward LLP, another insolvency practice, acquired Numerica PLC's regional offices in Bristol, Manchester and Southampton. The contractual terms governing the acquisition provided that the businesses and assets of those three regional offices should be transferred to BDO. The winding up of AGM Casualwear Limited formed part of the work in progress acquired by BDO.

[3] Following the transfer of Numerica PLC's Manchester business to BDO, the first noter proposes to retire from practice, and will accordingly relinquish his insolvency permit. The second noter has left the business acquired by BDO and has joined another insolvency practice, Vantis PLC. As a result of the transfer and their subsequent retirement or resignation from BDO's business, the noters no longer have access to the files and papers in the winding up of the company. The insolvency managers to whom responsibility for the day-to-day progress of the winding up is delegated have been transferred into the employment of BDO. In these circumstances the noters consider it necessary to resign from their office as joint liquidators of AGM Casualwear Limited, to be replaced by partners of BDO. The present note has been presented to achieve that end. Its prayer requests the court to remove each of the noters as joint liquidator of the company and to appoint two other licensed insolvency practitioners, Mr. Dermot Power and Mr. David Hill, as joint liquidators in their place. Both of those individuals are partners in BDO. The note was intimated and advertised in the Edinburgh Gazette, but was not served on the creditors of the company.

[4] The resignation of a liquidator and the appointment of a successor is governed by the Insolvency Act 1986 and the Insolvency (Scotland) Rules 1986 (SI 1986/1915). Section 172(6) of the Act provides that a liquidator may, in the circumstances prescribed in the Rules, resign his office by giving notice of his resignation to the court. The prescribed circumstances are specified in rule 4.28(3), which is in the following terms:

"[T]he liquidator may only proceed under this Rule on the grounds of ill health or because:

 

(a)                he intends ceasing to be in practice as an insolvency practitioners; or

(b)               there has been some conflict of interest or change of personal circumstances which precludes or makes impracticable the further discharge by him of the duties of the liquidator."

 

In the present case those conditions are clearly satisfied in respect of both of the noters. The first noter intends to cease practice as an insolvency practitioner, and the second has left the firm responsible for the winding up; that makes impracticable the further discharge by him of the duties of liquidator.

[5] The Act further provides, in 174(4)(c), that a liquidator who resigns office will obtain his release from such time as may be prescribed; thereafter, in accordance with section 174(6), the liquidator is discharged from all liability in respect of the winding up and his conduct as liquidator. The procedures that are contemplated when a liquidator wishes to resign are found in rules 4.28 and 4.29. Rule 4.28(1) states that, before resigning his office under section 172(6), the liquidator shall call a meeting of creditors for the purpose of receiving his resignation. Rule 4.28(2) makes detailed provision regarding the notice summoning the meeting; the notice is to be accompanied by an account of the liquidator's administration of the winding up, including a summary of his receipts and payments. Rule 4.29(3) provides that, if the liquidator's resignation is accepted, he shall forthwith after the meeting give notice of his resignation to the court. Rule 4.29(4) provides that meeting of creditors may grant the liquidator his release from such date as they may determine. Rule 4.29(5) contemplates that the meeting may appoint a successor as liquidator.

[6] Rule 4.29(6) provides as follows:

"If there is no quorum present at the meeting summoned to receive the liquidator's resignation, the meeting is deemed to have been held, a resolution is deemed to have been passed that the liquidator's resignation be accepted, and the creditors are deemed not to have resolved against the liquidator having his release."

 

In that event note is made in the Rules for the appointment of a new liquidator. That is obviously unsatisfactory, although the problem can be dealt with using the court's inherent powers at common law: see paragraph [11] below. It was submitted on behalf of the noters that the situation contemplated by rule 4.29(6) was likely to occur in cases where the winding up has been continuing for a number of years. In such a case the ordinary creditors will normally have realized at a fairly early stage that they are unlikely to obtain any dividend, and at that point it is likely that they will lose interest in the further conduct of the liquidation. In my opinion that submission seems inherently probable.

[7] It was further submitted that the procedures contemplated by rules 4.28 and 4.29 are themselves complex and costly, and that that is particularly significant where an insolvency practitioner holds office in a large number of liquidations. I was informed that that is the case with the present noters, and indeed it is usual for a licensed insolvency practitioner to hold a large number of offices simultaneously. In my opinion the procedures do appear unsatisfactory, in three respects. First, the procedures are likely to involve significant expense, especially where a large number of liquidations are involved. Secondly, the procedures contemplate the summoning of a meeting when it is obvious that a quorum is unlikely and that the resignation will be accepted by default. Thirdly, where default occurs, there is no provision for appointing a successor.

[8] In England the Insolvency Rules 1986 (SI 1986/1925) contain provisions that correspond to the Scottish rules 4.28 and 4.29. The unsatisfactory nature of those provisions has been recognized for a number of years. The High Court has provided a remedy by permitting applications to be made directly to the court for the removal of one insolvency practitioner and his replacement by another. The relevant jurisdiction of the court is summarized by Neuberger J. in Re Equity Nominees Ltd, [2000] BCC 84, as follows (at 86F-H):

"The High Court has jurisdiction to remove insolvency practitioners from multiple offices in a single application and, where appropriate, to appoint replacements for them. That jurisdiction is well established. See, for instance, per Knox J. in Re Bullard and Taplin Ltd [1996] BCC 973, and per Blackburne J. in Re A & C Supplies Limited [1998] BCC 708. ...

 

So far as liquidations are concerned, where a company is in compulsory liquidation the court may remove the liquidator from office under s. 172(2) of the Act, and appoint a replacement liquidator following such removal, pursuant to s. 168(3) of the Act: see per Harman J. in Re Parkdawn Ltd (unreported, 15 June 1993), and Bullard at p. 974D-G."

 

That jurisdiction is, however, discretionary in nature. Neuberger J. discussed that discretion as follows (at 87B-H):

"So far as discretion is concerned, the Rules address the question of when and how a liquidator or trustee in bankruptcy may seek to resign, and they provide procedures for such resignation. The Rules provide for the office-holder to call a meeting of creditors to receive his resignation, and they require him to provide creditors with what is in effect an account of his stewardship. The creditors have an opportunity of deciding whether to accept his resignation, and, if they do so, of appointing a new office-holder in his place. ... Nevertheless the courts have been willing to bypass these procedures and to make orders removing an insolvency practitioner from multiple offices and to appoint an appropriate replacement from the same firm in the following circumstances:

 

(1) where the office-holder has retired due to ill-health ...;

(2) where the office-holder's partnership was dissolved and his business taken over by another firm which was based in different towns from the dissolved firm ...;

(3) where the office-holder was expelled from a partnership and could not manage on his own ...;

(4) where the office-holder has retired from the partnership from which he had practised ....

 

... In determining whether a removal and replacement order should be made, i.e. whether the "short-cut procedure" under the Act should be adopted rather than the "normal procedure" under the Rules, the courts have asked whether the convening of the meetings required by the Rules would serve any useful purpose .... If the court is satisfied that they would not serve any useful purpose, or are unlikely to serve any useful purpose, it has adopted what proceeds to be the practical and sensible approach of avoiding the expense of the statutory resignation procedure ..."

 

In Re Equity Nominees Ltd, Neuberger J. followed the "short-cut procedure", and permitted the applicant, who acted as trustee in bankruptcy, liquidator or supervisor in respect of 43 different insolvencies, to obtain an order removing him from office in each case and appointing a substitute office-holder.

[9] In my opinion the policy considerations that underlie the English cases are equally applicable in Scotland; they are the factors identified at paragraph [7] above. For that reason I consider that it would be desirable, if possible, to adopt a similar procedure in Scotland. The basis of the English jurisdiction is found in sections 168(3) and 172(2) of the Insolvency Act. Section 172(2), which applies to Scottish liquidations, is in the following terms:

"Subject as follows, the liquidator may be removed from office only by an order of the court or by a general meeting of the company's creditors summoned specially for that purpose in accordance with the rules."

 

Sufficient cause must obviously be shown if the court is to exercise the power conferred by that subsection. Nevertheless, where a liquidator cannot effectively perform the duties of his office, that is manifestly sufficient cause for his removal. In the present case, the noters have left or are about to leave the firm of insolvency practitioners that is responsible for the conduct of the Company's liquidation. That will prevent them from performing the duties of their office. For this reason I am satisfied that sufficient cause has been shown for their removal.

[10] The second statutory provision founded on in the English cases is section 168(3) of the Insolvency Act. That subsection cannot be founded on in Scotland, because section 168 is only applicable to companies that are being wound up by the court in England and Wales. Subsection (3) provides that the liquidator may apply to the court for directions in relation to any particular matter arising in the winding up. There is no corresponding statutory provision applicable to Scotland. Nevertheless, a liquidator is an officer of the court: Millar, 1890, 18R 179. As such he has an inherent power to apply to the court for directions as to the performance of his functions, or for authority to follow a particular course of action. The court has a corresponding common law power to regulate the conduct of the liquidator, and to pronounce such orders as are necessary to ensure that the winding up, which is under its control, is carried out properly and efficiently. Those common law powers are at least as wide as the English statutory power, and their existence may well explain the absence of any statutory provision in Scotland.

[11] In my opinion the foregoing common law powers can be used in an appropriate case to replace a liquidator who has been removed from office; it is obvious that the conduct of the winding up requires a liquidator, and any failure in the office must be remedied. Indeed, if the procedure in rule 4.29(6) were followed, with the result that the liquidator's resignation was deemed to have been accepted by the creditors, the only procedure available for appointing a new liquidator would appear to be an application to the court, presumably by the resigning liquidator. On this basis I am of opinion that the procedure that has been adopted in English cases such as Re Equity Nominees Ltd can competently be followed in Scotland; the court has statutory power to remove a liquidator and a common law power to appoint a replacement.

[12] The next question is whether the power should be exercised in any particular case. This is significant, because there is a statutory procedure available to enable a liquidator to resign and, at least if a quorum of creditors appears at the meeting convened for the purpose, to appoint a replacement. The existence of similar statutory procedures has not prevented the English courts from intervening, but they have done so on a discretionary basis, in the manner described by Neuberger J. in Re Equity Nominees Ltd. The basis on which the English court is willing to act appears to be as follows. First, there must be a good reason for the liquidator's ceasing to act as such. Neuberger J. enumerates various specific cases that have been considered by the English courts, but I think that it is possible to draw the general conclusion that any sufficient reason for the liquidator's ceasing to act will be enough. Secondly, the court must consider whether the convening of the meetings required by the Rules would serve any useful purpose. If the court is satisfied that the meetings would not serve any useful purpose, or are unlikely to serve any useful purpose, the view has been taken that the practical and sensible approach is to avoid the expense of the statutory procedures. In my opinion these considerations are equally applicable in Scotland; consequently the Scottish court should follow a similar approach.

[13] In the present case it is clear in my view that there is a sufficient cause for the noters' ceasing to act as joint liquidators, in that they have both left or are about to leave the firm that is responsible for the conduct of the winding up; thus the first requirement is satisfied. I am equally of opinion that the convening of the meeting required by rule 4.28 would not serve any useful purpose in the present case, with the result that the second requirement is satisfied. I was informed by counsel for the noters that, where a winding up as been continuing for a number of years, it is unlikely that a quorum will be achieved at the meeting, because the ordinary creditors realize that they are unlikely to obtain any dividend and lose interest in the conduct of the liquidation. In the present case the winding up has been in existence for more than four years, and I have no reason to doubt that counsel's submission is accurate. For that reason I think it unlikely that convening the meeting would serve any useful purpose.

[14] In certain of the English cases in this area the court's order has been granted subject to conditions that, in broad terms, the retiring liquidator should notify creditors of the court's order and that creditors should be authorized to apply within a specified period to vary or discharge that order; that was the procedure followed by Neuberger J. in Re Equity Nominees Ltd. In two earlier cases, Re Sankey Furniture Ltd, ex parte Harding, [1993] 2 BCLC 594, and Re Crickhowell Construction Ltd, Chadwick J. and Rimer J. respectively imposed a further condition that the liquidator should send creditors copies of his receipts and payments accounts. In other cases, however, no such conditions have been imposed. These include the decision of Jacob J. in Re Diamond Computer Systems Ltd, 10 March 1997, that of Lightman J. in Re Steena Metals Ltd, 17 July 1997, that of Laddie J. in Re Baillie Construction Co. (1985) Ltd, 20 July 1998, and that of Blackburne J. in Re A & C Supplies Limited, supra. The argument in favour of the latter course is that the main purpose of this type of order is to save costs, and if significant conditions are imposed a very substantial proportion of the financial benefit will be lost. That will of course represent a loss to the creditors. In addition, in most such cases all that happens is that one partner in a well-established firm of insolvency practitioners is replaced by another such partner. All of the partners in such firms will normally be covered by professional indemnity insurance, and in those circumstances there seems little danger to creditors. The argument that has found favour in the cases were conditions have been imposed is that the creditors are entitled to be given notice of the change of liquidator and to have the right to object because those were rights that they would have enjoyed if the procedures in the Insolvency Rules had been followed. If that procedure is not followed the creditors can be said to be prejudiced.

[15] In my opinion any such prejudice is largely illusory. Before the court pronounces an order for the removal of a liquidator and the appointment of a replacement its must be satisfied both that there is good reason for adopting such a course and that convening the meeting required by rule 4.28 would not serve any useful purpose. The latter requirement, in particular, will normally be satisfied only if the court concludes that the ordinary creditors are no longer taking any significant interest in the liquidation. If that is the case, however, I cannot see any substantial benefit from notifying those creditors that the court proposes to change the liquidator and giving the creditors a right to object. Any such course would involve substantial expense. In addition, it would be artificial in my view to fail to recognize that the conduct of a liquidation is normally carried out by a firm of insolvency practitioners; virtually all of the day-to-day administration will be delegated to managers, and not carried out by the liquidator personally. In these circumstances, where the effect of the court's order is merely to replace one partner in a firm of insolvency practitioners with another partner, or a partner in that firm's successor, the likelihood of prejudice is minimal. In this connection it is material that the partners in such firms are normally covered by professional indemnity insurance. For all these reasons I am of opinion that it should not normally be necessary to impose any special conditions regarding notification of the court's order to creditors or giving creditors leave to object to the order. There may be exceptions, but at least in cases where one partner in a well-established firm of insolvency practitioners is replaced by another partner, or a partner in a successor firm of equal standing, I cannot see that any useful purpose would be served by imposing conditions. In the present case, I do not think it necessary to impose any such conditions.

[16] For the reasons stated above, I have pronounced an interlocutor removing the noters as joint liquidators of the company and nominating and appointing Mr. Power and Mr. Hill as their successors. I have appointed Mr. Power and Mr. Hill to give notice of their appointment to the Registrar of Companies within seven days, and found the expenses of the application to be expenses in the liquidation. I have confined notification of the interlocutor to an advertisement in the Edinburgh Gazette, to appear within 28 days of the date of the interlocutor.