It seems like s248 of the Insolvency Act 1986 (“Act”) is flavour of the month with the judiciary at the moment, with two recent cases analysing this in the context of administration extensions (read our previous blogs here and here ) and now a further decision considering this in the context of converting an administration into creditors voluntary liquidation (“CVL”) – the question this time being whether “preferential creditors” are unsecured creditors in the context of converting an administration to liquidation under paragraph 83 of Schedule B1 (“Schedule B1”).  The answer (see below) offers a helpful solution.

Background of the case

In Stephen Hobson, Lucinda Coleman v Oas Realisations (2022) Limited an application was made by the office holders of OAS Realisations (2022) Limited (the “Company”) under section 112(1) of and/or paragraph 12(1)(c) of Schedule B1 to the Act. It concerned the validity of a notice that the joint administrators had sent to the Registrar of Companies (the “Registrar”) under paragraph 83(3) pursuant to paragraph 83(6)(b) of Schedule B1 to move the Company from administration to a CVL.

Paragraph 83 of Schedule B1 allows an administrator to move a company from administration to a CVL if they “think” that:

• the total amount which each secured creditor of the company is likely to receive has been paid to him or set aside for him, and
• a distribution will be made to unsecured creditors of the company (if there are any) which is not a distribution by virtue of section 176A(2)(a).

The application sought the following three declarations:

1. That the Company moved from administration to a CVL on the registration by the Registrar of the notice;
2. That the joint administrators appointment ceased to have effect from that time; and
3. The joint administrators were then appointed as liquidators of the Company at that time.

The joint administrators had sought legal advice from a solicitor on whether they could move the Company from administration into a CVL in circumstances where the only prospective distribution was to a preferential creditor (HMRC). The legal advice they were given was that they were entitled to do so on the basis that a preferential creditor is an ‘unsecured creditor’ for the purposes of paragraph 83(1) of Schedule B1 and by reference to the statutory definition of ‘secured creditor’ in s248 of the Act. It was on this advice that the joint administrators sent the notice to the Registrar.

As joint liquidators, they were then informed by an external compliance reviewer that the solicitor’s interpretation of ‘unsecured creditor’ was wrong for the purpose of paragraph 83(1) of Schedule B1. Therefore, because the requirements of paragraph 83(1) of Schedule B1 were not satisfied, they were not entitled to file the original notice and their purported appointment as joint liquidators was invalid.

How are unsecured creditors defined in relation to paragraph 83(1)?

The key question of this case was: are preferential creditors ‘unsecured creditors’ for the purpose of paragraph 83(1) of Schedule B1?

Looking at the legislation itself, there is no definition of ‘unsecured creditor’ in Schedule B1 or the Act. However, s248 of the Act provides the meaning of what a ‘secured creditor’ is for the purpose of Schedule B1.

This states:

“[a] ‘secured creditor’, in relation to a company, means a creditor of the company who holds in respect of his debt a security over property of the company, and ‘unsecured creditor’ is to be read accordingly”.

On reviewing this definition, the judge said that an ‘unsecured creditor’ is any creditor who does not hold “in respect of his debt a security over property of the company”. Accordingly, a preferential creditor can be an unsecured creditor for the purpose of paragraph 83 of Schedule B1 as they did not hold security over the property of the Company.

As further support for this view he noted that if the intention of paragraph 83 of Schedule B1 was to restrict administrations moving to a CVL only to those cases where non-preferential unsecured creditors were to receive a dividend, then it would say this in paragraph 83 of Schedule B1. He gave the example of paragraph 65(3) of Schedule B1, which expressly limits the ability of an administrator to make a distribution other than a prescribed part distribution to “a creditor of the company who is neither secured nor preferential”. Therefore, the judge concluded the joint administrators notice was valid and the Company had been effectively moved from administration to a CVL.

In summary, the meaning of ‘unsecured creditor’ (in the context of paragraph 83 of Schedule B1) is not to be restricted to non-preferential unsecured creditors. Therefore, preferential creditors (whether secondary preferential or ordinary preferential) are ‘unsecured creditors’ for the purpose of this paragraph – provided that they do not hold security for their debt.

Wider reach?

This decision may have a wider reach in relation to the rest of the Act where reference is made to ‘unsecured creditors’ but there is no specific carve out for preferential creditors as a separate class of creditor – as noted by the judge paragraph 65(3) does this – as do others such as paragraph 78 of Schedule B1 which specifically differentiates between preferential and unsecured creditors. With that in mind, practitioners may need to closely scrutinise the legislation to determine whether preferential creditors are unsecured creditors when referring to other provisions of the Act.

Making Decisions

Paragraph 83 of Schedule B1 applies when the administrator “thinks” that the conditions in paragraph 83(1) of Schedule B1 are satisfied.

This term is used throughout the Act, and in previous cases such as Davey v Money [2018] Bus LR 1903 and Dolfin Asset Services Ltd v Stephens & Anor (Re Dolfin Financal (UK) Ltd) [2023] EWHC 123 (Ch) the judges have said that language such as “thinks” or “considers” give officeholders latitude to make decisions.  Essentially, unless a decision is perverse or made in bad faith, if practitioners apply their own commercial judgment the decision is unlikely to be wrong.

What gives further comfort to practitioners is the ability to rely on legal advice to justify their decisions – even if that advice turns out to be wrong. 

The Benefit of Legal Advice

As noted above, the administrators had relied on legal advice that they could file a notice to move the Company from administration into a CVL on the basis that “preferential creditors” were “unsecured creditors”. Even if that was wrong advice it would still have been reasonable for the administrators to take the view they could send a notice.

The judge drew parallels with Unidair plc v Cohen [2005] EWHC 1410 (Ch). In Unidair plc, the administrator (who was acting on legal advice) decided that the conditions in paragraph 83(1) of Schedule B1 were satisfied on the basis that the debenture was invalid. Whilst the judge in Unidair plc held that the legal advice the administrator was given was wrong, and the debenture was in fact valid, this did not mean that paragraph 83 of Schedule B1 did not apply. The judge said that he did not think the administrator should be subject to an objective standard test under paragraph 83 of Schedule B1 and even though the legal advice was wrong the administrator had formed his opinion on reasonable grounds.

Concluding Thoughts

This case is helpful in two key respects:

1. it clarifies that a company can be moved from administration to a CVL when the only creditors who will be paid are preferential creditors; and
2. it confirms that administrators have latitude to make decisions and when reasonably relying on legal advice (even if that is subsequently found to be incorrect) this does not affect a decision made on that basis.

It may also mean that we see more companies move from administration to CVL, rather than remaining in administration.  Often a justification for keeping a company in administration is that the insolvency practitioner cannot move the company to a CVL because the requirements of paragraph 83(1) are not made out because there will be no distribution to “ordinary” unsecured creditors.  This decision will likely change that.

This article was co-authored by Jenny Cooper