Re Kaupthing Singer & Friedlander Ltd [2010] EWHC 316 (Ch) (19 February 2010) - Insolvency Act 1986, Schedule B1, para 63 and academics considered

Mr Justice Blair (pictured) has handed down his judgment in Re Kaupthing Singer & Friedlander Ltd [2010] EWHC 316 (Ch) (19 February 2010). The case concerns the consideration of an application made by the Joint Administrators seeking directions from the court pursuant to the Insolvency Act 1986, Schedule B1, paragraph 63, as to how they should treat a claim submitted in the administration by the Prudential Trustee Company Ltd. The section notes:

"The administrator of a company may apply to the court for directions in connection with his functions."

The case is interesting for a number of reasons, not least because the learned judge provides an examination of the process of administration. He also uses a number of academic authorities in his judgment including Professor Ian F Fletcher and Professor Sir Roy Goode QC. Sir William notes:

"The legal background is as follows. The Enterprise Act 2002 created what Mr Tom Smith, counsel for the Joint Administrators, described as a "two-stage process" for administration. As he put it in his submissions (to which I am indebted), the "first stage" involves the performance by the administrator of his functions with the objectives of rescue, achieving a better result than liquidation and/or making a distribution to secured or preferential creditors. The "second stage" arises where the Court gives permission under paragraph 65(3) of Schedule B1 of the Insolvency Act 1986 to make a distribution to creditors who are neither secured nor preferential, i.e. unsecured creditors. (Schedule B1 was substituted by the 2002 Act for the existing provisions as to administration in the IA 1986.) This involves the administrator receiving proofs of debt, adjudicating such proofs and making a distribution to creditors in much the same way as in a liquidation. In order to facilitate the change, a new Chapter 10 to Part 2 of the Insolvency Rules 1986 was introduced to provide machinery for making distributions, modelled on the equivalent rules applicable to liquidations. Rules 2.72 to 2.105 are in essentially the same terms as the equivalent rules which apply to a liquidation."

The learned judge continues:

"..The administration procedure was first introduced into English law by the IA 1986, but no provision was included to enable an administrator to make distributions to the creditors of the company. This was inconvenient, and led to unnecessary expense caused by the need to put the company into liquidation or made subject to a voluntary arrangement (Fletcher, Higham and Trower, Corporate Administrations and Rescue Procedures, Tottel Publishing, para 15.5). Under the reforms effected by the Enterprise Act 2002 to which I have referred, the position was totally remodelled (Fletcher, The Law of Insolvency, 4th edn (London, Sweet & Maxwell, 2009) para 16-138). With effect from 15 September 2003, Schedule B1, paragraph 65, IA 1986 ("Distribution"), provides as follows:

(1) The administrator of a company may make a distribution to a creditor of the company.

(2) Section 175 [preferential debts] shall apply in relation to a distribution under this paragraph as it applies in relation to a winding up.

(3) A payment may not be made by way of distribution under this paragraph to a creditor of the company who is neither secured nor preferential unless the court gives permission."

...Consistent with the "second stage" of an administration, Mr Smith points out that paragraph 84, Schedule B1, IA 1986 Act provides that a company may move directly from administration to dissolution. In other words, it is now possible for a company to go into administration, to have its assets realised and distributed to creditors and then to be dissolved without going into liquidation. I am told that as a result of these changes, a number of insolvencies where distributions to unsecured creditors would previously have been made by way of a liquidation are proceeding without the company going into liquidation. Instead, distributions are being made to unsecured creditors through the enabling provisions of Schedule B1, paragraph 65, IA 1986, and the machinery in Part 2, Chapter 10, IR 1986 (which as I have said, are modelled on the equivalent rules applicable to liquidations). Examples of this in the banking field are Lehman Brothers International (Europe), as well as the present case...

As it is put by Professor Sir Roy Goode QC, "… in making distributions to creditors the administrator is performing a function similar to that of a liquidator …" (Goode, Principles of Corporate Insolvency Law, para 10-81)."

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