Monday, 22 February 2010

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

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

    (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...
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