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Ila Conference 2013 Eurosail on Trial – the Implications

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Ila Conference 2013 Eurosail on Trial – the Implications ILA CONFERENCE 2013 EUROSAIL ON TRIAL – THE IMPLICATIONS David Chivers QC – Erskine Chambers Jeremy Goldring – South Square Chambers David Allison – South Square Chambers Introduction 1. The session will be spent exploring the arguments for and against the findings of the Court of Appeal in the Eurosail case, considering the wider implications of the decision, and discussing the possible approach of the Supreme Court on what represents the first opportunity for the highest court to consider the meaning of section 123 IA 1986 since its introduction onto the statute book more than 25 years ago. 2. This paper is intended to serve as an introduction to the issues that will be discussed during the session. It addresses the following topics: (1) section 123 IA 1986 and its statutory context; (2) the statutory history of section 123 IA 1986; (3) the facts of the Eurosail case; and (4) the findings of the Court of Appeal. (1) Section 123 IA 1986 3. Section 123 is one of the four main sections in Chapter VI of Part IV of the IA86, concerned with the grounds and effect of winding up petitions. 4. Section 122(1) is headed “Circumstances in which company may be wound up by the Court”. Sub-paragraphs (a) to (g) identify those circumstances. One of the circumstances in which a company may be wound up is that the company is unable to pay its debts. Section 122(1) provides (in so far as relevant) that: “A company may be wound up by the court if - … 1 (f) the company is unable to pay its debts,”. 5. Section 123 (headed “Definition of inability to pay debts”) then elaborates on the preconditions for the exercise of the statutory power granted to the Court in section 122(1)(f), by providing a definition of inability to pay debts. The raison d’etre for section 123 is to assist in answering the fundamental question raised by section 122(1)(f): is the company unable to pay its debts? 6. If, but only if, the company is unable to pay its debts, then the Court ‘may’ order it to be wound up under the IA 1986 pursuant to section 122(1)(f). The Court is not, therefore, required to make a winding up order once it is shown that a Company is unable to pay its debts. 7. Sections 123(1) and (2) provide as follows (underlining added): “(1) A company is deemed unable to pay its debts— (a) if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company’s registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or (b) if, in England and Wales, execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part, or (c) if, in Scotland, the induciae of a charge for payment on an extract decree, or an extract registered bond, or an extract registered protest, have expired without payment being made, or (d) if, in Northern Ireland, a certificate of unenforceability has been granted in respect of a judgment against the company, or (e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due. (2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.” 8. Section 124 goes on to identify those entitled to present a winding up petition, which include “any creditor or creditors (including any contingent or prospective creditor or creditors)”. There is no statutory definition of “contingent creditor” or “prospective 2 creditor”, but it is obvious that the reference is to two different types of un-accrued claim (identified by Buckley LJ in Stonegate Securities v. Gregory [1980] 1 Ch 576, at 579D- E): (a) a “creditor in respect of a debt which will only become due in an event which may or may not occur”; and (b) a “creditor in respect of a debt which will certainly become due in the future, either on some date which has been already determined or on some date determinable by reference to future events”. (2) Statutory history of section 123 IA 1986 9. The structure and much of the language of the provisions dealing with the Court’s power to wind up companies, including section 123 IA 1986, may be traced back to the Companies Act 1862. The phrase “unable to pay its debts” appeared in the Companies Act 1862, section 79(4), the equivalent to section 122(1)(f) IA 1986, giving the Court power to wind up a company “whenever the company is unable to pay its debts”.1 Section 80 of the 1862 Act, like section 123 IA 1986, provided the preconditions for the exercise of the statutory trigger to be found in the previous section: “A company under this Act shall be deemed to be unable to pay its debts … (4) whenever it is proved to the satisfaction of the court that the company is unable to pay its debts.” 10. Section 82 of the 1862 Act permitted a creditor with an accrued but unpaid claim to petition on the basis of the company’s inability to pay its debts. But at this stage the power to wind up was limited: (1) Creditors with merely contingent or future debts were not entitled to petition. Thus, a stockholder with a right to be redeemed in 100 years’ time or in respect of future interest which had not accrued due could not present a petition: see, for example, Re Melbourne Brewery and Distillery [1900] 1 Ch 453, at 457 (per Wright J). (2) An inability to pay debts that would or might fall due in the future could not found the Court’s power to make a winding up order under section 79(4). Re European Life Assurance Society (1869) LR 9 Eq 122 concerned two petitions by shareholders, against a company that was paying its debts as they fell due. Sir 1 Similarly, section 79(5), the equivalent to section 123(1)(g), gave the court such jurisdiction “whenever the court is of the opinion that it is just and equitable that the company should be wound up”. 3 William James V-C held (at 127) that the debts referred to in section 80 were those “absolutely due – that is to say, debts for which a creditor may go at once to the company’s office and demand payment”. The Companies Act 1907 11. The power to wind up companies on the basis of inability to pay debts under the 1862 Act was amended by s 28 of the Companies Act 1907. Headed “Reckoning of contingent liabilities on petition to wind up”, it provided (underlining added): “In determining whether a company is unable to pay its debts within the meaning of section 80 of the Companies Act, 1862, the Court shall take into account the contingent and prospective liabilities of the company, and any contingent or prospective creditor shall be a creditor entitled to present a petition under section 82 of that Act: Provided that the Court shall not give a hearing to a petition for winding up the company by such a creditor, until security for costs has been given as the court thinks reasonable, and until a prima facie case shall also be established to the satisfaction of the Court.” 12. Much of the language of this amendment was derived from s 21 of the Life Assurance Companies Act 1870. Within a year of Re European Life Assurance Society, the power of the Court to make winding up orders against life insurance companies had been extended by s 21 of the Life Assurance Companies Act 1870, which had included the following: “The Court may order the winding up of any company, in accordance with the Companies Act 1862, on the application of one or more policy holders or shareholders, upon it being proved to the satisfaction of the court that the company is insolvent, and in determining whether or not the company is insolvent the court shall take into account its contingent or prospective liability under policies and annuity and other existing contracts; But the Court shall not give a hearing to the petition until security for costs for such amount as the Judge shall think reasonable shall be given, and until a prima facie case shall also be established to the satisfaction of the Judge.” 13. The position in relation to ordinary companies following the 1870 Act, however, had remained that (a) only creditors with accrued debts could petition, and (b) only an inability to pay those debts could satisfy the requirement of section 80 of the 1862 Act. The Company Law Amendment Committee (Cd 3052)2, reporting in 1906, recommended reform of (amongst other things) the law relating to creditors’ winding up petitions. The 2 The Committee was appointed by the Board of Trade, whose President was David Lloyd-George MP: see page 1 of the Report. 4 mischief that section 28 of the 1907 Act was aimed at is clearly identified (para 45, underlining added): “Greater facilities are also wanted, we think, for winding up insolvent companies at the instance of creditors whose debts are not immediately payable.
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