Restructuring & Insolvency

Winding up petitions issued in breach of a statutory moratorium, what are the consequences?

Take this scenario: You have filed and served notice of intention to appoint administrators by a company or its directors (“NOI”) and, immediately before filing the notice of appointment (“NOA”), your central index check reveals a winding up petition issued between the filing of the NOI and the proposed filing of the NOA. What do you do?

Caselaw initially suggested that this gave rise to a stand off between the petitioner and company/ proposed administrator(s), which would need to be resolved by court intervention. More recent cases have, however, suggested that the company might proceed with the appointment of administrators and ignore the petition.

The moratorium and the petition – conflicting provisions

The interim moratorium1 prevents the making of a winding up order or the instituting or continuing of any “legal process” (which, it is generally accepted, will include a winding up petition). The winding up petition has therefore been issued in breach of the statutory moratorium.

However, an administrator may not be appointed if a petition for the winding up of the company has been presented and is not yet disposed of2.

Which of these apparently conflicting provisions takes priority?

The “stand off”

The case of Arucana3 concluded that the petition was not a nullity (it referred back to previous employment tribunal decisions on the point). HHJ Cooke considered that the appointment of the administrators could not proceed and the matter would only move forwards with either: (a) the petitioner applying for permission to continue with the petition; or (b) the administrators applying for dismissal of the petition so that the appointment of administrators could proceed.

Prevalence of the NOI

In the later, unreported, case of Red Web Security4 HHJ Cooke encountered almost identical circumstances. He followed his earlier decision in holding that the petition was not a nullity but went on to hold that paragraph 25(a) could not be taken to refer to a petition which had been presented in breach of the interim moratorium. To do so would ignore the purpose of the interim moratorium and provide creditors with the ability to temporarily frustrate an administrator’s appointment.

Respectfully, we consider this a rather strained interpretation of paragraph 25(a) and the simpler solution might have been to find that a winding up petition issued in breach of a statutory prohibition/ moratorium is a nullity and can therefore be safely disregarded.

On 26 August 2012 HHJ Purle QC heard the case of Ramora5 (a case run by Clarke Willmott LLP’s Insolvency team). Here, HHJ Purle QC preferred HHJ Cooke’s reasoning in Red Web Security and allowed the out of court appointment of administrators to proceed, despite the fact that a winding up petition had been presented and not disposed of.

Conclusion and recommendation

In such situations it is our recommendation that the petitioner is asked to withdraw or dismiss the petition prior to the appointment of administrators. The cases referred to here can be used to persuade the petitioner that this is the correct course of action.

If the petitioner refuses to cooperate then the current state of the caselaw provides that the appointment of administrators can proceed notwithstanding the petition.

However, in the face of a determined petitioner or perceived risk of challenge, the administrator might consider a swift application to court to ratify the validity of his appointment.

For further information, please contact Martin Askew.

1Paragraph 43 Schedule B1 Insolvency Act 1986 (“Schedule B1”).
2Paragraph 25(a) Schedule B1.
3Arucana Limited [2009] EWHC 3838 (Ch)
4Re: Red Web Security (UK) Limited (unreported)
5Re Ramora UK [2011] EWHC 3959 (Ch)