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InsolvencyWednesday 30 March 2022

Counsel General for Wales & Ors v Gareth Allen (as Official Receiver) & Ors

On Monday last week, the High Court handed down judgment in Counsel General for Wales & Ors v Gareth Allen (as Official Receiver) & Ors [2022] EWHC 647 (Ch).

The case is the first occasion on which the courts have considered whether a liquidator’s power under s.167(1) and Sch.4, para.5 of the Insolvency Act 1986 to “to carry on the business of the company so far as may be necessary for its beneficial winding up” can include consideration of environmental and other public interest factors. It also provides useful clarification on the approach to applications under s.168(5) of the Insolvency Act.

The facts were stark. The Official Receiver had been appointed as the liquidator of a defunct power station in South Wales. In preparation for disclaiming the Site, the Official Receiver formulated a ‘make safe plan’ which included disconnecting a private wire network running across the Site from the National Grid. The Private Wire Network was the sole source of power to numerous properties situated in the Baglan Energy Park. These included a number of waste-water treatment plants and pumping stations operated by the local council (Neath Port Talbot) and Welsh Water which, collectively, form an integral part of the flood defences for the local area. The unchallenged evidence before the court was that an alternative connection to the National Grid would not be in place until Spring 2022 at the earliest, and that if these assets were to lose power during the intervening storm season, there would be a significant risk of both major flooding and of foul sewage being discharged into the shellfish waters at Swansea Bay.

The Official Receiver’s position was that, on the true construction of Sch.4, para. 5, a liquidator’s power only permits the continuation of a company’s business for the purpose of ensuring the realisation and distribution of the company’s assets to its creditors. Accordingly, the Official Receiver contended, it was legally disabled from taking the potential for environmental catastrophe into account when deciding when to disconnect the Private Wire Network.

Norris J rejected this construction of the Act. It was held that, while the exercise of the power to carry on the business of a company must have as its ultimate objective the company’s winding up, the ‘beneficial winding up’ of the company may not always be confined to exclusively financial considerations. So, on the facts of the case, the appointment of special managers for the purpose of decommissioning the plant safely, and the fact that there was no anticipated return to creditors (the liquidation being funded by an indemnity from the Department for BEIS), indicated that the purpose of the winding up included safeguarding the health and wellbeing of those living in the local area. As such, the liquidator would not be acting ultra vires in continuing the Company’s business for that purpose.

Norris J also answered the “difficult question” of whether the Official Receiver could take into account broader environmental factors when deciding whether to continue the supply of power in the affirmative. He noted that the Court of Appeal’s decision in Re Rhondda Waste Disposal Ltd [2001] Ch 57 and the remarks of Neuberger J in Re Mineral Resources Ltd [1999] BCC 422 at 431 both illustrated other parts of the insolvency regime affording prominence to such concerns. Given the nature and purpose of the liquidation, it would not “accord with the standards of right-thinking people” by which liquidators are expected to act (as per David Richards LJ in Lehman Brothers Australia Limited v MacNamara [2020] EWCA Civ 321 at [35]) for the Official Receiver to act as the author of a major environmental risk.

While Norris J’s remarks were confined to the almost unprecedented facts before him, they show that – in appropriate cases – the insolvency regime can respond to public interest concerns. In particular, with the proliferation of environmental regulation and the growing public concern with environmental protection, this area is likely to be ripe for development in the coming years. It remains to be worked out in subsequent cases how far these matters may take precedence where, unlike here, there would be significant detriment to the interests of creditors.

The decision will also be of wider interest to insolvency practitioners for its discussion of the applicable test to applications under s.168(5).

As is well-known, s.168(5) provides that “If any person is aggrieved by an act or decision of the liquidator, that person may apply to the court; and the court may confirm, reverse or modify the actual decision complained of and make such order in the case as it thinks just”.

It was accepted that, while in most cases only a creditor or contributory of the insolvent company would have standing as a ‘person aggrieved’, on the unusual facts of the case the Applicants came within the narrow classes of persons described in Re Hans Place [1992] BCC 737 and Mohammed v Morris [2001] BCC 233 as being directly affected by a power exercised within the liquidation which they would otherwise have no opportunity to challenge.

Applicants under s.168(5) are normally required to show that the act or decision under challenge was either taken in bad faith or ‘perverse’: Re Edennote Ltd [1996] BCC 718 at 722. However, Norris J held that this was not the only test. While bad faith or perversity was the appropriate standard of review in cases involving genuine exercises of discretion or commercial decisions taken by office-holders, in cases concerning the scope of an office-holder’s vires, authorities such as Re Buckingham International Plc [1998] BCC 943 showed that a lower threshold applies. In other words, where an office-holder is operating under a mistaken apprehension as to the legal scope of his powers, the court will intervene more readily on an application by an affected party. This is a welcome clarification, which also accords with the law’s approach to reviewing the acts of other public and private decision-makers.

Finally, the Applicants also argued in the alternative that the Official Receiver’s proposed construction of Sch.4, para.5 was incompatible with Art.2 and Art.8 of the European Convention on Human Rights. Norris J rejected this novel argument, but permission has been granted to appeal to the Court of Appeal on it; the Respondents have also been granted permission to cross-appeal.

Thomas Robinson, Francesca Mitchell and Daniel Petrides acted for the successful Third and Fourth Applicants.

Daniel Scott acted for the Fifth Applicant.

A copy of the judgment can be found here

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