The Insolvency Act moratorium – does not apply to defensive steps

Judgment has been handed down in Thomas Evan Cook v Mortgage Debenture Limited. Mr Cook, partner of a law firm, represented the firm in that capacity in an application to be joined as fourth defendant in an action continued by a claimant company after it went into administration. Mr Cook successfully appealed the decision in the Manchester District Registry of the High Court which dismissed his application. Mortgage Debenture Limited (MDL) appealed that decision. MDL’s appeal has been dismissed. Mills & Reeve acted for the respondent, Mr Cook, and his indemnity insurers, instructing Sebastian Clegg of Deans Court Chambers.

Background

In 1992, a Mr and Mrs Chapman (the first and second defendants) borrowed £9,000 from Basdring Limited (the third defendant). Their debt became governed by a debenture to National Westminster Bank, which was later assigned to a Mr Nolan and by him to MDL. Basdring went into liquidation and its liquidator settled the Chapmans’ claim that they had repaid the loan in full by accepting £9,000 in consideration for discharging Basdring’s charge over their property. The Chapmans financed the settlement by a further loan from Nationwide which was secured by a first charge over the property. Mr Cook’s firm acted for the Chapmans and Nationwide in respect of that further loan.

MDL claimed the original loan was not fully paid and in 2005 commenced proceedings against the Chapmans and Basdring. Although the claim was pursued and defended initially, by 2007 neither the Chapmans nor Basdring took any active part. Basdring was later dissolved. In 2011 Nationwide put Mr Cook’s firm on notice that if it suffered any loss, due to the loan not being registered as the first charge, it would consider potential claims against the firm In 2012 Mr Cook applied to be joined as fourth defendant in the 2005 claim, as in 2007 MDL had launched other proceedings against his firm which were stayed pending the outcome of the 2005 proceedings. That outcome would impact on the 2007 proceedings and the potential Nationwide claim.

Mr Cook’s application was at first instance successfully opposed by MDL on the basis that it was barred by paragraph 43(6) Schedule B1 Insolvency Act 1986, which imposes a moratorium on any legal process or legal proceedings “instituted or continued against a company [in administration]” without the consent of the administrator or the permission of the court. Mr Cook’s successful appeal of that decision is the subject of today’s judgment. The Court of Appeal found that a defensive action against proceedings pursued by a company in administration was not covered by the moratorium.

The Judgment

In a fully reasoned judgment by David Richards LJ, agreed by the Master of the Rolls and Richard McCombe LJ, the Court of Appeal considered the ambit and purpose of the moratorium. It concluded that, while the moratorium covers legal proceedings against a company in administration, it does not cover defensive steps in proceedings brought by a company in administration, or which are continued by a company after it goes into administration.

As a matter of basic fairness it is established that the defendants to such proceedings should be able to defend themselves by means of serving a defence or witness statements or attending trial. The crux of the question here was whether a proactive step such as applying for joinder is a defensive or an active step against the company.

MDL argued that there was a distinction between defensive steps taken against a company in liquidation and a company in administration, because the purpose of an administration was distinct in that the moratorium allowed the company a “breathing space” in order to determine whether or not it could continue to be viable notwithstanding its difficulties. The court rejected, as a matter of principle, the submission that any different approach in respect of administration could be justified when it came to defensive proceedings. Any adverse effect on the administrator in terms of time or costs in dealing with defensive steps did not justify disadvantaging a party in the defence of claims made against it.

MDL was the claimant in the proceedings and Mr Cook, in seeking to be heard on an issue which affected the interests of his firm, was not making an application which had the character of legal proceedings against MDL.

Comment

Although, at first blush, this may seem a point of limited specialist interest, the judgment brings clarity to the scope of paragraph 43(6) Schedule B1 Insolvency Act 1986 and may allow future defendants of claims pursued by companies in administration (or liquidation) something more of a level playing field.

The time and cost an administrator may have to expend in dealing with a defensive step does not constitute a claim on the claimant company’s assets and resources. The moratorium was designed to prevent such claims in order to protect the interests of the creditors of a company. If the administrator considers it appropriate to apply those assets and resources in the pursuit or continuance of legal proceedings it has presumably factored the time and costs of doing so into its decision making.