In re Oasis Merchandising Services Ltd

A liquidator’s statutory power to sell the company’s property does not extend to the fruits of wrongful-trading proceedings which only the liquidator may bring under section 214 of the Insolvency Act 1986. Such recoveries arise through the liquidator’s exercise of a statutory power after liquidation. They are distinct from pre-liquidation assets and causes of action belonging to the company.

The general power to do things necessary for winding up the company cannot authorise an agreement which is otherwise unlawful for champerty. A liquidator pursuing statutory proceedings must also remain free, as an officer of the court, to control the litigation and exercise statutory responsibilities independently of the funder.

The liquidator of an insolvent company considered that former or alleged shadow directors should face wrongful-trading proceedings under section 214 of the Insolvency Act 1986. The company lacked funds. The liquidator therefore agreed to assign the fruits of the proceedings to a litigation funder, which would finance the claim and exercise extensive control over its conduct and settlement.

Robert Walker J stayed the proceedings and set aside the Companies Court’s authority for the agreement: [1995] 2 BCLC 493. The funder appealed. It accepted that the agreement was prima facie champertous but contended that paragraph 6 or paragraph 13 of Schedule 4 to the 1986 Act supplied statutory authority for it.

The central issues were whether the fruits of section 214 proceedings were “the company’s property” capable of sale and whether the liquidator’s general winding-up power otherwise authorised the agreement.

Appeal dismissed unanimously. Peter Gibson LJ delivered the judgment of the court, with Otton and Hutchison LJJ.

1. Paragraph 6 of Schedule 4 to the Insolvency Act 1986 did not authorise the agreement. Although “property” receives an extended definition under section 436, the expression “the company’s property” distinguishes assets belonging to the company when liquidation begins, and assets representing them, from recoveries obtained after liquidation through statutory rights conferred exclusively upon the liquidator.

2. A pre-liquidation cause of action belonging to the company, including a misfeasance claim enforceable under section 212, may be company property capable of sale. A section 214 claim is different. The company could never bring it; it arises only in an insolvent liquidation and only upon the liquidator’s application. Its fruits therefore are not company property within paragraph 6 and do not fall within a debenture over the company’s present and future assets.

3. The reasoning in Re M.C. Bacon Ltd (No.2) [1990] BCLC 607, Re Yagerphone Ltd [1935] Ch 392 and Re Ayala Holdings Ltd [1996] 1 BCLC 467 supported that distinction. Recoveries obtained through statutory avoidance, fraudulent-trading or wrongful-trading powers are received for distribution under the statutory scheme, rather than as assets previously belonging to the company.

4. Re Movitor Pty Ltd v Sims (1995) 19 ACSR 440 was distinguished. The Australian provisions created an amount recoverable as a debt due to the company once the conditions of liability arose. Section 214 used materially different language and vested the relevant power in the liquidator.

5. Paragraph 13 of Schedule 4 did not authorise the agreement. Its general power to do things necessary for winding up the company’s affairs and distributing its assets did not give a liquidator authority to perform an act which remained unlawful under the general law.

6. The court further considered that a liquidator pursuing sections 213 or 214 proceedings must remain free, as an officer of the court, to control them and exercise statutory powers. The agreement’s extensive transfer of control to the funder was objectionable, although that consideration concerned the propriety of the agreement rather than the meaning of “the company’s property”.

1. Court of Appeal: The appeal was dismissed unanimously. The stay of the section 214 proceedings and the setting aside of the authority to enter the funding agreement were upheld: [1996] EWCA Civ 689; [1998] Ch 170. Leave to appeal to the House of Lords was refused.
2. High Court: Robert Walker J stayed the wrongful-trading proceedings and set aside the Companies Court order authorising the liquidator to enter the funding agreement: [1995] 2 BCLC 493.
3. Companies Court: Mr Registrar Pimm had authorised the liquidator to enter the agreement.