In re NT Gallagher & Son Ltd (Shierson v Tomlinson, NT Gallagher & Sons Ltd v Howard)

A voluntary arrangement creates a trust where its terms require money or other assets to be paid, transferred or held for the arrangement creditors. The effect of liquidation, bankruptcy or failure of the arrangement upon that trust depends primarily upon the arrangement’s terms.

If the arrangement prescribes what is to happen, those provisions govern. Otherwise, a fully constituted trust continues and must be administered according to its terms, even though the arrangement’s contractual element has ended or become incapable of further performance. The arrangement creditors may also prove in the ensuing insolvency for the balance of their debts, after crediting distributions received or to be received under the trust.

A company voluntary arrangement enabled a civil engineering company to continue trading while pursuing a substantial contractual claim. It required monthly contributions and the proceeds of that claim to be applied for the benefit of creditors. The company subsequently entered creditors’ voluntary liquidation while the supervisors held more than £500,000 and the claim remained unresolved.

The High Court, in a decision reported at [2001] BPIR 1088, held that the retained funds and the claim were held on trust for the arrangement creditors and that those trusts survived liquidation. It also restricted those creditors’ ability to prove in the liquidation by analogy with secured creditors.

The liquidators appealed. The central issues were which assets were held on trust, whether the trusts survived liquidation, and whether the arrangement creditors could prove for their remaining debts.

1. Appeal allowed in part. Lord Justice Peter Gibson delivered the judgment of the court. The retained contributions and the benefit of the contractual claim were held on trust for the creditors bound by the company voluntary arrangement. The trusts survived the company’s liquidation. The High Court’s order was varied, however, so that the arrangement creditors could prove in the liquidation for their remaining debts after crediting dividends received from the supervisors.

2. Whether a voluntary arrangement creates a trust depends upon its terms. Although this arrangement did not use express trust language, the monthly contributions were payable to the supervisors for creditors’ benefit and were distributable to those creditors. The supervisors were therefore trustees. The terms also dedicated the entire proceeds of the contractual claim to the same purpose and gave the supervisors control over its conduct and settlement. The company consequently held the benefit of that claim on trust.

3. A court giving directions under sections 7(3) and 7(4) of the Insolvency Act 1986 cannot modify the arrangement or authorise the supervisors to deal with trust money inconsistently with its terms.

4. The arrangement’s contractual and proprietary elements were distinct. Liquidation ended the statutory contract and prevented its further performance, but it did not terminate a fully constituted trust which remained capable of administration. Where an arrangement expressly provides what is to happen upon liquidation, bankruptcy or failure, effect must be given to that provision. In the absence of such a provision, the trust continues according to its terms.

5. The form of liquidation and the identity of the person presenting an insolvency petition do not determine whether the trust survives. Rule 4.21A of the Insolvency Rules 1986 and section 276(2) of the Insolvency Act 1986 protect arrangement expenses in their specified circumstances. They do not establish a general rule terminating arrangement trusts.

6. The arrangement creditors were not analogous to secured creditors required to surrender security before proving. Once the contractual arrangement had ended, justice permitted them to prove for the unpaid balance of their debts, after credit for distributions received or to be received under the continuing trust.

• Court of Appeal: The appeal was allowed in part. The court affirmed that the retained funds and contractual claim were held on trusts which survived liquidation. It substituted a declaration permitting the arrangement creditors to prove for their debts after crediting dividends received from the supervisors.
• High Court, Companies Court: His Honour Judge Howarth held, in a decision reported at [2001] BPIR 1088, that the retained funds and contractual claim were held on trust for the arrangement creditors and that the trusts survived liquidation. He restricted the creditors’ right to prove by analogy with secured creditors.