Regina v Jones (On Appeal from the Court of Appeal (Criminal Division))

The heads of liquidation expense listed in rule 4.218(1) of the Insolvency Rules 1986 form a definitive statutory statement. A post-liquidation liability falling within the rule requires no additional equitable justification based on benefit to the insolvent estate.

Corporation tax imposed on profits or gains arising during winding up is a necessary disbursement under rule 4.218(1)(m). It must therefore be paid from the company’s assets according to the statutory priority.

The liquidation expenses principle has a different function. It permits certain liabilities arising from pre-liquidation obligations, particularly rent on property retained for the winding up’s benefit, to be treated as expenses. It does not control the classification of liabilities imposed after liquidation.

Toshoku Finance (UK) Plc entered creditors’ voluntary liquidation. Its principal asset was a debt owed by an insolvent connected company. Although no post-liquidation interest was received, the tax legislation required profits from the connected-company loan relationship to be computed on an accruals basis and on the assumption that amounts due would be paid in full.

The liquidators sought directions on whether any resulting corporation tax was an expense properly incurred in the winding up and therefore payable ahead of other claims. Evans-Lombe J held that it was not an expense: [1999] STC 922. The Court of Appeal reversed that decision: [2000] 1 WLR 2478.

The central issue before the House was whether rule 4.218 of the Insolvency Rules 1986 conclusively classified the tax as a liquidation expense, or whether it also had to satisfy an equitable requirement that the liability result from a step taken for the estate’s benefit.

1. Appeal dismissed unanimously. Lord Hoffmann delivered the leading speech. Lord Woolf, Lord Hutton and Lord Rodger expressly agreed with it. Lord Hobhouse concurred in the order, although he found the contrary argument and the reasoning of Nicholls LJ and Sir Donald Nicholls V-C more persuasive.

2. Per Lord Hoffmann, rule 4.218(1) of the Insolvency Rules 1986 definitively identifies liquidation expenses and determines their order of priority. Its listed heads are not subject to an implied requirement that the liability must have arisen from a step taken for the estate’s benefit. The word “may” in paragraph 17 of Schedule 8 to the Insolvency Act 1986 merely reflects the liquidator’s right to reimbursement for liabilities falling within the rule.

3. Corporation tax expressly imposed on profits or gains arising during winding up is a post-liquidation liability which the liquidator must discharge. Following the approach in In re Mesco Properties Ltd [1979] 1 WLR 558, the tax is a necessary disbursement within rule 4.218(1)(m). The specific placement of tax on chargeable gains in paragraph (p) leaves corporation tax on profits within paragraph (m).

4. The principle derived from In re Lundy Granite Co; Ex p Heavan (1871) LR 6 Ch App 462 has a narrower function. It permits a liability arising under a pre-liquidation obligation to be treated as if incurred in the winding up where property is retained for the insolvent estate’s benefit. It is not a general test governing liabilities incurred after liquidation.

5. Whether a debt qualifies as an expense is not discretionary. Section 130(2) of the Insolvency Act 1986 confers discretion concerning the creditor’s remedy, such as immediate proceedings or execution. Section 156 permits only a rearrangement of priorities between expenses. The classification itself follows from the rules and applicable legal principles.

6. In re Kentish Homes Ltd [1993] BCLC 1375 was wrongly decided. A post-liquidation community-charge liability falling within rule 4.218(1)(m) required no application of the Lundy Granite principle. Any perceived unfairness caused by liabilities imposed on companies in liquidation was a matter for legislation, not an extension of that equitable principle.

1. House of Lords: Dismissed the liquidators’ appeal unanimously and affirmed the Court of Appeal’s order: [2002] UKHL 6.
2. Court of Appeal: Reversed Evans-Lombe J and held that the assumed corporation-tax liability would be a liquidation expense: [2000] 1 WLR 2478.
3. High Court: Evans-Lombe J held that the liability would not be an expense incurred in the winding up: [1999] STC 922.