Re Lune Metal Products Ltd

The Court of Appeal considered whether administrators, under the Insolvency Act 1986 (as it stood prior to the Enterprise Act 2002), had power to make a free-standing distribution of realised funds to creditors and whether the court had power to sanction such a distribution. The court held that the administrators had no power to make a free-standing distribution outside the purposes specified in section 8(3) and that section 14(3) and Schedule 1 did not authorise such a distribution. The court accepted that section 18(3) could authorise distributions, but only on the hearing of an application under section 18(1) (for discharge, variation or additional purpose) and where the proposed payment was consequential to the discharge. Accordingly the first-instance judge was right to dismiss the application as originally framed, but the Court allowed an amendment to add an application for discharge and sanctioned the proposed distribution as ancillary to discharge subject to specified conditions (including informing the Registrar under section 652 of the Companies Act 1985 and giving the Registrar liberty to be heard).

Background and parties. The administrators, Mr Mark Getliffe and Ms Diane Hill, were appointed to Lune Metal Products Ltd on 16 April 2003 with purposes under section 8(3) of the Insolvency Act 1986. After realisation of assets they held a fund of £485,237 and proposed to pay preferential creditors in full and unsecured creditors 35p in the pound, a better return than would be achieved under a company voluntary arrangement or liquidation because of lower immediate costs. They applied to the High Court (Liverpool District Registry) for the court's sanction of that distribution.

Procedural history. His Honour Judge David Hodge QC dismissed the application as framed, following Rimer J in Re The Designer Room Ltd and Lightman J in Re Powerstore (Trading) Ltd, concluding there was no jurisdiction to sanction a free-standing distribution. The matter came to the Court of Appeal on the administrators' appeal.

Issues framed. The court identified: (i) whether administrators had power under the 1986 Act to make the proposed free-standing distribution; (ii) whether the court had power under section 14(3), Schedule 1, or section 18(3) to sanction or order such a distribution; and (iii) whether amendment to seek discharge could enable sanction under section 18(3).

Court's reasoning and subsidiary findings.

• The court analysed the statutory purposes of administration in section 8(3) and observed that the proposed payment was not aimed at achieving any of those stated purposes because the assets had already been realised.
• Section 14(3) (court directions) and Schedule 1 powers do not permit the court to sanction payments which are outside an administrator's functions; the contrast with the broader powers available to liquidators in Schedule 4 supported this conclusion.
• Section 18(3) is engaged only on the hearing of an application under section 18(1) (discharge, variation or specifying an additional purpose). Consequently a free-standing application seeking sanction of the payment was not within section 18(3).
• Arden J's reasoning in Re UCT (UK) Ltd was persuasive: the court may make directions under section 18(3) which are consequential to discharge and necessary to achieve a practical and advantageous exit (for example enabling voluntary routes or strike-off under section 652 Companies Act 1985).
• The Court therefore permitted amendment to add an application for discharge, concluded the proposed distribution could be sanctioned as ancillary to discharge under section 18(3), and set conditions including informing the Registrar and allowing the Registrar and parties liberty to apply.

Relief sought and disposition. The administrators had sought court sanction for an immediate distribution to creditors. The Court of Appeal allowed the amendment and the appeal on the terms indicated: the free-standing application was rightly dismissed below, but the distribution could be sanctioned when made ancillary to an application for discharge, subject to procedural and prudential conditions.

Appeal allowed. The Court agreed with the High Court that there was no jurisdiction to sanction a free-standing distribution under the Insolvency Act 1986 because such a distribution is not within the purposes in section 8(3) and section 14(3)/Schedule 1 did not permit it. However, the administrators were given permission to amend to add an application for discharge and the Court held that, on an application under section 18(1), the court can make orders under section 18(3) consequential to discharge permitting the proposed payments. The sanction was allowed subject to conditions (notice to the Registrar under Companies Act 1985 s652, provision for Registrar's costs and liberty to apply).

Appeal to the Court of Appeal (Civil Division) from the High Court of Justice, Liverpool District Registry (Chancery Division), His Honour Judge David Hodge QC (No. 890A of 2003). The High Court dismissed the administrators' free-standing application; the Court of Appeal allowed the appeal insofar as it permitted amendment to seek discharge and sanctioned the proposed distribution as ancillary to discharge. Neutral citation: [2006] EWCA Civ 1720.