Sovereign Hospital Services Ltd v The Official Receiver

Where a company is cash-flow and balance-sheet insolvent, continued trading is inappropriate. Administration may be unavailable where no funding exists to support the appointment of a competent administrator. In those circumstances, compulsory liquidation may be the proper course where it enables the company’s assets to be distributed under the statutory insolvency scheme and secures the Official Receiver’s appointment as liquidator. The court may also appoint special managers where the Official Receiver lacks the resources to manage the company’s estate and business, particularly where effective management is strategically important.

The directors of Sovereign Hospital Services Limited, a company within the Carillion Group, sought an urgent compulsory winding-up order. Following the winding-up of its parent and other group companies, Sovereign had become cash-flow and balance-sheet insolvent. The directors considered continued trading, administration and compulsory liquidation. Administration could not be funded, and the Official Receiver consented to appointment as liquidator. The Official Receiver also sought the appointment of special managers under section 177 of the Insolvency Act 1986.

1. The court was satisfied that it had jurisdiction to make the winding-up order. Sovereign was insolvent on both a cash-flow and balance-sheet basis. Continued trading was not a viable or proper option for the directors.

2. Administration was not realistically available. Although it might ordinarily have been desirable, an administrator would require funding, and no funding was available from existing lenders or the Government. In those circumstances, compulsory liquidation was the appropriate course.

3. Compulsory liquidation would ensure that Sovereign’s assets were distributed in accordance with the statutory insolvency scheme. It would also result in the Official Receiver becoming liquidator pursuant to section 136(2) of the Insolvency Act 1986.

4. The court appointed special managers under section 177 of the Insolvency Act 1986. The Official Receiver lacked the resources to manage Sovereign and its wider group without their assistance, and the strategic importance of the companies made proper management particularly important.

5. Sovereign was wound up, and orders were made for the appointment of special managers.