Philip Gillyon of Erskine Chambers comments on the Court of Appeal’s consideration of the directions the court may make when restoring a company to the register of companies
In Pickering v Davy [2017] EWCA Civ 30, the Court of Appeal considered directions made in favour of a third party preventing a limitation period from running during the time a company had been voluntarily struck off the register of companies (register) under s 1003(1) CA 2006 and dissolved. The directions had been made by the judge at first instance when the company was restored to the register under s 1031(1) CA 2006.
What was the background to the case?
S 1032(3) CA 2006 gives the court the power to give such directions and make such provision as seems just for placing the company and all other persons in the same position (as nearly as may be) as if the company had not been dissolved or struck off the register. A direction may prevent a limitation period from running during all or part of the period in which the company was dissolved.
In this case, a direction was made in favour of a claimant against Heather Moor & Edgecomb Limited (Company), which had been voluntarily struck off the register on the application of its sole director (P). The Company was restored to the register on the application of the respondent to the appeal (D). The judge at first instance directed that:
- the period between 20 March 2012 (the date the Company was struck off) and 1 July 2014 (the date of the order restoring the Company to the register (Restoration Order)) was not to count for the purposes of any enactment, including the Limitation Act 1980, as to the time within which proceedings against the Company must be brought by the claimant (the Limitation Direction); and
- if the claimant shall petition for the winding up of the Company within 14 days from the date that the Restoration Order came into effect, the petition shall be deemed to have been presented on 20 March 2012 (the Petition Direction).
The purpose of the Petition Direction was to enhance the prospect of there being available assets to meet the claimant’s claim.
The Company was formed in 1971 and its only directors were P and her husband. The Company carried on business as an independent financial advisor. D took advice from the Company, and transferred his pension fund out of an occupational scheme and into a personal pension plan. He subsequently made a loss. In December 2012, the Financial Services Compensation Scheme (FSCS) estimated his loss at £617,507. D alleged that he acted on the advice of P’s husband, acting on behalf of the Company, and that the advice was negligent. The Company denied both allegations.
In June 2010, before any indication of a claim by D, P and her husband caused the Company to sell its client list and to cease business. The Company transferred its freehold property to P and her husband and their pension trustee, apparently for no consideration. P’s husband resigned as director in July 2010, leaving P as the sole director and secretary.
D stated that he first became aware of a potential claim against the Company on 19 July 2011 during a visit by a representative of the firm that had bought the Company’s client list. D then made a complaint to the Financial Ombudsman Service (FOS), which wrote to the Company on 28 July 2011 and requested a response within eight weeks. No response was forthcoming.
On 17 November 2011, P applied to the registrar of companies to have the Company struck off the register pursuant to s 1003. Under s 1006 CA 2006, the Company was obliged to give notice to any creditor of the Company, defined by s 1011 CA 2006 to include a contingent or prospective creditor. No notice was given to D, who was unaware of the steps being taken to strike the Company off the register. The Company was struck off the register and notice was published on 20 March 2012, whereupon the Company was dissolved by virtue of s 1003(5). D became aware that the Company had been struck off in early 2012. With the dissolution, the FOS’s function was at an end, and D then submitted a claim to the FSCS. The FSCS assessed D’s entitlement to compensation at £617,507.42, and D was offered the statutory maximum of £50,000, which he accepted.
By October 2013 D became aware of the transfer of the Company’s freehold to P and her husband in 2010. D subsequently issued an application for the restoration of the Company to the register, which was opposed by the Company.
At first instance, the judge had made the above Limitation and Petition Directions on the basis that there had been a window of opportunity (if only a small one) in which D might have brought his claim had the Company not been struck off the register. It was not possible to know whether D would have actually done so; however, that impossibility arose out of the conduct of P and her husband in bringing about the dissolution of the Company.
What did the Court of Appeal decide?
The principal issue in the appeal was whether, as a matter of law, the finding of the judge at first instance (that there had been “a window of opportunity, if only a small one, in which [D] might have established the merits of his claim to the satisfaction of the FOS and been able to present the petition that he now seeks to present and bring the claim that would underpin such a petition”) was a sufficient basis on which to have made the Limitation and Petition Directions. The main grounds of appeal related to the express statutory purpose of a direction under s 1032(3) and what the applicant must show in that respect before the court can consider the justice of giving a particular direction. The appellants submitted that the judge was wrong to hold that the relevant question was whether the applicant had been deprived of the opportunity of bringing proceedings or presenting a winding-up petition. They said the question should have been whether the applicant had changed his position by reasonably abstaining from taking such steps as a result of the Company’s dissolution. The direction should not put the applicant in a substantially different position than he would have been if the Company had not been struck off the register.
In delivering the Court of Appeal’s judgment, David Richards LJ agreed with the first instance judge where he emphasised that the discretion conferred by s 1032(3) is not unlimited but must be exercised only for its stated purpose (for placing the company and all other persons in the same position (as nearly as may be) as if the company had not been dissolved or struck off the register) and, assuming a direction would meet that purpose, only if such direction seems just. David Richards LJ went on to say, however, that in the context of an application for a Limitation Direction, the issue is the requisite degree of likelihood that a claimant would in fact have issued proceedings if the company had not been struck off the register. If the claimant would not have done so, then a Limitation Direction is not needed to place him in the same position as if the company had not been struck off. On the contrary, if the claimant would not have issued proceedings, a Limitation Direction would place him in a position that he would not have otherwise have been in and would confer an unwarranted benefit on him.
David Richards LJ also noted that, at the time of the first instance hearing, there had been little authoritative guidance on the circumstances in which a direction should be made in favour of a third party, as opposed to in favour of the company itself.
He considered, in particular, County Leasing Asset Management Ltd v Hawkes [2015] EWCA Civ 1251, (see FromCounsel Q&A) in which the Court of Appeal considered a direction that had been made at first instance in favour of a company (in contrast to Pickering, where it was made in favour of a claimant against the company). County Leasing was decided after the order was made at first instance in Pickering. In County Leasing, Briggs LJ (with whom Jackson and King LJJ agreed) analysed the application of s 1032(3) to directions in favour of third parties as well as the company. In David Richards LJ’s judgment, the decision in County Leasing established that the discretion to make a Limitation Direction requires a causative link between the dissolution of the company and the failure to commence the proceedings in question. This flows from the express statutory purpose of a direction, ie, for placing the company and all other persons in the same position (as nearly as may be) as if the company had not been dissolved or struck off the register. No distinction is drawn in s 1032(3) between the company and third parties. The purpose to be served by a direction is the same, whether it is in favour of the company or a third party.
David Richards LJ held that the position is therefore that the making of a Limitation Direction under s 1032(3) requires the applicant to show a clear and causal link between the dissolution and the failure to bring proceedings within the applicable limitation period. The test is one of probability. He could not agree with the first instance judge when he held in this case that D satisfied the purpose test because “there was a window of opportunity, if only a small one” in which D might have taken action and established the merits of his claim to the satisfaction of the FOS. This was setting the bar too low. A window of opportunity in which a step might have been taken is an insufficient basis for a direction under s 1032(3).
It then fell to the Court of Appeal to consider whether D had satisfied the purpose test, ie whether D could show that he probably would have issued proceedings against the Company during the period of its dissolution or presented a winding-up petition against the Company before 21 June 2012 (being 2 years after the transfer of the Company’s freehold property to its then directors, apparently for no consideration). In David Richards LJ’s view, it was not possible to conclude that D may well have either issued a claim or issued proceedings, or presented a winding-up petition; and to reach that conclusion was “no more than speculation as to what might have happened”. The judge at first instance was right when he said that the evidence showed only a small window of opportunity in which D might have taken these steps. David Richards LJ concluded that the judge below was, therefore, wrong to give the Limitation and Petition Directions and the appeal was therefore allowed. The Limitation and Petition Directions were set aside.
FC Q&A have been updated to reflect this decision.
This article was first published in FromCounsel's Corporate Briefing on 24 March 2017.