Philip Stephen Wallace (as liquidator of Carna Meats (UK) Limited) –and- George Wallace  EWHC 2503 (Ch)
The High Court has recently revisited the question of whether section 236 of the Insolvency Act 1986 has extraterritorial effect and, in doing so, considered the differing views expressed in previous cases.
Section 236 of the Insolvency Act 1986
In short, section 236 empowers the Court to assist an office-holder to 'discover the truth' of a company in order that the office-holder can perform his/her functions. It is a mechanism by which an office-holder can apply for and the Court can make various orders, including orders:
- Summoning various categories of person to appear before the Court for examination.
- Requiring such persons to provide an account of their dealings with the company or produce any books, papers or records relating to the company.
The present case concerned the fairly typical scenario of a company's liquidator looking to obtain company books and records from its bookkeeper, including accounting records such as Sage records.
When will a Court make an order under section 236?
The applicant has to demonstrate a 'proper case', which is one where the office-holder reasonably requires the information and documents sought and providing the same will not impose and unnecessary or unreasonable burden on the respondent.
In the present case, the Judge had no hesitation in finding that the liquidator's case way clearly made out. The company's latest accounts showed significant debtors, and the liquidator naturally required the company's accounting records to help him ascertain whether these were recoverable. The bookkeeper had refused to provide the accounting records because he was owed money by the company, which was not a good reason for refusing to make an order.
However, the novel feature to the case was the fact the bookkeeper resided in the Republic of Ireland.
The Court therefore had to consider whether section 236 had 'extraterritorial effect', that is does section 236 empower the Court to make an order against a respondent abroad.
The question has previously been considered by the Courts, with differing outcomes. In short, these turned on alternative interpretations of section 236 and the provisions from earlier insolvency legislation.
Central to the debate was whether the power to order a person to produce books, papers and records was ancillary to or stand-alone from the power to summons a person for examination.
In Re MF Global UK Limited (in special administration), the Court considered that section 236 was in substantially the same terms and was intended to carry the same meaning as section 25 of the Bankruptcy Act 1914, which had been previously been held by the Court of Appeal to be territorially limited. The Court in MF Global followed the Court of Appeal. The Court of Appeal's interpretation of section 25 of the Bankruptcy Act 1914 had been that the section essentially related to the power to summons a person. Section 25 of the Bankruptcy Act 1914 also contained wording limiting the scope of the summonsing power to persons in the jurisdiction. In MF Global, the Court noted that this wording is effectively replicated in section 237 of the Insolvency Act 1986, which supplements section 236.
Whereas, in Official Receiver v Norriss the Court found that the structure of section 236 was materially different to previous incarnations and provided the Court with a free-standing power to order a person to produce information and documents without summonsing that person to appear for examination. The Court concluded that, whilst the territorial limitation applied to the summonsing power, it did not apply to the separate power to order the production of information and documents.
What did the Court decide in the present case?
The Court came to the same conclusion as in Official Receiver v Norriss, that is it construed the power to order a person to produce information and documents as extending to any of the persons against whom such an order could be made, regardless of whether they were within or outside the jurisdiction.
In doing so, the Court agreed that the power to order the production of information and documents was standalone and not ancillary to the summonsing power. Whilst in previous cases the Court had understandably limited this summonsing power, requiring a person to produce information and documents was less intrusive and in the 'modern world' it ought naturally to apply to persons out of the jurisdiction.
Will the Court always make an order against someone abroad?
No. The Court made it clear the power is limited. Given that the categories of person who fall within section 236 are very broad (including third parties who could have had little to do with the company), there needs to be a 'safeguard'. This is that the person in question must have a sufficient connection with the jurisdiction.
In the case of the bookkeeper, the Court concluded he was sufficiently connected with England and Wales because:
- The Court had an international jurisdiction over the winding up of the Company under the EU Regulation on Insolvency Proceedings, which was relevant with the UK and Republic of Ireland both being member state of the EU. This gave the liquidator authority to exercise the powers conferred on him by English law in other member states and recognised his legitimate interest in taking action abroad
- The bookkeeper was not a remote third party removed from the company's affairs: he was an important part its operations and only he appeared to have the information and documents sought, which were company books and records critical to the liquidator properly administering the company's liquidation.
Section 236 of the Act is a powerful investigatory tool among an office-holder's armoury and is commonly relied upon to recover company books and records held by third parties. The Court's decision will therefore be welcome news for office-holders given its 'modern' take on the power to order the production of information and documents and the Court's willingness to assist an office-holder to recover a company's accounting records notwithstanding the fact they were held by a person abroad.
Whilst the fact the bookkeeper was within the EU (and the EU Regulation applied) was relevant, a Court would presumably also be willing to make an order against a third party requiring them to deliver up company books and records where the third party was, for example, outside the EU but within the scope of another cross-border insolvency regime, such as the UNCITRAL Model Law, which has been adopted by the United States among other countries.