No winding-up petition? No problem in UK
The recent UK Chancery Division judgment in Re Gracio Property Company Limited  B.C.C 15 (“Gracio”) saw the court make an order for a compulsory liquidation without any winding-up petition having been issued.
This was an application under paragraph 79 of Schedule B1 to the Insolvency Act 1986 (“IA86”) by the administrators of Gracio for the administration to be brought to an end, the company to be placed into compulsory liquidation and for the administrators to be appointed as joint liquidators and discharged from their liabilities as administrators. The court had to decide whether it could make a winding-up order without a winding-up petition having been issued.
Amongst Gracio’s key assets were a freehold property and a leasehold property. The freehold property was sold but, in respect of the leasehold, Gracio had breached various covenants prior to the administration and the landlord both refused to consent to a sale, or accept a surrender, unless those breaches were remedied – but remedy was not possible. The administrators formed the view that the purpose of the administration – the making of a distribution to secured creditors – could no longer be achieved and that the only practical way of concluding Gracio’s affairs was for it to be put into liquidation and for the lease to be disclaimed.
The administrators notified the creditors of the position before applying to court.
Paragraph 79(2)(a) of Schedule B1 IA86 provides that an administrator can make an application for his or her appointment to cease to have effect if the administrator thinks that the purpose of the administration cannot be achieved. Pursuant to paragraph 79(4)(d) of Schedule B1 IA86, the court can make any order it thinks appropriate whether in addition to, in consequence of, or instead of the order applied for.
Norris J held that the administrators’ view that the purpose of the administration could not be achieved was correct. Their appointment would cease to have effect immediately and they would be released from their liability for acts as administrators with immediate effect, rather than after the normal 28-day period for creditors to challenge any acts of the administrators, as all creditors had been notified of the intention to apply for immediate discharge and none had objected.
An order for the compulsory winding up of Gracio would be made, and two of the former administrators would be appointed liquidators, notwithstanding that no petition for that relief was before the court. The scope of paragraph 79(4) was unrestricted, so provided that the order had some relationship to the discharge of the administrators and to the termination of the administration, any order could be made. There appeared no reason to fetter the broad terms of the paragraph. Re TM Kingdom Ltd (in admin.)  B.C.C. 480 and Re J Smiths Haulage Ltd  B.C.C. 135), were referred to as examples of the use of this paragraph to facilitate a winding up through the passing of a resolution for a creditors’ voluntary liquidation (CVL) or the reactivation of a suspended winding up.
The court did have jurisdiction to wind up a company even if no petition had been presented, provided one or more of the circumstances in s.122 IA86 existed as per Neuberger J in Lancefield v Lancefield  B.P.I.R.1108. Neuberger J had caveated this finding by saying that it would require a thoroughly exceptional case before the court would even consider making a winding-up order in relation to a company where there is no petition. In the present case, Gracio was before the court in connection with the discharge of its administrators and the bringing to an end of the administration. It was not appropriate to return Gracio to the control of its directors, for it was plainly insolvent. The administrators (or a creditor) could have issued a winding-up petition, but the expense of that process would have been borne by the secured creditor, who was already not going to recover all amounts due to it – as such, the application under paragraph 79(4) Schedule B1 provided a more efficient route. No creditors opposed the application and the secured creditor was in support of it. There appeared no reason to deplete the return to the secured creditor by requiring the presentation of a petition.
This judgment is both pragmatic in effect and helpful to administrators. It builds upon the decisions noted above and represents a logical step in the right direction, helping to avoid the time and cost of preparing and issuing a winding-up petition. It is also worth noting that the judge used the discretion available under paragraph 79(4) Schedule B1 to appoint the administrators as compulsory liquidators to allow those familiar with the case to continue it seamlessly and close it off efficiently.