Factors in the exercise of the court’s discretion in relation to a counterclaim against a company in administration.
When a company enters into Administration, in England or Wales, the effect is to give rise to a moratorium that prevents a third party, such as a creditor, from instituting or continuing legal action against the company or against its property. The effect is also to prevent a landlord from exercising a right of forfeiture by peaceable re-entry. These restrictions will remain in place for as long as the company is in Administration, but can be removed, in relation to a particular third party, if permission is granted either by the administrator or by the court.
When creating this “carved-out” right, Parliament did not set out any guidance on the principles to be applied to determine when such a request should be granted. It was essentially left to the discretion of the courts. In a case that dates back to 1990 and that is often referred to as Re Atlantic Computers, the Court of Appeal made a number of general observations, emphasising that these were merely guidelines and should not be treated as anything more than that.
These included that if, by granting leave to a lessor of land or a hirer of goods to exercise his proprietary rights and re-possess his land or goods, it was unlikely that the achievement of the purpose of the administration would be affected, leave should normally be given.
Generally, the court had to carry out a balancing exercise, balancing the legitimate interests of the lessor and the legitimate interests of the other creditors of the company: each case would call for an exercise in judicial judgment, in which the court seeks to give effect to the purpose of the statutory provisions, having regard to the parties’ interests and all the circumstances of the case.
It recognised a principle that an administration for the benefit of unsecured creditors should not be conducted at the expense of those who have proprietary rights which they are seeking to exercise, save to the extent that this may be unavoidable. If significant loss would be caused to the lessor by a refusal, that would be a strong factor in support of the granting of leave. But if substantially greater loss would be caused to others by the grant of leave, or loss which is out of all proportion to the benefit which leave would confer on the lessor, that may outweigh the loss to the lessor caused by a refusal. In assessing these respective losses the court should have regard to matters such as: the financial position of the company, its ability to pay the rental arrears and the continuing rentals, the administrator’s proposals, the period for which the administration order had already been in force and was expected to remain in force, the effect on the administration if leave were given, the effect on the applicant if leave were refused, the end result sought to be achieved by the administration, the prospects of that result being achieved, and the history of the administration to date. Degrees of probability would also be relevant, so that if loss to the applicant is virtually certain if leave is refused, and loss to others a remote possibility if leave is granted, that will be a powerful factor in favour of granting leave.
Other case law has suggested that where a claim is for money only, such as a claim for damages or debt, leave is more unlikely to be given. Conversely, if a claim is nearing the point at which it would become “time-barred” because of the provisions of the Limitation Act 1980, that would be a material point in favour of granting leave. Similarly, where the company had insurance for the claim.
What, then, of a case where a company that is in Administration is pursuing a claim against a third party? Is that third party precluded from defending itself by relying on a counterclaim, on the basis that the moratorium applies? This was the situation in the recent High Court case of Cargo Logic Air Ltd v WWTAI AirOpCo 1 Bermuda Ltd, which concerned aircraft leasing. In particular, what if, as here, the counterclaim was not simply a set-off, or shield, against the action brought by the company itself? Previous case law in 2016 (Mortgage Debenture Ltd v Chapman) had confirmed that where a “counterclaim” was made solely to raise a defence of set-off to a claim brought by a company in Administration, or its Administrator, that counterclaim would not breach the moratorium rule.
In the Cargo Logic case, the Administrators tried to get the court to strike out the counterclaim on the basis that the court’s permission had not been granted.
The court accepted that the amount of the counterclaim could exceed the amount claimed by the Administrators – so this was not a purely defensive case, like Mortgage Debenture Ltd v Chapman. Permission was therefore needed. But it decided nonetheless to grant retrospective permission to proceed with the counterclaim subject to certain conditions. These included that any money judgment given in relation to the counterclaim could not be enforced without the Administrators’ consent or the court’s permission. The court’s reasons included that even where a counterclaim is more than purely defensive, the fact that it is in part defensive and is connected closely with the claim that the company itself is making was influential: “If, for instance, someone has an unliquidated claim which might be set off against the company’s claim, but may exceed it, the court cannot avoid deciding the claim to the extent that it constitutes a set off. But since that means that the claim must be decided, it would serve no useful purpose not to insist that it should be only partly decided. Furthermore, there is something fundamentally questionable about a company making claims arising from a set of events but refusing to permit the target of its action to assert cross-claims arising from the very same facts….”
Another factor in the court’s decision was that the process of quantifying a creditor’s claim against the company, where there was a live dispute as to its validity, through the court action, could be of positive benefit to the creditors as a whole, where the Administrators were contemplating making a distribution to those creditors. It would help to define the company’s true financial position. Thirdly, the court found that the balance is more likely to lie in favour of the determination and preservation of an individual’s proprietary rights, to which the court attaches great importance.
The decision seems entirely fair in the circumstances. The collective interests of the creditors of the company as a whole, in relieving the company of the need to devote its time and money to “responding to the claims of the loudest and most aggressive creditors, or of dismemberment of its assets through execution or distress“, may deserve priority over some individual’s interests, but a balancing exercise does need to be carried out to avoid inequitable outcomes.
Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.
