Court applies the brakes on liquidators' pursuit of "everything forever"

The court has dismissed an appeal brought by liquidators in respect of their previous application for disclosure of all information and documents in relation to the insolvent company. 

The judgment represents an emphatic restatement of the relevant law. It is also indicative of the approach the courts are taking when dealing with such applications: office holders seeking "everything forever" are likely to hit the buffers. 

The first instance decision

In Webb v Eversholt Rail Limited [2024] EWHC 2217 (Ch), the High Court dismissed the liquidators' application for disclosure and delivery up of all information and documents in relation to the insolvent company, made pursuant to sections 235 and 236 of the Insolvency Act 1986. 

The joint liquidators of Eversholt Rail (365) Ltd (365) had sought records and information from sister company Eversholt Rail Ltd (ERL), in connection with the business of 365. This was in circumstances where the administrative function of 365 had been hived off to ERL.

ERL provided documentation to the liquidators, who then proceeded to make further requests, culminating in a request that ERL should deliver up everything it held "in relation" to 365. This wide-ranging request was resisted by ERL, and the matter went before the court.

Ultimately the court found that the liquidators failed to evidence a "reasonable requirement" for the documents and information sought. Not only had ERL been cooperating with the requests made, but the liquidators' application was too widely framed. In refusing the application, ICC Judge Burton commented that it was "fundamentally misconceived", essentially because it proceeded on the basis that the liquidators were entitled to be in the same position as they would have been in, had 365 held its own records.

The appeal

The liquidators of 365 advanced 10 grounds of appeal, several of which concerned the ICC Judge's interpretation and application of section 235 (duty to cooperate with office holder) and section 236 (inquiry into company's dealings). 

By way of reminder and broadly speaking, the duty to co-operate with an office holder under section 235 is to give the office holder information that they may reasonably require, concerning the company and its promotion, formation, business, dealings, affairs or property.

Under section 236, an office holder may apply for an order requiring a person to provide information about the company, attend a private examination in court and produce any books, papers or other records in their possession or under their control.

The power under section 236 is an extraordinary one: the court must consider the reasonable requirements of the office holder to carry out their task but avoid making an order which is wholly unreasonable, unnecessary or oppressive to the person concerned (the balancing exercise) [1].

In the appeal, the central issues for the court to decide boiled down to:

• What the liquidators had to demonstrate in an application under sections 235 and 236 IA 1986, and
• The extent to which the liquidators were entitled to ask for wide categories of documents and information, including documents "relating to" the affairs of 365.

The liquidators argued that section 236 IA 1986 exists, primarily, to assist a liquidator in reconstituting the corporate knowledge of the company. Accordingly, they were entitled to that, without having to establish a reasonable requirement to particular information. In short, they were entitled to "everything forever".

Alternatively, it was reasonable for the liquidators of 365 to require "everything forever", because they had no useful documents available to them, and were essentially "starting from scratch". 

The decision

Both of these arguments failed, and the court was clear that liquidators must establish a reasonable requirement for documents or information under both sections 235 and 246 IA 1986. The judge noted that it may be possible, in certain cases, to establish that a need to reconstitute the company’s knowledge does justify "everything forever" disclosure, but that was not the case here. 

In relation to the duty to duty to cooperate with an office holder, the reasonable requirement factor is "baked into" section 235: it is a statutory qualification. The judge commented that it would appear to be "anomalous" if that same requirement was not also required by section 236 (which applies to a broader category of persons and third parties). A "reasonable requirement" is therefore also a necessity in an application under section 236. 

Further, a need to reconstitute corporate knowledge is not a requirement: it is one of the underlying purposes of the statute. As the judge remarked, "it is not sufficient to express the reconstituting purpose": requirement and purpose are different. Sections 235 and 236 are the means of achieving the purpose, and they come with their own limitations and qualifications. 

Takeaways

What is clear is that office holders must demonstrate a reasonable requirement for documents and information: that is the first hurdle to overcome before the balancing exercise can even begin.  

Reading between the lines of the judgment, it is also possible to see how applications may be prepared in such a way that they will be more palatable to the court asked to make the order. It is notable that the judge made direct comments as to the drafting of the liquidators' application:

For the purposes of this appeal it should be noted that in paragraph 1 of that application there is a generalised application for a very wide body of documents and information, unlimited by time or any other factor other than their relationship to the business of 365. The following sub-paragraphs focus more on particular aspects, some of which are expressly time-related, but some are again widely phrased by the words “relating to” or similar. The application is not couched as applications for the wider and narrower relief each in the alternative; the narrower relief is expressed to be part of ("including but not limited to") the wider form.

It appears that an application for documents "relating to" the insolvent company is an immediate red flag. A greater level of thought and engagement is required in the drafting of the order sought, as an application designed to "cover all bases" seems less likely to succeed. What defined and specific categories of documents might the office holder need, and why? While this may be initially more challenging for office holders who are "starting from scratch", clearly defined categories of documents, with alternatives proposed, will likely reap rewards, even if an iterative process is required.