The High Court confirms that time does not stop running for limitation purposes when a company goes into administration

Our article looks at the decision and what it means for those who may have a claim against a company in administration.

What did the High Court decide?

The factual background related to two energy companies which had both entered administration, and subsequently liquidation. Each asserted claims against the other. One of the issues that fell to be determined by Andrew Twigger KC (sitting as a Deputy Judge of the High Court) was whether, when a company enters administration, time stops running for limitation purposes in respect of claims against that company.

The Deputy Judge reviewed the authorities on the effect of administration and liquidation on limitation, and noted that “it is settled law that, when a company enters compulsory liquidation, time ceases to run for limitation purposes”. The Deputy Judge also expressed the view that the position is the same when a company enters creditors’ voluntary liquidation. The rationale for time ceasing to run in a liquidation scenario is that “a statutory trust arises in favour of all those who have claims at the date on which that trust arises. Each such creditor then becomes entitled to claim a share in the company’s assets”. So, in liquidation, a claim that existed at the time of the company’s entry into that procedure will not become time-barred.

As regards administration, whilst it has been held that time continues to run for limitation purposes when a company enters administration, the authorities which reached that conclusion were all concerned with administrations under the statutory regime which applied prior to the Enterprise Act 2002. That statute introduced a new (that is, new in 2003 when it came into effect) process of administration by inserting Schedule B1 into the Insolvency Act 1986. The question to be determined in the present case was “whether that new process has changed the law so that time stops running for limitation purposes when a company enters administration”. 

A key difference between pre- and post-Enterprise Act administrations is that historically, an administrator had no power to make a distribution of assets amongst creditors. However, in a post-Enterprise Act administration, it is possible for an administrator to make distributions. If an administration reaches a point where a company’s assets will be divided amongst the creditors by an administrator, “as and when an administrator gives notice of intention to make a distribution, and assuming it is a distribution of the proceeds derived from all the remaining assets, there would be good grounds for saying that the conditions for a statutory trust had arisen”. It would be on this basis that an argument could be run that time stops running for limitation purposes in administration, because at that point, the administration closely aligns with a liquidation.

Critically, however, the Deputy Judge noted that not all administrations are distributive (as administration is primarily designed to be a rescue procedure, rather than a terminal one). Given that some administrations are distributive, and some are not, seeking to determine whether and when time stops running for limitation purposes by reference to whether a statutory trust has arisen in any given administration would be fraught with uncertainty. Parliament cannot have intended such inconsistency between different types of post-Enterprise Act 2002 administrations.

Whilst the Deputy Judge observed that “I have considerable sympathy with creditors who submit a proof of debt in an administration and are subsequently taken by surprise by the discovery that their claims have become time barred”, he also noted that the question of whether an administration has the effect of stopping time running “does not depend on what creditors might reasonably understand from the proof of debt process”.

The Deputy Judge therefore confirmed that time continues to run in respect of claims against a company when that company enters administration.

Why does this matter?

Whilst the conclusion of the High Court accords with the position as widely understood before this judgment, this is the first time that the point has been specifically addressed by a Court in relation to a post-Enterprise Act 2002 administration. The decision therefore provides some clarity in the context of limitation periods within insolvency proceedings.

Practical steps that creditors in an administration might wish to consider to protect against claims becoming time-barred include seeking to negotiate a standstill agreement with administrators, or asking that administrators consent to proceedings being issued (given the existence of a moratorium in administration which would prevent creditors issuing proceedings without the consent of the administrators or the permission of the Court). This is an area fraught with complexity and so creditors should tread carefully, and take appropriate legal advice.

How Eversheds Sutherland can assist

Should you require advice on litigation in the context of insolvency proceedings, or upon restructuring or insolvency matters more generally, Eversheds Sutherland can leverage its market-leading strength and depth of experience in this area to assist. For more information or guidance, please get in touch with your usual Eversheds Sutherland contact, or one of the individuals below.