Corporate groups trade as one business but are made up of separate legal persons, each with its own creditors. Sections 320A to 320C of the Companies Act 1997 allow the Court to look past that separation when a group fails.
Section 320A — the two kinds of order
(a) a company that is, or has been, related to the company in liquidation must pay to the liquidator the whole or part of any or all of the claims made in the liquidation; and
(b) where two or more related companies are in liquidation, the liquidations must proceed together as if they were one company, to the extent the Court orders and subject to such terms and conditions as it may impose.
(2) The Court may make such other order or give such directions to facilitate an order under subsection (1) as it thinks fit.
| s 320A(1)(a) — contribution | s 320A(1)(b) — pooling | |
|---|---|---|
| Target | A related company that need not be in liquidation | Two or more related companies that are in liquidation |
| Effect | The related company pays the liquidator the whole or part of the claims | The liquidations proceed as one, so one pool of assets meets one pool of claims |
| Who benefits | Creditors of the company in liquidation | Creditors of all the pooled companies, together |
| Who may lose | The solvent related company and its own creditors and shareholders | Creditors of the better-funded company in the group |
| Guidelines | s 320C(1) | s 320C(2) |
Whether companies are related is determined by the definitions in sections 5 to 7 — holding company, subsidiary, and related company. Paragraph (a) reaches a company that has been related, so restructuring the group before the liquidation does not defeat an application.
Note who may apply: the liquidator, but also a creditor or shareholder directly. A creditor need not persuade the liquidator to act.
Section 320C(1) — the guidelines for a contribution order
(a) the extent to which the related company took part in the management of the company in liquidation; and
(b) the conduct of the related company towards the creditors of the company in liquidation; and
(c) the extent to which the circumstances that gave rise to the liquidation are attributable to the actions of the related company; and
(d) such other matters as the Court thinks fit.
All three named factors look at what the related company did: whether it ran the failed company, how it behaved towards that company’s creditors, and whether its actions caused the failure. A parent that simply held shares and left the subsidiary to trade on its own is in a very different position from one that directed its affairs, took its cash, and let it incur debts.
Section 320C(3) makes the point from the other direction: the fact that creditors relied on the fact that another company is, or was, related to the company in liquidation is not a ground for making an order. Trading with a company because it belongs to a well-known group is not enough. Creditors who want the group to stand behind a subsidiary must take a guarantee.
Section 320C(2) — the guidelines for a pooling order
(a) the extent to which any of the companies took part in the management of any of the others; and
(b) the conduct of any of the companies towards the creditors of any of the others; and
(c) the extent to which the circumstances giving rise to any of the liquidations are attributable to the actions of any of the others; and
(d) the extent to which the businesses of the companies have been combined; and
(e) such other matters as the Court thinks fit.
Where a group has traded as a single business — shared bank accounts, intermingled stock, common employees, no reliable inter-company accounting — separating the estates may be impossible, or so expensive that it consumes the assets. That is the classic case for pooling.
Pooling is not neutral. Creditors of the company with the better balance sheet are diluted; creditors of the weaker company gain. That is why the test is just and equitable and why every factor is directed at whether the companies were genuinely run as separate concerns.
Section 320B — notice of the application
(1) Unless the Court orders otherwise, an applicant must give notice to the liquidator and each creditor of each related company in liquidation that the application has been filed. (2) The applicant need not give notice to themselves.
(3) The notice must (a) identify each company to which the proposed order relates; (b) summarise all information known to the applicant that is material to whether the order should be made; and (c) state that a person to whom notice must be given may oppose the application by filing a statement of defence in accordance with the Court Rules.
(4) This requirement is in addition to anything required by the Court Rules.
The applicant must summarise all information known to the applicant that is material to whether the order should be made — not only the material that supports the application. It is a duty of candour owed to the creditors who will be affected, and it reflects the fact that many of them will not otherwise know the application exists.
The section as enacted refers to an application “under Section 371A”; read in context with its heading and with sections 320A and 320C, it is directed at pooling applications, and a prudent applicant will give the notice on any application under section 320A.
How this fits with the other group provisions
| Provision | What it does | Threshold |
|---|---|---|
| ss 320A–320C | Contribution by, or pooling with, a related company | Just and equitable, on the s 320C factors |
| s 346 | Recovery of a benefit received by a related entity resulting from a transaction | The transaction and the benefit |
| s 349 | Liability of a holding company for the insolvent trading of a subsidiary | Awareness, or reasonable expectation of awareness, having regard to the company’s control |
| ss 340–345 | Voidable transactions, with longer look-back periods for related parties | Insolvency and preferential effect |
| s 295A | Setting aside a creditors’ resolution carried by related creditors | Unreasonable prejudice |
Together these provisions make the point that separate legal personality holds in a group — until the group is run in a way that makes it unjust to insist on it.
Sources
- Companies Act 1997 — ss 5–7, 295A, 320A–320C, 340–346, 349
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.