“National interest insolvencies” – creditors vs the public interest?

At a seminar in London on 11 May 2022 – National Interest Insolvencies – Should these be for the State to manage? – [ Webinars – Reorg ] a decision of the English High Court was discussed where the government Official Receiver was appointed to a failed and hazardous electricity supply company the liquidation of which tested the extent to which the OR could act in the public interest in maintaining vital electricity supplies beyond those required for the purposes of the liquidation. The issue connects with the question of the extent to which private liquidators in Australia, which has no OR role, should assume undue risks which they may not be able to disclaim. 

That came up in the recent decision in Australian Sawmilling denying the liquidators the right to disclaim hazardous assets. Comments were made that liquidators would need to more carefully assess whether to consent to such appointments if that right to disclaim were limited.  There is no reason why a private liquidator should assume the extreme risks that can exist with some failed businesses’ operations. See Insolvency disclaimer or state control – furnaces and coke ovens, pyrophoric iron sulphide and methane, effluent lagoons and asbestos … – Murrays Legal

My response it to agree but to note that Australian law offers no direct solution to such a dilemma such as is available elsewhere, where there are government Official Receivers.  In the UK, the Official Receiver has taken appointments to what might be termed national interest insolvencies – British Steel, with extreme environmental and health risks; Thomas Cook, the failure of which called for the largest peace time repatriation of British citizens; and Carillion Constructions, which had extensive government contracts for the construction of schools and hospitals.  In each case, the OR was appointed by the Court with large private firms appointed as special managers to handle the work under the supervision of the OR.

A UK failed electricity supplier – Baglan

In a recent matter, the OR had been appointed to a group of failed electricity supply companies – Baglan – with major health and environmental risks; two private liquidators were appointed a special managers.  The OR had received an indemnity from the Department for Business Energy and Industrial Strategy to the effect that the OR was protected in relation to work ensuring “that the Companies’ sites and operations can be secured and that health and safety concerns associated with the site can be addressed”.

If the OR were to close down Baglan’s operations according to its duty to carry on the business only for the beneficial winding up (a test the same as that in Australia), there would have been consequent severe environmental and other harm to the local area. Nevertheless the OR considered it had no discretion in continuing to trade the business by way of supplying electricity where this was not necessary to safely oversee the ordered closure of the plant.  Its right to disclaim was also clear.

Certain government customers applied to the English High Court and succeeded in having the OR’s decision altered.

The public interest role of the UK OR

From my Australian perspective (where we have no corporate Official Receiver) I won’t purport to address the nature of the UK OR beyond noting that its duty as a liquidator would not properly be different from that of a private liquidator; the OR cannot for example treat the government as a creditor different from any other creditor.

A further question is whether it can assume public interest tasks beyond its duties as a liquidator.  As under Australian law, there are limits in how far a liquidator or trustee can go in trading on a business for its beneficial disposal, as one liquidator found out when his application to the court to allow him to trade on the company’s wine business and transform it into a large enterprise was refused.  To what extent a trade on can proceed in order to ameliorate disruption to electricity or other such vital supplies, beyond the interests of creditors, is the issue.

As to the OR, the High Court noted that the “public element in winding up” has much changed since the creation of the OR roles in England in the last 19th century, the court referring to the development of the law in responding to major social changes, including the establishment of prosecuting authorities, the emergence of a body of skilled and responsible insolvency practitioners, and the recognition that the protection of the public against corporate misconduct may be better attained by civil action (in particular disqualification of directors) rather than by criminal proceedings. The need to protect the public against the abuse of limited liability is a clear and constant theme.

The resolution of the ‘health and safety and environmental concerns’ was part of the ‘beneficial winding up’ and therefore within the Official Receiver’s powers

With that public element in mind, the Court ultimately resolved the matter by declaring that the resolution of the ‘health and safety and environmental concerns’ was part of the ‘beneficial winding up’ of Baglan and therefore within the OR’s powers.

Rather than require the OR to reconsider its decision, the Court agreed to direct that its decision be modified to allow a continued supply of electricity to particular public authorities for a short period of time to allow for alternative solutions to be put in place; this concession did not extend to private interests affected by the company’s closure.

See  Counsel General for Wales & Ors v Allen & Ors [2022] EWHC 647 (Ch) (21 March 2022) (bailii.org)

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