Vol 2 (2005) - Issue 4

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Court Rules on its Discretion under Section 130(2)

In the recent case of Enron Metals & Commodity Limited (in administration) v HIH Casualty & General Insurance Limited (in provisional liquidation) [2005] All ER (D) 178), the Companies Court was required to consider the extent of its discretion in determining an application to lift the statutory stay under section 130(2) of the Insolvency Act 1986.

The case concerned a claim by Enron under a policy of contract frustration insurance to which HIH subscribed as leading insurer. Disputes between the parties were required to be resolved pursuant to an arbitration clause under the policy, which also imposed a two year contractual limitation period. No arbitration had been commenced within the two year period, but it was Enron’s case that the period had been extended by way of a subsequent policy endorsement. There existed a substantive issue between the parties as to whether the endorsement had, in fact, become effective.

The case was unusual in that, by the time the claim under the policy came to be pursued, both protagonists were subject to insolvency proceedings; Enron became subject to administration in November 2001, while the English court had appointed provisional liquidators of HIH in March of that same year. By February 2005, the Administrators of Enron had resolved to commence arbitration on the claim against HIH, and so brought an application in the Companies Court under section 130(2) of the Insolvency Act 1986. This provides as follows:

When a winding up order has been made or a provisional liquidator has been appointed, no action or proceeding shall be proceeded with or commenced against the company or its property, except by leave of the court and subject to such terms as the court may impose.

It was accepted by both sides that arbitration constituted ‘proceedings’ for the purposes of the section. It was also common ground that the appointment of a provisional liquidator would not stop time running for limitation purposes, in the way that would be the case upon an ordinary liquidation (to which, see in Re Cases of Taff’s Well Ltd [1992] Ch. 179). That being so, HIH could raise as a defence to the claim any limitation period expiring during the course of the provisional liquidation.

Accordingly, HIH resisted the section 130(2) application on the ground that the claim, being contractually time barred, was bound to fail, and so nothing would be served by granting the Claimant permission to pursue it. As such, the Companies Court was asked to reach a view on the merits of the time bar defence, which Enron contended was outside its remit. Referring to the judgment of Parker J in Re Bank of Credit & Commerce International SA (No. 4) [1994] 1 BCLC 419, Enron argued that the role of the court upon a section 130(2) application was merely to determine the appropriate method for administering the claims against the company in liquidation, and not to undertake any investigation into the merits of the claim. Furthermore, since the parties had agreed upon arbitration as the mechanism for the resolution of disputes under the contract, Enron contended that it was not the role of any court, still less the Companies Court, to adjudge on the merits.

The court rejected each of those contentions. Noting the wide discretion conferred by section 130(2), Pumfrey J held that the Companies Court was entitled to assess the triability of the proposed claim, regardless of the tribunal in which the claim was sought to be raised. Relying upon the authority of in Re Hartlebury Printers [1992] ICR 559, and the earlier Australian case of Capital Financial Group Ltd v. Rothwells Ltd [1989] 15 ACLR 348, the judge subjected Enron’s claim to a threshold test of the ‘prima facie case’, which he characterized as the same test as that for summary judgment under CPR Part 24. Upon review of the documents, he concluded that the extension endorsement had not come into operation, and that accordingly Enron’s claim had no real prospect of success. The application under section 130(2) was dismissed.
A good deal of the judgment is devoted to the judge’s reasoning on the merits of the time bar defence, a reflection of the fact that the point was not obvious on its face. In order to reach a conclusion that the claim was time barred, it was necessary to review a draft rescheduled loan agreement and associated correspondence passing between Enron and its counterparty under the insured contract.