High Court cannot stay liquidated company's Magistrates' Court case

Out-Law Legal Update | 25 Nov 2019 | 3:09 pm | 2 min. read

The High Court in England has ruled that it does not have the authority to stop a criminal trial in another court to protect the creditors of a company in voluntary liquidation.

The Court said that it could order one of the parties to the litigation not to pursue the case but could not stay the proceedings where those proceedings were brought before another court.

This is the first case to be decided on section 126 of the Insolvency Act of 1986 (IA86) which gives a court the 'power to stay or restrain proceedings against [a] company' in voluntary liquidation.

Paperback Collection and Recycling Limited treated and disposed of non-hazardous waste materials. After it had entered into creditors' voluntary liquidation the National Resource Body for Wales (NRBW) took criminal proceedings against the company and its directors in the Magistrates' Court over multiple alleged offences,  including the company knowingly generating waste with no authorisation to store it and a breach of the conditions of its environmental permits. The clean-up costs were estimated to be around £3 million.

Paperback's liquidators sought an order to stay the criminal proceedings. It is the first time the High Court has been asked to rule on a stay under section 126 of IA86, and under section 112, which deals with 'reference of questions to the court'.

In a voluntary winding up case section 112 allows a court to exercise "all or any of the powers which the court might exercise if the company were being wound up by the court". The judge said that section 126 allowed a company to apply for a stay in the court where the action was pending and apply to the court having jurisdiction to wind up the company to restrain further actions or proceedings. The judge, therefore, concluded that "whilst it would be open to me to make an order restraining NRBW from pursuing the criminal proceedings, I do not have the jurisdiction to order a stay".

Although the court concluded it did not have jurisdiction, the judge said that the criminal proceedings should not be stayed in any event because the wider public interest to prosecute for serious environmental offences outweighs the disadvantage of the cost to Paperback's creditors of defending the case and paying any fines.

The court did not comment on whether any fine or environmental clean up costs would rank in priority in the insolvency waterfall of payments. It also did not refer to the case from last year which dealt with whether environmental clean up costs could be a liquidation expense.

This was the first ruling on this issue and will set a precedent that the High Court does not have jurisdiction to stay criminal proceedings against a company in voluntary liquidation. This decision will affect insolvency practitioners in the future as it has made it clear that an application of this nature needs to be made to the same court where the proceedings have been brought.

It is interesting that the judge took the view that serious environmental offences outweighed creditor disadvantage stemming from a prosecution. Creditors should bear in mind that criminal proceedings for serious environmental breaches against a company in voluntary liquidation are taken seriously by the court and proceedings may not be stayed which could significantly reduce the company's asset realisation for its creditors.

Co-authored by Emily Turnock, a restructuring expert at Pinsent Masons, the law firm behind Out-Law