In County Leasing Management Ltd v Hawkes(1) the Court of Appeal considered an appeal against a limitation direction made under the Companies Act 2006.
A limitation direction provides for the restoration to the Register of Companies of a dissolved company and the suspension of the limitation period for claims during dissolution for the purposes of the Limitation Act 1980. The Court of Appeal has now provided guidance on the principles applicable to the court's discretion to make such an order, which suspends the effects of the Limitation Act.
During its life a company exists as a separate legal entity. At the end of a company's life it is struck off the Register of Companies and ceases to exist.
However, in certain circumstances it is possible to restore to the register a company that has been struck off or dissolved. Usually, the need to restore a company to the register arises where:
- a company has been struck off for failing to file annual returns and accounts, but its business continues to trade;
- a third party has an unresolved claim against the company and must take some action against the company to obtain compensation or redress; or
- the company had title to an asset when it was dissolved that is of value or importance to the operation of another company.
Under Section 1031(1)(c) of the Companies Act, the court may order the restoration of the dissolved company if it considers it just to do so.
As described above, where a company has been dissolved it is no longer a legal entity and proceedings cannot be started by or against it. Therefore, in order to bring a claim it is first necessary to restore the company to the Register of Companies by making an application under Section 1032 of the Companies Act.
Section 1032(1) of the Companies Act provides that the "general effect of an order by the court for restoration to the register is that the company is deemed to have continued in existence as if it had not been dissolved or struck off the register".
Further, Section 1032(3) of the Companies Act provides that when ordering the restoration of a company to the register, the court can also give any directions or make any provisions as may be just for restoring the company and any other persons to the same position that they would have been in had the company not been dissolved or struck off . It is by means of this discretion that limitation directions may be made.
Until County Leasing limitation directions have previously been subject to limited judicial guidance.
Re Donald Kenyon Limited(2) concerned the granting of a limitation direction with respect to a company restored to the register, to the benefit of creditors whose claims had otherwise expired.
The judge stated that it was only common fairness that if the shareholders wished to restore the company to the register years after its dissolution, the period between dissolution and the restoration to the register should be disregarded for the purpose of claims being brought against the company.
In terms of the exercise of the court's discretion to make a limitation direction to the benefit of a restored company, Regent Leisuretime v Natwest Finance Limited(3) is instructive.
In this case, the circumstances were different to Re Donald Kenyon, as the question under consideration was whether a limitation direction could be granted to enable the company to pursue claims against third parties which would otherwise be statute barred under the Limitation Act, rather than the other way around.
In Regent the Court of Appeal noted that a limitation direction could be made only where the company was not statute barred from bringing a claim at the date of its dissolution. Further, while the court considered that it had jurisdiction to deliver up a limitation direction in favour of the company, it also considered the scope of giving such direction to be extremely limited and ought only to be exercised in "exceptional circumstances", given that the effect of such a direction was to completely override the statutory limitation regime.
In Regent it was decided that there were no ''exceptional circumstances'' justifying the making of a limitation direction although, somewhat disappointingly, the court did not explore further what might constitute such ''exceptional circumstances''.
However, in County Leasing the question arose again as to when the court could make a limitation direction, and here the Court of Appeal explored in greater detail the factors a court should consider if and when deciding to grant one.
Telerate Limited carried on the business of demolition and clearing works. The respondent was the sole director and shareholder of Telerate.
In 2004 Telerate was experiencing serious financial difficulty and in October 2004 Her Majesty's Revenue and Customs petitioned to have Telerate wound up due to a debt owed to it.
In an attempt to keep the business afloat, the respondent negotiated a sale and leaseback arrangement with the appellants, County Leasing Asset Management Ltd and others. Pursuant to that arrangement, £225,000 was to be paid to Telerate for its assets and these would then be leased to two other companies also owned by the respondent. However, the full amount was never received under the arrangement.
Telerate subsequently went into administration in late January 2005 and liquidation in December 2005. Although the liquidator began investigating the potential claims in relation to the moneys due under the leaseback arrangement, this achieved no tangible result for Telerate before it was finally dissolved in April 2009.
In September 2010 the respondent applied for the restoration of Telerate to the register, and in December 2010, just as the primary limitation period for Telerate's claims in connection with the sale and leaseback arrangement were expiring, he applied for a limitation direction.
The respondent required the assignment of Telerate's claim as a defence and counterclaim on the grounds that, following an assignment, he had a real prospect of success.
The restoration order was granted in October 2011 and, in connection with this, Telerate's new liquidator assigned various causes of action to the respondent. The primary limitation period in respect of the assigned claims had expired approximately two years before the assignment to the respondent (and nearly one year before the order for restoration order was made).
The appellants subsequently appealed to have the limitation direction set aside.
Lord Justice Briggs, leading the Court of Appeal, held that Lord Justice Parker's comments in Regent on the issue of discretion were not simply obiter dicta and that the Court of Appeal should be bound by the principles set out in Regent regarding the discretion to make a limitation direction in favour of a company – namely:
- such discretion may be exercised only in exceptional circumstances (which the company must prove);
- the effect of making a limitation direction is to completely override the statutory limitation regime under the Limitation Act; and
- fairness would generally require that the company, like any other claimant faced with a limitation defence, should be left to attempt to meet that defence by recourse to the statutory regime.
In relation to the case in question, the Court of Appeal agreed with the comments in the first instance that a limitation direction would not be given to allow the pursuit of an obviously unmeritorious claim; however, it disagreed with much of the first-instance approach.
The Court of Appeal considered that the starting point for deciding whether to grant a limitation direction was to recognise that time would have run against Telerate even if it had not been dissolved. The court must therefore ask itself whether Telerate (or any assignee of the cause of action) would, on a balance of probabilities, have commenced proceedings within the statutory time limit. The judge in first instance had focused on why the claim was not brought within the time limit, rather than whether it actually would have been. However, the Court of Appeal did note that this test should not be applied in every case, and there may be exceptions where it could be disregarded.
If it is therefore established that the claim would probably have been brought within the time limit, the court must ask itself whether it would be just to provide that opportunity, after the event, by a limitation direction.
In County Leasing the Court of Appeal considered that nothing in the respondent's evidence suggested that a claim would probably have been brought before such claims became statute barred.
Briggs went on to state that as Telerate was dissolved by a deliberate act of the liquidator, it was not clear why it would be just to provide Telerate with a further opportunity to bring a claim. To do this would prejudice the persons who would thereby be deprived of a limitation defence, and would also be to the detriment of public interest whereby "stale" claims should be prevented.
Therefore, the limitation direction was set aside by the Court of Appeal.
The Court of Appeal decision in County Leasing provides practical guidance on the exercise of judicial discretion in making a limitation direction. In is apparent that a limitation direction to allow a restored company to pursue claims that have otherwise expired will only be granted in exceptional circumstances, and the court will apply the tests set out above.
The case is instructive as it will hopefully assist legal practitioners in advising corporate clients which find themselves in this situation on whether they are likely to be granted a limitation direction by the courts and given leave to pursue expired claims they may possess.
Whether the Court of Appeal's decision will prevent potential claimants from seeking a limitation direction in first instance remains to be seen.
For further information on this topic please contact Joe Speakman at Brown Rudnick LLP by telephone (+44 20 7851 6000) or email (firstname.lastname@example.org?). The Brown Rudnick LLP website can be accessed at www.brownrudnick.com.
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