LAW REPORT: 13 MAY 1998; Claim could not be made against insolvent company

Re Polly Peck International plc (in administration) (No 2); Court of Appeal (Lord Justice Nourse, Lord Justice Potter and Lord Justice Mummery) 7 May 1998
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WHERE an insolvent company had gone into administration or liquidation the court would not grant leave to commence proceedings against the company where the claim was for a "remedial constructive trust", which would operate to exclude an asset of the company from pari passu distribution among its unsecured creditors.

The Court of Appeal allowed the appeal of Polly Peck International plc, which had been in administration since 25 October 1990, and its administrators, against a decision that the applicants should have leave to commence proceedings by way of writ pursuant to section 11(3)(d) of the Insolvency Act 1986, claiming, inter alia, that an undisclosed substantial sum received by the administrators represented the profits and proceeds of wrongdoing by PPI, which had been unjustly enriched at the applicants' expense.

The applicants claimed that that sum was subject to a "remedial constructive trust" for their benefit. PPI opposed the application, contending that the proposed action was bound to fail on the ground, inter alia, that the claim was misconceived and failed to disclose any seriously arguable case.

Michael Crystal QC, William Trower and Philippe Sands (Cameron McKenna) for PPI; Barbara Dohmann QC, Lawrence Collins QC and Thomas Beazley (Osborne Clarke, Bristol) for the applicants.

Lord Justice Mummery said the applicants claimed to own and be entitled to immediate possession of land, buildings, and other immovable property in the northern part of Cyprus, which had been occupied by Turkey in August 1974, and had since been declared by the Turkish Cypriot authorities to be the "Turkish Republic of Northern Cyprus" (TRNC). After the Turkish invasion, the properties had been expropriated.

The applicants contended that their property had been, with knowledge of the wrongs committed against them and their property, illegally occupied and exploited without their authority by direct or indirect subsidiaries of PPI, or by persons acting for or at the direction of the administrators of PPI.

The making of an administration order triggered a prohibition on proceedings being commenced or continued against the company. The court might grant leave for commencement of proceedings against the company under section 11(3)(d) of the 1986 Act, provided that the application for leave disclosed that the jurisdiction of the court to entertain the claim had been sufficiently established in respect of a seriously arguable case.

The order sought by the applicants would operate to exclude the assets from pari passu distribution by the administrators among the unsecured creditors of the company in accordance with the legislative scheme prescribed by the 1986 Act.

The essential characteristic of the statutory scheme was that the liquidator or administrator was bound to deal with the assets of the company as directed by statute for the benefit of all creditors who came in to prove a valid claim. If an asset was the absolute beneficial property of the company, there was no general power in the liquidator, the administrators, or the court to amend or modify the statutory scheme so as to transfer that asset or to declare it to be held for the benefit of another person.

There was no prospect that the court would, in the present case, grant a remedial constructive trust to the applicants, since the effect of the statutory scheme applicable on an insolvency was to shut out a remedy which would, if available, have the effect of conferring a priority not accorded by the provisions of the scheme. It had been submitted for the applicant that "the law moves". That was true, but it could not legitimately be moved by judicial decision down a road signed "No Entry" by Parliament. The insolvency road was blocked off to remedial constructive trusts, at least when judge-driven in a vehicle of discretion.

Kate O'Hanlon, Barrister