In a decision earlier this month, the High Court lifted a statutory moratorium allowing a counterclaim against a company in administration to proceed. The court declined to set out definitive rules to be applied in such cases, but noted three main themes. We consider this decision and why it matters in the current economic climate.

The case of Cargologicair Limited v Wwtai Airopco 1 Bermuda Limited [2024] EWHC 508 (Comm) concerns a claim by the lessee of an aircraft ("CLA") against the aircraft lessor (the “Lessor”). After the claim was issued, CLA was placed into administration. Thereafter, the Lessor served its defence to the claim, together with a counterclaim. No consent to advance the counterclaim had been sought from either the court or the administrator. Accordingly, CLA sought to strike out the counterclaim on the basis that the permission required under the Insolvency Act 1986 was lacking.

Paragraph 43 of Schedule B1 to the Insolvency Act 1986 sets out the statutory moratorium that arises in an administration. It provides that no legal process may be instituted against a company in administration without the consent of the administrator or the court. This prohibition includes advancing a counterclaim. 

As established in Mortgage Debenture Limited v Chapman [2016] EWCA Civ 103, permission is not required where a counterclaim is “pleaded solely to raise a defence by way of set off”. However, the counterclaim pleaded in this case was acknowledged to have the potential to exceed the quantum of any sum due to CLA. Other relief was also sought. Accordingly, permission should have been sought before the counterclaim was advanced and the counterclaim had therefore been made in breach of the statutory moratorium. 

The court therefore considered whether permission should be given retrospectively. In doing so, the court noted the cases of Sunberry Properties Limited v Innovate Logistics Limited [2008] EWCA Civ 1321, in which the court stated the test is whether it would be “inequitable” to prevent the prospective claimants from pursuing proceedings, and Re Atlantic Computer Systems Plc [1992] Ch 505, which noted that a balancing exercise of the legitimate interests of one creditor against the collective interests of creditors as a whole must be undertaken.

The court concluded that when deciding whether permission should be given, “[i]t is impossible to reduce such an exercise to rules. But certain themes may be noted”. These are as follows:

1. It will often be in the collective interests of the creditors of an insolvent company (as well as those of the individual claimant) for there to be a definitive decision on liability, which will in turn aid understanding of the company's financial position.
2. The balance is more likely to be in favour of the determination and preservation of an individual's proprietary rights.
3. Even if a claim is not solely defensive, if it is partly defensive and has a close connection to the claim being brought by the company, this will be an important factor. Therefore, if the administrators choose to proceed with a claim, they should prepare to deal with the defence.
4. A court can give permission, but subject to conditions.

The court allowed the Lessor's counterclaim to proceed. However, it imposed a condition that any judgment obtained by the Lessor “should not be enforced or executed in a way that could disrupt the administration or enable the Lessor to steal a march on other creditors”. Further, it was held that the Lessor must plead the specific figure (or range of figures) that it maintains constituted the market rent of the aircraft, which would serve to assist CLA's administrators in being able to form a view of the size of the claim. A “wait and see” approach in terms of quantum was not, in the judge's opinion, reasonable or responsible. Lastly, it was ordered that the sale contract of the aircraft be disclosed, in order to allow CLA to properly respond to a specific part of the defence and counterclaim. 

Comment

The UK economy fell into recession at the end of 2023 and interest rates remain (relatively) high for now at least. Company insolvencies have increased in the wake of the withdrawal of Covid support measures and they remain high. Statistics published by the Insolvency Service indicate that the number of company insolvencies in 2023 was the highest annual number since 1993. Although administrations form a relatively small part of the insolvency procedures in use, in the absence of agreement with insolvency office holders regarding claims, we might expect issues such as those in the Cargologicair case to arise increasingly frequently in the present climate.

The themes set out in this case, and the considerations when imposing conditions on the grant of permission to proceed with a counterclaim, should be borne in mind by insolvency professionals, as well as those dealing with an insolvent counterparty.

In reaching its decision, the court had high regard for the requirement of certainty and clarity, both in the administration itself (certainty for all parties concerned as to the amount of the potential liability the company faces and certainty of preservation of proprietary rights) and in respect of the counterclaim (requiring the best information to be put forward to allow the claim to proceed in an efficient and cost-effective way).

For a discussion on issues raised in this article, or to explore our interactive and informative training offering to legal and business teams on insolvency issues, please contact Mark Lim.