Insolvency and inquisitiveness

As reported in Building earlier this year, construction experienced the highest number of insolvencies of any UK industry in 2018. Last year 2,954 firms became insolvent, an increase of 12% on the previous year and more than in any year since 2013. It is well known that the construction sector is particularly prone to insolvencies and there has been a great deal written about why that is and what can be done about it. Of equal importance, perhaps, and particularly for those that find themselves involved with an insolvent company, is what happens once an insolvency practitioner has been appointed. There is a significant amount of statutory regulation around this area, much of it contained in the Insolvency Act 1986. One aspect of the Insolvency Act that I would like to consider in a bit more detail here is section 236. 

If you receive a request for information referring to section 236 but without any explanation or prior requests for information, consider whether this has been properly made

When a company is in insolvency, whether that be administration, administrative receivership, provisional liquidation or liquidation, the insolvency practitioner can apply to the court for an order under section 236 requiring a person to provide information about the company or to attend an examination in court. I am concerned here with the provision of information since an aspect of this was the subject of a recent decision in Wallace vs Wallace [2019] EWHC 2503(Ch). I will come back to this case shortly. 

The reasons for seeking an order under section 236 include the following: 

• Allowing the insolvency practitioner to “discover the truth” of the company’s circumstances
• Putting the affairs of the insolvent company in order 
• Identifying and recovering assets 
• Discovering facts surrounding potential claims 
• Reconstituting the company’s accounting or business records
• Obtaining information to enable contracts to be completed. 

The issue in Wallace vs Wallace was whether, as the court put it, section 236 has “extraterritorial effect”. In the circumstances of this particular case the question was whether a section 236 order could be made against someone resident in the Republic of Ireland. 

This was not a construction case (it concerned the insolvency of a meat wholesaler) but the principle explored in the case is obviously equally applicable to insolvent construction companies. While we do not need to go into too much detail about the facts, an order was being sought by the liquidator of the meat wholesale company for the production of extensive company records from the company’s former bookkeeper, who was now resident in the Republic of Ireland and who had refused to comply with written requests to produce the documentation. It seemed clear that this person was probably the only one who had sufficient records to enable the insolvency of the company to proceed properly. 

The cases that consider whether a section 236 order can be made against somebody out of the jurisdiction are at odds with each other and present, as the court said, “a somewhat fragmented picture”. The court reviewed the purpose of section 236, which is to facilitate the functions of the insolvency practitioner, and concluded that the production of these documents would not be unduly onerous or impose an unreasonable or unnecessary burden on the person against whom the order was sought. The court also concluded that the ability to require production of documents and information under section 236(3) was a standalone power that could be exercised against someone out of the jurisdiction. Accordingly, the order as requested was granted. 

Given the potential extent of the requests for information that can be made under a section 236 order, anyone applying for an order must demonstrate that the request is reasonable, that the information is reasonably required for the purposes described above, that investigations have already been made to get as much documentation as possible from other sources and that it can be demonstrated that that documentation is not available elsewhere. Also, as noted in Wallace vs Wallace, it has to be shown that the production of the information does not impose an unnecessary and unreasonable burden on the person from whom the information is being sought. I have come across examples of requests being made of third parties (often the other party to a contract entered into by an insolvent contractor or subcontractor) to provide a wide array of documentation citing section 236 in circumstances in which no order has been sought and indeed without providing any evidence to show that enquiries have already been made elsewhere. This is obviously not a proper exercise of the section 236 powers. 

Consequently, if you receive a wide-ranging request for information referring to section 236 but without any explanation or prior requests for information, consider whether this has been properly made. Section 236 orders are undoubtedly helpful to insolvency practitioners but, as was the case in Wallace vs Wallace, they should be used only after other avenues of enquiry have been exhausted.

Simon Lewis is a partner in the construction and engineering team at Womble Bond Dickinson (UK)