Does Section 236 Need A Statutory Presumption Of Reasonableness?

The question cannot be answered without considering Section 236 of the Insolvency Act 1986 and its use. Is Section 236 a power to enable discovery of facts unknown or is it a power only to be deployed to assemble evidence of known facts?

In Picard (The Foreign Representative of Bernard L. Madoff Investment Securities Llc) v Fim Advisers Llp [2010] EWHC 1299 (Ch) it was said to be a power:

….conferred to enable the office holder to discover the true facts concerning the affairs of the company so that he may be able as quickly, effectively and with as little expense as possible to complete his duties…

This appears ironic as there is little that Clapham man would regard as quick where court processes are concerned.

It would nevertheless seem to follow that the section is not confined to the enforcement of evidence collection but extends to discovery of the unknown. 

However, there is a risk of a self-defeating circular position when Section 236 is deployed to enforce Section 235 obligations with reference to the ‘reasonable requirement’ that needs to be shown. The burden is placed at the door of the liquidator and this might be too great that the absence of the information sought could sometimes hamper the justification for it in the first place. 

Could parliament have structured a law with safeguards but risk diminishing its effectiveness?

What Is Section 236?

Section 236 of the Insolvency Act 1986 is a power to enable a liquidator to investigate. Without it, a liquidator is largely powerless to do so.

The section affords a liquidator the ability to either apply to court for an order to seek out documents held by third parties or to have an individual with information about the insolvent company examined in court.

Once a company goes into insolvent liquidation an independent person (the liquidator) has a duty to realise the company’s assets. A company’s assets can be known about but it is not unheard of for company assets to be withheld or even concealed.

Parliament clearly wished for liquidators to be able to expeditiously and thoroughly investigate so that the conduct of former directors could be examined and scrutinised.

Section 236 is there to enable a liquidator to obtain transparency about a company in liquidation’s financial dealings. The need for transparency is because it is not unknown for directors of insolvent companies to engage in improper appropriation of their assets in periods prior to liquidation. The potential for director abuse of their fiduciary functions triggers the need for investigation.

However, a liquidator needs the right tools for the job. There is little point in deploying an independent person to review if they are powerless to act when faced with resistance to provision of information from those obliged to provide it. 

Were a company’s records complete and delivered up then the section might never be needed. It is however not uncommon for company records provided to a liquidator to be incomplete making it hard to understand the merits of transactions and what happened to company assets.

Need For Section 236 Safeguards?

When independent parties are given powers it has also not been unknown (although by no means commonplace) for them to act on occasion with an excess of zeal. That is inter alia one of the purposes of court oversight. 

However, the controls can have a serious impact on the effectiveness of Section 236. Safeguards implemented to fetter the potential for use by a liquidator with an over zealous appetite for information may risk overlooking the abuse that Section 236 is there to arrest in the first place. 

What Are The Section 236 Safeguards?

The Section 236 safeguards take the form of the reasonable requirement threshold and the court oversight.

The reasonable requirement safeguard is written into Section 235. It restricts a liquidator from being above to scrape up information he or she does not reasonably need. A somewhat nebulous description perhaps that means court oversight (as the section’s power relies ultimately on a court application) determines if a reasonable requirement for the information sought has been shown. But it is inherently subjective.

The irony is that such safeguards can render section 236 potentially troublesome to deploy by placing obstacles before the liquidator to obtain information so that an investigation can be undertaken.

Section 236’s Potentially Self-Defeating Circular Problem

More concerning is the potentially self-defeating circular nature of certain Section 236 applications.

You have to show a reasonable requirement for the information sought. However, the person who makes the application enters office as a stranger. It is axiomatic in many instances they cannot plead a case save either in general terms or without engaging in speculation because the discovery phase has not yet taken place.

An investigation is not confined to knowledge of facts that need to be evidenced; it is also the discovery of facts unknown that need to be uncovered. This is where Section 236 can risk potentially creating a self-defeating circular position. It plainly can be a struggle to demonstrate a reasonable requirement if you have to prove a need for information about facts that you have not discovered. 

So long as the reasonable requirement threshold dictates a liquidator must prove a need for the information sought then it may risk the need for engagement of applications characterised by some speculation. Discovery of pertinent facts therefore may risk being lost if the information a liquidator can hope to obtain is restricted. 

This appears a loss to society. It must be in the public interest a liquidator’s investigations are undertaken with ease and able to be as thorough as possible.

Contested Section 236 applications are untypical but when they do sprout they illuminate the difficulties that can arise. 

The argument that there is no need for a statutory presumption for the liquidator is perhaps dampened by those who may suggest it already exists. In Cloverbay Ltd (joint administrators) v Bank of Credit and Commerce International SA [1991] 1 All ER 894 the view of the office-holder was said to be important:

…as officers of the court with detailed knowledge of all the circumstances of the company, their views should be afforded great weight by the court…

However, whilst that may be so, it still may not outflank the burden on the liquidator who might be fettered from being able to take their views beyond speculation. 

All investigations will likely have to start with some speculative elements. Accordingly, it would appear that when a person within the scope of Section 235 can be shown to have had involvement and knowledge about a company, is called to assist a liquidator, that on balance there appears to be a respectable argument for a statutory presumption to bolster the effectiveness of Section 236. 

Such a presumption could be added to conceivably enhance the effectiveness and utility of the section through a simple amendment to Section 235 as follows:

(3A) An office-holder who seeks the cooperation of the persons in sub-section (3) and section 435(6), is presumed, unless the contrary is shown, to reasonably require the same.