IP Briefing: Sahaviriya Steel Industries UK Ltd v Hewden Stuart Ltd – Validation Orders

The Background

In September 2015, the English High Court issued a limited public judgement in the case of Sahaviriya Steel Industries UK Ltd v Hewden Stuart Ltd. Insolvency Practitioners may recognise that Sahaviriya Steel Industries (“SSI”) is the company behind the closure of the large steelworks in Redcar which has recently been the focus of national headlines. This particular case, however, came prior to the closure of the plant, at a time when SSI were eager to investigate a financial restructure or pre-pack sale of the business.

This case is the most recent in a series of English ‘validation order’ applications to be heard by the English courts under S.127 of the Insolvency Act 1986. This is a process which is much less common in Scotland, yet it is still an important piece of legislation for Insolvency Practitioners to bear in mind.

The Facts

A petition for the winding up of SSI was presented to the court by Hewden Stuart Ltd at a time when SSI was seeking to investigate restructuring or a pre-pack sale in an effort to avoid liquidation. In order to achieve a sale of the business as a going concern, SSI required to keep the coke ovens operational and in addition to requisite operational costs, employees wages required to be paid. In light of the pending winding up petition, SSI were forced to apply to the court for validation of certain payments under S.127, if they were to be able to achieve this. Although SSI were expecting to receive a tax rebate, it was not clear whether this would be received in the near future. There was, therefore, a risk that the unsecured debt could increase if payments were validated and the company could not subsequently be saved. Given commercial sensitivities, a private hearing was sought by SSI.

The Decision

The English Court decided to grant the validation order on the basis that it would improve the interests of the unsecured creditors by increasing the chances of a successful restructure or sale of the business. It was also borne in mind that the projected company income would be greater or equal to the level of authorised expenditure (although a cap was put on the validation order to the effect that if the tax rebate was not received, expenditure would only be permitted up to the level of income actually received). It appears that the court considered the significance of what would happen if the company could not be saved, i.e. that employees would be automatically dismissed with no return being made to unsecured creditors. The court also found that it would be appropriate to hear an application for a validation order in private where a public hearing would damage the confidential nature of discussions surrounding the sale or restructuring of the business.

Advice

This case serves as a reminder of the potential usefulness of seeking a validation order where it is possible that a business can be saved and creditors will not be prejudiced as a result. Although these are rare in Scotland, most probably because the period of time between the presentation of a petition and granting of a winding up order is often much shorter than in England, this is an application which can be made by way of a Note in the Liquidation of a company, should this thought to be advantageous. Furthermore, although private court hearings in Scotland are rare, it may be possible that courts would be willing to impose reporting restrictions in cases where commercial sensitivities exist and the directors are hopeful that the company will be rescued and ultimately avoid liquidation.

BBM Solicitors specialise in advising IPs in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb [AT] bbmsolicitors [DOT] co [DOT] uk) or Alasdair Baijal (agb [AT] bbmsolicitors [DOT] co [DOT] uk). This briefing note is current as at 16 December 2015 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).

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