A recent case tests the practical implications of provisions for the restoration of a business to the register of companies. Allyson Colby explains the outcome.
Section 1024 of the Companies Act 2006 deals with the administrative restoration of companies to the register. It applies where a company has been struck off because the registrar had reasonable cause to believe that the company was defunct. In such cases, a former director or member of the company has six years in which to apply to have the company restored to the register.
If the application is successful, section 1028(1) deems the company “to have continued in existence as if it had not been dissolved or struck off”. In addition, the court can make such provision as seems just for placing the company and all other persons in the same position “as nearly as may be” as if the company had not been struck off: section 1028(3). But just how far can the court go in such circumstances?
Contract for sale
Bridgehouse (Bradford No 2) v BAE Systems plc [2019] EWHC 1768 (Comm); [2019] PLSCS 162 concerned a £93m contract for sale, which formed part of a transaction involving a property portfolio valued at more than £200m. The contract was made in 2012, but completion was to take place between 2020 and 2022. The buyer, BB2, was incorporated specifically in order to enter into the agreement and did not carry on any business or own any assets other than its rights under the agreement.
Unfortunately, BB2 forgot to notify Companies House when its previous address ceased to function as its registered office. So communications from the registrar went astray and, when the company failed to file its annual return and accounts and then failed to respond to warning notices, the registrar removed its name from the register of companies.
To make matters worse, BB2’s contract with BAE included a termination provision that applied in the event of BB2 “being struck off the register of companies or being dissolved or ceasing for any reason to retain its corporate existence”.
BAE exercised its right to terminate two days later, which led to proceedings in the High Court, in which BAE argued that the termination of the contract survived BB2’s restoration to the register two months later.
Authorities
Surprisingly, the courts have never had to consider the point before, even though successive statutes have contained essentially the same deeming provision since the 19th century.
Cockerill J accepted that section 1028(3) is widely drawn. But, having reviewed the cases, she concluded that the deeming provision does not apply universally. The courts have used the provision to validate actions that would have lacked efficacy. Everything that would have happened, had a company continued in existence, is effectively deemed to have happened. But that is very different from saying that everything that has happened, including steps taken by third parties in the knowledge that a company has been struck off, must be unpicked.
The authorities indicated that there was a line between direct and secondary consequences, and that the deeming provision was directed at the direct or automatic effects of removal from the register. Furthermore, section 1028(3) uses the phrase “as nearly as may be”, which was a clear indication that there will be some situations in which an “as you were” solution cannot be achieved.
The termination of the contract did not flow from, and was not an automatic consequence of, BB2’s loss of corporate capacity. BAE had chosen to terminate and had taken the steps that were necessary to do so. So the termination of the contract fell outside the ambit of the deeming provision and could not be reversed.
Proof of the pudding
The judge noted that her conclusion was consistent with Bennion on Statutory Interpretation. It states that a statutory deeming provision should be carried as far as necessary to achieve the legislative purpose, but no further, and that the court should “ensure that it does not create harm… outside the intended purview of the Act”.
Some would regard administrative failures on the part of a company as the hallmark of an undesirable partner. It was something of a challenge for a company to be struck off, and the judge did not consider it draconian for parties to contract for the right to terminate agreements with companies that fail to comply with their statutory obligations to file returns and accounts with, and to respond to warning notices from, the registrar of companies. The courts have historically respected risk management tools in the form of termination clauses such as this and considerable practical difficulties might be caused if the deeming provision were to apply.
BB2’s arguments would deprive such clauses of effect, despite the valuable certainty that they provide, given that administrative restoration can occur at any point during six years after removal from the register.
A party who had terminated quite validly could subsequently be accused of having wrongly repudiated a contract, and the company itself might be exposed to actions from third parties who had entered into new contracts with it, if such contractual arrangements were to have to be undone.
Prematurity
Did an event of default arise immediately? Or should BAE have allowed a reasonable period of time to elapse, without an application for restoration having been made, before terminating the contract (especially as completion of the transaction was not due to take place for a number of years)?
The judge ruled that the clause could hardly be clearer; it made no reference to restoration to the register within a reasonable time and it was impossible to imply such a term.
Consequently, BAE had not acted prematurely.
Allyson Colby is a property law consultant
