Chancery Court Upholds FCA’s Regulatory Action
An ICC judge[1] held at first instance that the Financial Conduct Authority (FCA) required the permission of the insolvency court because, under s130(2) of the Insolvency Act 1986, regulatory action against a company in liquidation constituted an action or proceeding.
This important point of statutory construction had significant implications for the FCA’s performance of a wide range of its functions under the Financial Services and Markets Act 2000 (FSMA); it was a novel point and could affect a number of other enforcement actions by the FCA.
The appeal court was therefore concerned only with this purely legal threshold issue in connection with the FCA’s proposed regulatory action under its powers in the FSMA: The Financial Conduct Authority v Carillion PLC (in liquidation) [2021] EWHC 2871 (Ch) Michael Green J
The spectacular collapse and the scale of the liquidation in relation to Carillion could not influence the proper interpretation of s130(2) of the Act but did provide perspective and explained why the point had been taken.
On appeal the court held that the ICC judge adopted too wide a construction of s130(2). As explained in Powdrill[2], the scope of the word proceeding was limited to legal proceedings or quasi-legal proceedings such as arbitration. Therefore, any court proceedings, including criminal proceedings, were included.
Non-court proceedings would only be within s130(2) if they were similar to court proceedings having regard to the statutory purposes of s130(2) as set out by David Richards LJ in Chapman[3].
Distress had historically been regarded as a form of legal proceeding and in any event clearly fitted with the purpose of s130(2) being not to disturb the pari passu basis for distribution to unsecured creditors.
That distress was within s130(2) did not assist in determining whether the FCA’s regulatory processes were also within as they had no material similarity to each other.
The judge was wrong to rely on a wide general purpose for s130(2) derived from Smith[4]. Which was concerned with a different section and which applied a narrower purpose that was consistent with Chapman.
The judge’s adoption of that wide general purpose shaped his construction of s130(2) so as to include any proposed action that might diminish the assets in the available estate for creditors.
Furthermore, he wrongly considered that the specific purposes needed only to be considered at stage two when the court was exercising its discretion and that they were irrelevant to the threshold question of construction at stage one.
The case of Frankice[5] should also have been distinguished by the judge from the case before him as to the scope of s130(2) rather than para 43(6) of Schedule B1 to the Act.
The judge’s construction of s130(2) was overbroad and incorrect.
The appellant contended that Parliament had conferred on the FCA statutory powers which were, and could only be, exercised by the FCA through the specific regulatory process defined by the FCA which had to act in accordance with its stated statutory objectives and in the public interest.
Against that, it was argued that s130(2) did not operate as a bar to the FCA proceeding but merely as a judicial filter and, as here, the court would readily grant permission if it were appropriate to do so. The court had unfettered discretion to do what was right and fair in the circumstances and to impose conditions where necessary.
That, however, was not a reason for requiring the FCA to have to seek the permission of the insolvency court to exercise its statutory powers.
Nor could Parliament have intended that the comprehensive statutory regime of FSMA operated by the FCA acting in the public interest should be overlain with the requirement to seek permission of the court to proceed if the company in question had gone into compulsory liquidation.
In the judgment of Michael Green J, the judge was wrong to conclude that the exercise of the specific powers under FSMA by the FCA was a proceeding that was subject to the stay in s130(2) of the Act.
The appeal was allowed and the judge’s order replaced by a declaration that the FCA did not require permission from the court under s130(2) of the Act for the purpose of taking action against Carillion under ss91 and/or 123 FSMA.
[1] Insolvency and Companies Court Judge
[2] Bristol Airport PLC v Powdrill [1990] Ch 744
[3] Mortgage Debenture Ltd v Chapman [2016] EWCA Civ 103
[4] Re Smith (a bankrupt) Ex p Braintree District Council [1990] 2 AC 215
[5] In re Frankice (Golders Green) Ltd (in administration) [2010] Bus LR 1608