The key legal issue centred on the interpretation of paragraph 78(2)(b) of Schedule B1 to the Insolvency Act 1986, specifically regarding when and how to assess the existence and status of preferential creditors for the purpose of obtaining their consent. The administrators argued that the test is applied at the point the extension is sought, requiring a forward looking assessment of whether any preferential creditors currently have an economic interest - not by reference to earlier proposals. This position aligns with recent case law, including Boughey v Toogood International Transport and Re Pindar Scarborough Ltd, which emphasise that only creditors with a real, present-day economic interest need be consulted.
Applied to CDI and CL, HMRC had no preferential claim against CDI, and CL’s earlier potential claim against a third party had been discounted as uneconomic. Progress reports therefore confirmed no preferential distributions would be made. There were therefore no preferential creditors with a genuine economic interest, and seeking their consent would have served no purpose and risked obstructing value maximising outcomes.
Deputy High Court Judge Richard Farnhill agreed, confirming that creditor rights under Schedule B1 depend on present economic interest, not past classification. Drawing on cases such as Re Lehman Brothers Europe Ltd, the Court held that the original extensions were valid, and a further extension was granted to allow the administrators to complete their work.
This decision reinforces a practical, evidence based approach to administration extensions:
- Assess preferential creditor status at the point consent is sought (and ahead of time, so there’s sufficient opportunity to obtain it).
- Keep proposals and progress reports under active review. Proposals are often circulated earlier than strictly required and possibly before administrators have a complete economic picture, so ensure subsequent progress reports reflect the current economic reality.
- Where uncertainty remains, document your analysis and evidence.
- Expect the courts to support reasonable, creditor-focused actions, backed by legislation and a clear evidential trail.
