Limits of Insolvency Act section 236 applications: Lessons from Webb v Eversholt Rail Limited

When a company enters insolvency proceedings, liquidators are often left without a complete set of records detailing the company’s operations. To address this, section 236 of the Insolvency Act 1986 grants office holders (typically liquidators) the power to request documents, including books, papers, and other records, to investigate the company’s affairs. However, in a recent decision in Webb v Eversholt Rail Limited [2024] EWHC 2217 (Ch), the court has highlighted for such applications to succeed, liquidators must demonstrate that the requested information or documents are reasonably required. 

The High Court held that the liquidators of Eversholt Rail (365) Ltd (Eversholt 356) had failed to persuade the court that their application under section 236 was necessary. While section 236 provides liquidators with broad investigatory powers, the court emphasised that these powers are not limitless. Applications lacking specific evidence or seeking overly broad disclosures or unsubstantiated by evidence will not be granted. 

This case serves as an important reminder of the limits of a liquidator’s powers under section 236 of the Insolvency Act 1986. Litigator Helen Rainford clarifies the limitations in this blog.

The liquidation of Eversholt 356

Eversholt 365 entered a creditors voluntary liquidation in August 2019 with Jeremy Robert Webb and Zelf Hussain appointed as joint liquidators. Eversholt 356 was a SPV owned by Eversholt UK Rails Group that relied on services provided by its sister company Eversholt Rail Limited (ERL) under a services agreement.

In normal circumstances, a liquidator would have access to the company’s books and records to aid their investigations, however in this case, the documents were held by a third party. Unusually, all of Eversholt 356’s documents were held by ERL.

Following on from the appointment of the joint liquidators, ERL cooperated with them and provided the documents related to Eversholt 356. The liquidators however continued to make further wide-ranging requests for further documents and information from ERL and their lawyers Norton Rose Fulbright (NRF). The liquidators requested that ERL provide all the documents which related to Eversholt 356 and continued to make generalised requests for documents. The liquidators claimed NRF had provided advice to Eversholt 356. NRF denied providing any such advice, yet the liquidators continued to maintain this request.

Neither ERL nor NRF complied with these requests. As a result, the liquidators applied to the court for an order against ERL to provide “copies of all documents…in its possession custody or control relating to the business, dealings, affairs or property” as well as documents from NRF which included a summary of advice given. The liquidators in their application provided a list of documents which were broadly described and provided no time limit for these documents. The liquidators also failed to explain why a vast number of documents over a lengthy period of time were required.

Judgment of the High Court

Although the court has a wide discretion to grant requests under section 236, it held that it must weigh the reasonableness of the request vs the burden of the request. The court must firstly assess if the request is reasonable. In assessing the reasonableness, the court will give weight to the liquidator’s assertions as to what is reasonable. If the court finds the request reasonable, the court must then also consider the possible burden and oppressiveness of the request on the other party.

The court held the unusual circumstances where ERL held all of Eversholt 356’s documents, in and of its own, is not sufficient to bring the order sought by the liquidators. The liquidators had to “work within the confines of the circumstances of the company to which they have been appointed”.

ERL 

The court found that ERL had cooperated with all focused requests for the provision of documents and that they only resisted when the requests were made for the production of all documents. It held that it “will only compel a third party to disclose information and deliver up documents that are reasonably required”. The court would need to see “compelling evidence to understand why a liquidator needs to reconstitute and thus see absolutely all of a company’s records.” 

The liquidators evidence focused on why it was evident that ERL had documents pertaining to Eversholt 356 and why it was entitled to the production of them rather than why the production of these documents was necessary. The liquidators took the view that they should be put in the position that they would have been in if Eversholt 365 had held its own records. The High Court disagreed with the liquidator’s approach and held their application was “fundamentally misconceived”. 

 Whilst the judge expressed sympathy for the liquidators’ position, ICC judge Burton dismissed the application brought against ERL. The judge held that the requests made by the liquidators were too broad and so were not reasonable. Any application for the delivery of documents should contain an explanation as to why these documents are “reasonably required“. Such a request should not be unduly broad or burdensome.  

 As the court did not find the request reasonable, the court did not assess if the production of these documents was burdensome.  

NRF

The court also dismissed the application brought against NRF.

The liquidators had brought the application on the premise of advice being provided on a joint interest privilege basis between ERL and Eversholt 356. However, ERL and Eversholt 356 were not a parent and subsidiary relationship but were sister companies and therefore joint interest privilege is not recognised.

The liquidators were unable to provide any evidence that advice from ERL had been disseminated to Eversholt 356. The judge concluded that it was not sufficient, to give rise to joint interest privilege, to assert that Eversholt 356 may have been the subject of legal advice provided to ERL. Legal privilege therefore belonged to ERL.

Conclusion

The decision in Webb v Eversholt Rail Limited serves as an important reminder of the limits of a liquidator’s powers under section 236 of the Insolvency Act 1986. While the court recognises the broad investigatory powers conferred upon liquidators, it emphasises that such powers are not without constraint. Liquidators must demonstrate that their requests for documents and information are reasonable and substantiated, providing clear evidence of their necessity. Unreasonable or overly broad requests that lack specificity or impose an undue burden on third parties will not be granted.

This case further highlights the importance of respecting legal privilege and understanding its limitations in corporate structures, particularly between sister companies.

Ultimately, the judgment underscores the need for liquidators to adopt a focused and evidence-based approach when seeking assistance from the courts. By doing so, they can ensure compliance with statutory requirements while avoiding unnecessary disputes and delays.