Liability limited to £250,000 overall

The MSA contemplated gas being supplied pursuant to ‘Transactions’, each of which was to be a separate contract between the parties. Clause 13.3 of the MSA limited liability of the parties for breach as follows:

“Subject to clause 13.9 the total liability of each party to the other and in respect of all claims arising under the matters set out in clause 13.1 shall not exceed the sum of £250,000.”

ZOG took clause 13.3 to mean that a £250,000 cap applied to each separate Transaction. It alleged that 11,799 Transactions were left unperformed by CNG, and therefore submitted a proof of debt in CNG’s administration in the sum of c.£13m. CNG interpreted the clause to mean that there was an overall £250,000 limit in respect of all ZOG’s claims.

Andrew Twigger KC agreed with CNG’s interpretation because the MSA existed independently of any Transaction, and if it was to be incorporated into each Transaction, some of the MSA’s important clauses would make little sense, such as those prescribing the process for entering into individual Transactions.

Furthermore, clause 13 set out the “entire financial liability” of each party to the other, as well as their “total liability… in respect of claims”. The reasonable reader would understand this language to contemplate one cap for all claims, and there was nothing which expressly incorporated the MSA into each and every Transaction.

ZOG argued that such a limit could produce an uncommercial result – if ZOG successfully claimed for £250,000 against CNG at the beginning of their relationship, ZOG could have been left with no recourse for the remainder of the relationship. Andrew Twigger KC found that it was not possible without further evidence to say that a £250,000 cap was not commercially realistic at the time it was agreed. For example, if ZOG had been in the scenario just outlined, it could have threatened termination of the MSA so as to encourage a renegotiation of the cap.

Contractual time bar applied to both parties

CNG submitted a proof of debt in ZOG’s administration of c.£1.4m. This represented the amount due from ZOG in respect of gas supplied to it by CNG. ZOG’s liquidators rejected CNG’s proof on the basis that CNG’s claim was time barred by clause 13.5 of the MSA which. provided:

The non-defaulting party shall only be entitled to bring a claim against the defaulting party where the non-defaulting party issues legal proceedings against CNG within the period of 12 months commencing on the date upon which ZOG ENERGY ought reasonably to have known of its entitlement to bring such a claim

The Court determined that the specific references to the parties in clause 13.5 was an obvious drafting error. If CNG was the non-defaulting party, the clause envisaged CNG bringing a claim against itself, which was “obvious nonsense”. Furthermore, there was no explanation as to why the otherwise bilateral clause 13 should limit a claim by ZOG to twelve months, whereas CNG should be permitted to bring a claim within the much longer six-year statutory period.

Therefore, the proper construction of clause 13.5 was that the twelve-month limitation applied to both ZOG and CNG. On its wording, however, a claim which was limited by clause 13.5 was not extinguished. This meant that CNG was not prevented from setting off the amount of its time-barred claim against ZOG from any sum paid to ZOG in respect of ZOG’s proof in CNG’s liquidation.

Entering administration does not stop time running for limitation purposes

ZOG entered administration in December 2021. CNG said that none of the debts claimed by it had become due more than twelve months prior to that point, meaning they were not limited by clause 13.5 of the MSA. In addition, CNG argued, if a claim is not time barred at the date on which a company enters administration, time stops running at that moment.

Andrew Twigger KC, considering the pre and post Enterprise Act 2002 authorities, determined that time does not stop running when a company enters administration. The first of the pre-Enterprise Act authorities, In re General Rolling Stock Co (1871 – 72) LR 7 Ch App 646, established that when a company enters compulsory liquidation, time ceases to run for limitation purposes from the making of the winding up order. The logic was that a winding up order created a trust of the company’s property for the benefit of its creditors. Once the trust came into existence, each creditor become entitled to claim as a beneficiary against a trustee, such that the limitation regime in place at the time did not apply.

The court in Re Maxwell Fleet and Facilities Management Ltd [2001] 1 WLR 323 made an essential distinction between compulsory liquidation and administration. Administration did not involve the collection and realisation of all of the company’s assets and the distribution thereof to its creditors. Because this characteristic was critical to the finding in Re General Rolling Stock Co, it could not be said that time stopped running when a company entered administration.

Section 21(1)(b) of the Limitation Act 1980 now provides that no limitation period applies to claims by beneficiaries to recover trust property from trustees. Andrew Twigger KC therefore had to “grasp the nettle” and determine whether a statutory trust arises in a post-Enterprise Act administration. A number of characteristics of the new regime were relevant to that question.

Firstly, according to paragraph 3(1) of Schedule B1 of the Insolvency Act 1986, the administrator of a company must perform his functions with the objective of:

(a) rescuing the company as a going concern; or
(b) achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration); or
(c) realising property in order to make a distribution to one or more secured or preferential creditors.

Paragraph 83 of Schedule B1 envisages creditors’ voluntary liquidation as an available exit route from administration. However, under paragraph 3(1)(c) above, it is clearly possible for an administrator to make distribution to secured or preferential creditors. Moreover, paragraph 65(3)(b) of Schedule B1 has the effect that an administrator may, with the permission of the court, distribute the assets of a company to a non-secured, non-preferential creditor.

Secondly, rule 14.24 of the Insolvency Rules 2016 provides that for the purposes of set-off of mutual debts, an account is taken at the date on which the administrator gives notice of the intended distribution. In Revenue and Customs Commissioners v. Football League Ltd [2012] Bus LR 1539, David Richards J considered this to be a significant indication that the pari passu regime does not operate prior to the date of notice. If that were the case, Andrew Twigger KC reasoned, administration closely aligned with liquidation, and there would be good grounds for saying that a statutory trust arose.

That was of no assistance to CNG, however. No notice of intention to distribute was given in the administration of ZOG, meaning CNG’s argument depended on a statutory trust arising from the time the administration order was made.

On the basis of the characteristics highlighted, the post-Enterprise Act regime contemplates that an administration may reach a point at which a company’s assets will be divided amongst the creditors by the administrator. Crucially, however, the fact that an administrator can make a distribution does not mean that they will do so as opposed to proceeding to a voluntary liquidation. Andrew Twigger KC emphasised that even if the administrator’s purpose of rescuing the company as a going concern seems unlikely to be achieved, it is conceivable that a rescue subsequently and unexpectedly becomes possible. In that scenario, the company remains beneficially entitled to its assets, which points away from there being a statutory trust.

Furthermore, the possibility that a company may survive makes it difficult to conclude that time should stop running for limitation purposes.

For example, if a claim was prevented from becoming time-barred by the making of an administration order, and that order was subsequently discharged such that the company continued to exist, what would then happen? Conversely, if a likely rescue turned out not to be possible, and the administrator proceeded to distribution, when would the statutory trust arise? And what if, after the trust arose, the administrator changed their mind and reverted to rescue? Andrew Twigger KC found that Parliament is unlikely to have intended to introduce such uncertainty into the question of whether and if so when time stops running for limitation purposes.

The Court expressed “considerable sympathy with creditors who submit a proof of debt in an administration and are subsequently taken by surprise by the discovery that their claims have become time barred”, but what ultimately mattered is that there is no inevitability that an administrator will make a distribution. Consequentially, there can be no statutory trust. It follows that the making of an administration order under the post-Enterprise Act regime does not stop time running so far as limitation is concerned.

Creditors’ voluntary liquidation does stop time running

ZOG moved from administration to creditors’ voluntary liquidation (CVL) in December 2022. CNG submitted that when a company enters CVL, time ceases to run for limitation purposes from the making of the winding up order. Andrew Twigger KC agreed. It was already settled law that when a company enters compulsory liquidation, time ceases to run for limitation purposes from the making of the winding up order. In Re Art Reproduction Co Ltd [1952] Ch 89, Wynn-Parry J, relying on Re General Rolling Stock Co, said it was illogical for there to be one rule in compulsory liquidation and another in voluntary liquidation.

Andrew Twigger KC opined that the reasons why a statutory trust arises in compulsory liquidation are equally applicable to CVL. Indeed, in Ayerst (Inspector of Taxes) v C & K (Construction) Ltd [1976] AC 167, Lord Diplock said that the essential characteristics of the statutory scheme for dealing with the assets of the company do not differ whether the winding up is voluntary or compulsory.

CNG’s claims against ZOG in December 2022 which had not yet become time-barred as a result of clause 13.5 of the MSA remained valid and CNG was entitled to prove for them in ZOG’s liquidation.

Acknowledgment of debt in statement of affairs does not start time running again

CNG argued that ZOG had acknowledged the debt due to CNG in a statement of affairs, thereby restarting the clock pursuant to section 29(5) of the Limitation Act 1980. Andrew Twigger KC held that this argument could not proceed because section 29 does not have any impact on a contractual time bar. The agreement of the parties as to time limits had to take precedence, and the Limitation Act would only be relevant if they agreed it should be, which was not the case in relation to the MSA.

CNG argued in the alternative that the common law rules on acknowledgments restarted the clock. In Swann v. Sowell (1819) 2 B & Ald 759, Bayley J held that if a party admits a debt and does not say that it is satisfied or refuses to pay a debt and alleges an insufficient excuse for not paying it, the law will raise an implied promise to pay the debt then acknowledged to be due.

Andrew Twigger KC held that the implied promise was a legal fiction employed in the old common law cases to avoid potential harshness caused by the limitation regime in place at the time. It had since become settled that an implied promise to pay is not required for there to be acknowledgement within the meaning of section 29 of the Limitation Act 1980. In the judgment of the Court, the notion that an acknowledgement might involve an implied promise to pay which amounts to a new cause of action had been swept away.

CNG and ZOG had agreed to a contractual time bar. This is what was material, and the question of whether the relevant time period had expired was to be determined solely by an interpretation of the MSA. As discussed, there was nothing in clause 13 of the MSA to suggest that the parties intended that an acknowledgment would restart the twelve-month period referred to in clause 13.5.