The short answer is no - for the purposes of limitation, time does not stop running on claims against a company which is placed into administration. This was the question before the High Court in the recent case of Contract Natural Gas Ltd v ZOG Energy Ltd, in considering this issue for the first time since the inception of the Enterprise Act in 2002, which streamlined the process for placing a company in administration.
This article provides a background to the Contract Natural Gas Ltd v ZOG Energy Ltd case, and presents the court's findings including a comparison of pre and post Enterprise Act administration regimes.
The dispute arose from an agreement between Contract Natural Gas Ltd (CNG) and ZOG Energy Ltd (ZOG) for the supply of natural gas. The dispute was set against the backdrop of the rapid increase in gas prices towards the end of 2021. When four of its major customers became insolvent, this created cash flow pressures for CNG who entered administration on 17 December 2021. ZOG also struggled with the rapid price rise of gas, entering administration on 9 December 2021.
Both ZOG and CNG later moved to creditors' voluntary liquidation on 7 December 2022 and 28 September 2023 respectively.
CNG subsequently submitted a proof of debt in ZOG's administration on 14 February 2022 in the sum of £1,403,340.25. ZOG’s liquidators rejected CNG’s claim on the basis that it was time barred by clause 13.5 of the agreement, which stated that:
| “Clause 13.5: 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.” |
CNG’s position was that the twelve month time limit in clause 13.5 does not apply to their claim for the following reasons:
The court gave helpful guidance on whether time stops running when a company enters administration through the streamlined out of court appointment process or liquidation. The court also addressed the above arguments and the effect of the clause on CNG's claim.
In delivering its judgment, the court conducted a comparison of the pre and post Enterprise Act administration regimes and concluded that time does not stop running for limitation purposes on claims against a company which has gone into administration. The court’s reasoning was as follows:
Firstly, when a company enters compulsory liquidation, time ceases to run for limitation purposes from the making of the winding up order. The authority generally cited for this proposition is a nineteenth century case of General Rolling Stock Co. In essence, the effect of the winding up order was to create a trust of the company's property for the benefit of its creditors at the date of the order. Once such a trust came into existence, each creditor became entitled to claim as a beneficiary against a trustee, so that the question of limitation would not apply. Furthermore, citing the Art Reproduction Co Ltd case the court concurred that it made no difference whether the case concerned a solvent voluntary liquidation, rather than an insolvent compulsory liquidation. The critical issue being that the assets were to be distributed to creditors in accordance with the insolvency legislation.
Before the commencement of the Enterprise Act a company had to make a formal application to court in order to enter into administration. If a company entered into administration under that 2002 regime, the court (citing Roger Sher KC from a 2001 case of Maxwell Fleet and Facilities Management Ltd confirmed time did not stop running. It was recognised that the nature of the administration was generally inconsistent with liquidation and what seems to have been the major feature that led to the decision in the General Rolling Stock Co case (the creation of a trust) was absent in the Maxwell Fleet case.
In the Maxwell Fleet case, Mr Sher KC recognised the similarities between administration and liquidation, but also importantly the difference. Importantly in also recognising the critical difference - that administrators had no power to make distributions to creditors - he concluded that the granting of an administration order did not stop time running and said that, if there were a gap in the law in this respect, it could not be filled by the courts, but was a matter for parliament.
The Enterprise Act 2002 introduced the new process of administration by inserting a new schedule (B1) into the Insolvency Act 1986. The court considered whether a statutory trust arises in a post-Enterprise Act administration in order to decide whether the effect of such an administration is to stop time running. The court found no statutory trust arises. While importantly, the new administration regime introduces the ability for administrators to make distributions, they are not inevitable. Consequently, time does not stop running when a company enters into administration.
The court held that a mistake has been made in the drafting of this clause, and instead it was intended that clause should apply to claims brought by either party. The court also went on to state that whether a contractually agreed time bar has the effect of extinguishing claims is dependent upon the proper interpretation of the language used by the parties. In this case, a reasonable reader would understand that the parties intended the expiry of the twelve-month period to have the effect of barring legal proceedings, but not extinguishing debts altogether. Thus, clause 13.5 did not prevent CNG from deducting the amount of its time-barred claim from any sums paid to ZOG in respect of its proof in CNG’s liquidation.
The court dismissed the argument that an acknowledgement of debts amounted to restarting the clock, indicating that it would only be relevant if the parties agreed it should be. Instead, he focused solely on interpreting the agreement between the parties. In this case, the agreement did not include anything about this issue.
The Contract Natural Gas Ltd v ZOG Energy Ltd case offers helpful, first time judicial guidance regarding the issue of limitation against companies in administration. It has been clarified that no matter the path into administration time does not stop running on claims when a company enters administration and that submission of a proof of debt is insufficient to stop the limitation clock.
The case stands as a reminder to those creditors with claims, or which are considering bringing a claim, against a company which has entered administration. It is essential to take notice of the limitation period and to take steps to preserve the right to bring claims.
Administration is a process designed to protect companies. It creates a moratorium which prevents any creditor commencing or continuing any legal action, without first obtaining the permission of the administrators or the court. An administrator will rarely grant permission, against concerns of incurring unnecessary costs.
If limitation is an issue it may be necessary to take legal advice with a view to ensuring appropriate steps are taken to preserve limitation. Options will include obtaining a clear admission of the debt for limitation purposes, standstill agreement or obtaining the necessary permission to issue proceedings.
For further information, please contact the construction team.
