CONTRACTS: HIGH COURT CONSIDERS WHETHER CONTRACTUAL TERMINATION SURVIVES RESTORATION TO THE REGISTER

31st October 2019

In Bridgehouse (Bradford No.2) v BAE Systems plc [2019] EWHC 17668 (Comm), the High Court considered whether notice of contractual termination triggered by a company being struck off the Register of Companies was effective notwithstanding the subsequent restoration of the company to the register. The court upheld an arbitrator’s decision that the contract had been validly terminated when the relevant party was struck off, notwithstanding it being restored to the register shortly after.

Background

Bridgehouse (Bradford No. 2) (BB2) and BAE Systems Plc (BAE) had entered into an agreement under which BAE agreed to procure the sale (to be completed several years later) by one of its subsidiaries to BB2 of two properties. The agreement provided that BAE was entitled to give notice of termination if BB2 suffered an ‘Event of Default’ (EOD), including BB2 “being struck off the Register of Companies or being dissolved or ceasing for any reason to retain its corporate existence”. BB2 failed to comply with its statutory obligations under s 441 CA 2006 to file accounts and was struck off the register under s 1000 CA 2006 (which confers a power on the registrar to strike off a company which he has reasonable cause to believe is not carrying on business or in operation). BAE then served notice of termination of the agreement as a result of the EOD arising from BB2 being struck off.

BB2 subsequently applied for administrative restoration under s 1024 CA 2006 and BB2 was restored. As set out below, BB2 then sought to argue that the result of its restoration was to reverse the prior termination of the agreement.

BAE then commenced arbitration proceedings seeking a declaration that the agreement had been validly terminated. BB2 opposed this on the basis, among other things, of s 1028(1) CA 2006, which provides that the effect of administrative restoration is that the company in question is deemed to have continued in existence as if it had not been dissolved or struck off. BB2 argued that the effect of s 1028(1) was that it was deemed never to have been struck off and so the clause allowing BAE to terminate the agreement had, on the statutory hypothesis, never been triggered. The arbitrator rejected this argument, holding that s 1028(1) did not automatically undo the termination of the agreement. He also rejected BB2’s other arguments and held that BAE had validly terminated the agreement. BB2 appealed.

Scope of s 1028(1) CA 2006

The main issue on appeal was the effect of s 1028(1) and the High Court found that the arbitrator was correct to conclude that s 1028(1) did not operate to undo the termination retrospectively and resurrect the agreement.

Looking first at the statutory purpose behind s 1028(1), Cockerill J concluded that the administrative restoration regime generally (which was introduced by CA 2006) was intended to apply where it was highly unlikely that a third party would be impacted, although the intention behind the deeming provision itself (which derived from predecessor provisions in relation to court restorations) appeared to have been that it better protected third parties who dealt with a company unaware that it had been struck off.

Turning the relevant authorities, Cockerill J concluded that there was no binding statement of principle or direct authority with respect to the situation before her. However, it was clear that s 1028(1) is of very wide effect and that the deeming provisions will operate to give force to acts performed by a company when it was removed from the register or dissolved prior to restoration which would not otherwise have had force (Hounslow Badminton Association v Registrar of Companies [2013] EWHC 2961 (Ch) applied). This approach was consistent with the statutory purpose, so far as discernible, and with the wording of the section but was also very different from saying: “everything which has in fact happened, including acts by third parties in reliance on their knowledge of the then status quo, must be deemed not to have happened and unpicked”.

Cockerill J concluded that there was a line to be drawn between the direct and secondary consequences of removal from the register and the effect of restoration on each. When a company is restored to the register, s 1028(1) will have a very wide application in undoing the automatic consequences that flow directly from it being struck off. However, consequences which are not a direct or automatic result of removal cannot be treated in the same way. S 1028(1), whilst wide in application, is not universal, and the section as a whole recognises the need for limitation. In particular, s 1028(3) provides that the court can give direction ‘as seems just for placing the company and all other persons in the same position (as nearly as may be) as if the company had not been dissolved or struck off the register’. This makes it clear that where possible the statutory regime will be looking to achieve an ‘as you were’ solution, but there will be some situations where an ‘as you were’ solution cannot be achieved.

In practical terms, universal application of s 1028(1) would effectively deprive similar termination clauses of effect and could cause significant practical difficulties, in particular as administrative restoration can occur at any point up to six years after the removal from the register. For example, a terminating party could be faced with a claim for breach of contract or be exposed to actions from any new party with whom it had contracted in reliance on the termination. In the present case, BAE made the choice to exercise its express contractual rights and take the necessary steps to terminate the agreement. Whilst this was because BB2 was removed from the register, it was not an automatic consequence of dissolution and BAE’s right to termination could not be undone by s 1028(1). The High Court therefore dismissed the appeal.

Whilst not required to decide the point, Cockerill J also addressed (obiter) whether it would have been possible for the parties to contract out of the effects of s 1028(1). In this regard, she noted that there is authority that a party can only renounce a remedy or right conferred by a statutory provision if that right or remedy is nothing more than a private remedy or right, without any element of public policy (Johnson v Moreton [1980] AC 37). S 1028(1) was plainly not a provision which existed for the sole benefit of the company and could affect and apply for the benefit of others, such as members, directors and creditors. The provision could not therefore be waived by the company.

This case feature was first published by FromCounsel on 17 October 2019.