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The Financial Conduct Authority and Liquidation Stays

Author: Syedur Rahman  14 December 2020
3 min read

Syedur Rahman of Rahman Ravelli examines a case that ruled on whether a Warning Notice can be issued while there is a liquidation stay on action and proceedings.

As the saga continues following the collapse of the facilities management and construction services group Carillion, so does the legal fall-out regarding the company and its regulation by the Financial Conduct Authority (FCA). 

The latest battle, FCA v Carillion PLC (In Liquidation) [2020] EWHC 2146 (Ch), has seen a judgment ruling upon, for the first time, whether the liquidation stay on action and proceedings under section 130(2) of the Insolvency Act 1986 (IA 1986) prevents the FCA from issuing a Warning Notice under sections 92 and 126 of the Financial Services and Markets Act 2000 (FSMA) without first seeking leave from the court.

What is a Liquidation Stay?

Section 130(2) IA 1986 provides that when an order is made to wind up a company, no action or proceedings can be brought against the company or its property, except when leave is granted by the court. In doing so, the court can impose certain terms. Therefore, when a company is in compulsory liquidation, an automatic liquidation stay is applied.

As a financial conduct regulatory body in the UK, the FCA has wide powers of supervision and enforcement. The FCA regulates the UK regulated market and is responsible for protecting the interests of those using the UK's financial markets. It protects against market abuse behaviour, such as insider dealing.

As part of its powers, under sections 92 and 126 FSMA, the FCA can issue Warning Notices and Decision Notices. Such issuance will take place when the FCA wishes to impose sanctions on firms or individuals for breaches of the Listing Rules (under sections 91 and 123 FSMA) and/or violations of the Market Abuse Regulations (MAR).

FCA v Carillion PLC

In January 2018, Carillion entered into compulsory liquidation, following its collapse. An automatic liquidation stay was, therefore, triggered. 

The FCA intended to issue a Warning Notice against Carillion for breaches of the Listing Rules and/or contravention of MAR. And so, in the case of FCA v Carillion PLC, the FCA applied for:

  1. A declaration as to whether, in order for the FCA to issue a Warning Notice, the court's leave is required (sections 92 and 126 FSMA); and
  2. If leave was required by the court, for it to be granted.

This is the first time such an issue has come before the UK courts. The task at hand was to balance the friction between the public interest argument (i.e.: the FCA being able to fulfil its statutory duties as outlined above) and the effective liquidation of the company in the interests of its creditors. 

The court decided that the FCA's decision to issue a Warning Notice did constitute an “action or proceeding” (as per section 130(2) IA 1986). It, therefore, followed that the FCA required leave of the court before the regulator was able to proceed. Such permission was granted by the court on the grounds of public interest, and on the condition that further leave should be obtained before the FCA imposed a penalty. 

In coming to this judgment, the judge considered - among other points - that the nature of the decision-making process within FSMA had features of “proceedings”, and the proceedings were such that Parliament had intended them to fall within the ambit of section 130(2) IA 1986. Furthermore, sanctions for breaches of the Listing Rules and/or contravention of MAR could have been placed within the remit of the civil or criminal courts, or left within the jurisdiction of the Upper Tribunal, in which case there would have been irrefutable “proceedings”. Finally, the judge said that it would be surprising if the FCA’s statutory role would not be subject to the control of the Insolvency Court for a company in liquidation.

Conclusion 

As noted above, this is the first time this particular issue has come before the court. The court was being asked to balance two issues at odds with one another and to resolve the tension between the two statutory regimes. The judge was able to do this by ruling that the FCA’s issuance of the Warning Notice fell under the necessary requirement for a stay but then giving permission for leave to proceed - while attaching the condition for further leave by the court to be granted before any penalty the FCA proposes to impose could be imposed. 

This decision is capable of having much broader consequences for (as the FCA told the court) the more than 200 other possible actions (all involving Warning Notices) that the FCA intends to take under FSMA. It is, therefore, highly likely that future cases are likely to be brought before the courts to rule on similar exploratory points in relation to insolvency proceedings.  

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Syedur Rahman

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Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, civil recovery, cryptocurrency and high-stakes commercial disputes.

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