FCA Warning Notices - update on the effect of the liquidation stay

What's new? 

After Carillion Plc entered compulsory liquidation in January 2018, triggering what is known as a "liquidation stay" under section 130(2) of the Insolvency Act 1986, no "action or proceeding" could be continued or commenced against Carillion Plc (in liquidation) without the leave of the court. 

Subsequently, in October last year, ICC Judge Jones grappled with the question of whether leave of the court was therefore required before the FCA could issue a proposed Warning Notice against Carillion by way of enforcement in respect of alleged breaches of the Listing Rules (s.91 of FSMA) and the Market Abuse Regulation (s.123 of FSMA). He decided that it was, as we discussed here.

The FCA appealed, on the grounds that section 130(2) of the IA is limited to court actions and proceedings, or materially similar actions and proceedings (such as arbitration), and did not include regulatory action taken by the FCA under FSMA.

In allowing the FCA's appeal, Mr Justice Michael Green held that the FCA did not have to obtain the court's permission before issuing the proposed Warning Notice for the following reasons: 

• the ICC Judge had adopted too wide a construction of the definition of "proceedings" in section 130(2) of the IA – in particular key differences between the legislative framework of stays in the context of liquidation and administration supported this conclusion; and
• it could not have been Parliament's intent for the "comprehensive regime of FSMA operated by the FCA acting in the public interest" to be "overlain with the requirement to seek permission of the court to proceed if the company in question has gone into compulsory liquidation."

What's next?

Although this decision in favour of the FCA could suggest a move away from the categorisation of such FCA enforcement action as "proceedings" caught by section 130(2) of the IA, uncertainty remains. 

In particular, the Judge limited his decision to the specific power of the FCA to take action against Carillion under ss.91 and/or 123 of FSMA in respect of alleged breaches of the Listing Rules and market abuse. Such action could have included the imposition of a financial penalty, although none was actually imposed in the case. He explicitly declined to conclude that the FCA would not require the court's permission before issuing any other statutory notices under FSMA. 

The consequence of this decision is that, in relation to FCA action pursuant to ss. 91 and/or 123 of FSMA at least, companies in compulsory liquidation are at risk of being required to incur costs engaging with FCA action and, where there is a deficit in relation to creditors (as is the case in Carillion), such costs will have to be met from public funds. As government support is wound down and with companies likely to face increased financial difficulty in the coming months, this risk may become a reality. 

Authors: Louise Youngman, Senior Associate, and Ella Stokes, Trainee Solicitor

Case Reference: The Financial Conduct Authority v Carillion Plc (in Liquidation) [2021] EWHC 2871