In Contract Natural Gas Limited v ZOG Energy Ltd, both companies (now in liquidation) appealed the rejection of their respective proofs of debt by the liquidators of the other entity. The two appeals were consolidated, and a preliminary issue hearing ordered, because each application turned, in large part, on the interpretation of an agreement between the two companies, known as the Master Sales Agreement (the "MSA").

A. Background

Contract Natural Gas Limited ("CNG"), incorporated in 1994, was an energy utility company in the UK, purchasing gas wholesale and selling it to gas operators. ZOG Energy Ltd ("ZOG"),  established in 2012, was a retail energy utility company, also based in the UK, supplying gas and electricity to domestic and non-domestic customers. The relationship between the two companies was governed by the MSA under which gas was supplied by CNG to ZOG.

Both companies were badly affected by an increase in gas prices towards the end of 2021. This led to ZOG entering administration on 9 December 2021, followed by CNG entering administration on 17 December 2021. Both companies eventually moved to Creditors' Voluntary Liquidation ("CVL"), with ZOG transitioning on 7 December 2022 and CNG on 28 September 2023.

CNG subsequently submitted a proof of debt into ZOG's estate, and ZOG did the same in CNG's estate.

The then liquidators of ZOG adjudicated and rejected CNG's proof in full based on a 12-month contractual time-bar within the MSA.

The Court was asked to determine, as a preliminary issue, the effect of the contractual time-bar. In response to arguments raised by CNG, the Court considered, among other things, (i) whether time stops running when a company enters administration; and (ii) whether time stops running when a company enters CVL.

B. Does time stop running when a company enters administration?

The Court ultimately concluded that time does not stop running for limitation purposes when a company enters administration under the post-Enterprise Act regime. Its reasoning was as follows:

• Time stops running for limitation purposes when a company enters into compulsory liquidation [2]. The underlying rationale being that a winding up order creates a statutory trust of the company's property for the benefit of its creditors (and that once such a trust comes into existence, each creditor becomes entitled to claim as a beneficiary against a trustee, so that limitation does not run).  
• Time does not stop running on entry into a pre-Enterprise Act administration. In Re Maxwell Fleet and Facilities Management Ltd. [2001] 1 WLR 323, Mr Sher KC, sitting as a Deputy High Court Judge, held that the administrative process as it then existed did not involve a distributive process akin to liquidation.
• The Court considered the changes introduced by the Enterprise Act: while post-Enterprise Act administrations introduced the ability for administrators to make distributions, this did not necessarily mean a distribution would occur or that a statutory trust would arise from the commencement of administration. Overall, the Court found no material differences between pre- and post-Enterprise Act administrations that would imply a statutory trust arises upon the making of an administration order, a critical factor for stopping time for limitation purposes.
• The Court noted that as and when an administrator gives notice of intention to make a distribution, and assuming it is a distribution of the proceeds derived from all the remaining assets, there would be good grounds to say that the conditions for a statutory trust had arisen.

Considering these points, the Court concluded that time did not stop running when ZOG entered administration. However, time did stop when ZOG entered CVL. As a result, the rejection of CNG's full proof of debt by ZOG's liquidators was incorrect. They should have accepted it for the invoices due in the twelve months leading up to 7 December 2022.

C. Comment

The above finding is helpful in that it confirms, for the first time, the limitation position in post-Enterprise Act administrations.

The Court recognised that time continuing to run on entry into administration could lead to higher legal costs and more complex procedures for creditors, who might need to file protective claims to safeguard their interests. However, these policy arguments were not seen as strong enough to justify the establishment of a statutory trust or to find that time stopped running. Indeed, the Court noted the sentiments expressed in the Re Maxwell case, stating that if there is a gap in the law regarding the effect of an administration order on limitation periods, it is not within the Courts' purview to fill this gap. Instead, it is a matter for Parliament to address.