Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Monthly Archives: November 2012


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Four High Court Decisions: (1) how (not) to avoid personal liability; (2) LPA Receivership changes “client” for TUPE purposes; (3) out-bid Newco avoids allegations of hiving out business; and (4) discharged bankrupt refused release from family proceedings debt

I don’t think any of these judgments introduces anything new, but they might still hold a little interest:

  • Wright Hassall LLP v Morris – lessons in avoiding personal liability in post-administration agreements
  • McCarrick v Hunter – LPA Receivership results in change of client, thus no TUPE transfer of service provision
  • City of London Group Plc & Anor v Lothbury Financial Services Limited & Ors – out-bid Newco avoids claims from purchaser finding the “cupboard bare”
  • McRoberts v McRoberts – when will a court release a bankrupt from a family proceedings debt under S281(5)?

Lessons in avoiding personal liability in post-administration agreements

 Wright Hassall LLP v Morris [2012] EWCA Civ 1472 (15 November 2012)

 http://www.bailii.org/ew/cases/EWCA/Civ/2012/1472.html

 Summary: This has been the subject of some discussion on the LinkedIn Contentious Insolvency group.  The main lessons I drew from this case are that, not only should IPs take care to avoid personal liability when signing contracts/agreements as agent (SoBO?), but also to understand who – himself or the insolvent entity – is made party to legal proceedings.  In this case, it seems that the IP did not think through the consequences of an action brought against him; he seemed to assume (or at least he attempted to rely on the assumption) that the successful litigant would rank pari passu with other administration expense creditors.  As the IP had not appealed the order, all that was left to the judge – who was asked by the litigant for directions that it be paid in priority to the other expense creditors – was the question: was the order against the IP personally or the companies in Administration?  As the companies had not been made party to the proceedings, the court on appeal concluded that it could not be the companies and thus the IP was held personally liable.

The Detail: Mr Morris, Administrator of two companies, entered into two CFAs with Wright Hassall LLP.  The judgment of Lord Justice Treacy notes: “Although the heading to the agreements made plain that the two companies were in administration, and the Appellant must have understood that Mr Morris was the Administrator, when he signed the agreements he did so without any qualification as to his personal position or reservation as to his personal liability. In due course Judge Brown QC was to find that Mr Morris signed the documents without reading them” (paragraph 5).  Here endeth the first lesson.

Later, the solicitors sought payment under the CFAs.  The court found in favour of Wright Hassall LLP, but, as described above, when the solicitors pursued payment, Morris sought to treat them as an administration expense creditor who would need to wait along with all other expense creditors.  The solicitors sought directions that they be paid in priority to the other expense creditors, but, although the issue of personal liability had not been raised before, Judge Cooke recognised that this issue was key.  He decided that Morris was not personally liable, putting some weight behind the naming of the defendant as “Morris as Administrator of… Limited” and suggested that this acknowledged that Morris was acting as agent, rather than in a personal capacity.  Wright Hassall LLP appealed this decision.

The problem identified by one of the appeals judges, Treacy LJ, was that the only defendant was Morris; at no stage had the companies been joined as parties to the litigation.  Treacy LJ noted that there was no authority for asserting that, by describing the defendant as “Morris as Administrator of… Limited”, this recognises that he is being sued as agent.  He also noted that the only way the companies could have been made party to the action was with the consent of the Administrator or by order of court, but neither of these steps had been taken.  Finally, he noted that, had the companies truly been the defendants, they would have been described as “XYZ Limited (In Administration)”.  As Judge Brown QC could only make an order against a party to the action before him, it followed that the order was against Mr Morris personally.

LPA Receivership results in change of client, thus no TUPE transfer of service provision

McCarrick v Hunter [2012] EWCA Civ 1399 (30 October 2012)

http://www.bailii.org/ew/cases/EWCA/Civ/2012/1399.html

Summary: I have seen some commentary on the Hunter v McCarrick Employment Appeal Tribunal ([2011] UKEAT 0167/10/DA) and, as this recent appeal was dismissed, there has been no change, but I thought it was worth a quick mention.

We are all used to the principle that, if a business switches its service provider, the people employed by the original service provider are protected under TUPE.  In this case, the appointment of LPA Receivers led to employees switching employer although they provided the same services to the same properties.  However, the switch of employers was not considered to be a transfer of service provision, because the “client” had changed from the borrower to the mortgagee/receivership.

The Detail: McCarrick was employed by WCP Management Limited (“WCP”), which provided management services on a group of properties.  The mortgagee appointed LPA Receivers, who instructed a new property management company, King Sturge, and thus WCP stopped providing the service.  McCarrick then became employed personally by Hunter, who had an interest in seeing the swift end of the receivership and who made McCarrick available to assist King Sturge in the property management at no cost to the receivership.  McCarrick apparently provided the same property management services as he had before, but he was now paid by Hunter.

Subsequently, McCarrick was dismissed and he sought to claim that the dismissal was unfair.  In order to do so, he needed to prove continuity of employment between WCP and Hunter.  The Employment Appeal Tribunal decided – and this appeals court confirmed – that there was no transfer of service provision between WCP and Hunter.  It was stated that Regulation 3(1)(b) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 envisages that the client will remain the same throughout the transfer of service provision and “it would be quite illegitimate to rewrite the statutory provisions in the very broad way suggested by the appellant” (paragraph 37), i.e. to enable the Regulations to achieve the purpose of protecting employees in this situation when there is a transfer of service provision.  Therefore, as the client switched from the borrower to the mortgagee “and/or the receivership” (paragraph 27), Regulation 3(1)(b) regarding the transfer of service provision does not apply.

Out-bid Newco avoids claims from purchaser who found the cupboard bare

City of London Group Plc & Anor v Lothbury Financial Services Limited & Ors [2012] EWHC 3148 (Ch) (8 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3148.html

Summary: The post-Administration purchasers of a business alleged that they found “the cupboard was bare”, but claims against “Newco” and others for migrating the business prior to insolvency failed.

What I found particularly interesting in this case was the apparent acknowledgement of the judge that the director could take certain steps in anticipation of a pre-pack sale to Newco.

The Detail: A subsidiary of the first claimant bought the business, name and assets of Lothbury Financial Limited (“LF”) from its Administrators four days after the company was placed into Administration on application of the claimants.  The claimants alleged that a former director, consultants, and employee of LF conspired to transfer the business to Lothbury Financial Services Limited (“LFS”) and thus committed serious acts of misfeasance.

Mrs Justice Proudman concluded that the claims failed.  She was satisfied that the evidence demonstrated that: LFS operated as a bona fide separate business prior to the Administration of LF; LF’s clients were not misled, but chose to follow the consultants, who had no restrictive covenants, to LFS of their own accord (the business was PR); and LFS was entitled to continue to use the name after the goodwill of LF was sold to the claimant.

As far back as summer 2009 (LF was placed into Administration on 29 March 2010), the director was taking advice from an IP regarding a pre-pack Administration, although he was also attempting to re-negotiate payment terms with the claimant in order to rescue LF.  The claimants alleged that LFS was set up and structured as part of the director’s exit strategy, that LFS was to be the destination for LF’s business.  “The claimants argue that the allegation of a pre-pack administration is self-serving as depriving LF of its business served to ensure that the price to be paid would be minimised and rival bidders would be discouraged. However, preparing to succeed to an original business in such circumstances is in my judgment different from preparing to compete with it. It is the essence of a pre-pack management buy-out that information has to be derived from the failing company in order to structure such a buy-out” (paragraph 38).

So how much activity in preparation of a pre-pack is acceptable and over what kind of period?  It is noteworthy that in this case, although there was evidence of some confusion of company names on a client’s contract and an employee was described as having “overreached herself” (paragraph 28) in explaining to the London Stock Exchange’s Regulated News Section that LF had simply changed its name to LFS and moved offices, the judge found no case against the director for breach of fiduciary duty and noted that LF suffered no loss by the actions.

When will a court release a bankrupt from a family proceedings debt under S281(5)?

McRoberts v McRoberts [2012] EWHC 2966 (Ch) (1 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2966.html

Summary: A discharged bankrupt was refused release from a bankruptcy debt arising from a family proceedings order.

Although this is not a particularly surprising outcome, the judgment provides a useful summary of the factors the court considers when deciding whether to override the default position of S281(5) of the Insolvency Act 1986.

The Detail: Mr McRoberts’ bankruptcy started in September 2006.  Mrs McRoberts submitted a proof of debt for c.£245,000 being the amount owed under an order in their family proceedings in 2003 in resolution of their financial claims ancillary to their divorce.  Mr McRoberts was discharged from bankruptcy in September 2007 and the bankruptcy was concluded with no distribution to creditors.

S281(5) provides that discharge from bankruptcy does not release the debtor from such a debt, but the court has jurisdiction to release it and the court in Hayes v Hayes held that the court’s discretion in this matter is unfettered and the debt can be released after the debtor’s discharge.  The Hon. Mr Justice Hildyard considered the factors described in Hayes and continued: “As it seems to me, the ultimate balance to be struck is between (a) the prejudice to the respondent/obligee in releasing the obligation if otherwise there would or might be some prospect of any part of the obligation being met and (b) the potential prejudice to the applicant’s realistic chance of building a viable financial future for himself and those dependent upon him if the obligation remains in place. In striking that balance I consider that the burden is on the applicant; unless satisfied that the balance of prejudice favours its release the obligation should remain in place” (paragraphs 24 and 25).  He also considered that a review of the merits or overall fairness of the underlying obligation did not come into it, but that, if any modification of the order were sought, this was a matter for the matrimonial courts.

In this case, the judge’s view was that the balance remained in favour of keeping the obligation in place – the debtor had not provided evidence that any future enterprise or activity would be blighted by the continued obligation – and thus he declined to grant release.


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Scottish Government’s Response to the Consultation on Bankruptcy Law Reform Defies Logic

I appreciate that I am a bit behind the times here – the Scottish Government’s response was published on 1 November 2012: http://www.aib.gov.uk/publications/scottish-government%E2%80%99s-response-consultation-bankruptcy-law-reform.  I won’t summarise it here, as it is a fairly brief document, which is well worth reading.  However, I could not resist commenting on some of the plans.

Fundamental Changes to Trust Deeds

It seems to me that, at present, one strength of the Trust Deed is its flexibility: with the assistance of an IP, a debtor can consider what he/she can afford and what he/she is prepared to put forward to creditors, effectively in exchange for avoiding bankruptcy.  I appreciate that, to some extent, Trust Deeds – and creditors’/creditor agents’ reviewing of them – have become standardised so that in effect we now have a “consumer” Trust Deed, which anticipates a pretty standard level of contribution over a standard three-year period, delivering a fairly standard dividend to creditors.  However, I think it should be remembered that this is not what the legislation (currently) provides and the beauty of it is that debtors can formulate a Trust Deed to fit their particular circumstances.  Not all debtors fit the “standard consumer” model.

However, the SG is now looking to “standardise the period over which an individual makes the assessed contribution in bankruptcy and protected trust deeds, to be equivalent to a minimum of 48 monthly payments”.  The response also states: “There is a strong case for setting a minimum dividend at which Trust Deeds are eligible to become protected. We recognise that there are differing views among interested parties and believe that there is a legitimate debate to be had on the level of any minimum dividend. Our view is that the level would be most appropriately set between/around 30-50p in the £.  We will engage constructively with interested groups over the coming weeks to agree on an appropriate level.”

Why take a flexible tool and impose such restrictions on its use?  And how do these conclusions stack up with the consultation responses?

One of the conclusions described in the report on the consultation responses was: “There should not be a fixed term for completion of a protected trust deed” (page 5) – 71 respondees were opposed to a fixed term and only 29 were in favour.  Perhaps the argument is that, in setting a minimum of 48 monthly payments, the SG is not setting a fixed term!

What exactly is the “strong case” for setting a minimum dividend?  The report on consultation responses observed that “in recent years some creditors have taken a greater interest in PTDs and have actively rejected the protection of trust deeds which propose a dividend of less than 10p in the £” (page 31) – so that means that the Trust Deed framework is working, doesn’t it?  In introducing a minimum dividend at which Trust Deeds become eligible for protection, isn’t the SG taking the power away from creditors to decide what they are prepared to accept?  And how does evidence of creditors rejecting Trust Deeds anticipating 10p in the £ lead to a conclusion that the minimum dividend should be 30-50p?

The report on consultation responses quotes two responses from credit unions in support of 50p in the £ and I have already described how I personally feel about these in my earlier blog post (https://insolvencyoracle.com/2012/09/13/the-aibscottish-governments-report-on-responses-to-the-bankruptcy-law-reform-consultation/).

In my mind, it is simply not logical to put a minimum dividend on a Trust Deed.  The dividend level is simply a measure of net assets/income over total liabilities; it is not a measure of what a debtor can afford to pay and neither is it a reflection of how appropriate the proposal is.  Take two people: one can raise net assets/income of £12,000 and has liabilities totalling £40,000; the other can raise net assets/income of £13,000 and has liabilities totalling £45,000.  Where is the logic in allowing the first person to acquire a Protected Trust Deed, as the dividend will be 30p in the £, but denying the second, as the dividend would be 29p in the £?

What is wrong with a Trust Deed that offers a return of 29p in the £, if the likely outcome of bankruptcy is no improvement?  I remember an IP telling me that she had arranged an Individual Voluntary Arrangement for a 1990s Lloyd’s Names individual, which proposed a return of only a fraction of 1p in the £, but it still represented the best deal for creditors and it involved some reasonable assets/income.  Surely that is the key of voluntary processes, such as IVAs and Trust Deeds – they can offer a better deal for both debtor and creditors, when compared with the alternative of bankruptcy.  They should not be restricted by the need to meet a minimum dividend, which fails to recognise the individual circumstances of the debtor.

So will the introduction of a minimum dividend lead to many more people choosing bankruptcy?  I wonder.  It seems to me that many people will do almost anything to avoid bankruptcy, even when from a purely financial perspective it is obviously the best option for them.  If they are prohibited from seeking a PTD, I wonder whether they would rather take the option of a long-term DAS or informal debt management plan or simply struggle on in no man’s land.  In introducing a minimum dividend for PTDs, it seems to me that the misery for thousands will be extended for many years.

Protected Trust Deed “Guidance”

The SG appears to be seeking to introduce a further fundamental change to the PTD process, but via “Guidance”: “New Protected Trust Deed Guidance will also be introduced, to encourage best practice to be adopted in all cases.  The Guidance will include a revised structure for trustee fees consisting of an up-front fee for setting up the trust deed and a percentage fee based on the amount of funds ingathered from the debtor’s estate.”

I believe that it is correct to avoid prescribing the basis on which Trustees should be paid via legislation, but I do wonder how the SG/AiB expects its Guidance will persuade IPs to re-structure fees to be on this fixed sum and percentage basis.  What pressure will it bring to bear on IPs who do not follow this approach that it calls “best practice”?  Will the AiB, as is stated in the paragraph preceding this, “take a more proactive role, where necessary compelling trustees to act by using their powers of direction”?  But the Guidance is just guidance, isn’t it?

Creditor applications for Bankruptcy

The SG response states that the Bankruptcy Bill will look to develop “the bankruptcy process to facilitate the ability for non-contentious creditor applications to come to AiB rather than a petition to the court for an individual’s bankruptcy”.  This plan appears most odd to me, particularly in view of the report on the consultation responses.

In the report’s summary, one of the conclusions of the consultation responses was: “creditors should continue to petition the court for an individual’s bankruptcy” (page 6), which appears unequivocal to me.  The response statistics also bear out this conclusion – there were more responses opposed to the proposal that creditor applications be submitted to the AiB than there were responses in favour and this remained the case even when the proposal was restricted to “non-contentious” creditor applications.  So what is the argument for proceeding with this plan?

Fortunately, Westminster has decided not to take forward the idea that creditor petitions for bankruptcy and company windings-up in England might avoid the courts.  It took that decision having consulted on the proposal and having received the clear message back that the majority were opposed.  It is strange that Holyrood has decided to take the opposite view on having received a similar reaction to a similar consultation question.

 

Of course, I have only commented on the plans that appear to me to be most significantly flawed – there are many more planned changes, including some that make perfect sense and are welcome.  However, some leave me asking the question: why?  What ills are these changes seeking to remedy?  Are they going to be an improvement over what we already have, which seems to me to work reasonably well on the whole?  And what kind of world will we live in when it all becomes a reality?


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Solicitors’ fees for unsuccessfully opposing a winding-up petition allowed in priority to Liquidators’ fees, but not in priority to Administrators’ fees

Neumans LLP (a firm) v Andronikou & Ors [2012] EWHC 3088 (Ch) (2 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3088.html

Although there is case precedent – Re a Company (No 004055 of 1991) [1991] 1 WLR 1004 – for allowing the company’s costs for seeking to strike out a winding-up petition to be a Liquidation expense, personally this seemed a new thought to me: that the category of Liquidation expenses at R4.218(3)(h), “the costs of the petitioner, and of any person appearing on the petition whose costs are allowed by the court”, could include the insolvent company’s costs for seeking to avoid the winding-up order.

Of course, these pre-Liquidation costs do not automatically rank in priority to the Liquidator’s fees – they have to be “allowed by the court” – but it seems to me that this case highlights yet more pre-appointment liabilities of which Liquidators need to be aware.

In contrast, the judge decided that the solicitors’ fees should not be allowed as an Administration expense.

It is perhaps important to note that the Liquidators did not object to the result (because there was no Administration surplus from which to discharge the costs).  However, the judgment provides some valuable comment on the application of the Lundy Granite principle in Administrations and what kind of costs the court will allow as Liquidation expenses.

Background: In December 2009, Portsmouth City Football Club Limited (“the company”) instructed solicitors to act for it in connection with a winding-up petition presented by HMRC.  The solicitors continued to act on the matter until c.12 February 2010 when the company’s instructions were withdrawn.  At that time, the petition had reached an appeal stage.  Administrators were appointed on 26 February 2010 and thus the winding-up petition was suspended automatically.  On considering the Administrators’ (revised) proposals, the creditors approved that the company should exit Administration via Compulsory Liquidation. The original HMRC winding-up petition was restored to a hearing on 24 February 2011 when the winding-up of the company was ordered and this resulted in the ending of the Administration.

The company’s former solicitors had received part-payment from a person connected with the company, but there remained c.£267,000 owing in fees and disbursements.  The solicitors sought a determination that the costs should be an expense of the Administration; alternatively, that they should be an expense of the Liquidation; and further alternatively, that they should be an expense of the CVA (which existed whilst the company was also in Administration).

Are the solicitors’ fees an Administration expense?

The solicitors’ first argument was that the court could order that the costs be paid as an Administration expense under S51 of the Senior Courts Act 1981.  In part, that section states that: “the court shall have full power to determine by whom and to what extent the costs [of proceedings] are to be paid”.  Morgan J decided that this did not help the solicitors: “An order for costs under section 51 is for the benefit of the company. At most, it would involve a payment by the company to the company. It would not involve the administrators making a payment to the solicitors…  Section 51 does not authorise the court to order the administrators to make a payment to the solicitors. As I have explained, they did not incur costs and no order for costs is to be made in their favour” (paragraph 68).

Another argument was that the court could order that the costs be “treated” as an Administration expense.  In considering this, Morgan J reviewed the list of Administration expenses at R2.67 and reflected on the impact of the Lundy Granite principle, i.e. a liability under a contract entered into before Liquidation could be treated as if it were an expense of the Liquidation, where the Liquidator had retained the benefit of the contract for the purposes of the winding-up.  He stated: “If the company is under a liability to pay a sum under the Lundy Granite principle, then it seems to me that, as a matter of fact, payment of such a sum will be a necessary disbursement within rule 4.218(3)(m)” (paragraph 91) and thus it followed that “a liability which is payable in full under the Lundy Granite principle can be a necessary disbursement within rule 2.67(1)(f). Further, such a liability can be a liability incurred by the administrator under rule 2.67(1)(a)” (paragraph 93).

So were the solicitors’ costs in this case a liability under the Lundy Granite principle?  Morgan J decided that they were not, as the company’s contract of retainer of the solicitors ended before the Administration began and the Administrators “did not do anything to elect to retain the benefit of the contract of retainer for the purposes of the administration. Further, if they had so elected, they would only have been liable for charges in relation to the period from the time of such election” (paragraph 95).

Morgan J concluded that the solicitors’ fees came under no category of Administration expenses per R2.67 and they were not to be “treated” as if they came within that rule.

Are the solicitors’ fees a Liquidation expense?

One of the significant differences between R2.67 for Administration expenses and R4.218 for Liquidation expenses is that the latter includes (at (3)(h)): “the costs of any person appearing on the petition whose costs are allowed by the court”.  Morgan J stated: “The company comes within the reference to ‘any person’ in rule 4.218(3)(h). The company incurred costs in that it contracted, before the presentation of the winding up petition, to pay fees to the solicitors. Thus, the decision for the court is whether to ‘allow’ the costs of the company as costs within rule 4.218(3)(h)” (paragraph 115).

“On the evidence and the submissions in this case, and having regard to the fact that there was no real opposition to this course, I consider that I am able to hold: (1) the solicitors were duly instructed on behalf of the company; (2) those directing the affairs of the company at the relevant time considered that it was in the best interests of the company for the company to oppose the winding up petition in the way, and on the grounds, on which it did; (3) those directing the company were not acting in their own interests in a way which was in conflict with the best interests of the company; (4) the work done by the solicitors on behalf of the company was in fact in the best interests of the company; (5) there is no factor which would justify the court in refusing to allow the company’s costs to be an expense of the liquidation” (paragraph 128).

Which elements of the solicitors’ fees are Liquidation expenses?

In addition to the solicitors’ fees and disbursements directly related to the opposing of the winding-up petition, Morgan J considered whether the solicitors’ other fees and disbursements also should be allowed:

  • Costs incurred prior to the presentation of the petition: allowed to the extent that the “work ultimately proved of use and service in the application which the company later made to strike out the petition” (paragraph 133).
  • Costs in dealing with another creditor’s petition: allowed from the date that this petition and HMRC’s petition were ordered to be considered together; work prior to this event related to a separate matter.
  • Costs in advising on a possible application for a S127 validation order: Morgan J felt that these costs were “very closely bound up” with the costs of dealing with the HMRC petition and thus they were allowed.
  • Costs in dealing with a First-tier Tribunal regarding the company’s VAT position: the company had been pursuing a credit, which it alleged would result in a substantial cross-claim supporting its application to strike out HMRC’s petition.  Morgan J felt that the arguments as to whether to allow these costs as a Liquidation expense were “very evenly balanced”, but he chose not to allow them, viewing them as “sufficiently different from the direct costs of responding to the HMRC winding up petition so that it would be wrong to give them the priority which would follow from allowing them as an expense of the liquidation” (paragraph 136).

UPDATE: Neumans’ appeal was heard on 24 July 2013 (http://www.bailii.org/ew/cases/EWCA/Civ/2013/916.html). Lord Justice Mummery dismissed the appeal, stating that the order made by Morgan J was “dead on” (paragraph 33).


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MF Global: Are Special Administrators analogous to Liquidators?

Heis & Ors (Administrators of MF Global UK Limited) v MF Global Inc [2012] EWHC 3068 (Ch) (1 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3068.html

Decision: In considering the default provisions of a repurchase agreement between the two parties, David Richards J concluded that Special Administrators appointed under the Investment Bank Special Administration Regulations 2011 are not officers analogous to a Liquidator and an application under the Regulations for a Special Administration Order is not analogous to a petition for a winding-up.

The primary consequence of this decision in this case is that, although the appointment of the Special Administrators over MF Global UK Limited (“UK”) occurred before a Trustee was appointed over MF Global Inc (“Inc”), UK has control over establishing the sums due under the agreement.  This makes quite a difference: the Special Administrators provisionally suggested Inc’s claim to be in the region of £37m, whereas with Inc as the non-defaulting party, its claim had been estimated at £287m.

Background: The Special Administrators sought directions regarding the default provisions of a Global Master Repurchase Agreement (“GMRA”) between UK and Inc in order to establish which was the defaulting party, which was necessary in order to establish the sums due under the GMRA.

Special Administrators were appointed over UK approximately three hours before a Trustee was appointed over Inc under the US’ Securities Investor Protection Act 1970.  The GMRA defined default events as including “an Act of Insolvency” where the non-defaulting party serves a default notice.  However, where the Act of Insolvency was “the presentation of a petition for winding-up or any analogous proceeding or the appointment of a liquidator or analogous officer”, no default notice was required.  As no default notice was served when UK was placed into Special Administration, it was crucial to determine whether the Special Administration was analogous to the appointment of a Liquidator.  The parties were agreed that the appointment of a Trustee over Inc was analogous to the appointment of a Liquidator, so if Special Administrators were not analogous to Liquidators, then Inc would be the defaulting party.

David Richards J stated that if the basic characteristics of liquidation – of bringing the business of the company to an end, realising its assets and distributing the proceeds amongst creditors – are not present, “it would in my judgment be impossible to say that the procedure was ‘analogous to’ liquidation as contemplated by the GMRA” (paragraph 33).  He then compared and contrasted the powers and objectives of Special Administrators and Schedule B1 Administrators with those of Liquidators and, not surprisingly, pointed out that “an administration and other insolvency proceedings may result in the realisation of a company’s assets and a distribution of the proceeds among creditors, but the alternative of a rescue of the company as a going concern is at least one of the purposes or objectives of those proceedings. In those cases it is understandable that the non-Defaulting Party under the GMRA would wish to have an opportunity to wait and see how the proceedings develop before deciding whether to exercise its right to serve a notice declaring an event of default and thereby close out all outstanding transactions under the GMRA” (paragraph 52).  David Richards J was not persuaded that Special Administrations were analogous to Liquidation even though, as Inc’s Counsel suggested, it would be very rare, if ever, that an investment bank that had been placed into Special Administration would be rescued – one of the alternatives of Objective 3 of the Special Administration process is to rescue the investment bank as a going concern and thus it is a process which is not analogous to Liquidation.