Insolvency Oracle

Developments in UK insolvency by Michelle Butler

(1) Legal charge for bankruptcy annulment service unenforceable; (2) Employment Appeal Tribunal acknowledges company’s conflicting statutory duties; (3) English court leaves US to decide bankrupt’s COMI; (4) company restoration did not avoid administration-liquidation time gap; (5) what are TUPE “affected employees”?; (6) more on Jersey administration appeal

Leave a comment

IMGP5257

Sorry guys, I’ve been storing up a few court decisions:

Consolidated Finance v Collins: legal charge resulting from bankruptcy annulment service unenforceable
AEI Cables v GMB: protective awards reduced in recognition of company’s conflicting statutory duties
Kemsley v Barclays Bank Plc: English court leaves US to decide bankrupt’s COMI
RLoans LLP v Registrar of Companies: company restoration did not avoid 2-year gap between administration and liquidation
I Lab Facilities v Metcalfe: redundant employees in non-transferred part of business not TUPE “affected employees”
HSBC Bank Plc v Tambrook Jersey: Court of Appeal’s reasons for reversing rejection of Jersey court’s request for administration

Out of the frying pan into the fire for bankrupts achieving annulments

Consolidated Finance Limited v Collins & Ors ([2013] EWCA Civ 473) 8 May 2013

http://www.bailii.org/ew/cases/EWCA/Civ/2013/475.html

Summary: Appellants were successful in resisting the attempts of Consolidated Finance Limited (“Consolidated”) to enforce mortgages over their homes, mortgages which had arisen as a consequence of engaging the Bankruptcy Protection Fund Limited (“BPF”, “Protection”) to secure annulments of their bankruptcies. The agreements were found to be refinancing agreements and thus subject to the Consumer Credit Act 1974, the requirements of which Consolidated had not met.

Whilst the arguments centred around the construction and effects of the agreements, of greater interest to me are the judge’s criticisms of the transactions which, at least in the case examined as typical, were in his judgment manifestly to the bankrupt’s and her husband’s prejudice. He felt that some of the companies’ literature was misleading and noted that it made no mention of the “extraordinarily high rates of interest”. He also criticised the solicitors involved in the process, questioning whether they could avoid the duty to advise their clients, who were clearly entering into a transaction that was manifestly to their disadvantage, and suggested that they may have had “a conflict of irreconcilable interests” given their relationship with Consolidated and BPF.

The Detail: Five sets of appellants sought to resist Consolidated’s attempts to enforce mortgages over their homes. The judge focussed on the facts of Mr and Mrs Collins’ case as typical of all claims.

Mrs Collins had been made bankrupt owing a total of £13,544 to her creditors. She engaged the services of BPF to help her secure an annulment, given that the equity in her jointly-owned home was more than sufficient to cover all debts. Mrs Collins’ bankruptcy was annulled by reason of BPF settling all sums due by means of funds totalling £24,674 received from Consolidated. Under the terms of a Facility Letter, Consolidated agreed to make available a loan of £32,000 (which was also used to settle BPF’s fees), which was required to be repaid within three months after drawdown. Mr and Mrs Collins were unable to refinance their liabilities under the Facility Letter supported by a Legal Charge, resulting in Consolidated filing the claim, some 2.5 years later, for a total at that time of £77,385 inclusive of interest at 4% per month after the first three months (at 2.5% per month). The Facility Letter also provided for a so-called hypothecation fee of 2.5% of the principal and an exit fee of the greater of £3,000 and 2.5% of the principal.

Amongst other things, the appellants contended that the agreements under which they were alleged to have incurred the liabilities were regulated for the purposes of the Consumer Credit Act 1974 (“the Act”) and did not comply with the requirements of the Act. Consolidated’s case was that it was a “restricted-use” agreement, which would lead it to be exempted from the requirements of the Act. The Collins’ argument was that, if anything, it was a refinancing agreement, which would mean that it was not exempt.

Sir Stanley Burton concluded from the documents that Mrs Collins was indebted to BPF for the sums advanced at least until the annulment order was made. “The effect of the Facility Letter was to replace her indebtedness to Protection, which was then payable, with that owed to Consolidated. In other words, the purpose of the agreement between Mrs Collins and Consolidated was to refinance her indebtedness to Protection” (paragraph 47). Consequently, it was a regulated agreement and it was common ground that it did not comply with the statutory requirements and was unenforceable in the present proceedings.

The judge felt inclined to air his concerns at the “unfairness” of the transactions between the Collins and BPF/Consolidated. He stated that, “at least in the case of Mr and Mrs Collins, the transactions were in my judgment manifestly to their prejudice… If they failed to refinance their liabilities to the companies, as has happened, and the Legal Charges granted to Consolidated were enforceable, it would not only be Mrs Collins’ equity in their home that would be in peril, but also that of Mr Collins. In other words, they were likely to lose their home. This was the very result that, according to the companies’ literature, entering into agreements with them would avoid, but with the added prejudice that the far greater sums sought by the companies would have to be paid out of the proceeds of sale of their home as against the sums due in the bankruptcy (for which Mr Collins had no liability)” (paragraph 56).

He also noted that the companies incur no risk in making the advance to the bankrupt, as they will only do so if there is sufficient equity in the property, and therefore “to suggest that they take any relevant risk, as they do by describing their services as ‘No win no fee’, is misleading” (paragraph 57). “Moreover, the companies’ advance literature… make no mention of the extraordinarily high rates of interest they charge, rates that are even more striking given that the indebtedness is fully secured” (paragraph 58).

The judge also criticised the solicitors who acted for Mrs Collins and who were introduced to her by BPF, a relationship which, he suggested, may have given them “a conflict of irreconcilable interests”. “It must, and certainly should, have been obvious to them that for the reasons I have given the transactions with Mr and Mrs Collins were manifestly to their disadvantage. Mrs Collins was their client. I raise the question whether in such circumstances a solicitor can properly avoid a duty to advise his client by excluding that duty from his retainer, as LF sought to do” (paragraph 59).

Employment Appeal Tribunal acknowledges insolvent employer’s Catch-22, but only drops protective awards by a third

AEI Cables Limited v GMB & Ors ([2013] UKEAT 0375/12) (5 April 2013)

http://www.bailii.org/uk/cases/UKEAT/2013/0375_12_0504.html

Summary: Having consulted IPs and failed to seek additional funding, the company decided to make employees in one division redundant and keep another division running with a view to proposing a CVA. The CVA was approved, but the dismissed employees were granted the maximum 90 days protective awards, as the company had failed completely to consult with the trade unions/employee representatives as required by the Trade Union and Labour Relations (Consolidation) Act 1992.

The company sought to have the protective awards reduced. The Appeal Tribunal acknowledged that it was unreasonable to expect the company to have continued to trade while insolvent to enable it to comply with the consultation requirements of the Act – the company could have consulted, at most, for 10 days – and that the Employment Tribunal should have considered why the company acted as it did. The protective awards were reduced to 60 days.

The Detail: Around the middle of May 2011, insolvency practitioners warned the company that, unless they took action, they risked trading whilst insolvent. Following a failure to secure additional funding from the bank, the decision was made to close the company’s cable plant, leading to the redundancy of 124 employees, but continue to trade the domestic division, which employed 189 people, and seek to agree a CVA. On 27 May 2011, the 124 employees were dismissed with immediate effect and later a CVA was approved on 24 June 2011.

An Employment Tribunal found that the company had failed to consult with trade unions and employee representatives as required by S188 of the Trade Union and Labour Relations (Consolidation) Act 1992. The company raised no special circumstances in an attempt to excuse non-compliance, but it did appeal the length of the protective awards, which had been granted for the full 90 days.

The reasoning of the Appeal Tribunal went like this: “We very much bear in mind that the purpose of making a protective award is penal, it is not compensatory. It is penal in the sense that it is designed to encourage employers to comply with their obligations under sections 188 and 189. We also bear in mind that the starting point in considering the length of a protective award is 90 days. Nonetheless Employment Tribunals are bound to take account of mitigating factors and are bound to ask the important question why did the respondent act as it did. Had the Employment Tribunal asked this question it could not possibly have ignored the fact and the conclusion that the company simply was unable to trade lawfully after the advice it had received on 25 May. In those circumstances, it is clearly wrong for the Employment Tribunal to anticipate that a 90 day consultation period could have started” (paragraph 22). In this case, the Appeal Tribunal noted that the company could have started consultation around 17 to 20 May, when it seems the company first consulted the IPs, but there had been no consultation or no real provision of information at all before the dismissals on 27 May. “However, because in our opinion the Employment Tribunal failed to have sufficient regard to the insolvency and the consequences of trading and that a consultation period of 90 was simply not possible, the award of 90 days cannot stand” (paragraph 23). The protective awards were reduced to 60 days.

English court leaves US to decide bankrupt’s COMI

Kemsley v Barclays Bank Plc & Ors ([2013] EWHC 1274 (Ch)) (15 May 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1274.html

Summary: An English bankrupt sought to have US proceedings against him restrained. The English court declined to intervene, observing that the Trustee’s ongoing application in the US Bankruptcy Court for recognition under UNCITRAL of the English bankruptcy would decide the bankrupt’s fate.

The Detail: On 26 March 2012, Kemsley was made bankrupt on his own petition. Shortly before this, Barclays commenced proceedings against him in New York (and later in separate proceedings in Florida). Kemsley’s Trustee applied to the US Bankruptcy Court for recognition under UNCITRAL of the English bankruptcy as a foreign main proceeding. At the time of this hearing, judgment on the Trustee’s application had not yet been given, but the New York proceedings had been adjourned awaiting the outcome.

Kemsley applied to the English court to restrain Barclays from continuing with either the New York or the Florida proceedings. The issue for Kemsley was that, although he would be discharged from his English bankruptcy on 26 March 2013, if Barclays were successful in the New York proceedings, that judgment would be enforceable for 20 years in the US and other jurisdictions that would recognise it.

Mr Justice Roth noted a couple of authorities, which followed the principle that “there must be a good reason why the decision to stop foreign proceedings should be made here rather than there. The normal assumption is that the foreign judge is the person best qualified to decide if the proceedings in his court should be allowed to continue. Comity demands a policy of non-intervention” (paragraph 30).

The judge noted that, if the English bankruptcy were recognised as foreign main proceedings on the basis that England was Kemsley’s COMI, the New York and the Florida proceedings would be stayed. But what if the US Court finds that Kemsley’s COMI was the USA? In that case, would it be right for the English court to intervene? As Roth J observed: “either Mr Kemsley’s COMI was in England, in which case an anti-suit injunction is unnecessary; or it was in the United States, in which case I regard such an injunction as wholly inappropriate” (paragraph 50). Consequently, Roth J dismissed the application.

In a postscript to the judgment, it was reported that the Trustee’s application for recognition was refused by the US court. The court found that, at the time of the petition, Kemsley’s COMI was in the USA.

Company restoration of no use to petitioner, as it left a 2-year gap between administration and liquidation

RLoans LLP v Registrar of Companies ([2012] EWHC B33 (Comm)) (30 November 2012)

http://www.bailii.org/ew/cases/EWHC/Comm/2012/B33.html

Summary: A creditor sought the restoration of a dissolved company to the register in order to pursue a preference claim. The company had been moved to dissolution from administration in 2010, so the petitioner sought a winding-up order that would follow on immediately from the administration so that the preference claim was not already out of time.

The judge restored the company and ordered the winding-up, but noted that this did not deal with the 2-year gap between insolvency proceedings. This was because he felt that, on filing the form under paragraph 84 of Schedule B1, the administration had ceased, dissolution being a later consequence, and so the eradication of the dissolution merely brought the company back to the position after the end of the administration.

The Detail: To enable a preference claim to be pursued, RLoans LLP sought the restoration of a company to the register and a winding-up order to take effect retrospectively from the date that the former Administrators’ notice of move to dissolution was registered. The transaction that is subject to the preference allegation occurred in March 2006; Administrators were appointed in January 2007 and they submitted the form to move the company to dissolution in June 2010. Therefore, only if the company’s restoration was accompanied by a continuation of insolvency proceedings – either a liquidation following immediately on the cessation of the administration or an extension of the original administration – would the preference claim have any chance due to the timescales involved; it would be of no use to the petitioner if the commencement of the winding-up were the date of restoration.

Mr Registrar Jones had no difficulty deciding that it was just to restore the company to the register. However, he concluded that the resultant fiction that the dissolution had not occurred had no effect on the cessation of the administration: “when paragraph 84 of Schedule B1 to the Act prescribes that the appointment ceases upon registration of the notice, it means that there is no longer any administration in existence. The cessation is not dependent upon dissolution taking place” (paragraph 26). Therefore, there would still be a gap of over two years between the end of the administration and the start of any winding-up, which would not help the petitioner. The judge also felt that the solution did not lie in extending retrospectively the original administration, because the company had ceased to be in administration before its dissolution; all the current direction could do was to restore the company to the position it was in before dissolution.

In the absence of the recipient of the alleged preference, the judge was not prepared to consider suspending the limitation period between the end of the administration and the commencement of liquidation. Therefore, all he did was restore the company to the register and order its winding-up. He also declined to order that the IP waiting in the wings be appointed liquidator: “I only have power to make the appointment if a winding up order is made ‘immediately upon the appointment of an administrator ceasing to have effect’ (see section 140 of the Act). For the reasons set out above, that has not occurred” (paragraph 61).

Another Employment Appeal Tribunal: “affected employees” narrowed for TUPE consultation purposes

I Lab Facilities Limited v Metcalfe & Ors ([2013] UKEAT 0224/12) (25 April 2013)

http://www.bailii.org/uk/cases/UKEAT/2013/0224_12_2504.html

Summary: Staff employed in one part of the business were not “affected employees” under the consultation requirements of TUPE, because they had not been affected by the transfer of the other part of the business, but by the closure of their business. The fact that the original plan had been that their part of the business would also transfer was not relevant, but rather it was what was finally transferred that was relevant for TUPE consultation purposes.

The Detail: I Lab (UK) Limited (“ILUK”) operated a business providing rushes and post-production work to the film and television industry. On 11 June 2009, the post-production staff were given notice of redundancy, but also were told that the plan was that some of them would be hired on new contracts. However it seems that the plan changed; the company was placed into liquidation on 30 July 2009 and on 11 August 2009 assets relating to the rushes part of its business were sold to I Lab Facilities Limited and no new contracts were made with the former post-production staff.

The Employment Tribunal found that ILUK had failed to comply with regulation 13 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”), but the transferee appealed on the ground that the post-production staff were not “affected employees” for the purposes of TUPE, because that part of the business had not transferred, and thus they had not been entitled to consultation. The Appeal Tribunal agreed – the post-production staff had not been affected by the transfer, but by the closure of the business. However, Counsel for the employees argued that it had been the original plan – which would have affected the post-production staff also – that had generated the requirement to consult.

The Appeal Tribunal reasoned: “It is necessary to appreciate that the time at which an employer must comply with the obligations under regulation 13 (2) and (6) is not defined by reference to when he first ‘envisages’ that he will take the relevant ‘measures’. Rather, the obligation is to take the necessary steps ‘long enough before’ the transfer to allow consultation to take place. That being so, it can never be said definitively that the employer is in breach of that obligation until the transfer has occurred” (paragraph 20). Consequently, as the indirect impact of the actual transfer of the rushes business did not make the post-production staff “affected employees”, the appeal was allowed.

Court of Appeal re-opens the way for administrations of overseas companies

HSBC Bank Plc v Tambrook Jersey Limited ([2013] EWCA Civ 576) (22 May 2013)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/576.html

Summary: As reported in an earlier post (http://wp.me/p2FU2Z-38), the Court of Appeal overturned a rejection of an application for an Administration Order over a Jersey company.

The Detail: At first instance, Mann J said that an Administration Order could not be made under S426, as the English Court was not being asked to “assist” the Jersey Court in any endeavour as there were no proceedings afoot in Jersey.

In the appeal, Lord Justice Davis expressed the view that, with all respect to Mann J, “his interpretation and approach were unduly and unnecessarily restrictive” (paragraph 35). His first point was that “S426(4) is not by its actual wording applicable (notwithstanding the title to the section) to courts exercising jurisdiction in relating to insolvency law: it is by its wording applicable to courts having jurisdiction” (paragraph 36) and, in any event, Davis J felt that the Jersey court was engaged in an endeavour: “the endeavour was to further the interests of this insolvent company and its creditors and to facilitate the most efficient collection and administration of the Company’s assets” (paragraph 41) and thus the Royal Court of Jersey made the request that it did to the English Court.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s