Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Case summaries: Two Admin appointments; two OR cases; valuing a bank’s claim; LB Pension Scheme; and disqual

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The Courts have been busy. Here’s a summary of half the recent judgments in my inbox:

Re Care People Limited: Administrator’s appointment valid despite defective QFCH demand
Re Integeral Limited: Proposed Administrators’ “supine approach” falls very far short of Court’s expectations
Re Clive McNally: how to value unsecured element of bank’s claim for IVA voting purposes
Howard v OR: OR is not Equality Act duty when deciding to revoke IVA
LB Re Financing No. 1 Limited v Trustees of Lehman Brothers Pension Scheme: Trustees entitled to add target companies to FSD
• From Scotland: SoS for BIS v Reza: director in name only disqualified
• From Northern Ireland: OR v Gallagher: OR fails to have post-petition matrimonial order set aside as disposition

Re Care People Limited (In Administration) ([2013] EWHC 1734 (Ch)) (18 March 2013)

In Brief: Appointment of administrators six minutes after QFCH demand, which gave conflicting deadlines for repayment, was premature at worst. Court decided defect did not render appointment a nullity and waived, declaring appointment valid.

Ultimate Invoice Finance Limited, a QFCH, issued a written demand dated 25 February 2013 to the company and an Administrator was appointed by filing a notice of appointment at court at 12 noon on 26 February. The difficulty was that the demand gave two different timescales for repayment: in one place, two days, and, elsewhere in the same demand, by return. Under the terms of the charge, the written demand was to be considered as served 48 hours from the time of posting. The QFCH repeated the demand by emailing it at 11.54am on 26 February, i.e. just six minutes before the appointment. Consequently, the question for Judge Purle was whether the Administrator had been validly appointed.

Purle J concluded that “at least enough time, which is more than six minutes, had to elapse for the unchallenged part of the demand to be met, assuming the company could meet it. The probability, therefore, is that the appointment was not properly made at the time, but was irregular” (paragraph 13). However, the company was in no position to make the repayment in two days or at all, so “what occurred at worst therefore was a premature appointment” (paragraph 14). He felt that the defect was simply a procedural matter and did not consider it “of such fundamental importance as to render the appointment a nullity” (paragraph 15). He also believed that the prejudice to the company was limited and that there was no substantial injustice resulting from the premature appointment and thus he declared the appointment valid notwithstanding the defect.

Re Integeral Limited ([2013] EWHC 164 (Ch)) (5 February 2013)

In Brief: Proposed Administrators criticised for taking “supine approach” to flawed administration application. Court took into account creditors’ lack of confidence in any administrator proposed by director and granted winding up order.

This judgment has not yet appeared on BAILII, but the article in R3’s Summer 2013 Recovery magazine by Prav Reddy and Christopher Boardman was quite striking, so I thought I’d track it down.

Readers of Recovery magazine may recall the article, which emphasised the obligations of nominee administrators indicated by this case in which an application for an administration order was dismissed in favour of a winding-up order. The judge, Richard Snowden QC, stated that “it is of fundamental importance that any insolvency practitioner who is nominated as a potential administrator – an officer of the court – and who ventures his opinion to the court as to the prospects of an administration order, should do so carefully, with an independent mind, and on the basis of a critical assessment of the position of the company and the proposals going forward” (paragraph 69). In this case, the court granted leave for the petitioner to apply for a costs order against the nominee administrators personally on the basis that their evidence “fell very far short of these basic requirements” (paragraph 70).

Having read the judgment, I thought I’d add to the R3 article. The facts of this case were quite unusual, leading the judge to state that, in his judgment, “the administration application has been a tactical ploy by Mr Joshi to avoid or at the very least postpone the liquidation of the Company and the independent investigation of his conduct of its affairs” (paragraph 78). It sticks in the throat a bit to hear a judge refer to an “independent liquidator” and to give weight to the views of creditors who “would have no confidence in any administrator suggested by Mr Joshi”. It makes for uncomfortable reading when a judge appears to hint at a risk, or at least acknowledges the perception of some creditors, that such an IP will not do his/her job when appointed officer of the court. In Snowden’s judgment “the supine approach of both practitioners and their failure even to acknowledge the fundamental problems… is so serious as to call into question their competence and independence from Mr Joshi” (paragraph 72). It makes me question: how is a nominated administrator to function? He is not an officer of the court until appointed administrator and until then he receives his instructions from the company in assisting in putting the company into administration – I am not suggesting that this supports a “supine approach”, but it does make me wonder how an IP can manage such risks of conflict of interest, which exist in every case, at least theoretically, where he is introduced to an appointment – whether Administration, Liquidation, or CVA – by the company.

Re Clive Vincent McNally ([2013] EWHC 1685 (Ch)) (17 June 2013)

In brief: Bank was correct to deduct future costs of LPA receivers in valuing unsecured element of claim for purposes of voting on IVA.

McNally appealed his bankruptcy, which had followed a rejected IVA Proposal, and the rejection of his application to set aside, amongst other things, the chairman’s decision on the amount of a bank’s debt for voting purposes.

The key differences in the chairman’s/bank’s view of the value of the claim for and the view of Mr McNally were (i) the value of the property – the bank relying on a valuation of £650,000 to £750,000 and Mr McNally relying on a letter proposing to market the property at £850,000 – and (ii) the costs of realisation – the bank estimating them at £100,000 and Mr McNally at £27,000.

The judge had little difficulty in rejecting McNally’s view of the property value in favour of the bank’s on the basis of the valuation evidence. Deciding on the costs of realisation was a little less straightforward, as they comprised costs incurred prior to the IVA meeting and future costs anticipated to be incurred by LPA receivers. Judge Purle QC stated: “I would accept that the court should not proceed on the basis that exceptional or unusual costs will be incurred, but where, as here, receivers are in place, the ongoing costs associated with their appointment are inevitable and cannot be ignored… Costs which must inevitably be incurred before or in the realisation of the security must, it seems to me, be taken into account in ascertaining the unsecured balance, as the value of the security (from which the costs will be paid) is necessarily reduced by the amount of those future costs” (paragraph 33).

On this basis, the value of the bank’s unsecured claim was considered sufficient to defeat the proposed IVA and the appeal was dismissed.

R (on the application of Amanda Howard) v The Official Receiver ([2013] EWHC 1839 (Admin)) (28 June 2013)

In Brief: OR exercised a judicial function when deciding to revoke a DRO, so not subject to public sector equality duty.

Ms Howard sought a judicial review of the OR’s decision to revoke her Debt Relief Order on the ground that the OR had failed to comply with the public sector equality duty set out in section 149 of the Equality Act 2010.

The DRO was revoked on the basis that the debtor’s disposable income during the moratorium period materially exceeded the £50 per month threshold allowed, albeit that this was a consequence of the debtor receiving three months’ underpayment of working tax credits from HMRC, but the debtor claimed that the OR had failed to take into account that she had a protected characteristic under the Equality Act 2010 – the OR had accepted that the debtor was disabled within the meaning of the Act – and that the decision to revoke amounted to direct discrimination.

The key issue was whether the OR was exercising a judicial function (within the meaning contemplated by paragraph 3 of Schedule 18 to the Act) in deciding to revoke the DRO – if so, she would not have the section 149 public sector equality duty.

Mr Justice Swaden’s judgment is one of the longest I have read, but the upshot was that the OR was exercising a judicial function – in my view, one persuasive argument was that the power to revoke a DRO is conferred on both the OR and the court and, as it was common ground that the court would be exercising a judicial function in revoking a DRO, it is difficult to see how the OR would not be also; if instead the OR were subject to the public sector equality duty, it could mean that the OR and the court would come to different conclusions on identical facts.

Consequently, the OR was not subject to the public sector equality duty in deciding to revoke the DRO and the application for judicial review was dismissed.

LB Re Financing No 1 Limited & Ors v The Trustees of the Lehman Brothers Pension Scheme & Ors ([2013] EWCA Civ 751) (214 June 2013)

In Brief: Trustees entitled to seek addition of further target companies to FSD, despite two-year timescale from look-back date having elapsed.

Although this is a Lehman Brothers pension case, and thus I have struggled to keep up with the issues and arguments, it seems to me to be a significant outcome.

On 13 September 2010, the Determinations Panel of the Pensions Regulator issued a Financial Support Direction to six Lehman group companies. The Trustees referred the determination to the Upper Tribunal in order to increase the number of targets of the FSD by adding a further 38 Lehman group companies. The additional targets appealed on the basis that the Trustees were not “directly affected” by the determination and thus were not entitled to exercise the right to request their addition and that the 2-year period had elapsed (based on the Pensions Regulator’s Warning Notice, which identified 14 September 2008 as the look back date for any FSD determination against a target identified in the warning notice) and thus the Regulator could not issue an FSD to the other companies based on the same issue date. Both grounds of the appeal were dismissed.

Lady Justice Arden did not believe that the court should adopt a narrow interpretation of “directly affected” and thus conclude in this case that, because the Trustees’ rights were affected two or three steps after the determination, this rules them out as being “directly affected”. “They are, therefore, interested in a very real sense in the initial stage involving the determination to issue an FSD” (paragraph 22).

On the 2-year time limit issue, it was acknowledged that “there will never be another case in which the time limit imposed by section 43(9) [of the Pensions Act 2004] in its original form will fall to be applied” (paragraph 38), as it has since been amended by the Pensions Act 2011. However, Arden LJ described the “plainly undesirable consequences” that would result from the imposition of a 2-year timescale in the way argued, which “would turn the reference and appeal proceedings into a filibusterer’s paradise” (paragraph 48) and “would be to treat the time limit as an inappropriate master rather than as a good servant” (paragraph 59). She believed that the Upper Tribunal’s directions given under section 103(5) and (6) of the Pensions Act 2004 were not subject to the time limit provided in section 43(9).

Secretary of State for Business, Innovation & Skills v Ferdousi Reza ([2013] ScotCS CSOH 86) (31 May 2013)

In Brief: Director’s abdication of all responsibility to husband resulted in two-year disqualification order. Also lesson for directors: if contemplating an undertaking, perhaps offer it before the hearing!

A disqualification order was made against Mrs Reza for two years.

Mr and Mrs Reza had both been directors. Mr Reza had already given an undertaking not to be a director for three years. The company had gone into administration after continuing to trade without paying tax, but Mrs Reza’s defence was that she had no knowledge of that, as she had no active involvement with the company but left all its affairs to her husband.

The judge commented that “over the whole of her 18 years in office as a director, the respondent failed to carry out even the most basic of her duties” (paragraph 15) and acknowledged that she had been made a director only because of the perceived tax advantages and in case her husband had been unavailable to sign documents. However, “if someone accepts a directorship and then abdicates all responsibility for the affairs of the company, on any common sense view they have demonstrated unfitness for the office to a high degree… and the case law is clear that incompetence can include inactivity” (paragraphs 17 and 19). The short disqualification period of two years was considered appropriate, given that Mrs Reza did not know of the company’s tax defaults.

Despite Mrs Reza informing the court at the end of the hearing that she would be prepared to give an undertaking, the petitioner pursued a disqualification order “not least as an example and a deterrent to others” (paragraph 21).

Official Receiver for Northern Ireland v Catherine Gallagher ([2013] NIMaster 12) (8 May 2013)

In Brief: OR failed to have matrimonial order set aside as a post-petition disposition, although managed to claw back funds intended for petitioner.

Although this is a Northern Ireland case, the arguments centre around Article 257 of the Insolvency (Northern Ireland) Order 1989, which pretty-much mirrors S284 of the Insolvency Act 1986, so I thought it was worth covering.

A bankruptcy petition was presented on 31 January 2011, but an order was only made on 13 January 2012. In the interim, the bankruptcy petition was removed from the bankruptcy court to the matrimonial court and a matrimonial agreement incorporating the transfer of the debtor’s interest in a property was made an order of court on 18 November 2011. The OR sought to have the order set aside, arguing that the petition should not have been moved to the matrimonial court and it should have been dealt with more expeditiously; had it been so, the OR argued that the bankruptcy order would have been made in all likelihood before the property adjustment orders were made.

The judge decided that, as the ancillary relief proceedings were High Court proceedings, the matrimonial court’s order fulfilled the Article 257 criteria in that the property adjustment orders had been made with the consent of the High Court and were therefore not void, save for the following.

One element of the matrimonial agreement was that £21,500 should be paid to the petitioning creditor. The judge noted that this was intended to enable the petition to be dismissed. Therefore, as it was not paid and the petitioning creditor had sought and obtained the bankruptcy order, the judge concluded that the sum should be paid to the OR as it formed part of the bankruptcy estate.

Author: insolvencyoracle

In working life, I am a partner of the Compliance Alliance, providing compliance services to insolvency practitioners in the UK. I started blogging as Insolvency Oracle in 2012 after leaving the IPA and on realising that I was now free to express my personal opinions in public.

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