Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Not the Nortel/Lehman Decision

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I am not going to comment on the Supreme Court’s decision in Nortel and Lehman, because, as with Eurosail, it has had plenty of coverage already. Instead, I’ll cover a few lesser-known cases, with a couple of Scotland ones taking the top-billing:

• Scotland: Re The Scottish Coal Company Ltd – Liquidator entitled to disclaim land and onerous licences (UPDATE: this was overturned on 12 December 2013 ([2013]CSIH 108). A summary of that reclaiming motion is at http://wp.me/p2FU2Z-5v.)
• Scotland: Re Station Properties Ltd – judge not convinced case made out for para 80 exit from administration and administrators directed to issue revised proposals to cover change of administration objective
Re GP Aviation Group International Ltd – appeals against tax assessments are not property capable of assignment by a liquidator
USDAW v WW Realisations 1 Ltd – reversal of Woolworths/Ethel Austin decisions on redundancy consultation legislation: number of redundancies at each location not as relevant as total number
Evans & Evans v Finance-U-Limited – creditor who proved in full in bankruptcy did not renounce security
• Scotland: Re William Rose – Trustee’s late application to extend 3-year period could not reverse property re-vesting
• Northern Ireland: Tipping v BDG Group Ltd – late application for protective award allowed, as ignorance of the law considered reasonable

However, if you do want to read a summary of Nortel/Lehman, I think that 11 Stone Buildings’ briefing note covers the subject well: http://www.11sb.com/news/24-july-2013—nortel—lehman-supreme-court-decision–guidance-on-insolvency-expenses-and-provable-claims.asp. I’m sure most IPs are breathing a sigh of relief and waiting, a little more comfortably now, for the Game appeal…

Finally, a Scottish precedent for a liquidator’s power to disclaim (UPDATE: … not so fast!)

Scotland: Re. The Scottish Coal Company Limited (11 July 2013) ([2013] CSOH 124)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH124.html

Liquidators sought directions on whether they could abandon or disclaim land and/or onerous water use licences, in order to avoid the substantial costs involved in maintaining and restoring the sites, which the Scottish Environment Protection Agency (“SEPA”) would require before it would accept a surrender of its licences. SEPA and other bodies made representations, conscious that, if the liquidators succeeded, significant costs might fall to the taxpayer.

Scottish readers will be aware that there is no express statutory provision available to liquidators of Scottish companies to disclaim onerous property, in contrast to the position of liquidators of English and Welsh companies who may disclaim under S178 of the Insolvency Act 1986. Counsel in this case were also unable to find any case law or textbook showing a liquidator of a Scottish company exercising such a power.

Lord Hodge drew a comparison with the position of a Trustee in a sequestration, which has power to abandon land, and contemplated its effect in relation to S169(2) of the Act, which provides that “in a winding up by the court in Scotland, the liquidator has (subject to the rules) the same powers as a trustee on a bankruptcy estate”. The judge felt that it was not an exact comparison, as the effect of a trustee’s abandonment was to reverse the vesting so that the bankrupt owns the property. However, there is no vesting of property in a liquidator, so if he were somehow to bring to an end the company’s ownership of the property, it would become ownerless. Although the judge saw the potential for abuse as a means of avoiding obligations, he saw no reason in principle why land could not be made ownerless, given that the Crown has a right to waive ownership of bona vacantia, which would render such property ownerless.

The judge then considered whether the liquidators could avoid the obligations imposed under the Water Environment (Controlled Activities) (Scotland) Regulations 2005 (“CAR”) in seeking to surrender the licences. The judge described powerful considerations that might have persuaded him to hold that the liquidators could not disclaim the licences, one reason being that he thought “that there is a strong public interest in the maintenance of a healthy environment, the remediation of pollution and the protection of biodiversity. There is a conflict between the results sought by the directive and the insolvency regime. I do not think that the insolvency regime has any primacy which means that CAR can exclude a liquidator’s power to disclaim only if, like section 36 of the Coal Industry Act 1994, it says so expressly” (paragraph 51). However, the judge recognised that “if the relevant provisions of CAR have the effect of (a) removing a liquidator’s right to disclaim the property of a company and refuse to perform an obligation in relation to that property and (b) creating a new liquidation expense which would have to be met before the claims of preferential creditors, it seems to me that it would modify the law on reserved matters… It would also be altering the order of priority on liquidation expenses in rule 4.67 of the Insolvency (Scotland) Rules 1986 if… the remuneration of the liquidator were to rank equally with the obligation to spend money to comply with CAR” (paragraph 64).

Consequently, the judge concluded that the liquidators could disclaim the sites and abandon the water use licences along with the obligations under CAR. He also endorsed the liquidators’ proposed mechanism for effecting the abandonment, which involved giving notice to all interested parties, advertising the fact so that locals were made aware of the abandoned sites, and sending a notice to the Keeper of the Registers in Scotland.

(UPDATE 09/01/14: this decision was overturned in a reclaiming motion ([2013] CSIH 108) on 12/12/13 – see http://wp.me/p2FU2Z-5v.)

Scotland: More work required of administrators to exit via Para 80 and administrators directed to submit revised proposals to address change in objective

Re. Station Properties Limited (In Administration) (12 July 2013) ([2013] CSOH 120)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH120.html

The administrators’ proposals, which included that they thought that the objective set out in Paragraph 3(1)(c) of Schedule B1 would be achieved, were approved at a creditors’ meeting. Subsequently, it appeared to the administrators that all creditors should receive full repayment of their debts, as the directors had secured funding, and therefore they planned to exit the administration and hand control of the company back to the directors. The quantum of the claim of one creditor, Dunedin Building Company Limited (“DB”), was subject to a legal action. DB objected to the administrators’ plan arguing that they should adjudicate on its claim before ending the administration.

The administrators sought directions as to whether in the circumstances they could end the administration under Paragraph 80 of Schedule B1 on the basis that the purpose had been sufficiently achieved notwithstanding DB’s objection.

Lord Hodge felt that an administrator could not come to this conclusion “without obtaining a clear understanding of the directors’ business plan and cash flow forecasts and forming an independent view, in the light of the best evidence reasonably available, whether that plan and those forecasts are realistic” (paragraph 20). He also felt that “It would be consistent with current accountancy practice to require the directors to produce a business plan and forecasts for at least 12 months and to attempt to look into the future beyond that time to identify whether there was anything which was likely to undermine the company’s viability” (paragraph 22). The ultimate value of DB’s claim was a factor in assessing the company’s future cash flow solvency, so the judge felt either that the administrators should await the outcome of the legal action or they “should take steps to enable themselves to reach an informed and up to date view on the likely value of that claim” (paragraph 23) before they could decide whether the company had been rescued as a going concern.

Lord Hodge also felt that the administrators had to deal with the change in administration objective – from Para 3(1)(c), as set out in their proposals, to Para 3(1)(a) – by issuing revised proposals under Para 54. “I am not persuaded that the obligation on an administrator under para 4 of Schedule B1 to ‘perform his functions as quickly and efficiently as is reasonably practicable’ provides any justification for bypassing para 54 even if an administrator were of the view that a dissenting creditor would be outvoted at the creditors’ meeting” (paragraph 30).

Although personally, I see this as a significant conclusion, particularly as I don’t think I’ve seen any administrator issue revised proposals, it should be remembered that the judge felt that, in the circumstances of this case, the change in administration objective was a substantial change, particularly because DB had been in dispute with the directors regarding its claim and the change in objective could see the company reverting to the directors’ control before the claim was determined.

Right to appeal a tax assessment is not property capable of being assigned

Re. GP Aviation Group International Limited (In Liquidation): Williams v Glover & Pearson (4 June 2013) ([2013] EWHC 1447 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1447.html

Former directors asked the liquidator to appeal against HMRC’s corporation tax assessments, but the liquidator did not have the finance to fund the appeals, so the former directors asked the liquidator to assign the appeals to them. The liquidator sought directions on whether he had the power to assign the appeals.

HH Judge Pelling QC concluded that the right of appeal was not property within the meaning of the Insolvency Act and so was no capable of being assigned. He noted that the liability, to which the right of appeal related, could not be assigned and the right of appeal could not be assigned separately. He stated that, even if it had been capable of assignment, he would not have sanctioned it, as: “the assignment of the right to appeal without being able to assign or novate the liability would place the office holder in a potentially invidious position – an unreasonable and intransigent position might be adopted in relation to the appeal that might expose the Company to penalties, interest and costs that could otherwise have been avoided. This risk is not one that the court should sanction given the potential implications for creditors as a whole” (paragraph 32). The judge made it clear that his judgment applied strictly to the bare right to appeal in this case. “Different considerations may apply where the liability can be novated or where the appeal right is one that is incidental to a property right that can be assigned (for example a right to appeal a planning decision in relation to land that is sold by an office holder)” (paragraph 33).

Less than 20 redundancies at any one site did not avoid consultation requirements where more than 20 were made redundant over all sites

USDAW & Anor v WW Realisation 1 Limited & Ors (30 May 2013) ([2013] UKEAT 0547 and 0548/12)

http://www.bailii.org/uk/cases/UKEAT/2013/0547_12_3005.html

I appreciate I’m behind the times on this one, which has been widely publicised in the past couple of months.

Earlier Tribunals had decided that there was no duty to consult under TULRCA with staff who worked at different sites where less than 20 redundancies were planned at those sites even though the total number of dismissals across the company was over 20. The Tribunals dealt with two separate cases involving such redundancies of staff who had worked in Ethel Austin and Woolworths stores. The consequence had been that 4,400 workers had been excluded from awards for the companies’ failures to consult, which had been granted to c.24,000 of their former colleagues who had worked at larger stores and head offices.

These decisions were overturned on appeals, although the judge expressed some disappointment that the respondents did not attend or comment, feeling that it put the Tribunal at a disadvantage. In particular, the judge noted that, as a consequence of the appeals, the Secretary of State for BIS would be faced with the prospect of paying out 60 or 90 days’ pay for 4,400 people.

The key issue was discerning the purpose behind S188(1) of TULRCA, which refers to “20 or more employees at one establishment”, which the Appeal Tribunal decided was more restrictive than the EC Directive, which was intended to be implemented into domestic legislation by means of S188. The judge concluded that “the clear Parliamentary intention was to implement the Directive correctly” (paragraph 50). Therefore, “the only way to deliver the core objective of protection of the dismissed workers in the two cases on appeal is to construe ‘establishment’ as meaning the retail business of each employer. This is a fact-sensitive approach which may not be the same in every case but it is consistent with the core objective as applied to the facts in these two cases” (paragraph 52). However, the Tribunal preferred a solution that made “the point more clearly and simply so that it can be applied without detailed consideration of the added fact sensitive dimension. We hold that the words ‘at one establishment’ should be deleted from section 188 as a matter of construction pursuant to our obligations to apply the Directive’s purpose” (paragraph 53), although they acknowledged that this might be a step too far.

(UPDATE 08/03/15: the European Advocate General’s opinion suggests that ‘at one establishment’ does have a purpose and is compatible with EU law.  Although it is likely, it remains to be seen whether the ECJ will follow the Advocate General’s opinion.  For a summary of the position as it stands at present, take a look at http://goo.gl/HhjHPN or http://goo.gl/MsfGFZ.)

Creditor who proved in full in a bankruptcy did not renounce its security

Evans & Evans v Finance-U-Limited (18 July 2013) ([2013] EWCA Civ 869)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/869.html

In 2007, Mr and Mrs Evans purchased a car financed by a loan from Finance-U-Limited (“FUL”) and a bill of sale granting FUL security over the car. Mr Evans went bankrupt later in 2007 and Mrs Evans went bankrupt in 2008. FUL proved in Mr Evans’ bankruptcy for the full sum due under the loan agreement; the existence of security was disclosed on the proof, but no value was put on it. The claim was admitted in full and FUL later received a small dividend. After Mrs Evans’ discharge from bankruptcy, she continued to pay monthly instalments to FUL until mid-2010. In 2012, the Evans were successful in seeking a declaration that the car was their property free from any claim by FUL on the basis that, because FUL had proved in full in Mr Evans’ bankruptcy, it no longer had a right to enforce its security over the car. FUL appealed the declaration.

Lord Justice Patten referred to the case of Whitehead v Household Mortgage Corporation Plc in which it was decided that the acceptance of a dividend from an IVA “did not amount to an agreement or election by the creditor to treat as unsecured that part of the debt in respect of which the dividend had been paid” (paragraph 20). He felt that “FUL was not therefore required to renounce its security as the price of being able to prove for the balance of the debt nor was that the effect of it proving for the entire amount due. It therefore retained its right to enforce the security following Mr Evans’ bankruptcy but did not exercise that right whilst Mrs Evans continued to meet the instalments” (paragraph 21). He therefore reversed the decision at first instance and, as the term of the loan had expired, he decided that FUL was entitled to possess the car free from any statutory requirement to give notice.

Scotland: impossible to undo the reinvesting of a family home in the debtor

Re. Sequestrated Estate of William Rose (4 June 2013) ([2013] ScotSC 42)

http://www.bailii.org/scot/cases/ScotSC/2013/42.html

The Trustee sought a warrant to serve an application under S39A(7) of the Bankruptcy (Scotland) Act 1985 on the debtor and his spouse. The debtor was sequestrated on 20 May 2008, so the Trustee sought to extend the 3-year time period after which the family home is reinvested in the debtor, albeit that the 3 years had expired before the Trustee made his application. The Trustee explained that he had failed to act sooner as a consequence of an “administrative error” (paragraph 4.3).

Sheriff Philip Mann was “unmoved” by the submissions on behalf of the Trustee: “The plain fact of the matter is that, on the Trustee’s averments, the property has already reverted to the ownership of the debtor and it is now too late to prevent that from happening. The Trustee is not trying to prevent that from happening. He is, in effect, trying to reverse that which has already happened in consequence of section 39A(2). Section 39A(7) says nothing about reversing the effect of section 39A(2)” (paragraph 5.4). The Sheriff therefore concluded that the Trustee’s application was incompetent and he refused to grant the warrant.

Northern Ireland: ignorance of remedy for company’s failure to consult was “reasonable”, thus five months’ late claim allowed

Tipping v BDG Group Limited (In Liquidation) ([2013] NIIT 2351/12) (19 April 2013)

http://www.bailii.org/nie/cases/NIIT/2013/2351_12IT.html

Whilst it is a Northern Ireland case, so of limited application, I thought it was worth mentioning briefly that the former employee succeeded in claiming compensation for the company’s failure to consult, despite his claim being lodged five months after the “primary limitation period” for lodging a complaint with the Tribunal.

The reason for the delay was that the claimant had not been aware of the protective award. “Courts and tribunals have consistently held that ignorance as to one’s entitlement to make a complaint of unfair dismissal is not reasonable ignorance. (This is on the basis that the general public now are well aware of entitlements to make unfair dismissal complaints). However, the situation is different in respect of protective award complaints. The availability of remedies in respect of collective redundancy consultation failures, the threshold (of 20 redundancies), and the circumstances in which an individual, as distinct from a trade union or employee forum representative, can seek such remedies, are all matters which are not generally well known” (paragraphs 16 and 17) and therefore the Tribunal held that it could allow the complaint, albeit that, in the judge’s view, the further period of five months was “close to the boundaries of what I consider to be ‘reasonable’” (paragraph 21).

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