Insolvency Oracle

Developments in UK insolvency by Michelle Butler

The case of the missing…

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0922 Dune 45 (2)

The case of the missing: (1) Declaration of Solvency; (2) “physical control”; (3) post-IPO income; (4) successful defence; (5) agency relationship; and (6) application to set aside a default judgment.

1. Re Wesellcnc.com Limited – what happens when a Declaration of Solvency is not made by the time the winding-up resolution is passed?
2. Your Response Limited v Datateam Business Media Limited – can a common law lien be exercised over an electronic database?
3. OR v Baker – can an Income Payment Order attach to income received by the bankrupt before the date of the IPO?
4. Appleyard v Reflex Recording Limited – who pays for the company’s legal costs in failing to resist freezing and administration orders?
5. Bailey & Anor v Angove’s Pty Limited – is an insolvent agent and distributor entitled to collect and retain customer payments despite termination of the agreement with supplier?
6. Power v Godfrey – could a doubtful default judgment be successful in extinguishing a bankruptcy petition debt?

When is an MVL not an MVL?

Re Wesellcnc.com Limited (12 December 2013) ([2013] EWHC 4577 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4577.html
A compliance review revealed that a declaration of solvency (“DoS”) had not been made at the time that the members had passed a resolution for the company’s winding-up. Therefore, even though a DoS was made a little later, the consequence under S90 was that the winding-up was a CVL, not an MVL. The liquidator sought the court’s directions, as required under S166(5).

Purle HHJ considered that he had the power to extend the time for holding a S98 meeting, but he decided against it on the basis that in this case it would be pointless: the liquidation had been going for ten months, all creditors had been paid, and, having made distributions to the shareholders, the liquidation effectively was complete. Although the judge declared that the liquidation were a CVL, he dispensed with the requirement for a S98 meeting and the Statement of Affairs. He granted the liquidator’s wish that he “continue to administer the liquidation on the basis of [an MVL]” (paragraph 14) (so presumably the liquidator was not required to submit a D-report/return) and he sanctioned the liquidator’s use of his powers, which under S166(2) technically, in the absence of the S98 meeting, he may not have exercised without the court’s sanction.

Can a lien be exercised over an electronic database?

Your Response Limited v Datateam Business Media Limited (14 March 2014) ([2014] EWCA Civ 281)

http://www.bailii.org/ew/cases/EWCA/Civ/2014/281.html

This case does not relate directly to an insolvency, but it still caught my eye as of potential interest in insolvency situations. It centred around the question of whether it is possible to exercise a common law possessory lien over an electronic database.

A publisher had instructed (albeit there was no detailed written contract) a data manager to hold and maintain its database of subscribers. The publisher ended the relationship and asked for the release of the database, but the provider refused until its outstanding fees were paid. At first instance, the judge decided that the data manager was entitled to withhold the data until its fees were paid and he rejected the argument that it is not possible to exercise a lien over intangible property, in this case electronic data.

At the appeal, Lord Justice Moore-Bick rejected the argument that the database be regarded as a physical object, as it is not “capable of possession independently of the medium in which it is held” (paragraph 19). He also considered whether it was nevertheless possible to “possess” a database in the sense that the data manager was able to exercise effective control over it as against the publisher. He stated: “Possession is concerned with the physical control of tangible objects; practical control is a broader concept, capable of extending to intangible assets and to things which the law would not regard as property at all… In the present case the data manager was entitled, subject to the terms of the contract, to exercise practical control over the information constituting the database, but it could not exercise physical control over that information, which was intangible in nature” (paragraph 23).

The judge seemed to acknowledge the limitations in the current law. In considering the opinion set out by Sarah Green and John Randall QC in The Tort of Conversion that the essential elements of possession can be exercised over electronic data, he stated: “In my view there is much force in their analysis, which, if accepted, would have the beneficial effect of extending the protection of property rights in a way that would take account of recent technological developments. However, to take the course which they propose would involve a significant departure from the existing law in a way that is inconsistent with the decision in OBG v Allan. That course is not open to us – indeed, it may now have to await the intervention of Parliament” (paragraph 27).

Although the judge was content, on the facts of this case, that the data manager had not exercised the degree of control necessary to entitle it to exercise a lien – amongst other things, it had freely allowed the publisher access to the database by means of a password – he also seemed concerned at where a common law lien on electronic data might lead: “I cannot see any basis on which the extension of the right to exercise a lien over intangible property could rationally be confined to electronic databases and for my own part I am not persuaded that it is necessary or desirable to extend this form of self-help, based on control rather than possession, to intangible property generally” (paragraph 32).

Lord Justice Davis reflected on possible unintended consequences of such a decision: “the right to such a possessory lien, if it exists, could have an impact on other creditors of the company (or individual) concerned and could confer rights in an insolvency which other creditors would not have. Further, the position of lenders could be affected: for they may well have ordered their lending arrangements and drafted their securities on the law as it is currently understood to be. Overall, given the number of IT companies and businesses in existence and the number of IT contracts being made the impact of the respondent’s arguments – if accepted – could therefore be significant” (paragraph 39) and Lord Justice Floyd suggested that it would come close to treating information as property.

Consequently, the publisher’s appeal was allowed to the extent of holding that the data manager was not entitled to refuse to provide the publisher a copy of the database.

“Twilight period” – between bankrupt receiving income and an IPO being granted – closed

Official Receiver v Baker (29 November 2013) ([2013] EWHC 4594 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4594.html
Although this case follows several precedents, not least Raithatha v Williamson, I have to say that, when I first looked at the IA86 reference, I was surprised at the outcome. As Mr Justice Warren said, the alternative “would leave a possible and possibly serious lacuna” (paragraph 46).

The story was that the OR had applied for an Income Payments Order for a single sum of £9,415, which was the sum held in Baker’s bank account, received by him after bankruptcy, less one month’s estimated essential outgoings. The deputy district judge had dismissed the application on the basis that, under S310(1), the court was being asked to make an order “claiming for the bankrupt’s estate so much income of the bankrupt during the period which the order is in force as may be specified in the order”, but in an attempt to catch income received before the date of the order. The deputy district judge decided that an IPO can only catch income received by the bankrupt after the making of the order.

At the OR’s appeal, Warren J was persuaded by the case precedent, but he also observed that, if the deputy district judge were correct, then, given that the bankrupt has 21 days in which to tell his trustee of an increase in income and that it takes at least 28 to obtain an IPO, “the bankrupt in some circumstances might quite properly be able to arrange that some income received in this twilight period, which could be a substantial amount when it is remembered that one-off payments can be income within section 307(5), could not be made the subject of an IPO and nor would they fall within section 307” (paragraph 46). He also felt that no distortion of the language of statute were necessary to lead to a conclusion that it is the claim to income, and not the receipt by the bankrupt of the income, which is the subject of the phrase “during the period for which the order is in force”. Therefore, he allowed the OR’s appeal.

Court allows company to settle legal costs of failed attempts to resist freezing and administration orders

Appleyard v Reflex Recording Limited (18 December 2013) ([2013] EWHC 4514 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4514.html
A company incurred legal costs in relation to a freezing injunction made against it. The company was not successful in resisting the freezing order and the court was asked to make an administration order.

David Cooke HHJ felt it was inappropriate to order that the company’s costs be paid as expenses of the administration, as the company had not been successful in its representations. However, he stated: “It does seem to me right, if it is possible to do so, to try and rectify the prejudice that the company’s solicitors have suffered through being willing to provide their services on credit for purposes for which it was anticipated the company would need to give them instructions and for which they have not been able to be paid for as a consequence of the court’s order itself” (paragraph 4). He allowed “the proper costs of the company in considering the administration order and whether the company can properly respond to or resist the administration order. Secondly, the proper costs to the company of complying with the terms of the freezing injunction and, again, considering whether the company can properly respond to the freezing injunction or seek to resist it or to argue that it should not have been made” (paragraph 5) to be paid from the company’s bank balance, treating them as having been transferred to the solicitors prior to the administration order.

Contract terms permit agent and distributor to retain customer payments

Bailey & Anor v Angove’s Pty Limited (7 March 2014) ([2014] EWCA Civ 215)

http://www.bailii.org/ew/cases/EWCA/Civ/2014/215.html
D & D Wines International Limited (“D&D”) acted as the sole agent and distributor of wine supplied by Angove’s Pty Limited (“Angove”). Angove terminated its agreement with D&D two days after D&D was placed in administration, the notice expressly terminating D&D’s authority to collect any further payments from two customers, who had received wine from Angove through D&D. The dispute centred around entitlement to payments made by these customers after the agreement had been terminated.

At first instance, the judge viewed the relationship between Angove and D&D as that of principal and agent, not buyer and seller, and he ordered that the sums, held in escrow, received from the customers after termination of the agreement be paid to Angove. The (now) liquidators of D&D appealed, arguing that after termination D&D remained entitled to collect payment from the customers in order to recoup its commission due under the agreement and the intervening administration then prevented it from accounting to Angove for the balance.

The difficulty for Angove was that the agreement provided that D&D should pay Angove for wine supplied to the customers regardless of whether D&D was able to recover payment from the customers. Thus, whilst at termination of the agreement D&D was required to settle its account with Angove, it did not mean that D&D was not able to pursue monies owed to it by the customers. Therefore, Lord Justice Patten decided that the escrow monies be paid over to the liquidators.

Angove sought to argue that “it would be unconscionable for the liquidators, as officers of the court, to accept payment of the Fund but not to pay in full to Angove what is due to it” (paragraph 31). However, Patten LJ stated: “Although the insolvency of D&D had unfortunate consequences for Angove (as for all its other creditors), that fact alone is insufficient to make it unconscionable for D&D to receive payment of the Fund. It is simply the product of the contractual arrangements which both parties agreed to” (paragraph 42).

(UPDATE 13/11/2014: permission to appeal to the Supreme Court was granted on 30 October 2014.)

(UPDATE 22/08/16: on 27/07/16 – http://www.bailii.org/uk/cases/UKSC/2016/47.html – the Supreme Court unanimously allowed Angove’s appeal on its first question: D&D’s agency was revoked by Angove’s termination notice. An agreement only provides for an agent’s authority to be irrevocable where (i) it states so and (ii) it secures an interest of the agent. The earlier Court of Appeal had not addressed the second criterion. In this case, the agreement allowed customers to pay Angove direct: it was D&D’s “responsibility” to collect the customers’ payments (and from it draw commission), not their “right”. Although not necessary for deciding the appeal, Lord Sumption’s comments on the second question, whether a constructive trust arose because the payee knew at the time of the agent’s imminent insolvency, were interesting: he considered such payments simply “adventitious timing”.)

Lack of action against “obviously tainted” default judgment scuppers bankruptcy petition

Power v Godfrey (5 December 2013) ([2013] EWHC 4359 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4359.html
Power appealed his bankruptcy order on the ground that he had obtained a default judgment (over two years ago) against Godfrey that was substantially greater than the debt on which he was made bankrupt. On that basis alone, it would seem that there ought not to have been a bankruptcy order made, so how then had the Deputy Registrar come to a different conclusion?

Mr Justice Morgan considered the Deputy Registrar’s decision and noted that it was apparent that he had gone behind the default judgment and assessed the underlying claim, which resulted in him effectively treating the judgment as non-existent. The Deputy Registrar had described the default judgment as “so obviously tainted and so obviously would have been set aside, that it would be bizarre if I were to adjourn this matter to give Mr Godfrey an opportunity to have it set aside” (paragraph 23). However, the questions Morgan J felt were more relevant were “whether Mr Godfrey would apply to have the default judgment set aside and if he did apply, how he would fare in relation to the question of promptness in Rule 13.3” (paragraph 26), a factor which he said is given “considerable weight at least in many such cases”. Faced with Power’s “trump card” of the default judgment and the fact that, despite the significant time that had passed, Godfrey had made no move to seek to have it set aside, the judge decided to dismiss the bankruptcy petition.

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3 thoughts on “The case of the missing…

  1. Michelle,

    Are you aware of any appeal in respect of Kaye v South Oxfordshire District Council, the recent CVA/business tax case?

    Potentially, this case has significant implications for IVAs. I’d be surprised if local authorities weren’€™t considering an appeal given that they could lose revenue.

    Regards.

    Andrew Wilkinson
    Insolvency Practitioner

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