Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Case Law… but not a Blue Monkey in sight

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0730 Cape Point2

As we cling to the last vestiges of summer, I thought I should summarise the last few months’ judgments.  I’m sure you’ve seen write-ups on the Blue Monkey Gaming v Hudson RoT case, but I’ve not seen the full judgment yet, so I have nothing useful to add.  However, here are some other cases:

  • Coventry v Lawrence – it’s not only Jackson that threatens IPs’ use of CFAs and ATE insurance
  • Top Brands v Sharma – how much digging should an IP do pre-appointment?
  • BAJ v SDS & AS (Scottish case) – is proof of sending sufficient to meet a requirement to inform, or is it proof of receipt?
  • Kaupthing Singer & Friedlander v UBS – do the manic first few days of an administration excuse misunderstanding balances of account?
  • DVB Bank v Isim Amin – can a lender rely on serving documents via an agent in liquidation?
  • Laverty v British Gas Trading – application of Nortel to post-administration gas and electricity supplies
  • Lock v British Gas Trading – is it right that an employee should suffer a drop in take-home pay because, when he is on holiday, he does not earn sales commission?
  • Contrarian Funds v Lomas – how accommodating should administrators be to creditors requesting more time to prove claims?
  • Bache v Zurich Insurance – if purchasers pull out because of their supplier’s failure to perform prior to the supplier’s administration, can they claim under insurance?
  • Goldtrail Travel v Aydin – can a dishonest assistant avoid returning a misfeasant payment received by setting it off against its claim as creditor?

One to look out for: new risks to recovering old CFA uplifts and ATE premium

Coventry & Ors v Lawrence & Anor (23 July 2014) ([2014] UKSC 46)http://www.bailii.org/uk/cases/UKSC/2014/46.html

This case does not involve insolvency directly, but, as Anton Smith, Ashton Bond Gigg, highlighted in a LinkedIn post (http://goo.gl/dIHyPi), it could have repercussions in the insolvency world.

Lord Neuberger was struck by the “very disturbing” figures involved in this case.  A home-owning couple took proceedings in relation to the noise emanating from a nearby speedway racing track.  Eventually, the couple were awarded damages of c.£10,000 and the respondents were ordered to pay 60% of the couple’s costs.  The couple’s costs (including their solicitors’ CFA uplift and ATE premium) amounted to over £1 million.

The respondents argued that the order that they pay 60% of the success fee and ATE premium infringes their rights under article 6 of the European Convention on Human Rights.  Interestingly, the judge pointed out a perverse (my word, not his) consequence in cases involving success fees and ATE premium: these elements will be higher for parties with seemingly weaker cases, and so parties who lose against apparently weaker opponents end up having to pay larger sums than those who lose against stronger opponents.  That certainly does not seem fair to me.

Because it is possible that the government could end up dealing with compensation claims from past “victims”, if it is found that the Convention has been breached, the Supreme Court decided that the appeal should be re-listed for hearing so that the Attorney General and Secretary of State for Justice can be notified.

This decision could affect litigation brought pursuant to CFAs made prior to April 2013 (i.e. pre LASPO Act 2012) with the effect that Courts could no longer be able to order that the CFA uplift and ATE premium be paid by the losing party.

(UPDATE 19/11/2014: this case is listed to be heard by the Supreme Court on 9 and 10 February 2015.)

(UPDATE 24/03/2015: Judgment is expected from the Supreme Court in July this year.  For an excellent analysis (both by Kerry Underwood and the many contributors of comments) of the dilemma facing the Judges, I recommend: http://goo.gl/o8CSIs.  Hill Dickinson has also posted a summary of the submissions to the Supreme Court: http://goo.gl/wSH2Qz.)

Re-writing SIP8

Top Brands & Anor v Sharma, Re. Mama Milla Limited (4 August 2014) ([2014] EWHC 2753 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/2753.html

In this hearing of a S212 proceeding against a former liquidator, the judge seems to have acknowledged that the IP appears to have been the victim of a fraud by having been deceived into paying out over £500,000 of estate funds, which she had been led to believe were trust monies.  The judge commented on where the IP seemed to have gone wrong:

  •  The IP’s enquiries pre-liquidation had been lacking: she had not enquired into the demise of the company (“MML”) further than the shadow director’s indication that it had been as a consequence of MML’s trading with a company subject to a SOCA investigation; she had not enquired into the “unusual” appointments and resignations of directors; she had not noticed the inconsistency in information about MML’s bankers, which should have been apparent from documents received by her; and she had not made contact with MML’s accountants pre-liquidation.
  • Had she reviewed the small amount of company records received pre-liquidation, she would have noted substantial transactions that did not stack up with the director’s explanations of MML’s trading, including the date that MML allegedly began trading.
  • The IP might also have made more enquiries into MML’s VAT position, including asking the director for figures for the outstanding VAT return, and she might have questioned the nil VAT output stated on previous returns.
  • MML’s financial statements also showed wage payments, but the IP did not seek any PAYE/NI records or ask about any wage-related liabilities, which the judge thought “ought to be standard [enquiries] for any competent insolvency practitioner in the process of taking on a new appointment and preparing a statement of affairs” (paragraph 84).
  • The judge criticised the deficiency account, revealing the “elementary error of double counting” and describing it as “fundamentally flawed and meaningless”.

But how much work is expected of an IP pre-appointment?  “Accepting that there is no duty on a liquidator designate to investigate the affairs of a company before appointment, any insolvency practitioner taking on the role of liquidator of MML must – or should – have appreciated that reviewing the available information and obtaining further basic, objectively reliable information (in particular bank statements and copy returns to HMRC) at a very early stage would be essential to the due performance of a liquidator’s duties” (paragraph 93).

Unfortunately for the IP (“GS”), her inquisitiveness does not seem to have become piqued even after appointment as liquidator; the judge related several other events that should have triggered warning bells, leading him to conclude: “On my findings GS conducted the liquidation of MML with a lack of thought and purpose tantamount to indifference as to the ascertainment of MML’s true obligations. GS’s approach may, on the facts, fairly be characterised as a conscious disclaimer or disregard of responsibility for the assets in her charge on a material scale. In my view, such conduct crosses the border into the territory of breach of fiduciary duty, and were it necessary to my judgment, I would so find” (paragraph 144).  

(UPDATE: the judgement on the appeal was given on 10/11/2015 ([2015] EWCA Civ 1140).  GS pleaded that the misfeasance claim was based on compensation for loss of criminal property (because the company had been engaged in VAT fraud before its liquidation) and thus the claim should be barred.  The judge decided that there was no causative relationship between the company’s illegal actions and GS’ actions that were the subject of the loss and so dismissed the appeal. )

Compliance with a requirement to “inform” should be considered from the perspective of the recipient, not the sender

BAJ v SDS & AS (8 May 2014) ([2014] ScotSC 28)http://www.bailii.org/scot/cases/ScotSC/2014/28.html

Sheriff Foulis considered a Trustee’s application for possession and sale of a property under S40 of the Bankruptcy (Scotland) Act 1985, which was defended on the basis that he had not informed the bankrupt’s non-entitled spouse of the right to petition for recall of the sequestration within the period specified under S41(1)(a).

The sheriff highlighted the difference between “inform” and “notify”: “In my opinion ‘inform’ must involve bringing the matters covered by section 41 to the attention of the non entitled spouse in order that that person can take steps to protect these rights if so desired…  The obligation to inform in terms of the section has to be looked at from the point of view of the non entitled spouse rather than the trustee. If it is not proved that the necessary information was received [by] that spouse, then the obligation in terms of the section has not been satisfied. There will be numerous ways in which that obligation can be performed. The information could, for instance, be given in a meeting with the non entitled spouse or by correspondence, written or electronic. It might even be satisfied if the information was given to a professional known to be currently representing that person. The less formal the means of communication, however, the more difficult it may be to counter an assertion that the non entitled spouse never received the information.”

In this case, the sheriff was not satisfied that the non-entitled spouse had received a letter apparently sent by the Trustee’s office.  Although the spouse had received the information, albeit around 3 months later, and the sheriff concluded that, in all the circumstances, had S41(1) been complied with, it would have been appropriate to have granted the Trustee authority to sell the property, he declined to grant the decree (although the final outcome depends on whether the Trustee applies for relief in relation to the defect under S63 or whether the action is dismissed on the basis that it is incompetent).

A lesson on how to lose US$65 million

Kaupthing Singer & Friedlander Limited (In Administration) v UBS AG (18 July 2014) ([2014] EWHC 2450 (Comm))http://www.bailii.org/ew/cases/EWHC/Comm/2014/2450.html

Just before Kaupthing Singer & Friedlander Limited (“KSF”) went into administration on 8 October 2008, it had expected to receive US$65 million from UBS AG (“UBS”), but the sum had been paid, via JP Morgan Chase (“JPMC”), by mistake to Kaupthing Bank hf (“Khf”).  Later, in November 2008, Khf went into liquidation without having paid over the $65 million to anyone.

Over the subsequent years, there were exchanges between Khf, KSF and UBS to reach agreements on other matters, but, in calculating the accounts between the companies, it seems that no thought had been given to the question of the $65 million; settlements in relation to these other matters were achieved in December 2010 and May 2012.

KSF first claimed the $65 million from UBS in August 2012.

The judge accepted UBS’ contention that KHF was estopped by convention from claiming that UBS’ payment obligation to KHF had not been discharged.  He said that “the communications between KSF and Khf on the one hand and UBS on the other hand were conducted through JPMC, and, in my judgment, those communications and in particular the message from JPMC of 9 October 2008 [regarding the planned reversal of the payment made to Khf] satisfy the requirement of estoppel by convention that communications ‘cross the line’” (paragraph 95).

But couldn’t it be argued that, in the early days of the administration, the administrators were so preoccupied with getting to grips with a company in crisis, they could not be expected to know anything much at all about the position between the companies and thus KSF could not be held subject to estoppel by acquiescence?  The judge acknowledged the “enormous task” facing the administrators and accepted that they themselves had no knowledge of the transaction.  However, he was not persuaded that this affected the ability of those in the “back office” to communicate with UBS in a normal business-like way.  In his judgment, it would be unjust to allow KSF to resile from the position to which KSF had been taken to have acquiesced.

Knowledge of an agent’s liquidation not a hindrance to good service

DVB Bank SE v Isim Amin Limited & Anor (9 May 2014) ([2014] EWHC 2156 (Comm))http://www.bailii.org/ew/cases/EWHC/Comm/2014/2156.html

A borrower had appointed a company to act as its service agent in relation to any proceeding in connection with the loan.  The judge was of the “clear view” that service of the lender’s claim had been good, despite the fact that the agent had been placed into CVL before the claim had been served… and despite the fact that the lender had known about the liquidation, but “what was not known was that the liquidators had ceased to be involved in performing their functions as such.  However, the company had not been struck off the register” (paragraph 3).

Admittedly, the judgment was obtained in default, as the borrower had not filed any defence, and I can see the argument that, technically, the lender was bound to follow the borrower’s instructions as regards their service agent.  Nevertheless, it sits a little uneasy with me that service on a company in liquidation (especially where the liquidators had vacated office) can be relied upon.

Post-appointment liability under deemed contract by statute constituted contingent liability under actual pre-appointment contract

Laverty & Ors v British Gas Trading Limited, Re PGL Realisations Plc (31 July 2014) ([2014] EWHC 2721 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/2721.html

As a consequence of the companies’ administration, British Gas Trading Limited (“British Gas”) terminated their contracts, but it continued to supply gas and electricity to the Peacocks stores under contracts deemed to arise under the Gas Act 1986 and the Electricity Act 1989.

The administrators paid for supplies provided after their appointment, but only up to the point that the stores were vacated.  Some landlords did not accept surrenders of the leases, but eventually the companies were placed into liquidation and the leases were disclaimed.  In the meantime however, British Gas’ fixed charges continued to accrue and it seems that gas and electricity continued to be used at the premises, resulting in a liability of £1.2 million.  British Gas argued that this should be paid as an administration expense on the basis that the deemed contracts came into existence after the administrators’ appointment, but the administrators argued that it ranked as an unsecured claim.

The judge highlighted the differences between deemed contracts arising under the Acts and an express contract entered into by an administrator: an express contract contains all the terms and conditions agreed by the parties, but neither the Gas Code nor the Electricity Code specifies the terms and conditions deemed to be made between the parties; neither are these negotiated, but they – including terms relating to tariffs, duration and termination – are determined and imposed by the supplier.

The court decided that the liability ranked as an unsecured claim: the moment that the consumer/owner-occupier began to receive supplies, it became bound by the framework of the two Acts, which included a contingent liability to pay for supplies pursuant to a deemed contract where the supply was otherwise than in pursuance of an actual contract.  Thus, the companies incurred the post-appointment liability by reason of an obligation incurred pre-appointment.

Another one to look out for: ECJ decides pay must take account of commission not earned during holiday period

Lock v British Gas Trading Limited (22 May 2014) ([2014] EUECJ C-539/12)    http://www.bailii.org/eu/cases/EUECJ/2014/C53912.html

Mr Lock was paid a basic salary plus commission payable several weeks or months following the completion of the sales contracts.  When Mr Lock took holiday, he was paid his basic salary plus commission maturing in relation to earlier sales. However, of course, he did not make any sales during his holiday period, which meant that, in the period after his return from holiday, his take-home pay was decreased from that he would have received had he not taken his holiday.

The European Court of Justice decided that Article 7 of Directive 2003/88/EC must be interpreted as precluding national legislation and practice under which a worker in this position is paid holiday pay composed exclusively of his basic salary, although they left it to the national court or tribunal to decide how to calculate what his holiday pay should be in these circumstances.

The case was referred to the ECJ by the Leicester Employment Tribunal, but I have not seen any reference to the ET having yet decided the case as a consequence of this decision.  (UPDATE 04/01/2015: I’ve seen a rumour that the Leicester Tribunal will be hearing the case in February 2015; see, for example, http://goo.gl/ezx8Qj.)

Enough is enough for creditor asking for more time to prove claim

Contrarian Funds LLC v Lomas & Ors (23 May 2014) ([2014] EWHC 1687 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/1687.html

In August 2013, the administrators formally rejected a creditor’s claim on the basis that, a year earlier, they had informed the creditor that they believed the contract had been with an associated company, not the company in administration, and, despite their request, the creditor had provided no further information in support of its claim.  By consent, the 21 day time period in which the creditor could appeal to court to reverse or vary the administrators’ decision was extended three times.  However, in January 2014, the administrators refused a further extension, resulting in the creditor applying to court for such an extension.

The court rejected the creditor’s request, stating that there is “clear public interest in ensuring as efficient and expeditious an administration of an insolvent estate as can reasonably be achieved. This suggests the need for all interested parties to comply with the time limits specified in the Rules, unless there are good reasons for requiring more time. Some minor delays may be tolerable but anything more will, in the absence of good reason, undermine the proper administration of the estate, to the detriment of the creditors generally and others with an interest in the estate” (paragraph 14).  The judge felt that there was no good reason in this case and that the creditor had been “seriously dilatory in its attempts to support its claim” (paragraph 42).

Responding to the creditor’s argument that the administrators still had much to do on the case, the judge pointed out that, if the administrators were to take a relaxed attitude towards the creditor, they would be required to treat all other claimants similarly, which “would result in wholly unacceptable delays in dealing with the administration” (paragraph 43).

Purchasers not barred from insurance recovery despite rescinding pre-administration

Bache & Ors v Zurich Insurance Plc (18 July 2014) ([2014] EWHC 2430 (TCC))http://www.bailii.org/ew/cases/EWHC/TCC/2014/2430.html

A couple paid a 10% deposit for a flat yet to be built.  They later wrote to the vendor asking for the return of the deposit on the basis that it had failed to complete the construction, resulting in a repudiation of the agreement.  Later, the vendor was placed into administration, which then moved to dissolution.  Zurich Insurance Plc (“Zurich”) refused to pay out under the policy, which covered a loss of deposit “due to the developer’s bankruptcy, liquidation or fraud”.  Zurich argued that this did not reach to the developer’s administration and that, for a claim to be made, the developer’s failure to complete the new home must be because of its liquidation, but in this case the failure to complete was due to the purported acceptance of the company’s alleged repudiatory breach.

Seemingly just before the hearing, Zurich did accept that dissolution would be sufficient to trigger cover under the policy, so the issue of whether insolvent administration was covered was shelved (handy – there may not be many CVAs arising from administrations, but perhaps it is no wonder that Zurich did not want to go there).

The judge observed that a developer’s failure to complete a construction is rarely going to be “due to” its liquidation, but rather due to the “actual or impending insolvency of the developer beforehand” (paragraph 27), although he accepted that insolvency alone would not engage the policy; the final liquidation terminates any possibility of the construction being completed.  He continued: “there is no obvious or logical reason why there should be a distinction between the two types of purchaser; one has the purchaser who is prepared to wait or who can not be bothered to do anything about the failure to complete the work and the purchaser who feels that he or she can not wait possibly for a very long time” (paragraph 28).  Thus, he decided that the fact that the purchasers accepted a repudiation was not a bar to recovery under the insurance policy.

Court entitled to unravel set-offs involving misfeasant payments

Goldtrail Travel Limited (in Liquidation) v Aydin & Ors (22 May 2014 ([2014] EWHC 1587 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/1587.html

The court found that the defendants dishonestly assisted the company’s sole director and shareholder in a breach of his fiduciary duties as regards the misapplication of the company’s money.

Two defendants claimed to have suffered considerably as a consequence of the director’s fraudulent activity, but the judge decided that they could not set off their losses against the misfeasant payments made to them on the basis that they were not to be treated as “dealings” under R4.90.  The judge also rejected the defendants’ argument that the court was not entitle to unravel set-offs that had occurred before administration; the defendants would have to attempt to prove in the company’s liquidation for sums owed in relation to flights arranged for the company.  In his judgment, this was the risk the defendants took when, having assisted the director in the misapplication of the company’s funds, they then allowed the company to deduct sums from the monies otherwise due for flights.

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