Insolvency Oracle

Developments in UK insolvency by Michelle Butler

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How risky is it to act contrary to a creditors’ committee’s wishes and other questions…

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  • Re. Brilliant Independent Media Specialists – will the court approve an Administrator’s fees when he acts contrary to the committee’s wishes?
  • Co-operative Bank v Phillips – is it an abuse of process for a charge-holder to seek possession of a property in negative equity?
  • Harlow v Creative Staging – when might a winding-up petition suspended on a QFCH appointment of Administrators come in handy?
  • JSC Bank of Moscow v Kekhman – in the absence of Russian personal bankruptcy law, is forum-shopping in England one of the “legitimate kind”?
  • Bank of Scotland v Waugh – what is the effect on Receivers where the charge has not been validly executed as a deed but has still been registered?
  • Airtours Holidays Transport v HMRC – what decides whether a company can reclaim the VAT paid on accountants’ review fees?
  • SoS v Weston – if a criminal court declines to disqualify directors, would the SoS have any better luck in the High Court?

Court fixes fees of Administrators who acted contrary to the committee’s wishes

Maxwell & Sadler v Brookes & Ors, Re Brilliant Independent Media Specialists Limited (23 September 2014) ([2014] EWHC B11 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/B11.html

The Administrators’ Proposals were approved with a modification that the Administration move to CVL within 6 months of the commencement of the Administration; the Liquidators were to be different IPs to the Administrators.

The 6-month time period ended on 31 May 2012. Immediately before this, the Administrators convened a creditors’ meeting to approve revised proposals providing that the Administration would move to CVL within 28 days of resolution of an issue regarding the quantum of a secured creditor’s claim.  The revised proposals were rejected and on 18 June 2012 the Administrators applied for directions.  Before this was heard, settlement was reached with the secured creditor and the Administration moved to CVL on 12 August 2012.

The Administrators’ fees had been approved on a time costs basis but the creditors’ committee refused to approve that the Administrators draw fees in relation to time costs incurred after 18 February 2012 (having approved fees incurred prior to this date). The committee asserted that it was never envisaged that the Administrators would carry out the vast amount of work for which remuneration was claimed; the committee felt that the Administrators should have worked simply to bring their appointment to an end and allow the Liquidators to fully investigate matters.  Consequently, the Administrators applied for the court to fix their fees.

Mr Registrar Jones’ consideration addressed a number of areas:

  •  Did the Administrators’ actions fall outside the approved Proposals?

The judge stated that “whilst the views of a creditors’ committee should be taken into account during an administration.., it is not for the committee to determine how the administration should be conducted. That is a decision for the office holder in performance of the duties and powers Parliament has thought fit to entrust to administrators. The outcome of such decision making… will depend upon the office holder’s assessment of how best to achieve the purpose of the administration in accordance with the powers conferred upon them by paragraph 59 of Schedule B1 and within Schedule 1 to the Act” (paragraph 26).

The judge then had to consider whether the work done by the Administrators was for the purposes of the Administration objective or otherwise formed part of the Administrators’ duties and responsibilities. He said: There will always be grey areas when deciding whether work will result in a better return and therefore should be carried out. It will not be a black and white scenario with a plain dividing line. The decision will depend upon all the circumstances and involve commercial judgment calls by the office holder in the exercise of his powers.  The court will normally not question the commercial judgments of an administrator. Usually a misunderstanding of law or apparent unfairness or a breach of duty will be required before the court will review such judgments” (paragraphs 30.6 and 30.7).  Consequently, the judge stated that it could not be concluded that the Administrators’ actions fell outside the Proposals.  He felt that this applied even in relation to activities that were not expressly referred to in the Proposals, such as in this case debt recovery efforts, given that a delay in recovery actions usually results in lower realisations.

  • Were the Administrators entitled to be paid fees for the period after the 6-month timescale when the approved Proposals provided for the move to CVL?

The judge recognised the commercial decisions taken by the Administrators in seeking to resolve the issue regarding the secured creditor’s claim, acknowledging that any delay would have been disadvantageous given the high interest rate attached to the debt. Consequently, the judge considered that the decision could not be described as “perverse” and it was a decision that “fell within the parameters of their commercial decision making powers” (paragraph 36.4).  However, the judge disagreed that the move to CVL could not have been done within the 6-month period; he felt that there were always more than enough funds to set aside to cover the maximum amount of the secured creditor’s claim plus interest.

  • Were the Administrators entitled to be paid fees after they had ceased to act, given that they worked to assist the Liquidators?

The Administrators sought approval for costs incurred in relation to a number of tasks including answering the Liquidators’ enquiries, assisting in the recovery of a director’s loan, other debts and overpayments, and dealing with the committee’s questions. The judge’s view was that R2.106 was limited only to remuneration of the Administrator whilst in office.  Therefore, the judge declined to fix the remuneration after the termination of the Administrators’ appointment, stating: “that is a matter between the Administrators and the liquidators” (paragraph 43).

  • What about the quantum of fees sought?

Then the judge turned to the detail of the Administrators’ application. The judge referred to the Practice Direction (2012) and in particular paragraph 20.4 as providing guidance on the information required to support the fees application and the judgment suggests that in a number of places the Administrators’ evidence failed to satisfy the judge as regards “briefly describing what was involved, why it was necessary and why it took the time it did” (paragraph 47).

For example, the Administrators sought fees of £23,473 in relation to “PKF/BDO Review”. The Administrator’s witness statement referred to the need to investigate potential claims quickly and early and thus such work could lead to actions that would produce a better outcome for creditors.  However, the judge observed: “This is wholly unspecific. There is no narrative describing and explaining the work, whether as to what it was or specifically as to why it was justified under the Objective” (paragraph 50.40).  The judge did not award any remuneration in relation to this activity.

The result of the judge’s examination of each task for which remuneration was sought was that, from a starting point request to fix fees at £389,341, fees of only £233,147 were approved.

The downsides of discontinuances

The Co-operative Bank Plc v Phillips (21 August 2014) ([2014] EWHC 2862 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/2862.html

The Bank, having a second charge over the debtor’s properties, demanded payment from Mr Phillips as guarantor of a loan to his company. Notwithstanding that Mr Phillips’ IVA Proposal (which was approved) showed that the properties attracted negative equity after the first charge, the Bank commenced possession proceedings.  Mr Phillips applied for the claims to be struck out or dismissed as an abuse of process.  The Bank later served a notice of discontinuance and the principal questions for the court related to the treatment of the costs arising from the process.

The court was asked to consider whether the Bank was seeking possession of the properties for a collateral purpose beyond its powers as a chargee and whether the Bank’s claims to possession were an abuse of process. Despite the fact that it appeared the Bank would not gain any benefit from selling the properties (although there was some argument that the Bank might have been able to raise rental income from its possession), the judge felt that the pressure on the charger and his family resulting from the possession proceedings was neither a collateral purpose outwith the Bank’s powers nor an abuse of process.  Ultimately, the proceedings were brought for the purpose of obtaining repayment of the sums secured by the charge.

However, although the charge entitled the Bank to recover its costs incurred “in taking, perfecting, enforcing or exercising (or attempting to perfect, enforce or exercise) any power under the charge” (paragraph 8), the judge decided that the Bank’s own costs, together with its liability to pay Mr Phillips’ costs arising from the discontinuance of the proceeding, were not reasonably incurred and therefore were not recoverable under the charge: “The Bank got absolutely nothing out of these proceedings, which have been a waste of time and expense from its point of view” (paragraph 75).

Finally, because the Bank had started the proceedings after Mr Phillips’ IVA had been approved, the Bank was unable to set off its liability to pay Mr Phillips’ costs against its claim in the IVA, per clause 7(4) of the IVA’s Standard Conditions (which appear to have been R3’s standard conditions).

Suspended Petition comes home to haunt the Petitioner

Harlow v Creative Staging Limited, Re. Blak Pearl Limited (23 July 2014) ([2014] EWHC 2787 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/2787.html

The Administrator had applied for the ending of the Administration, together with the dismissal of the application of Creative Staging Limited to withdrawn its winding-up petition (which, under Paragraph 40(1)(b) of Schedule B1, had been suspended on the appointment of the Administrator by the QFCH), the dismissal of the application of another creditor to be substituted as petitioner, and finally for a winding-up order on the original petition.

Why was the Administrator so keen to have the suspended petition revived, rather than to petition for the winding-up himself under Para 79? If a winding-up order were made on the original petition, then S127 would kick in to make certain pre-Administration payments (including a payment of £88,000 to the original petitioner) vulnerable to attack.  However, if the Administrator were to seek a winding-up order on a new petition, S127 would only apply from the date of presentation of the new petition.

The judge was reluctant to go to the lengths of substituting the petitioner, which would only incur additional costs. He felt that there was sufficient precedent and support under S122 enabling a court to make a winding-up order without a petition and thus the court had jurisdiction to make a winding-up order on the existing petition and under the powers of Para 79(4)(d).  The judge said (although, personally, I do wonder if he is crediting Parliament with a little too much foresight): “In all the circumstances it does seem to me that this court ought to recognise that Parliament must have intended to keep the petition in being for a reason and one of the reasons is so that an order might be made on the suspended petition, taking advantage of the doctrine of relation back, despite any objections of the Petitioner” (paragraph 53).  Thus, he allowed the appeal, waived all procedural requirements that had not otherwise been complied with, and granted the winding-up order.

Russian bankruptcy tourist entitled to escape “law of the jungle”

JSC Bank of Moscow & Anor v Kekhman & Ors (9 April 2014) (not yet reported on BAILII)

http://cisarbitration.com/wp-content/uploads/2014/08/UK-High-Court-in-Buncruptcy-Bank-of-Moscow-and-Sberbank-Leasing-v-Vladimir-Kekhman-and-others-Judgment-April-2014.pdf

At the time of his bankruptcy petition and afterwards, Mr Kekhman was a Russian citizen, domiciled and resident in the Russian Federation. He had disclosed in the petition that he was going to remain in England for only two days and he wished to be made bankrupt in England, as he had been advised that there is no personal bankruptcy law in the Russian Federation and, in view of the international reach of his affairs, “the English jurisdiction as a sophisticated jurisdiction in these matters appears appropriate to help resolve my affairs in an orderly manner that will be recognised internationally” (paragraph 11).

The matter returned to Registrar Baister, who had made the bankruptcy order, in the format of applications by two major creditors to annul or rescind the bankruptcy on the basis, amongst others, that Mr Kekhman was a ‘bankruptcy tourist’ to England, a place with which he has no real connection, in an attempt to evade Russian law. One of the creditors also contended that, contrary to Mr Kekhman’s indications that his English bankruptcy would be recognised in Russia, Russia would not recognise or enforce the bankruptcy order, which bound Mr Kekhman’s English creditors, whilst allowing his other creditors to collect in his substantial Russian assets.

Registrar Baister mentioned that, particularly in corporate contexts, “the courts here are prepared to countenance what is in reality forum shopping, albeit of a positive, by which I mean legitimate, kind… I do not see why a debtor whose petition is not governed by that restrictive jurisdictional regime should not also be able to invoke an available jurisdiction for a self-serving purpose, provided of course, that he does so properly and there are no countervailing factors to which equivalent or greater weight should be given” (paragraph 104).

Baister summarised Mr Kekhman’s connections with England, largely involving contracts providing for English law and English jurisdiction. He also put some emphasis on the purpose of bankruptcy being the debtor’s rehabilitation, observing that plenty of bankruptcy orders have been granted on English debtors’ petitions in cases where there were no likelihoods of recoveries for creditors. In any event in this case, the report of the Trustee in Bankruptcy, which explained that he was continuing to pursue certain assets, persuaded the judge that there was “utility” in the bankruptcy, Baister did not consider that utility necessarily required there to be a distribution to creditors; he found the prospect of an orderly realisation of the debtor’s assets “more attractive and more constructive that the law of the jungle advocated” by Counsel for the creditors (paragraph 141).

Baister reviewed the expert testimony of three prominent Russian academic lawyers and concluded on the balance of probabilities that the English bankruptcy order was unlikely to be recognised or enforced by the Russian courts. However, this conclusion seemed to work in Mr Kekhman’s favour: the judge noted that “if the English bankruptcy will never be recognised in Russia, then the free-for-all can continue over there in relation to the few assets that might be left over after execution; as to assets elsewhere, all the creditors will be in the same position vis-à-vis one another” (paragraph 142).

Although Baister stated that the arguments were “finely balanced”, he decided that the utility of the bankruptcy order was not outweighed by the creditors’ current complaints, “so that even if this court had known the true position regarding the problems of recognition and resulting from the arrest of the Russian assets, it still could and probably would have made the bankruptcy order on the basis that there was commercial subject matter on which it could operate, it would have enabled Mr Kekhman’s affairs to be looked into, made possible an orderly realisation of his non-Russian assets and assisted his own financial rehabilitation even if only outside the Russian Federation” (paragraph 144).

(UPDATE 14/03/15: JSC Bank’s appeal was dismissed: http://goo.gl/BkoIxd.  Although the judge agreed that the Chief Registrar had not applied the correct test, the appeal judge made his own decision that the bankruptcy order ought to have been made.  A more detailed summary of the appeal will be posted soon.)

Bank and Receivers entitled to rely on registration of a deficient deed

Bank of Scotland Plc v Waugh & Ors (21 July 2014) ([2014] EWHC 2117 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/2117.html

The Bank pursued repayment of a loan to a Trust and appointed Receivers over a property. Some time later, the Trustees applied to the Registry for cancellation of the charge over the property on the basis that the charge did not comply with the Law of Property (Miscellaneous Provisions) Act 1989, primarily because none of the signatures on the charge were attested.  Subsequently, the Bank applied for summary judgment that the Trustees be estopped from denying the validity of the charge.

The judge agreed that the charge had not been validly executed as a deed and therefore it was void for the purpose of conveying or creating a legal estate. However, the charge had been registered.  “The effect of registration of the charge was to create a charge by deed by way of legal mortgage” (paragraph 66) but if the Trustees were successful in having the register rectified, this would only operate for the future, not retrospectively.  “It follows that acts (such as the appointment of Receivers) carried out by the Bank under the charge prior to any order for rectification and acts of the Receivers are not void as alleged by Mr Waugh. Both the Bank and the Receivers were entitled to rely on the effect of registration of the charge” (paragraph 67).

On the question of estoppel, however, the judge was not persuaded by the arguments that the solicitor for the Trustees had represented the document as executed and on this basis the Bank had lent the monies; because the charge simply had not been executed as a deed, the Trustees were not estopped from relying on the invalidity of the legal charge. However, the judge stated that, notwithstanding the defects, it took effect as an equitable mortgage.  Left open for another hearing is the question of whether the Bank will succeed in obtaining an order that the Trustees execute documents to perfect the legal charge.

Company paid fees but not entitled to reclaim the VAT

Airtours Holidays Transport Limited v HMRC (24 July 2014) ([2014] EWCA Civ 1033)

http://www.bailii.org/ew/cases/EWCA/Civ/2014/1033.html

PwC had been instructed to review a financially distressed group of companies as it explored and pursued a restructuring plan. The restructuring process was successful, but HMRC disputed that the company was entitled to deduct the VAT that it had been invoiced and had paid in respect of PwC’s fees.

The First Tier Tribunal (“FTT”) reviewed PwC’s letters of engagement and terms and conditions, which effectively comprised a tri-partite contract between PwC, the Group, and the “Engaging Institutions” and found that the company, as well as the Engaging Institutions, had requested and authorised the work. However, the Upper Tribunal (“UT”) disagreed with the FTT’s approach; it concluded that the substance of the transactions was that there had been a supply of services by PwC to the Engaging Institutions and that the company had not received anything of value from PwC to be used for the purpose of its business in return for payment.

Although Lady Justice Gloster led the judgment in the Court of Appeal, she was in the minority in concluding that the company’s appeal should be allowed. She felt that the company had required PwC to provide valuable services to it for the purpose of its own business – in her view, the provision of PwC’s services was the only way that the financial institutions could be persuaded to support the company’s attempts to survive and that this was a distinctive supply of services from that supplied to the Engaging Institutions.

Lord Justice Vos, however, saw the economic reality in a different light. He felt that “it was as likely that PwC might have advised the Banks to pull the rug… The substance and economic reality was that PwC was supplying its services to the Banks in exchange for Airtours’ payments” (paragraph 87) and that the UT had been correct to conclude that the company was a party really only for the purpose of paying PwC’s bills, not to receive any service from the firm.  Lord Justice Moore-Bick also noted that, although the use of “you” in the terms and conditions suggested that PwC had certain obligations to the Group, they were a standard form document that must be applied in a way that is consistent with the letter of engagement, which is the “controlling instrument” (paragraph 96).  The question was “not whether the Group needed the report to be produced or whether it obtained a benefit as a result of its production, but whether in producing it PwC were providing a service to the Group for which the Group paid” (paragraph 99).  The majority of appeal judges decided that the service was not provided to the Group and thus the company could not reclaim the VAT input paid on PwC’s bills.

(UPDATE 14/03/15: permission to appeal to the Supreme Court has been granted.)

Court rejects attempts at second bite of the cherry

Secretary of State v Weston & Williams (5 September 2014) ([2014] EWHC 2933 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/2933.html

Two directors had been found guilty and sentenced in a criminal court, which had also been asked to consider disqualification orders, but because the matter had slipped the mind of prosecuting counsel at the original trial, this was dealt with only some two months later. The judge declined to make such orders, feeling that it would be “perhaps kicking a dog whilst he is down” (paragraph 14).

The SoS later applied to the High Court for disqualification orders under S2 of the CDDA86. S2 provides that the court may make a disqualification order where the person is convicted of an indictable offence in connection with the promotion, formation, etc. of a company.  The two year timescale for the SoS to apply for disqualification orders under the usual S6 of the CDDA86 had expired.

Counsel for the directors argued that the application was an abuse of process: the High Court was being “asked to exercise exactly the same jurisdiction as the criminal court but to decide the matter the other way” (paragraph 15). The argument for the SoS was that he had not been party to the prosecution and so had not had an opportunity to contest the original decision.

Although David Cooke HHJ recognised that the SoS was not a claimant seeking to vindicate a private right, but a restriction for the public good, he also considered what was fair to the directors. He noted that there was a wide range of potential applicants under S2 of the CDDA86, including company shareholders and creditors: “Fairness to the defendant must mean, it seems to me, that he should not be exposed to the same claim on multiple occasions by different litigants unhappy with the outcome of the earlier claim or claims” (paragraph 51) and that such subsequent claims could be described as “collateral attacks” on the first decision.

Even though the judge said that, in this case, he would have made disqualification orders (if he were found wring on the issue of abuse of process): “standing back, this claim is no more than an attempt by the Secretary of State to obtain a different decision from this court than was given on identical issues by the criminal court, which had the issues placed before it and made a positive decision to refuse an order. It is in my view unfair that the defendants should be thus exposed to the same claim on two occasions. The unfairness is not relieved by the argument that the claim is being pursued by a different entity… There is the general point that where the basis of the claim and the relief sought is essentially identical it is just as much unfair to the defendant to have to face it twice at the hands of two applicants as it would be if there were only one” (paragraph 52).


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Keeping the lights on for insolvent businesses

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It is 13 days and counting until the Insolvency Service’s consultation on the extension of the IA86 provisions regarding essential supplies to insolvent businesses closes. R3 pretty much said it all in its autumn 2014 magazine (pages 8 and 9), so I shall be brief – honest!

The Insolvency Service’s consultation, impact assessment, and draft statutory instrument are at: http://goo.gl/N4Tg3c

Personal guarantees in IVAs and CVAs?

As I’m sure you know, the changes seek to wrap in to the existing S233 and S372 suppliers of a number of IT services and goods. Thus, these suppliers may not hold the IP to ransom in relation to their pre-appointment debts in order to agree to supply post-appointment… but they can seek a PG from the office holder, just as utility suppliers can do at present.

The draft statutory instrument also sets out restrictions on IT/utility suppliers’ powers to terminate pre-appointment contracts (or “do any other thing”, which the Service envisages would prevent actions such as increasing charges simply because of the administration or VA). A supplier would be entitled to terminate if, within 14 days of the commencement of the VA (or administration), the supplier has asked for a PG and one has not been provided within a further 14 days.

How likely is it that a Supervisor will agree to personally guarantee the payment of IT or utility supplies to a company or an individual in a VA?! Although I think that this is an entirely unrealistic prospect, VAs at present only work if the company/individual can reach agreements with their suppliers, so I don’t think the insolvent will be any worse off – and at least this might give them a 28 days breathing space in which to get things sorted.  It is perhaps not surprising, therefore, that the impact assessment takes a cautious approach and puts no monetary benefit on the impact of this provision on companies/individuals trading whilst in VAs.

Pre-Administration/VA events

The draft SI lists aspects of what is described as “an insolvency-related term”, which ceases to have effect if a company enters administration or CVA (or an individual in business enters an IVA). One of these ineffective features of an insolvency-related term is:

  • “the supplier would be entitled to terminate the contract or the supply because of an event that occurred before the company enters administration or the voluntary arrangement takes effect”

I guess that “insolvency”, i.e. being unable to pay one’s debts as and when they fall due, is an event that occurs before administration or VA, isn’t it? Given that this frequently appears in termination clauses, could this be a catch-all that avoids termination in all cases where an administration or VA results?  Well, surely the problem with this is that, when insolvency first rears its head, who knows what the final outcome will be?  What if a creditor, petitioning for a winding-up order, is tussling with a company hoping to be placed into administration?  It seems that suppliers might be entitled to terminate, but only if the company does not end up in an administration or VA.  A statutory provision that seeks to impact on a past event is no provision at all, is it?

So does the draft SI have anything else to say about the pre-Administration/VA periods, e.g. when a Notice of Intention to Appoint an Administrator has been issued or when a Nominee is acting? The Explanatory Note indicates that a termination clause would not have effect when a VA is proposed, but this is not what the draft SI says. It states that the insolvency-related term ceases to have effect if “a voluntary arrangement approved… takes effect”.

The impact assessment uses the expression, “the onset of insolvency”, which is something else again. It uses this expression to describe the starting point of the 14 days in which the supplier can ask for a PG.  However, the draft SI states that this period begins with “the day the company entered administration or the voluntary arrangement took effect”.

Therefore, it would seem to me that, in more ways than one, the period during which a Nominee is acting or when a company is preparing to go into administration falls between the cracks of the draft SI that can only work, if at all, in hindsight: are supplies assured during this period?

£54 million more to unsecured creditors

The impact assessment calculates the benefits on the basis of R3’s August 2013 survey, which suggested that 7% of liquidations could be avoided. The Service has extrapolated this to mean that these liquidations instead may be tomorrow’s administrations… and, as the OFT 2011 corporate insolvency study indicated that on average unsecured creditors recovered 4% more in administrations than in liquidations, they conclude that this could result in an additional £54 million being returned to unsecured creditors.

Personally, I would have thought that the key insolvency shift that is likely to occur from these measures – especially given the Government’s appetite to act on Teresa Graham’s recommendations – is that some pre-packs may be replaced by post-appointment business sales, as IPs’ hands are freed up (if only a little) to continue to trade the business. I think it odd, therefore, that the impact assessment does not assume there would be any change in the proportion of administrations that will involve trading-on: the Service works on an assumption – both before and after the proposed changes – that 10% of administrations involve post-appointment trading-on.

Then again, didn’t Teresa Graham’s review conclude that pre-pack sold businesses are more likely to survive than post-appointment sold businesses? If this is so, is it a good or a bad thing that there could be fewer pre-packs and more post-appointment sales?  That really does depend on one’s view of pre-packs.  Still, as it seems inevitable now that the hurdles to pre-packs are going to be raised, I guess that we should welcome any lowering of the high jump bar for post-appointment trading.

Over 2,000 businesses could be saved each year

That was R3’s “Holding Rescue to Ransom” tagline. Is it realistic?

Personally, I think not. However, I don’t think I’m alone: the R3 article does remind us that its original campaign highlighted the need for all suppliers of essential services to be brought into the net, not just IT services.  Therefore, it remains to be seen if these provisions will provide enough breathing space to enable insolvency office holders to help more businesses to survive.

(UPDATE 24/02/2015: for a summary of the outcome of this consultation, go to: http://wp.me/p2FU2Z-9w)


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Moving Thresholds: DROs and the Creditor’s Bankruptcy Petition

Peru252

Having finally drafted my presentation for the SWSCA course later this week, I can turn to reviewing the Insolvency Service’s consultation on DROs and the creditor’s bankruptcy petition threshold. There’s still time for you to respond: the deadline is 9 October 2014.

I have to confess that my practical experience is corporate insolvency-heavy, so personally I don’t feel in a great position to comment, but, of course, that won’t stop me!

Strictly-speaking, it is not a consultation, but a call for evidence. Thus, whilst there are hints of the direction in which the Government/InsS might take the issues forward, it’s all (supposed to be) pretty open at the moment.  This also means that the emphasis is on providing data, rather than opinion – another reason why I do not feel well-placed to comment.

The call for evidence can be found at: http://goo.gl/UhT52U.

DROs: Key Questions

Fundamentally, the Service is asking: are the criteria (and the publicity/delivery of DROs) blocking out people who should be able to benefit from a DRO?  Much of the Service’s arguments seem to focus on how many people would move from bankruptcy to DRO if thresholds were moved.  I guess this helps to explore the potential consequences of any changes on suppliers who may react by raising the hurdles for people at the margins from accessing their supplies.  However, what I’m interested in is: at what stage does a bankruptcy become beneficial to creditors?  Surely, this is a key factor in deciding the DRO/bankruptcy threshold, isn’t it?  I don’t think the Service’s consultation document explores this sufficiently.

Debts and Assets

As we know, the thresholds for accessing a DRO are:

  • Total debts less than £15,000;
  • Total assets less than £300 (excluding certain items); and
  • Surplus income less than £50 per month.

Are these at the “right” levels?

The consultation illustrates these thresholds adjusted for inflation:

  • The threshold for total debts would move to between £16,200 to £18,900;
  • Total assets threshold: £325 to £380; and
  • Surplus income threshold: £54 to £63 per month.

Hmm… assuming that the 2009 levels were valid, that appears to suggest that change should be minimal.  The world seems to have changed more than this, doesn’t it?  Or is it our attitudes to debt that have changed?

The consultation also looks to the recently statute-enshrined Scottish Minimal Assets Process (“MAP”) levels:

  • Debts between £1,500 and £17,000 (and I recall that many fought to persuade the Minister to increase this from £10,000);
  • Assets less than £2,000 (again, I think this was proposed originally at £1,000); and
  • Zero disposable income (or income entirely from benefits).

The Service then examines the levels of debts and assets of the 2013/14 bankruptcies, which suggest that, if the two thresholds were adjusted in line with inflation, up to 5% of those who became bankrupt would have qualified for DROs (assuming they met the other DRO criteria). They haven’t done the same comparison to the MAP thresholds, but have illustrated that, if the asset threshold were £2,000 and the debt threshold £30,000 (interesting number to pick!), 23% of last year’s bankrupts could have had a DRO (again, assuming they met the other criteria).  That’s all very interesting, but what is the logic behind the thresholds?

Personally, I cannot see the rationale for imposing a low debt threshold. The Service states that the threshold “was designed to limit the scheme to those with low levels of unsecured debt rather than allowing debtors to discharge ‘excessive’ sums”.  What is an “excessive” sum?  I’m in no position to answer, but, from my corporate insolvency perspective, I don’t see much of the “debt-dumping” that seems to inflame the Daily Mail reader.  I suspect that the personal insolvency world is similar: individuals are in a sorry state when they have accumulated more debts than they can afford; they’re not trying to scam their creditors, simply escape from the hole.  Does it really help to make this endeavour difficult for them?

Ah, but wouldn’t an increase in the debt threshold dissuade lenders etc.? I’m guessing that some debtors suffer a substantial change in circumstances, leaving them unable to support high levels of debt, but I guess there are other debtors who manage to build up fairly high levels of debt whilst having little assets/income to back it up.  Whichever way it is, don’t suppliers at the moment accept the risks that they might not see any recovery from a proportion of those to whom they extend credit?  If these individuals simply move from a nil-return-to-creditors bankruptcy to a nil-return-to-creditors DRO, where’s the harm?  It is far more expensive for the Insolvency Service (i.e. the public purse) to administer a bankruptcy than a DRO and, if the debtor doesn’t have the assets/income to cover those costs, that’s a loss to everyone.  So who is winning from this whole process?

I hear much support for R3’s call to raise the debt threshold to £30,000 and I can see no real argument against that.

As to the level of assets, I also see no reason why it should not be £2,000 (Debt Camel – http://debtcamel.co.uk/dro-consultation/ – makes the sensible observation that computers and the like are generally accepted to be necessities in this day, especially for job-seekers).  However, I’d like to ask the question: how high do the assets and surplus income need to be in order to generate a material return to creditors?  I’ve not done the sums, but there must be a relatively simple answer, mustn’t there?

Surplus Income

The Service’s analysis of surplus income levels is a bit cloudier. Firstly, I’m surprised to read that the Service has no income data for bankrupts who are not subject to an IPO/IPA – why not?  Surely they need to have known what the debtor’s income was in order to decide not to pursue an IPO/IPA, don’t they?  Secondly, later the Service states that “under bankruptcy, an Income Payments Order will be put in place taking the whole surplus income if a bankrupt has a surplus income of more than £20 per month, subject to an allowance for emergencies and contingencies of £10 a month for each family member.”  So presumably, all bankrupts for which they have no data fall below this threshold, don’t they?  The consultation discloses 22,044 “blanks”, i.e. no data cases, which is 93% of the total bankruptcies, but the Service estimates that only 25% of all bankrupts had incomes below the DRO level.  But shouldn’t all those “blanks” be below the DRO threshold?  If not, then why isn’t the OR pursuing IPOs/IPAs from them?

The Service’s argument against increasing the surplus income threshold is pretty-much that, apart from the emergency/contingency factor mentioned above, all the debtor’s surplus income is taken in an IPO/IPA, so why should a debtor in a DRO get to keep any of it?  Well I’m sorry, Insolvency Service, but your stats indicate to me that IPOs/IPAs are so not the norm for bankrupts; it seems that there are plenty of bankrupts getting to keep at least some surplus income, so I don’t see that debtors in DRO generally are better off than their bankrupt contemporaries.

I was also surprised to read that the Insolvency Service uses the “Living Costs and Food Survey” for calculating surplus income. Considering the Service was a body that was heavily involved in the IVA and DMP Protocols, I’m wondering why they chose this tool, rather than the CFS or Step Change guidelines.  I notice that “a consultation is ongoing to produce a Common Income and Expenditure Calculator to use as an industry standard” – presumably this will be rolled out for IVAs and DMPs too and presumably these industries are engaged in this consultation?  Personally, I’ve not seen it…

Debt Camel illustrates the disparity that using different tools can generate. She states that many IPs use guidelines that are stricter than the CFS (I guess she’s referring to the Step Change guidelines?) with the result that an IVA can be proposed for £70 or £100 per month for an individual who would meet the current DRO £50 per month threshold.  Personally, I’m not surprised at this, as an individual’s actual I&E might be very different from what any model predicts they should be.  Also, just as some debtors have chosen an IVA over bankruptcy – even though, from a purely economic perspective, bankruptcy might appear the best way to go – an individual’s choice to go for an IVA over a DRO does not make it wrong.  However, given the substantial differences in downsides for the debtor, I expect that IPs dealing in low contribution IVAs would be fanatical about giving and recording thorough advice on all the options available to avoid mis-selling complaints down the line.

However, back to my question: do creditors get to see anything from £50 per month IPOs/IPAs? That’s only £1,800 over three years.  What’s the current bankruptcy admin fee: £1,715 for starters..?  If creditors only start seeing a real recovery on IPOs/IPAs at, say, £70 per month, then shouldn’t that be the threshold – for DROs and bankruptcies?

The Debtor’s Experience

The consultation then moves to examine the debtor’s experience of DROs: how much it costs them; whether it is right that they should be able to access a DRO only once in a 6 year period; whether the competent authority/intermediary model can be improved on. Personally, I cannot really add to these issues, so I won’t attempt to.

I was intrigued by Debt Camel’s comments (sorry, DC, from drawing so heavily on your post) regarding the paucity of publicity given to DROs, including on some IPs’ websites. I can see how this situation may have arisen: when DROs were introduced back in 2009, IVAs and DROs were poles apart.  IVAs were often marketed with a surplus income threshold some way above the £50 DRO limit.  Therefore, it was perhaps understandable that IVA websites rarely signposted DROs as a potential option for readers.  However, the disposable income threshold for proposing an IVA has dropped in recent times, so I can well understand that IVA providers may now look to advise individuals with a DI of c.£50.  Given this environment, it is appropriate that IP/IVA provider websites (and, of course, advisers) that purport to set out debtors’ options cover DROs.  From my own spot-check of the websites of some of the major providers, I’d say that c.50% covered DROs, although some did seem to trail after the bankruptcy blurb, which didn’t seem entirely fair and transparent.

Any lack of DRO coverage by IPs can only give weight to arguments that someone who appears to be in the region of a potential DRO candidate should be referred to an Authorised Intermediary. I also ask myself if the DRO calculator is accessible by non-Authorised Intermediaries: if IPs are to cover well DROs in possible options for a debtor, it seems to me that they must have access to it – this is another reason for addressing the lack of consistency in the tools currently in use.

DRO Revocations

The number of DROs revoked has been running consistently for the past three years at c.300 per year. Revocations most often occurred at the OR’s discretion when he felt that the debtor’s change in financial circumstances meant that he could deal with his creditors – that is how the consultation describes it anyway.  Given that the document continues to explain that 154 revocations occurred because the asset limit had been exceeded and 29 because the surplus income level had been exceeded, it seems to me that it was more all about hitting the DRO thresholds.

Interestingly, one debtor was successful in challenging the OR’s discretion. The document states that since this, “the decision to revoke following a change of circumstances is no longer being so strictly applied, with revocation now only occurring if the creditors could be expected to benefit if the DRO was revoked”.

The consultation asks whether the revocation system could be improved. My questions would be: what happens to the debtor next; are they thrown back out into the cold?  Could they not be “switched” into a bankruptcy, if the debtors consent?

DRO Discharge

The consultation asks if the Scottish MAP discharge provisions should be adopted for DRO.

Personally, I don’t understand why MAPs have different timescales: six months for discharge from debts, but with a restriction on credit for a further six months after discharge with an option to extend this restriction for a further six months. I expect that the impact of a MAP or DRO on a debtor’s credit file restricts access to credit more than the statutory provisions anyway and, if six months is considered an appropriate timescale within which windfalls should be caught for the benefit of pre-DRO/MAP creditors (although, personally, I think that one year is not too much to ask), then why not stick with that single line in the sand?

Becoming employed

Understandably, some wonder whether being in a DRO might discourage some from taking up opportunities that risk bringing them out from under that safety net – for example, taking up employment that might take their surplus income over the £50 threshold.

I think that only those who have experienced DROs – more specifically perhaps, revocations on the basis of increased income – can really answer this question. However, I wonder if such a risk might be mitigated by allowing a greater level of surplus income once someone is in a DRO.

Bankruptcy Creditor Petition Limit

Having contemplated 25 pages of DRO territory, it seemed odd to switch to this topic for the final three pages, but good on the Insolvency Service for including it. It is a simple question: the bankruptcy creditor petition limit has been £750 since 1986, so what should it be now?

The consultation sets out these facts:

  • If it were increased in line with inflation, it would now be £1,600 to £1,700.
  • Germany, Italy, The Netherlands and Spain have no limit.
  • Australia’s is £2,700.
  • Scotland’s is £3,000.
  • Republic of Ireland’s is £15,900.
  • If the limit had been £2,000, there would have been 404 (3%) fewer creditor petitions last year.
  • If the limit had been £3,000, there would have been 979 (8%) fewer creditor petitions last year.

Personally, I don’t know where I’d put the level. I sympathise with the debtors who find themselves with a hefty bankruptcy annulment bill on the back of a small petition debt.  At the same time, I can see that creditors (even Councils) are entirely justified in using the statutory tools to pursue their debts.

Clearly, an increase is well overdue, and I hope that those with evidence-based views will help the Government decide on an appropriate level.


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Case Law… but not a Blue Monkey in sight

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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The Small Business, Enterprise and Employment Bill: Part 3 – Regulation

1115 Swakop

In my final post on the Bill, I summarise the prospective changes to the IP regulatory landscape: by what standards will IPs be measured in the future? What will be the Insolvency Service’s role? And for how long will we continue with the multi-RPB model?

Regulatory Objectives

A key element of the Bill portrayed as the potential solution to several perceived problems is the introduction of regulatory objectives “as a framework against which regulatory activity can be measured and assessed”.

There has been a little refining of the objectives as originally proposed in the consultation document. They now appear (S126) as follows:

“‘Regulatory objectives’ means the objectives of:
(a) having a system of regulating persons acting as insolvency practitioners that
(i) secures fair treatment for persons affected by their acts and omissions,
(ii) reflects the regulatory principles, and
(iii) ensures consistent outcomes,
(b) encouraging an independent and competitive insolvency practitioner profession whose members:
(i) provide high quality services at a cost to the recipient which is fair and reasonable,
(ii) act transparently and with integrity, and
(iii) consider the interests of all creditors in any particular case,
(c) promoting the maximisation of the value of returns to creditors and promptness in making those returns, and
(d) protecting and promoting the public interest.”

Thus, the consultation’s suggested “value for money” objective has been replaced with reference to “high quality services at a cost to the recipient which is fair and reasonable”. However, “value for money” continues to appear large in the IA, which swings wildly from, on the one hand, conveying the sense that the introduction of a “value for money” regulatory objective will cause a sea change in regulation to, on the other hand, stating that, as RPBs say that “they already carry out an assessment of fees in monitoring visits”, they “do not anticipate this objective will add additional costs to the RPBs in terms of monitoring”.

Fees Complaints

The IA also states that “the objective makes it explicit that fee related complaints should be dealt with by the regulators”, but it states it is leaving the “how” entirely in the hands of the RPBs: “it will be for the RPBs, to create a system (whether within the existing complaints process or by combining resources to create a joint system) which adjudicates on fee issues”.

The IA sets a “high scenario” of 2,000 additional fee complaints (but with a best estimate of 300): that would be an average for each appointment-taker of three complaints every two years. However, despite this doom-saying, the IA factors in zero additional costs to the Service (in managing the Complaints Gateway) and to IPs. The IA states that the changes “should have minimal impact for individual IPs, particularly for those who already act in compliance with the existing legal and regulatory framework”. The Service does not seem to appreciate how the most compliant of IPs attracts complaints – it’s in the nature of the work – and how enormously time-consuming it can be to respond to RPB investigations, even when they end in “no case to answer”. I wonder how much work will be required to satisfy one’s RPB that the fees charged are a fair and reasonable exchange for the high quality services provided.

One consultation respondent estimated that the IP licence fee could increase by £950 pa, which prompted the IA drafter to write: “given the increased confidence and credibility to the industry which will result from a strengthened regulatory framework, is a proportionate cost for an industry which generates an estimated £1bn per annum”. In addition, the IA’s assessment of costs to the RPBs (for complaints-handling alone) shows a best estimate of £1,074 per IP, which increases to £7,184 per IP under the “high scenario”. Is this still considered a proportionate cost? It continues to sicken me that the Service seems to fail to understand the spectrum of environments within which IPs work. Yes, some do make a tidy living, but I know IPs for whom an extra £1,000 bill (let alone £7,000) would be the straw that breaks their back. For a Minister who seems so intent on “reducing a little the high bar on entry to the profession” (per her speech at the Insolvency Today conference) by introducing partial licences, which, allegedly, will encourage competition in the profession, she seems all too blind to the likely impact of burdening IPs with yet more costs; I think it will certainly threaten some sole practitioners’ survival in the industry. And for those IPs who can, inevitably the cost increase will be passed onto the insolvent estates – well done, Minister!

Will this “strengthened regulatory framework” really increase confidence in, and credibility of, the industry? Does the government feel that confidence will only increase once we see a few heads resting on platters? Well, public confidence had better improve, because the Bill will result in the Service’s hand hovering over the red button of the Single Regulator.

Partial Licences

The Small Biz Bill already makes obsolete the Deregulation Bill, which has yet even to complete its journey through the House of Lords, although principally only by adding to the Deregulation Bill’s requirements for RPBs – whether recognised for full or partial IP-licensing – by referring to the need to have rules and practices designed to ensure that the regulatory objectives are met.

Does this mean that the partial licensing debate over? The clause in the Deregulation Bill emerged intact from the House of Commons after a vote on a motion for its removal of 273 to 213. There has been some debate at the Bill’s second reading in the House of Lords, but it seems to me not nearly enough to turn the juggernaut. I find it quite striking how, on the one hand, there have been some very strong submissions against partial licensing primarily from R3 but also from the ICAEW* (which has stated that, through its own consultation process, it received “no indications of support at all” for partial licences), but on the other hand… Actually, who is fighting the “for” partial licensing corner? Why is it seen as such a great idea, where is the evidence that good people are being shut out of the market by the need to sit three exams (how many exams does it take to qualify as an accountant these days?), and has anyone with experience and knowledge of these things been arguing that partially licensed IPs will be just as skilful and competent as full licence-holders, only they will be cheaper?

* Responses on Clause 10 consultation, February 2014:
R3’s: http://goo.gl/vkqYvR
ICAEW’s: http://goo.gl/lhVNo8

Oversight Regulator’s Powers

The Bill introduces a range of powers, which will enable the oversight regulator (aka the Secretary of State, acting by the Insolvency Service) to influence an RPB’s actions – by means of directions, compliance orders, fines, reprimands, and ultimately the revocation of recognition – but also to leapfrog the RPB in its regulatory action against a licensed IP.

The Bill’s Explanatory Notes discloses the type of conditions that might prompt the Secretary of State to issue directions to an RPB: “if the RPB has failed to address the Insolvency Service’s concerns following a review of the way the RPB handles its complaints or a RPB’s failure to carry out a targeted monitoring visit of its IPs where the Insolvency Service has requested that it be done”. The Memorandum adds: “the Secretary of State will also be able to apply to the court to require an RPB to discipline an insolvency practitioner if disciplinary action appears to be in the public interest”.

When would the SoS apply to court directly to sanction an IP, rather than leave it to the IP’s RPB? The IA summary states: “where public confidence in the regime is undermined and could have serious consequences for the reputation of the profession. An example is where the activity undertaken impacts across all regulators and is so serious that action is required immediately, rather than wait for each regulator to investigate the case and come to potentially different findings”.

Personally, I find these moves worrying. In every Insolvency Service Annual Review of Insolvency Regulation, there is reported a clutch of complaints made to the Service about RPBs and, almost without exception, the Service’s investigations reveal nothing untoward. In addition, the Reviews disclose complaints made by the Service to the RPBs about individual IPs: these complaints appear to be processed by the RPBs adequately. Is this not the way things should be handled? It seems to me to be wholly inappropriate to side-step due process on the simple ground that public confidence appears to be undermined. Considering that the objective is to shore up public confidence in the existing regulatory regime, it seems to me that taking an issue out of the RPB’s hands is one sure way of destroying any confidence the public may have. If the Service were ever tempted to exercise such a power, it would seem to me that the nuclear option of a single regulator could become almost inevitable.

Single Regulator

What would prompt the SoS to designate a single regulator? The Bill’s Explanatory Notes state: “the power to move to a single regulator will only be used if the changes proposed by clauses 125 to 131 [i.e. including the regulatory objectives and the Service’s powers to sanction or direct the RPBs] do not succeed in improving confidence in the regulatory regime for insolvency practitioners”. The Memorandum also states: “the changes proposed by clauses 125 to 131 will be reviewed with a reasonable time of commencement. If there is still a lack of confidence in the insolvency practitioner regulatory regime, then the Secretary of State will consider whether to act to bring an end to the system of self-regulation by creating a single independent regulator which will apply consistent standards of regulation and will not be perceived to act in the interests of insolvency practitioners over creditors.”

I appreciate that often members of the public – and not a few IPs – express bemusement that the regulation of such a small industry should be shared amongst seven bodies and that there tends to be a natural scepticism towards the idea that a body funded (even in part) by IPs, some of whom also sit on regulatory committees, can be sufficiently independent to regulate its members satisfactorily (although I wonder how else anyone expects an insolvency regulator to be funded). However, whatever one’s criticisms are of the existing regulatory structure, I struggle to see how a single regulator would be certain to do a better job. But maybe it’s only the perception that’s important.


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The Small Business Enterprise and Employment Bill: Part 2 – insolvency odds and sods

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My second post on the Small Business Enterprise and Employment Bill focuses on the proposed changes to the Insolvency Act as a consequence of the Red Tape Challenge… with a couple of sneaky additions thrown in.

Changes to the Insolvency Act 1986

The Red Tape Challenge proposals require changes both to the Act and the Rules. Therefore, this Bill is not the whole story and many of the practicalities of the new processes will only become evident when the Insolvency Rules are changed.

The Insolvency Service’s current targets on the Rules consolidation exercise appear to be finalisation of the statutory instrument in October 2015 so that it has an effective date of April 2016.

The Bill’s Impact Assessment (“IA”) summarises the changes as follows:

1. “Removing meetings of creditors as the default position in insolvencies
2. Abolition of final meetings
3. Removal of requirement for liquidator to be present at a S98 meeting
4. Opting out of further correspondence
5. Administration extensions
6. Allowing an office-holder to pay a dividend in respect of a debt of less than £1,000 without the need for the creditor to submit a formal claim
7. Removal of requirement to seek sanction for certain actions in liquidation and bankruptcy
8. Crystallisation of Scottish floating charges
9. Abolition of Fast Track Voluntary Arrangements
10. Official Receiver to be appointed trustee on the making of a bankruptcy order
11. Clarification that a court application under paragraph 65 of Schedule B1 is not required where an administrator intends to make a prescribed part payment to unsecured creditors
12. Clarification that a progress report must be issued to creditors where the liquidator changes within the first year of a CVL
13. Alignment of the time limit for an appeal against the outcome of an IVA where there is no interim order with that where there is an interim order in place”

“Deemed consent” and non-physical meetings

The savings that will result from complete removal of “physical” meetings seem to be built on the premise that all IPs are charging room hire of £64 and 1.5 hours of administrator/manager time each time a meeting is “held”. Although the vast number of circulars still refer to a place and time for meetings, I suspect that rarely does this involve any more cost than if the business were conducted by correspondence.

Firstly, the Bill introduces a “deemed consent procedure” (S110 and 111) that seems to work like this:

• The office holder provides creditors with written notice of his “proposed decision” on a matter.
• If less than 10% (or perhaps “10% or less” – the IA does not make it clear and the Rules will prescribe this) of total creditors by value object to the proposed decision, the creditors are treated as having made the decision.
• If more than 10% (or “10% or more”) object to the proposed decision, then the office holder must follow a “qualifying decision procedure”.

The Bill lists several decisions that cannot be handled by the deemed consent procedure:

• “Any matter relating to a proposal” for a VA;
• Removal of an office holder;
• “Any matter relating to the remuneration of an office holder”, which I guess will wrap in S98s and consideration of Administrators’ Proposals (unless Para 52(1)(b) applies);
• Where the court so orders; and
• “Any matter prescribed as an excluded matter by the Rules”.

The IA suggests that the process will not disadvantage small-value creditors, as “they will still have the facility to object to [the proposals] and raise any concerns with the office holder, who will in turn have a duty to consider whether deemed consent is the most appropriate mechanism to use”, which seems most odd: does the Service expect office holders to start the deemed consent process and, even if the 10% threshold has not been passed, they might decide that minority objecting creditors deserve a voice and thus they can spend estate monies in following a more inclusive decision-making process? This also seems contrary to the Bill, which states that, if less than the prescribed proportion of creditors object, the creditors are to be treated as having made the proposed decision (S246ZF(4) under S110).

The IA does point out that use of the deemed consent procedure is discretionary; it states that “office holders will be able to use their experience to identify situations where the creditors are unlikely to agree with its use” and thus go straight to an alternative decision procedure. However, the Service also waves the stick of regulatory action, if it seems that an IP has lost sight of achieving “value for money”.

The Bill’s memorandum states: “in most cases the intention is that the office holder will be able to use a process of deemed consent”. However, given the exclusions listed above, how many opportunities will there be for the deemed consent procedure in any event? How many meetings (other than final meetings, which are dealt with elsewhere) do not include a resolution on fees?

The Bill doesn’t prescribe the qualifying decision procedures – the Rules will “prescribe examples of procedures” – but the IA indicates that these will not include a physical meeting, unless 10% or more request a physical meeting. The procedures will include business by correspondence, remote meetings, and electronic voting.

Given that most meetings are convened at present to deal with the excluded matters listed above and that physical meetings will not be an option unless creditors ask for one, I really cannot see why the IA has estimated a reduction of only 50% in the number of physical meetings. It states that “50% was seen as prudent, given because this will be ‘new ground’ for office holders and creditors, who may feel decide (sic.) that they would prefer to have meetings in some cases”. Don’t you get it, Insolvency Service? How many times do we have to say it? On the whole, creditors don’t vote! Why on earth would they – in 50% of cases! – ask for a physical meeting?!

The IA states that “it is not anticipated that the time taken to undertake a virtual meeting will be any more or less than the time taken to undertake a physical meeting” – I agree – but it then states “where a physical meeting is not being held the proportion of instances where a virtual or remote meeting is held is likely to be small, given that deemed consent will be available as well as other cheaper methods”. The IA then applies a best estimate of 50% reduction in meetings, whether virtual or physical, and eliminates entirely the time costs of an estimated 1.5 hours for holding a meeting. Crazy! As is clear above, there will barely be an opportunity to use deemed consent and, as the time incurred in completing unattended meetings is mostly about collating and considering proofs and proxies and drafting minutes, these pretty-much will still need to be spent in any other decision procedure. Okay, business by correspondence will be cheaper than a physical or virtual meeting where people actually turn up, but it is not cost-free!

Is it any wonder that the Service has managed to come up with savings for this measure alone of £50 million over ten years?!

Final meetings

The IA states that the proposal “scraps all final meetings of creditors where they occur”, although the Bill (S114) provides only that the SoS be empowered to remove Insolvency Act meetings, so I think there is another step required to amend S106 etc. It is not clear whether the Service envisages that the deemed consent procedure will apply to a proposed resolution for release, or whether the draft final report simply will be issued and creditors will need to request a meeting, if they want to object to the office holder’s release.

The IA suggests that this measure will save £6 million per year (in addition to the £50 million above), based on room hire of £64 per meeting and 45 minutes of time, although, if the deemed consent procedure were necessary, it will carry with it some costs to wrap up. The Bill does not refer to any requirement to tell creditors the outcome of any attempt at obtaining deemed consent; hopefully the Rules changes will add nothing, as this would return any costs saved in abolishing final meetings.

S98 meetings

The Bill and IA seem confused over the fate of S98 meetings: are they being abolished? If not, who gets to decide how they should be held? And practically, how can such decisions be managed?

One thing is clear: the need for the company’s liquidator to be present at the S98 meeting will be removed (although it is not in the Bill, as it is a Rules provision). The IA states that “in most cases it will be an insolvency manager who has best knowledge of the intricacies of a CVL rather than the office holder themselves and it represents much better value for the creditors for that person to attend the meeting” – charming! Don’t they think that creditors will want and deserve to see the liquidator in person? The IA does acknowledge that, if there is significant creditor interest in the proceedings, suggestion of director misconduct or “negotiations that the office holder in person may wish to lead”, the IP may “feel that their presence would be necessary or beneficial”. The IA estimates this may occur in 30% of cases.

I know that some have aired grave concerns over the prospect of creditor disengagement by abolishing physical S98 meetings. Chuka Umunna MP commented on this when the Bill had its second reading – see column 922 at http://goo.gl/VGOE07.

But are physical S98 meetings being abolished? The IA estimates there will be a 50% reduction in physical S98 meetings, which suggests that they aren’t. However, from my reading of the Bill, it seems that S98s will be subject to the “qualifying decision procedure” rules, which means that a physical meeting could only be held where over 10% of creditors request one, so, without this, an IP may only decide to “attend” a meeting remotely. Also don’t directors technically convene S98 meetings..? So a director who doesn’t want to face creditors – even remotely – can decide to conduct business by correspondence..?

Given that creditors only receive seven days’ notice of S98 meetings, I am not sure how a creditor’s request for a physical meeting will work practically. Presumably, directors/IPs may do well to predict cases where there is likely to be sufficient creditor interest and set up a meeting room in advance (although this will be wasted if the requisite creditors do not request a meeting). Otherwise, they could be looking at expensive last-minute conference room bookings – and you would need to give timely notice to all creditors of the venue – or a postponed S98 meeting, albeit not for long given the need to get on with the liquidation and the Centrebind restrictions.

So much for saving costs!

Creditors’ circulars

The Bill provides (Ss 112, 113) that creditors may opt out of receiving correspondence from office holders (excluding notices of (proposed) distributions, which presumably include notices of intended dividends).

Again, I think the Service has over-estimated the savings to be made: personally, I cannot see their assumption of 20% of creditors deciding to opt out becoming reality, although apparently “a representative of a leading firm of insolvency practitioners, a partner in a large regional firm, and a major creditor representative all said that they agreed that the assumption was reasonable and two of them thought the 20% figure to be conservative”, so what do I know..? I also note the IA assumption that no creditors will opt out where the OR is in office: if this provision is such a cost-saver, why is it only being imposed on IPs? They have also provided no provision for the costs to the office holder of managing two creditor databases.

What I want to know is: where has the other Red Tape Challenge proposal gone? If the Service is serious about IPs’ saving costs, then they should progress the proposal to allow office holders to post everything on a website without the need to write to each creditor every time notifying them that the document had been released. Maybe this will turn up in the Rules revision…

Extending administration extensions

Para 76(2)(b) of Schedule B1 is to be changed so that an administration may be extended by up to one year by consent (S115).

It is a shame the Service has not taken this opportunity to change the consent requirements, so that it does not require the administrator to seek the approval of every secured creditor, irrespective of their recovery prospects. Oh well. This may mean that the Service’s prediction that all administrations set to last up to two years will be extended by consent in future may prove to be an over-estimate also.

Dividend processes

Ss119 and 120 of the Bill provide for creditors who have not proved small debts (to be prescribed, although the IA proposes a threshold of £1,000) “to be treated as having done so”. The IA points out that, as with any proving creditor, this does not stop the office holder asking for further evidence from the creditor if thought necessary, although it states that this measure will “permit the insolvency office holder to rely upon the debtor’s own records”. Also, a creditor can always submit a proof, if it is owed more than the debtor’s records indicate.

I must admit that I have often struggled with the office holder’s duty as regards adjudicating on claims and I have even more difficulty with it in this “value for money” world: on the one hand, an office holder is expected to be diligent to ensure that he distributes the estate’s monies to those who are entitled to it; however, on the other hand, every minute he spends on scrutinising claims, asking for, and examining further evidence, eats away at the funds available to distribute. I guess this provision sets out more clearly the government’s expectation: just take small claims as read… unless you have reason to doubt them, e.g. if you think that the director who swore the SoA has added all his friends and neighbours to the list of creditors.

A Red Tape Challenge proposal that would really help put this measure into context is that small dividend payments – £5 or £10 were mentioned – would not be sent to individual creditors, but would be pooled for use by the disqualification unit or the Treasury. If this also were introduced, then, yes indeed, don’t waste any time considering whether to admit small claims, as the chances are that those creditors will not see their dividends anyway. However, this proposal hasn’t made it to the Bill. Is it another one for the Rules or will we never see it again..? (UPDATE 02/11/2014: I understand this proposal has now been dropped, as the Service had received advice that it would prove too contentious to deprive certain creditors of the right to receive a dividend, however small that might be.)

The Bill includes two measures affecting administration distributions. The IA describes them as clarifications and as removing ambiguities, although personally I think that the provisions change the Act, which seems pretty clear-cut to me.

S116 contains two parts:

• To Paragraph 65(3) will be added the power to distribute the prescribed part in an administration.
• Paragraph 83 will include a further restriction on moving from administration to CVL: this will only be possible where the administrator thinks that a non-prescribed part distribution will be made to unsecured creditors.

It is a shame that Schedule B1 of the Act is not being amended so that dividends generally can be paid through administration. The IA hints at why this is not considered appropriate: it states that liquidation “provides for more engagement” of unsecured creditors. Personally, I see no difference in creditor engagement in administrations and liquidations: there are the same powers to form a committee and to approve fees (as we are not talking about Para 52(1)(b) cases here), and the changes to liquidators’ powers mentioned below bring the office holders’ needs to seek sanction on a par. The IA has estimated a cost of £8,250 on converting an administration to liquidation, so why not save by eliminating the need to move to liquidation?

Pre-packs

S117 of the Bill is the Dear IP 62 threat to “ban ‘pre-pack’ administration sales to connected parties if certain criteria are not met”. The Bill’s memorandum elaborates, referring to Teresa Graham’s recommendations: “Clause 117 is in response to the recommendation to take a legislative power to legislate in the event that the recommendation to establish third party scrutiny is not adopted on a voluntary basis… It is considered that by taking a legislative power, this will act as an incentive to encourage connected parties to adopt the voluntary proposals set out in the Graham Review”. Hmm… I can’t see that the threat of future legislation is going to matter one jot to connected parties presently contemplating a sale! However, “the Government is fairly confident that voluntary reforms backed by this ‘backstop’ power will act as sufficient incentive to change behaviours and so it will not be necessary to exercise the power.” I know that R3 and others are working frantically to see what can be done with the Graham recommendations and I will not list my own views and concerns, as there have been plenty of other loud critics.

The Bill empowers the SoS to make regulations “prohibiting or imposing requirements or conditions in relation to the disposal hiring out or sale of property of a company by the administrator to a connected person in circumstances specified in the regulations”. Note that regulations may not be limited to pre-packs, but may affect any transaction involving a connected person (which is also defined by the section), whenever they occur and however large or small the property transferred. This fits in with Teresa Graham’s recommendations, although I haven’t seen any commentary refer to this wider scope.

S117 provides that, in particular, future regulations may require approval (or provide for the imposition of requirements/conditions) by creditors, the court, or “a person of a description specified by the regulations”.

Other fixes

The Bill also contains:

• S107: the proceeds of claims or assignments arising from Ss213, 214, 238, 239, 242, 243, and 244 are not to be available for floating charge holders, i.e. they will not be part of the company’s net property. I believe that some have expressed concern over this, but doesn’t this simply put case precedent into the Act?

• S108: liquidators may exercise any of the powers in Parts 1 to 3 of Schedule 4 of the Act without sanction (S109 provides similarly in relation to trustees and Schedule 5)… although I’m wondering why the Parts need to exist at all.

• S118: provides that, when an administrator of a Scottish company obtains permission from the court to pay a dividend to unsecured creditors, floating charges crystallise.

• S121: the OR will become trustee on the making of a bankruptcy order (if an IP isn’t made trustee at that time). The IA explains that the motivation for this is to improve the efficiency of asset realisations by not restricting the OR’s immediate activities only to protecting the estate. I can see some value in having the bankrupt’s estate vest in the OR immediately on bankruptcy, avoiding some of the confusion illustrated in the Pathania v Adedeji case (http://goo.gl/AcktAk), although there is obvious concern that this process disenfranchises creditors, as this erodes creditors’ opportunities to make a decision on who they want to administer the estate.

• S122: changes S262(3)(a) of the Act so that the 28 day time period for challenging an IVA meeting decision counts from the decision where there is no interim order and from the filing of the report to court in interim order cases… although I’m wondering why the time of the meeting’s decision could not work for all cases; it’s hardly “alignment”, as the IA suggests.

• S124: removes reference to producing progress reports only for (E&W) VLs that last longer than one year. This deals with the nonsensical position that, if the liquidator changes during the first year, it seems that he must predict if the case will last longer than one year in order to decide whether to issue a progress report on the change-over – an issue highlighted by Bill Burch (http://goo.gl/6K4a4E) – although it does not deal with the unnecessary costs of issuing progress reports mid-year and the re-setting of deadlines caused by changing liquidators. Courts usually deal with these matters in block transfer orders, but let’s hope that the revised Rules will effect a change.

That’s almost the whole of the Bill’s insolvency measures covered. It just leaves the provisions impacting on IP regulation… for another day.


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The Small Business, Enterprise and Employment Bill: Part 1 – Directors

IMGP0277 This “Small” Bill will have a big impact on IPs. Not only does it include the widely-publicised reserve powers to ban pre-packs and appoint a single insolvency regulator, but it will result in a completely new D-reporting process and will relegate physical creditors’ meetings to something that only creditors can request. The Bill contains many other smaller items that will require significant overhauling of templates and checklists… far more than the 7 hours estimated in the Impact Assessment!

The Bill’s government webpage is at http://goo.gl/VwKvPe and I have sketched out (to help myself get an overview) the clauses that will impact IPs here: Insol relevant provisions Jul-14

In this first post, I cover the key changes to reporting on directors and actions arising from directors’ misconduct. My next post will deal with the changes to the IP regulation regime, pre-packs, and the numerous technical changes to the Act.

D-Reporting

I know that R3 spins this as a success – the move from burdensome paper reports to something far speedier online – but I have to say that I am more sceptical about the advantages of this process for IPs.

The Impact Assessment (“IA”) describes the present problem as delayed reporting because “the IP must be satisfied that there is evidence of unfit conduct… The proposed design of the new form would require the IP to highlight (at an earlier stage) information or behaviour which may indicate unfit conduct as opposed to providing a significant amount of justification and evidence at that stage.” The Bill sets the timescale for submitting a report to within three months of appointment – the rationale, it says, being that “the SoS would be able to better consider behaviour identified by the IP” at this earlier stage [why?] and “the quality of information should improve due to the return being submitted with greater proximity to events” [really?] – although I thought it was charming that, in the same breath, the Bill is providing the Service with an extra year in which to commence disqualification proceedings.

Personally, I expect that this change will result in a greater number of ‘clean’ reports, as IPs will have less knowledge of past events at three months than at six months. However, as IPs will be “under an ongoing obligation to report any new information that he/she considers should have been included in the return”, I cannot see that this will result in less, or even the same amount of, work for IPs in the long run. The forms themselves might also require more work, as “there are also other pieces of information not currently requested which R3 states that IPs could usefully provide”.

The IA estimates only one hour for IPs (nothing for other staff) to familiarise themselves with the new process and one hour per director in completing the new return where misconduct is indicated, which I can see, depending on the final form of the return, would be a reduction over the present demand, although the IA has provided no time costs in relation to providing additional information to the SoS after a return has been submitted.

One sentence that really got my goat was: “Analysis undertaken on a sample of 250 cases where D1 reports were submitted but not proceeded with indicated that a significant percentage of them should not have been submitted”. Should not have been submitted?! What can the government mean? Are IPs failing to meet their statutory obligations?

I am reminded of a question raised by the House of Commons BIS Select Committee when it interviewed Richard Judge and Graham Horne in 2012 about the apparent disparity between the number of D1s filed – around 5,000 per year – and the number of disqualifications. I remember Dr Judge stating that this meant there were “5,000 indications of misconduct… there are people that are innocent in that” and Mr Horne chipping in quickly to clarify that IPs are required by statute to report directors who, by analogy, drove at 31 mph in a 30 mph zone; technically, the conduct might be reportable, but of course not all such directors will be pursued to disqualification. Although switching to a system in which IPs simply provide the facts and leave the SoS to decide whether the director’s behaviour merits action may avoid future discomfort in answering such questions, it seems to me that nothing here changes the statutory obligation for IPs to waste time reporting on the 31 mph drivers.

Compensation Awards

The IA gives us a clear hint at what has driven this measure. It states that “a frequent complaint in Ministerial correspondence from creditors is that although disqualification can prevent a director acting as a director in future, it provides no compensation to those who have suffered from their misconduct”. What types of cases might attract compensation awards? The IA states that “it is reasonable to believe that compensation could be sought from, at least those cases where there has been an identifiable loss to creditors, for example: misapplication of assets, transactions to the detriment, criminal matters and accounting records” – that’s quite a list! The IA continues: “it is also reasonable to assume that whatever the allegation, the SoS will also seek compensation for those cases where there are a lot of unsecured creditors or ‘vulnerable’ members of the public who have lost out”.

However, the IA presents a confusing picture as to how the government envisages the process of seeking compensation awards against disqualified directors working – in tandem? – with the activities currently carried on by office holders in challenging antecedent transactions. For example, the IA states: “the option of the SoS seeking a compensation order or agreeing a compensation undertaking from a miscreant director will enable greater financial redress for creditors, where the office holder (IP) has not taken any of the available actions him/herself or it is considered that further action in addition to that taken by the IP is merited”. Fair enough, as the IA points out, this may be because the office holder has insufficient funds to pursue the case (although I am irritated by the comment that an IP might feel “they don’t have the specialist expertise to bring a claim”). But, I wonder, will this exacerbate the difficulties in reaching settlements with directors who, notwithstanding any settlement agreed with the IP, could then be pursued by the SoS? At least the IA recognises that there are likely to be fewer disqualification undertakings under the future regime, as directors are less likely to give in without a fight.

Do you wonder whether this could result in the SoS and IP fighting between themselves as to who might chase after the director’s finite pot first? The IA states that IPs “should be able to proceed with any action they deem appropriate before the SoS”. Well, that’s alright then.

The Bill also indicates that compensation may be awarded to a particular creditor or creditors, a class or classes of creditors, or it may form a contribution by the director to the assets of the company. However, the IA states “the compensation award will be awarded direct to creditors” (although it makes no provision for the Service’s costs in collecting the monies from the director, adjudicating on creditors’ claims, or paying a distribution). This quote appears in the context of “free-riding amongst liquidators”! It seems that some consultation responses suggested that office holders might not pursue claims themselves, but they might sit back, wait for the Service to do the work, and then pop up to collect the funds and take a fee. The IA does nothing to counter this libellous title and simply states that, because the award is direct to creditors, they “do not think the risk of ‘free-riding’ is high” and “no evidence exists on the likely number of cases of free-riding by liquidators”. Come on, Insolvency Service, we expect better of you than that!

I am also puzzled by the repeated references to improving gateways so that the SoS and IPs might share information better, for example, “to better enable successful recovery actions to be taken forward by the office holder”. As far as I can tell, the gates only swing one way (unless there is something in the OR’s handover) and will continue to do so; there are no proposals in the Bill to help IPs have greater access to information, although the IA suggests that things may change “through updating internal guidance used by Insolvency Service staff”.

I was also puzzled at the IA highlighting a “risk” that “this will result in compensation orders being made for the benefit of HMRC as they are the major unsecured creditor in the majority of insolvencies”. Personally, I don’t see that a bit of recompense to the public purse is a bad thing. Instead of the IA pointing to the Bill’s reference to factors that the court/SoS would consider – the amount of loss, nature of misconduct, and any recompense already paid – it answered this by referring to the fact that the court/SoS could determine that compensation be awarded to a particular creditor or class or group of creditors “taking into account what is equitable in all the circumstances”. Could the prospect of deviating from the pari passu rule, especially if HMRC might not get a look-in at all, result in some creditors calling for office holders to resist taking action and leaving it to the SoS?

Power to assign certain rights of action to third parties

The apparent “problem” that the government is seeking to fix is the lack of court applications as regards wrongful and fraudulent trading (which are both extended under the Bill to Administrators), transactions at undervalue etc. However, the IA acknowledges that “a lot” of claims are settled out of court (they have heard upwards of 90%) and it reports that the other principal reasons for lack of court actions given in the consultation responses were the targets’ lack of assets and the high evidential bar necessary, so the government acknowledges itself in the IA that the Bill’s provisions are unlikely to result in many more cases going to court.

The IA does not mention the issue for an IP who agrees to share in the proceeds of any action assigned to a third party: won’t the risk of an adverse costs order deter IPs from entering into some assignments? The IA points out a risk “of speculative or opportunistic claims being brought against directors who may be ill placed to defend themselves. However, this risk should be small as we expect insolvency professionals to have regard to existing professional and ethical standards in judging when to assign causes of action.” But in the next paragraph the IA refers to the IP’s duty to maximise returns to creditors: could an IP really be justified in turning away third parties offering to pay for rights of action, if it represented a good deal for creditors?

The IA appears more thoughtful in relation to the justification for IPs selling to a third party, who after all is looking to make a profit from the action: they feel that IPs may be justified as the third party’s greater appetite for risk and economies of scale in taking the action forward compensate for the discount on the action suffered by the estate. The IA also makes the sensible point that simply opening the way for third parties may improve IPs’ negotiating position in pursuing claims directly from directors.

My part 2 on the Bill will follow in a week or so (once I’ve done some real work!)

(UPDATE 25/09/14: I read an excellent blog on the subject of the director provisions of the Bill from Neil Davies & Partners – http://goo.gl/uYp3RU.  I was particularly intrigued by the observations on the complications that could arise from the provision to empower the SoS to pursue compensation orders.)


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Council Tax and IVAs: some more thoughts

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The IPA has published an interesting article in its July 2014 magazine (accessible from http://www.ipa.uk.com Press & Publications>Insolvency Practitioner magazine) explaining how its Personal Insolvency Committee believes the judgment in Kaye v South Oxfordshire District Council impacts on past and future IVAs. I have some more thoughts…

The article points out that the judgment has no practical effect where the household income is shared between solvent and insolvent adult occupiers, because whatever “tax holiday” might be enjoyed by an insolvent occupier will be off-set by the fact that the council likely will re-bill the solvent occupier, with the effect that the household income and expenditure account is unchanged. The rest of this post assumes that the debtor is the sole adult occupier (although perhaps some points also might apply where all the adult occupiers are – or are intending to be shortly – in an insolvency process; I’ve not worked out whether a council’s “re-bill” of another occupier would be a pre- or post-insolvency liability…).

For new IVA Proposals, on the basis that the first (part) year’s council tax will be caught as an unsecured claim, the article states that “it may be advisable to consider… whether the proposal might make specific provision for an increased contribution during this period”. Fair enough. I hear that many IPs are doing this already.

For existing IVAs, however, the tone of the article makes it clear that there is no expectation for Supervisors to examine potentially overpaid council tax with a view to recovering any overpayment. The article goes so far as stating: “It is also believed that Counsel has expressed a view that this judgement would not be of retrospective effect”, which I find quite extraordinary. However, there is no doubting the commercial arguments against the Supervisor going to the effort of seeking to extract small refunds from a number of councils.

Of course, the IPA article is aimed at helping its members, so it is not surprising that it has not viewed the position from the debtor’s perspective. For example, could the debtor pursue a refund? I don’t see why not (although I’m not sure I rate their chances of easy success). Would it be a “windfall” caught by the IVA? I don’t see how, as it simply refunds the debtor for payments made post-IVA; it isn’t an asset that has been acquired after the IVA started.

Would the council be entitled to set off any refund due to the debtor (for council tax paid post-IVA) against the council’s unsecured claim? I don’t think so; set-off principles in insolvency apply only where the overpayment and the claim both occurred pre-insolvency, although I appreciate that this is not what the pre-January 2014 Protocol STC stated. Clause 17(6) used to say: “Where any creditor agrees, for whatever reason, to make a repayment to the debtor during the continuance of the arrangement, then that payment shall be used solely in reduction of that creditor’s claim in the first instance”. However, the January 2014 Protocol STC now state: “Where Section 323 of the Act applies and a creditor is obliged, for whatever reason, to make a payment to you during the continuance of the arrangement, then that payment shall be used first in reduction of that creditor’s claim”. S323 begins: “This section applies where before the commencement of the bankruptcy there have been mutual credits, mutual debts or other mutual dealings between the bankrupt and any creditor of the bankrupt proving or claiming to prove for a bankruptcy debt”… so as long as the debtor doesn’t become bankrupt, I don’t think S323 will ever apply in an IVA!

What about debtors who are in the first year of their IVAs (provided the IVA commenced after 1 April 2014)? Can they avoid paying the remaining council tax for the rest of the year on the basis that it now falls as an unsecured claim? Excepting the IPA’s comment that the Kaye judgment does not have retrospective effect, it seems that they can. Some words of caution, however: I can envisage that some councils may be a bit behind the times, so debtors may need to have a strong stomach to resist council pressure to pay up, remembering that a case precedent only exists to the point that another court sees things in a different light. The effect of pushing the year’s tax into the IVA might also be material: for example, the Protocol STC state that breach occurs when the debtor’s liabilities are more than 15% of that originally estimated and some IVAs may require a minimum dividend to be paid. If an increased council IVA claim could threaten the successful completion of an IVA containing terms such as these, one might like to think again…

Could a Supervisor demand increased contributions from a debtor who is not paying his council tax for the rest of the first year? Of course, it will depend on the IVA terms, but it seems to me that the Protocol STC don’t help a Supervisor seeking to do this. Clause 8(3) states that the debtor must tell his Supervisor asarp about any increase in income… but this is not an increase in income, it is a decrease in expenditure. Clause 10(11) states that, as a consequence of the Supervisor’s annual review of a debtor’s income and expenditure, the debtor will need to contribute 50% of any net surplus one month following the review. By the time the first annual review comes around, the “tax holiday” will have ended and the debtor again will be required to pay council tax, so the I&E will show no consequent surplus. Therefore, as far as I can see the Protocol STC do not provide for the Supervisor to recover any surplus arising from a decrease in expenditure in the first year of the IVA. Of course, this does not take into consideration the terms of the Proposal itself (or any variations in the standard, or any modified, terms) and the debtor can always offer the unexpected surplus to the Supervisor, which one would hope would go down well with the IVA creditors.

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For background on the judgment itself, you might like to take a look at my earlier post – http://wp.me/p2FU2Z-5U – or R3’s Technical Bulletin 107.1.

(UPDATE 25/08/14: for another perspective, I recommend Debt Camel’s blog: http://debtcamel.co.uk/council-tax-insolvency/.  Sara highlights the difference in DROs (I think the reason this decision has no effect on DROs is because the remainder of the year’s council tax is a contingent liability and as such is not a qualifying debt for DRO purposes) and the possibility of debtors putting in formal complaints if the council does not acknowledge the effect of this decision.)


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HMRC clarifies VAT deregistration of insolvent businesses… but how does it work in practice?

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In April 2014, HMRC released a Business Brief – 13/14 (http://www.hmrc.gov.uk/briefs/vat/brief1314.htm) – which R3 circulated to its members on 1 May 2014. The Brief seemed pretty self-explanatory as regards future cases, but I have seen no commentary about how IPs should be handling cases where VAT deregistration has already taken place. I summarise below HMRC’s responses to my queries.

Scenario 1: a company became VAT deregistered after it had gone into liquidation and the liquidator (prior to the Brief) sold its assets on a plus VAT basis. What happens now?

The issue arising from the recent legal advice is that the asset purchaser may encounter difficulties reclaiming input VAT on the sale. In that event, it is likely that the purchaser would be told by HMRC to go back and obtain a valid invoice to evidence the sale and that would mean reinstating the VAT registration if possible. But HMRC will address this issue on a case by case basis as and when the situation arises. HMRC does not propose to revisit historical cases on mass nor does it expect IPs to do so.

Scenario 2: as a consequence of this Brief, an IP reviewed his caseload and identified some cases with assets as yet unsold, but they fall below the VAT registration threshold (of £81,000), so he does not propose to look at re-registering the insolvent entities for VAT. However, if then he sells the assets exclusive of VAT, can he still recover (via a VAT426) any VAT input on the costs incurred in selling those assets?

The rules around the VAT 426 process are set out at Section 7 of the Insolvency VAT Public Notice 700/56 (http://goo.gl/WYkYxs) and the clarification provided in the Brief has no impact on this process.

The basic principle here is that an office holder is entitled to recover the VAT element of costs incurred in the winding up of a VAT registered business. Therefore, as before, if a business had deregistered for VAT before the IP’s appointment, the IP needs to consider the circumstances surrounding that deregistration. If the business had deregistered due to having ceased trading shortly before the IP’s appointment, then HMRC will still consider a VAT 426 claim as the IP is winding up a business that was VAT registered when it was trading. On the other hand, if for example the business had deregistered voluntarily due to reduced turnover some time before the IP’s appointment, then the IP would not be winding up a VAT registered business and, therefore, would have no entitlement to reclaim input tax on behalf of that business.

Where VAT deregistration occurred after the IP’s appointment, although VAT426 claims should be considered on a case by case basis, the fact that some asset sales did not attract VAT because deregistration had occurred should not affect the IP’s ability to submit a VAT426 claim to recover the VAT input on the costs incurred.

Okay then, what about cases that have been deregistered for VAT where the unsold assets are over the VAT registration threshold? How does an IP go about re-registering the business for VAT?

Contact the National Insolvency Unit Helpdesk. The contact details for the Helpdesk are included at Section 1.4 of the Insolvency VAT Public Notice 700/56 (http://goo.gl/WYkYxs).

In the past, HMRC has issued VAT168 notices to IPs warning them that, unless they object, deregistration will take place automatically after 7 days. Given the difficulties that can be caused through a business deregistering prematurely, will HMRC change its approach to progressing automatic deregistration?

It appears that the VAT167 and VAT168 deregistration enquiries will still be issued. Under VAT legislation, HMRC is entitled to cancel a VAT registration without the registered person’s express consent, but only where HMRC is “satisfied” that the criteria for registration no longer applies (Paragraph 13(2) of Schedule 1 of the VAT Act 1994). That judgment will be based on evidence in HMRC’s records concerning assets on hand etc. On receiving a deregistration questionnaire, if the IP still anticipates supplies being made in terms of continued trading or (more likely) asset realisation, then HMRC would expect the IP to inform them at that point. The VAT registration will then be kept open.

The Brief suggests that legal advice has merely clarified the position that has existed for some time, so this could mean that there are a host of historic cases of assets sold post-deregistration on a plus VAT basis. Does HMRC expect IPs to revisit these cases and take action to amend the position to that set out in the Brief?

Only if that proves necessary in order for a VAT registered purchaser of assets from an insolvent business to recover input tax. As explained in the answer to question 1 above, HMRC is neither proposing nor requesting a mass resurrection of historical cases. But reinstatement of a VAT registration may prove necessary on a case by case basis where a purchaser of assets encounters difficulty reclaiming input tax. Hopefully the number of such cases will be relatively small. The intention of Brief 13/14 is to try to reduce the number of such cases to zero going forward.

My huge thanks to Steve Taccagni, Insolvency Policy Adviser at HMRC, for answering my questions so comprehensively.


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Mopping Up: courts clarify “apparent bias”, “fair and proper price”, and “unfair harm”, but blur “debenture”

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Oh dear, I’m slacking – even the R3 Technical Bulletin has beaten me to it this time! I will try to avoid much of the same ground in this batch of judgment summaries…

• Pathania v Adedeji – lack of evidence as regards an OR becoming trustee calls into question when the bankrupt’s estate vested
• Dryburgh v Scotts Media Tax – if a company does not know it has a claim against a director, does the clock tick?
• Northern Bank v Taylor – where an IP is free of actual bias, how important is apparent bias?
• O’Connell v Rollings – what makes a “fair and proper price” obtained for fixed-charge assets?
• Fons HF v Corporal – court’s definition of “debenture” brings into question unregulated lenders’ and borrowers’ activities
• Registrar of Companies v Swarbrick – under what circumstances can replacement Administrators’ Proposals be filed?
• Top Brands v Sharma – can a former liquidator apply to have an adjudicated creditor’s claim expunged?
• Eastenders v HMRC – can HMRC detain goods pending investigations into their duty status?
• Hockin v Marsden – can an administrator cause “unfair harm” to creditors’ interests and be acting reasonably?

Scanty OR records leave estate-vesting shrouded in mystery

Pathania v Adedeji & Anor (21 May 2014) ([2014] EWCA Civ 681)
http://www.bailii.org/ew/cases/EWCA/Civ/2014/681.html

Mr Pathania obtained judgment against Dr Adedeji at a time when the court did not know that Mr Pathania had been made bankrupt six months earlier. Dr Adedeji appealed on the ground that a bankrupt claimant cannot maintain legal proceedings under his own name, but these should have fallen to his trustee.

Although the bankruptcy order had been made in June 2010 – and the judgment made in December 2010 – it was not until April 2011 that an IP was appointed. The questions arise: what was the status of the OR in December 2010? Was he a trustee or simply the receiver and manager of the estate pending appointment of a trustee? The questions are important, as S306(1) provides that the bankrupt’s estate vests in the trustee on his appointment or when the OR becomes trustee. S293(3) provides that the OR becomes trustee when he gives notice of his decision not to convene a meeting of creditors. So when did the OR give such notice, if he ever did?

Lord Justice Floyd, using “moderate language”, stated that it was “highly unsatisfactory that the question of whether or not Mr Pathania’s assets had vested in a trustee should still be shrouded in any degree of mystery” (paragraph 50). Granted, it seems to have taken three or four years for the importance of the timing of the vesting of the bankrupt’s estate to have been appreciated; this seems to have been time enough for holes to develop in the OR’s records. The OR’s system suggested that he became trustee of 28 August 2010 and the file contained an undated report to creditors (although it seems that it may have been under cover of a letter dated 23 August 2010), which referred to a notice ‘attached’ but there was no attachment, leading the judge to states that “there is, as it seems to me, still no clear evidence that the formalities necessary for the appointment of the official receiver as trustee were complied with in this case” (paragraph 51). He also noted other indications in the case that he was not so appointed, including the document appointing the IP as trustee, which “contains no reference to a previous trustee or his discharge” (- does it ever?).

Although the judge was not persuaded on the evidence that the OR had become trustee around August 2010, he noted that this was not the be-all and end-all: Dr Adedeji “must show that Mr Pathania knew that the official receiver had become trustee, that his estate had become vested in the official receiver and that he knew that was so before judgment on the claim was entered” (paragraph 53). He also observed that, had Mr Pathania’s bankruptcy been disclosed before judgment, the action likely would have been stayed and, given that the (IP) trustee later assigned the action to Mr Pathania, the chances are that he would have been authorised to continue with it sooner or later. Consequently, De Adedeji’s appeal seeking to have the judgment set aside was dismissed.

Error or deliberate contrivance: either way, the clock didn’t tick whilst the director withheld information from his company

Dryburgh v Scotts Media Tax Limited (In Liquidation) (23 May 2104) ([2014] CSIH 45)
http://www.bailii.org/scot/cases/ScotCS/2014/2014CSIH45.html

The liquidator brought proceedings against the company’s two directors for breach of fiduciary duties in depriving the company (“SMT”) of c.£750,000 and breach of the common law duties to exercise reasonable skill, care and diligence in relation to the SMT’s payment of a dividend at a time when it had insufficient distributable assets to justify it.

SMT had ceased trading in late 2001, but it had not been placed into liquidation until September 2005 (as an MVL, which converted into CVL in March 2007). The transactions challenged by the liquidator occurred in September and November 2001. The liquidator had been given leave to bring proceedings in January 2009. At first instance, although the Lord Ordinary had held that the director/respondent had been in breach of his duties, he dismissed the principal action as he had concluded that the claims “had prescribed”, i.e. they were out of time as a consequence of the Prescription and Limitation (Scotland) Act 1973, which provides a time limit of 5 years.

Section 6(4) of the 1973 Act states: “In the computation of a prescriptive period in relation to any obligation for the purposes of this section: (a) any period during which by reason of
(i) fraud on the part of the debtor or any person acting on his behalf, or
(ii) error induced by words or conduct of the debtor or any person acting on his behalf,
the creditor was induced to refrain from making a relevant claim in relation to the obligation… shall not be reckoned as, or as part of, the prescriptive period”.

The Inner House judges concluded that this section applied in this case: SMT had been induced to refrain from making a claim by error induced by the director’s conduct and also by fraud on his part. Therefore, the commencement of proceedings in January 2009 was well within the period of 5 years from the winding-up in 2005. The judges added that it was also possible that the delay during which SMT was induced not to make a claim continued throughout the MVL until it had been converted into CVL.

The court explained it this way: “if the respondent was unaware of SMT’s right to make a claim for breach of fiduciary duty, the result following the rules of attribution is that the company was in error as to its legal rights and section 6(4)(a)(ii) applies. If the respondent was aware of SMT’s right to make a claim against him, his failure to alert to the company to its right was a deliberate contrivance to ensure that his breach of fiduciary duty was not challenged… That in our opinion falls within the concept of fraud, in the sense of a course of acting that is designed to disappoint the legal rights of a creditor, SMT. In our view that falls squarely within the underlying purpose of section 6(4), namely to excuse delay caused by the conduct of the debtor. As a result of the respondent’s failure to draw attention to SMT’s rights, SMT was induced to refrain from making a claim. It follows that either SMT’s inaction was the result of an error induced by the actings of the respondent, or it was the result of the respondent’s failure to inform the company of its rights (“fraud” in the technical sense described above). Either way, the prescriptive period does not run” (paragraph 31).

Apparent bias works against nominee’s appointment as administrator

Northern Bank Limited v Taylor & Donnelly (4 April 2014) ([2014] NICh 9)
http://www.bailii.org/nie/cases/NIHC/Ch/2014/9.html

Two IPs were prepared to act as administrator of a partnership: one was the nominee of the partners’ proposed interlocking IVAs that had been rejected; and the other was the choice of the largest creditor. There are no prizes for guessing which of the two IPs had the court’s favour, but I thought this case serves a useful reminder.

Although it could be argued that the nominee had acquired valuable knowledge of the partnership and its assets, the judge did not feel that the costs of getting the other IP up to speed was going to make a fundamental difference. He considered that “the choice of the only (or main) creditor should carry great weight” (paragraph 16).

The judge wanted to emphasise that there was no suggestion of actual bias on the nominee’s part, but he felt that apparent bias did exist. He described this generally (per Porter v Magill (2002)) as “‘where the fair-minded and informed observer, having considered the facts, would conclude that it was a real possibility of bias’… In some cases the circumstances may be such where the directors’ nominee is in a position where the issue of apparent bias can arise because of his previous dealings with the directors. In such circumstances, even where he has acted blamelessly, he should stand down” (paragraph 15).

Court satisfied that Administrators’ marketing and sales process led to fair and proper price

O’Connell v Rollings & Ors (21 May 2014) ([2014] EWCA Civ 639) (Re Musion Systems Limited (In Administration))
http://www.bailii.org/ew/cases/EWCA/Civ/2014/639.html

Online articles (e.g. http://www.mercerhole.co.uk/blog/article/administration-fixed-charge-creditors-rights) have highlighted the key outcome of this case: the dismissal of the charge-holder’s appeal against the order under Para 71 permitting Administrators to sell assets as if they were not subject to the fixed charge. The judgment is valuable in illustrating how the court measures the fine balance between the prejudice to the charge-holder caused by an order and the interests of those interested in the promotion of the purposes of the administration.

The other points that I found interesting in the judgment are:

• The judge had to be (and was) satisfied that the Administrators were proposing to sell the assets for a “proper price” (paragraph 49). Absence of reference to “best price” is interesting to me, in view of the fact that the Administrators did not pursue a somewhat tentative sale to a party, who on the face of it was offering a larger sum (but which would have involved deferred consideration due from an overseas company). Personally, I have never liked the concept of achieving a “best price” sale; apart from the practical difficulties of measuring against a superlative “best”, it’s not just about the quantum.
• In the circumstances – limited cash, ongoing liabilities to 17 employees, and quarter-day rent looming – the Administrators could not be criticised for deciding to pursue a sale by means of a contract race.
• Although the appellant argued that the company’s intellectual property rights were valued at “very substantially more than the Administrators achieved” (paragraph 62), the judge was “satisfied that the Administrators did ascertain the value of the business and assets of the company, including its intellectual property rights, such as they were, by testing the market, and doing so in a perfectly sensible and adequate way. Faced with rising costs and diminishing assets, they were naturally concerned to secure a sale as soon as reasonably possible. That is precisely what they did and I am satisfied that, in doing so, they obtained a proper price” (paragraph 63).
• Although the judge recognised “that the urgency of the situation and commercial pressures will sometimes require administrators to make a decision before a meeting [of creditors] can be convened. But in any such case it may still be possible for the administrators to consult with the creditors and, so far as circumstances permit and it is reasonable to do so, that is what they should do” (paragraph 80).

Implications of apparent widening of “debentures” definition

Fons HF (In Liquidation) v Corporal Limited & Anor (20 March 2014) ([2014] EWCA Civ 304)
http://www.bailii.org/ew/cases/EWCA/Civ/2014/304.html

Fons made unsecured loans to Corporal Limited under two shareholder loan agreements. The question for the Court of Appeal was: did the loans fall under Fons’ charge-holder’s security, either as “debentures” or “other securities” under the charge’s definition of “shares” (“…also all other stocks, shares, debentures, bonds, warrants, coupons or other securities now or in the future owned by the chargor in Corporal from time to time or any in which it has an interest”)?

Having reviewed the historic use of the word debentures, Patten LJ concluded: “As a matter of language, the term can apply to any document which creates or acknowledges a debt; does not have to include some form of charge; and can be a single instrument rather than one in a series” (paragraph 36). It seems that the previous judge gave “debentures” a narrower meaning because it appeared in a list ending: “other securities”. However, Patten LJ pointed out that other items in that list may be considered a security, if “securities” is synonymous with “investments” and thus he could not see why a reasonable observer should regard “other securities” as limiting “debentures” to a meaning that would exclude the shareholder loan agreements. The appeal judges were unanimous in the decision to allow the appeal.

The implications of this judgment have been summarised in a letter from the City of London Law Society to HM Treasury dated 4 June 2014 (http://goo.gl/2F9tpH). The Society wished to raise its “serious concerns in respect of the significant legal uncertainty” caused by this decision: “In holding that loan agreements are debentures in that, whether or not the relevant loan is drawn, the agreements acknowledge or create indebtedness, the judgment appears to have the effect of regulating loans in a manner not previously adopted.”

The Society’s key concern is that, if loan agreements are debentures, then they could be caught as regulated investments under the Financial Services and Markets Act 2000 (“FSMA”). If this is the case, then unless a party is authorised or exempt under the FSMA, they are at risk of criminal sanctions – this might apply, not only to unregulated lenders, but also borrowers as well as secondary traders of loans.

Consequently, the Society has asked the Treasury to “take action (a) immediately to clarify HM Treasury’s policy intentions on this topic and (b) as soon as practicable act so as to provide clarity in law.”

(UPDATE 25/08/14: The Society has released a copy of the FCA’s response to the Loan Market Association (17/07/14), which states that the FCA has considered the judgment in this case and, in the FCA’s view, it does not impact the regulatory perimeter prescribed by the FSMA: http://goo.gl/vO99NT )

(UPDATE 31/08/14: well, it was there!  It seems to have been pulled down again; I don’t know if that means the FCA has had second thoughts…)

(UPDATE 20/11/14: the letter is back at http://goo.gl/ek9Td6 )

Registrar of Companies’ resistance to file replacement Proposals overcome

The Registrar of Companies v Swarbrick & Ors (13 May 2014) ([2014] EWHC 1466 (Ch)) (Re Gardenprime Limited (In Administration))
http://www.bailii.org/ew/cases/EWHC/Ch/2014/1466.html

11 Stone Buildings has produced a good summary of this case: http://www.11sb.com/pdf/insider-rewriting-the-register-gardenprime-sc-may-2014.pdf.

The Registrar of Companies (“RoC”) applied to set aside an order that the administrators’ original Proposals be removed from the register and replaced with another set of Proposals, which omitted certain information in view of a confidentiality clause in a share purchase agreement.

The RoC’s central challenge was whether, and to what extent, the court could intervene in the performance of the RoC’s duties and powers: the RoC had carried out its duty in registering the Proposals that had been delivered to it and the original Proposals had not been found to be non-compliant or containing “unnecessary material” (per S1076 of the CA 2006) and thus in want of removal and replacement. Accordingly, it was argued, the RoC had no statutory power to accept the amended Proposals as a replacement and could not be required to do so.

Does R2.33A, which provides for an administrator to apply for an order of limited disclosure in respect of Proposals, only apply in advance of filing? In other words, once Proposals have been filed, is it too late to apply for a R2.33A order? The judge stated: “in my judgment on the correct construction of Rule 2.33A the jurisdiction of the court to make an order limiting disclosure of the specified part of the statement as otherwise required by Paragraph 49(4) is not exhausted the moment the statement has been sent. On the contrary, an application for such an order may be made even after that event, and an order may be made with retrospective effect” (paragraph 52).

But how does such an order fit in with the RoC’s powers under the CA2006 as regards removing documents containing “unnecessary material” from the register? The judge’s conclusion was that the effect of the R2.33A order was to render the disputed material as “unnecessary material” under the CA2006 and thus the RoC was empowered to remove it.

Technicality blocks IP’s attempts to reverse her decision

Top Brands Limited & Anor v Sharma (8 May 2014) ([2014] EWHC 1454 (Ch)) (Re Mama Milla Limited (In Liquidation))
http://www.bailii.org/ew/cases/EWHC/Ch/2014/1454.html

I have seen other commentaries on this case focus on the repercussions of being slow in dealing with court matters, but I will look at the case’s once-in-a-blue-moon technical intricacy.

A liquidator rejected a creditor’s claim, the creditor appealed to court, and then the two of them submitted to a consent order by which the liquidator reversed her decision to reject and agreed to admit the claim. The liquidator, having been replaced by another IP at a creditors’ meeting, now faces a S212 action. The (now former) liquidator sought to adjourn the trial so that she could pursue a claim to set aside the consent order on the basis that it was procured by fraudulent misrepresentation. If the creditor’s claim were to be rejected, then its standing to pursue the S212 application might be thwarted.

The difficulty for the former liquidator was that R4.85 sets out who can apply to have a claim expunged: the liquidator or (where the liquidator declines to act) the creditor. As the former liquidator was neither, she had no jurisdiction. Simon Barker HHJ accepted that “such a conclusion would be troubling in the light of there being a real prospect that neither [of the two applicants] are creditors” (paragraph 48), but for the facts that the current liquidator, who was still investigating matters, had jurisdiction and the former liquidator had “a reasonable window of opportunity” to take action under R4.85 after the S212 application had commenced but before she had been removed as liquidator. He also stated that, even in the event that the current liquidator did not intend to investigate the matter (although, of course, the liquidator will be duty-bound to satisfy himself that any distributions made by him are made to genuine creditors), “the court simply does not have jurisdiction to act in disregard of R4.85”.

Lack of hindsight does not hamper HMRC’s powers of detention

Eastenders Cash and Carry Plc & Ors v The Commissioners for HM Revenue & Customs; First Stop Wholesale Limited v The Commissioners for HM Revenue & Customs (11 June 2014) ([2014] UKSC 34)
http://www.bailii.org/uk/cases/UKSC/2014/34.html

HMRC detained the companies’ goods, citing S139(1) of the Customs & Excise Management Act 1979 as their authority for doing so, but they later returned some of the goods when the officers’ enquiries as regards the goods’ duty status proved inconclusive. In the Eastenders case, the court had previously found that the officers had had reasonable grounds to suspect that duty had not been paid on the goods, but in First Stop’s case, the goods were detained pending investigations into whether duty had been paid. The question arising was: could only goods that were actually liable to forfeiture be detained, i.e. was it unlawful for HMRC to detain goods that turned out not to be (or not proven to be) liable to forfeiture?

The Supreme Court judges all agreed that S139(1) of the 1979 Act should be interpreted so that “detention of goods is unlawful whenever the goods are not in fact liable to forfeiture” (paragraph 24). The difficulty flowing from this is that, of course, at the time of detention, officers may well suspect that the goods are liable to forfeiture, but further enquiries sometimes will establish that this is not the case. Hindsight is a wonderful thing!

But does this mean that the officers had no statutory power at all to detain the goods? In creating the S139(1) power of detention, was the power to detain, which had previously been held to arise by necessary implication from statutory powers of examination, abolished? The judges could not see “why Parliament should have conferred upon the Commissioners and their officers a wider range of intrusive investigatory powers than any other public body, but should at the same time have chosen to deprive them of a means of preventing goods from being disposed of until they have completed their examination and decided whether the goods should be seized” (paragraph 45).

Consequently, the Supreme Court judges concluded that the limited circumstances in which goods could be detained under S139(1) was not the only source of the officers’ powers of detention. In the Eastenders case, “since the officers were carrying out a lawful inspection of the goods for the purpose of determining whether the appropriate duties had been paid, and had reasonable grounds to suspect that duty had not been paid, they were in our view entitled by virtue of section 118C(2) to detain the goods for a reasonable period in order to complete the enquiries necessary to make their determination” (paragraph 49). Even in the First Stop case, the judges considered that “the examination was not completed until the necessary enquiries had been made, and that the power of examination impliedly included an ancillary power of detention for a reasonable time while those enquiries were made” (paragraph 49).

Administrators compelled to assign mis-selling claim

Hockin & Ors v Marsden & Anor (19 March 2014) ([2014] EWHC 763 (Ch)) (Re London and Westcountry Estates Limited (In Administration))
http://www.bailii.org/ew/cases/EWHC/Ch/2014/763.html

The R3 Technical Bulletin 107 has covered this case, which resulted in a direction that administrators assign potential mis-selling claims to the shareholders (one of which was also a creditor). As the Bulletin pointed out, the judge did not criticise the administrators for declining to pursue the claims themselves, but he felt that, as the terms of the proposed assignment included that the estate would share the benefit from any success, it would unfairly harm the creditors if the claims were simply lost and thus he felt that there was a basis to the creditor’s Para 74 claim.

A further point that I found interesting in this case was the judge’s reaction to the administrators’ criticism of the consideration offered under the proposed assignment. The judge could see no practical alternative to effecting the assignment in the terms proposed: once the court had expressed itself in favour of an assignment, faced with no other potential assignees the administrators had no real negotiating position, and the court could not compel the shareholders/creditor to fix the consideration at a higher figure.