Insolvency Oracle

Developments in UK insolvency by Michelle Butler

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Exercise of court’s discretion to allow creditor’s action to continue despite Interim Order and Other Judgments

1116 Sunset

Some recent court decisions:

• Dewji v Banwaitt – under what circumstances will the court allow a creditor’s action to continue despite an IVA Interim Order?
• Masters & Beighton v Furber – can a debtor be forced to hand over assets caught by IVA?
• Ward Brothers (Malton) Limited v Middleton & Ors – does an IP acting in an informal capacity avoid TUPE?
• O’Kane & O’Kane v Rooney – fixed charge receivers’ agents’ “worrying conduct” scuppers sale
• Re Hotel Company 42 The Calls Limited – will the court terminate an Administration and hand back the company to the directors despite the Administrators’ wishes for it to continue?
• Re ARM Asset Backed Securities SA – does the EC Regulation on Insolvency Proceedings apply when the winding-up petition is based on the just and equitable ground?
• Westshield Limited v Mr & Mrs Whitehouse – which takes precedence: a CVA term requiring a Supervisor to decide on set-offs or the enforcement of an Adjudicator’s decision?

Creditor’s interim charging orders made final despite IVA Interim Order

Dewji v Banwaitt (29 November 2013) ([2013] EWHC 3746 (QB))

http://www.bailii.org/ew/cases/EWHC/QB/2013/3746.html

Mr Banwaitt had obtained judgment in proceedings against Dr Dewji for fraudulent misrepresentation in relation to an agreement under which Mr Banwaitt had paid to Dr Dewji sums for the purchase of land in Cambodia. Mr Banwaitt then obtained interim charging orders over three properties, but before the charging orders were made final, Dr Dewji was granted an Interim Order. However, at the hearing on the charging orders, the Master granted leave under S252(2)(b) of the Insolvency Act 1986 for Mr Banwaitt’s action to continue and exercised his discretion in making the charging orders final.

Dr Dewji’s request for permission to appeal the charging orders was refused. Mrs Justice Andrews accepted that usually the overriding principle would be that all creditors of a single class should rank equally once a statutory scheme had got underway. However, she noted that “there may be situations in which, despite the Interim Order, the ‘first past the post’ approach is justifiable” (paragraph 45). She suggested some scenarios: where a judgment creditor were seeking to recover monies paid under a contract that had been rescinded for fraud, “the Court might take the view when exercising its discretion that it would not be in the interests of justice to allow the debtor’s other creditors to participate in that share of his estate that was increased at the expense of the party he deceived” (paragraph 29) or where “the asset against which the judgment creditor is seeking to execute judgment falls entirely outside the IVA, so that there is no question of it being shared between the general body of creditors. Another, quite independent, example would be where the IVA was bound to fail, either because the judgment creditor had sufficient voting power to block it by himself, or because the creditors as a whole or a majority of them were bound to regard it as unattractive” (paragraph 39).

What Dr Dewji had proposed for his IVA led the judge to conclude that the Master had been justified in exercising his discretion in favour of the creditor. “The question that the Master had to determine is not whether it would be unfair to let Mr Banwaitt have an advantage over the general body of creditors. It is whether it would be unfair to let Mr Banwaitt, (who, on the evidence before the Master, was the only Investor induced to part with his money for this project by deceit, and who alone has chosen to expend costs in pursuing its recovery from Dr Dewji) obtain final charging orders over property that was not going to be distributed between Dr Dewji’s creditors, but (in the case of one property only, Dale Street) utilised to raise money to pay foreign lawyers to try and recover a substantial sum of money that would then be shared equally between Dr Dewji himself and some of those creditors, including the judgment creditor” (paragraph 47).

IVA debtor was not free to resist realisation of assets

Masters & Beighton v Furber (30 August 2013) ([2013] EWHC 3023 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3023.html

The Joint Supervisors of Mr Furber’s IVA sought an order requiring Mr Furber to allow the collection of some of his vehicles that, in accordance with the terms of the IVA, had been sold. The Joint Supervisors had also been granted a power of attorney to enable them to deal with Mr Furber’s assets. Mr Furber refused to allow the vehicles to be collected, claiming that he entered the IVA under pressure and that the vehicles had been sold at an undervalue.

Purle HHJ acknowledged that, in one sense, Mr Furber could choose to default on the IVA, with a potential consequence of being made bankrupt. However, as counsel for the applicant put it, “unless the process of disposal of the vehicles is concluded, there is a risk that the successful bidders will withdraw their bids and thereafter demand return of all monies paid, as well as possibly seeking damages. Ironically, if, as Mr Furber says, the value of the vehicles was higher than the sum that has been achieved by the online auction process then there will be a claim for loss of bargain by the successful bidders” (paragraph 9). With the risk of increasing creditors’ claims in mind, the judge agreed to order the release of the vehicles: “In my judgment, requiring Mr Furber to comply with his obligations under the IVA and the power of attorney will be in the best interests of his creditors generally and maintain the authority of the supervisors who are effectively, if not in law, officers of the court” (paragraph 11).

IPs acting in an advisory capacity not sufficient to avoid TUPE

Ward Brothers (Malton) Limited v Middleton & Ors (16 October 2013) ([2013] UKEAT 0249)

http://www.bailii.org/uk/cases/UKEAT/2013/0249_13_1610.html

Bulmers Transport Limited ceased to trade on a Friday and on the following Monday Ward Brothers (Malton) Limited started to perform Bulmers’ major contracts using some of its former employees. Before Bulmers had ceased to trade, it had been presented with a winding up petition and had sought the advice of IPs. It seems that, although Administration had been contemplated, this was abandoned around the time that trading ceased. Some ten days later, different IPs were appointed Administrators by the QFCH.

The key question for the Appeal Tribunal was: did the involvement of IPs fit the TUPE exception, “where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner” (Regulation 8(7) of TUPE)?

The Appeal Tribunal supported the original Tribunal’s conclusion that the first set of IPs had been acting only in an advisory capacity and that Bulmers had not been under the supervision of an IP at the time of the transfer.

The Appeal Tribunal also appreciated that “it is regrettable that so much uncertainty exists” (paragraph 20) as regards the application of TUPE and acknowledged “the importance of establishing, if possible, a red line”. They felt that the principles in Slater v Secretary of State for Industry, whilst not formally binding, “command considerable respect; and we respectfully agree that what is there set out is an appropriate and sensible red line and is the correct principle to apply. It is consistent with section 388, which, as we have said, provides that a person acts as an insolvency practitioner in relation to a company by acting as its liquidator, provisional liquidator, administrator or administrative receiver; if not appointed as such, then a person is not acting as an insolvency practitioner” (paragraph 23).

In the summary to the decision, it states that “an appointment (formal or informal) was necessary before there could be said to be supervision by an insolvency practitioner”. Personally, I struggle to see how an IP can be informally appointed and acting in a S388 capacity. The body of the decision states: “Clearly, that red line is not an entirely straight line. There may be disputes, for example, as to whether an insolvency practitioner was on the facts, appointed before a formal letter of appointment was provided or even drafted” (paragraph 24), so perhaps that is what is meant by an “informal” appointment.

The consequence of this decision in this case was that the appeal was dismissed: there had been a transfer that was not subject to the TUPE exclusion as regards the transfer of employee claims to the transferor.

Fixed charge receivers’ sale process tainted by agents’ “worrying conduct”

O’Kane & O’Kane v Rooney (12 November 2013) ([2013] NIQB 114)

http://www.bailii.org/nie/cases/NIHC/QB/2013/114.html

The O’Kanes sought an injunction restraining the joint fixed charge receivers from selling a property.

The judge was presented with evidence, albeit most of it hearsay but nonetheless “very strong”, which the judge described as showing “worrying conduct”, “very curious behaviour indeed”, and even “bad faith” (paragraphs 8, 9, and 10). The criticisms were levelled at the joint receivers’ agents who seemed to have discouraged some parties from bidding, provided inaccurate information, and allegedly advised the highest bidder not to increase its bid during the open bidding process, stating that the bidder would win out at the lower figure.

Although the O’Kanes’ proposal was complex and it was argued to be unrealistic, the judge viewed the previous sealed bid process to be tainted. He granted an injunction restraining the sale and directed that the property should be remarketed and sold by way of private treaty, with a bidding book being maintained and exhibited to the court for its approval of the sale. He directed that there should be no involvement of the individuals named, although he did not go so far as to require a new firm of agents to be instructed.

Administration terminated and company handed back to directors despite outstanding fees and expenses

Re Hotel Company 42 The Calls Limited (18 September 2013) ([2013] EWHC 3925 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3925.html

Joint Administrators were appointed on the application of a creditor. All creditors’ claims were paid or waived, although no monies passed through the Joint Administrators’ hands, as they were dealt with by third parties.

The shareholder and director wanted the company returned to them and the administration terminated, given that its purpose had been achieved, but the Joint Administrators were reluctant to rely simply on their statutory charge as regards their unpaid remuneration and expenses as provided by Paragraph 99 of Schedule B1 of the Insolvency Act 1986, given that the appointing creditor had been “given the run around” by an associated company for many years. There was also a separate application ongoing by the shareholder and director under Paragraphs 74 and 75 under a claim that there had been unfair harm and misfeasance by, amongst other things, the charging of excessive remuneration.

Purle HHJ did not consider that the Joint Administrators’ fears were “sufficient to justify their continuing in office when, as they themselves recognise, there is no practical reason for them to do so, and, most importantly, the administration purpose has been achieved” (paragraph 21). It was also his view that the statutory charge, which could be supported by a restriction registered against the company’s property by means of filing an agreed notice with the Land Registry, was ample to protect them.

The judge refused the relief sought by the Joint Administrators to authorise them to grant a charge to themselves and he ordered the termination of the administration. He did not order that the Joint Administrators be discharged, as the misfeasance proceedings remained unresolved.

Does the EC Regulation on Insolvency Proceedings apply when the winding-up petition is based on the just and equitable ground?

Re ARM Asset Backed Securities SA (9 October 2013) ([2013] EWHC 3351 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3351.html

A Luxembourg-incorporated company applied for the appointment of provisional liquidators under a winding up petition presented on the grounds that it would be just and equitable to wind it up.

Mr Justice David Richards was satisfied that the evidence pointed to an England COMI: it was apparent that the decisions governing the Company’s administration and management were taken in London and that this was clear to third parties. However, as the petition was based on the just and equitable ground, rather than on the Company’s insolvency, the judge had to consider whether the EC Regulation on “Insolvency Proceedings” kicked in.

Rather than reach a conclusion on this question, the question of the Company’s solvency was addressed. The circumstances of this case were not cut and dried: although it was likely that there would be insufficient funds to service in full the Company’s issued bonds, the terms of the bonds provided that the holders were entitled to recover sums only to the extent that the Company had available to it certain sums. “As a matter of ordinary language, I would take the view that if a company has liabilities of a certain amount on bonds or other obligations which exceed the assets available to it to meet those obligations, the company is insolvent, even though the rights of the creditors to recover payment will be, as a matter of legal right as well as a practical reality, restricted to the available assets, and even though, as the bonds in this case provide, the obligations will be extinguished after the distribution of available funds. It seems to me it can properly be said in relation to this company that it is unable to pay its debts. A useful way of testing this is to consider the amounts for which bond holders would prove in a liquidation of the company. It seems to me clear that they would prove for the face value of their bonds and the interest payable on those bonds” (paragraphs 31 and 32).

Consequently, although David Richards J has left open the question of whether just-and-equitable petitions are caught by the EC Regulation, he was content that the Company could and should be wound up.

(UPDATE 16/03/14: I recommend a briefing by Tina Kyriakides of 11 Stone Buildings: http://www.11sb.com/pdf/insider-limited-recourse-agreement-march-2014.pdf?500%3bhttp%3a%2f%2fwww.11sb.com%3a80%2fhome%2fhome.asp. This briefing addresses the issue as regards the application of the EC Regulation, pointing out that the decision in Re Rodenstock GmbH held that the winding up of a solvent company is governed by the Judgments Regulation 44/2001 and not by the EC Regulation. More interestingly, this briefing deals with the issue about this case that had niggled me (but which I cowardly avoided): how can liabilities that are expressly restricted to the company’s funds topple the company into insolvency? Personally, I find the conclusions of this briefing far more satisfying.)

Supervisor required to consider effect of set-off despite Adjudicator’s decision

Westshield Limited v Mr & Mrs Whitehouse (18 November 2013) ([2013] EWHC 3576 (TCC))

http://www.bailii.org/ew/cases/EWHC/TCC/2013/3576.html

The Whitehouses had some work done on their house by Westshield prior to the company entering into a CVA in December 2010. After little exchange, Westshield served a Notice of Adjudication in relation to the work done. The Whitehouses raised the issue of a substantial counterclaim and referred to the terms of the CVA, which included that the Supervisor should address the extent of mutual dealings and consider set-off. The Adjudicator decided that the Whitehouses should pay Westshield c.£133,000, but did not consider the counterclaim. The Whitehouses submitted a claim to the Supervisor of c.£200,000, but the Supervisor was reluctant to deal with it given the Adjudicator’s involvement.

Westshield then issued proceedings seeking to enforce the Adjudicator’s decision, but the Whitehouses maintained that the Supervisor would need to deal with the counterclaim.

The judge believed that Westshield had been entitled to pursue the pre-CVA debt and that, had the cross-claim not intervened, the Adjudicator’s decision would have been enforceable. However, the Whitehouses had become bound by the CVA and therefore the CVA condition requiring an account to be taken of mutual dealings and set off to be applied could be carried out by the Supervisor. “Once that exercise is done, if it shows money due to Westshield, that can be paid subject to the right which the Whitehouses have to refer the matter to Court within a short time. The Court can then consider what effect (if any) the adjudication decision may have on its decision as to what should be done. If the accounting shows money due to the Whitehouses, they will get however many pennies in the pound as are available to creditors from the CVA” (paragraph 27).

Consequently, the judge dismissed the application for summary judgment, staying any further steps until the outcome of the Supervisor’s account was known.


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A Janus View of Developments in Insolvency Regulation

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I thought I would take a look at where we’ve got to on a few of the current developments in insolvency regulation:

• The Deregulation Bill: who says limited IP licences are a good idea?
• SIP3.2 (CVA): a preview of the final SIP3 (IVA) or an ethical minefield?
• The JIC Newsletter: grasping the nettle of the commissions issue
• Insolvency Service update to the BIS Committee: promises, promises!

It’s by no means a complete list, but it’s a start!

The Deregulation Bill: when is a consultation not a consultation?

The Joint Committee of the Houses of Lords and Commons published its report on the draft Deregulation Bill on 19 December 2013, available here: http://www.parliament.uk/business/committees/committees-a-z/joint-select/draft-deregulation-bill/news/draft-deregulation-bill-report/.

Insolvency features relatively insignificantly in the wide-ranging draft Deregulation Bill, the so-called Henry VIII Power attracting far more attention, so in some respects it is quite surprising that insolvency got a mention in the Committee report at all. However, the background to this report included oral evidence sessions, one of which was attended by Andrew Tate representing R3’s Small Practices Group. A recording of the session can be accessed at: http://www.parliamentlive.tv/Main/Player.aspx?meetingId=14073&player=windowsmedia – insolvency pops up at c.50 minutes.

Andrew had a chance to express concerns about the draft Bill’s introduction of IP licences limited to personal or corporate insolvency processes. He raised the concern, which I understand is shared by many IPs, that IPs need knowledge of, and access to, all the tools in the insolvency kit, so that they can help anyone seeking a solution, be they a company director, a practice partner, or an individual, and some situations require a combination of personal, corporate and/or partnership insolvency solutions.

What seemed to attract the attention of the Committee most, however, was learning that there had been no public consultation on the question. It’s worth hearing the nuanced evidence session, rather than reading the dead-pan transcript. It fell to Nick Howard, who was not a formal witness but presumably was sitting in the wings, to explain that there had been an “informal consultation”, which had revealed general support, and I thought it was a little unfair that a Committee member seemed sceptical of this on the basis that they had not heard from anyone expressing support: after all, I don’t think that people tend to spend time shouting about draft Bills with which they agree.

Personally, I do not share the same objections to limited licences, or at least not to the same degree. I see the value of all IPs having knowledge of both personal and corporate insolvency, but even now not all fully-licensed IPs have had experience in all fields, so some already start their licensed life ill-equipped to deal with all insolvency situations. I believe that there are more than a few IPs who have chosen a specialist route that really does mean that practically they do not need the in-depth knowledge of all insolvency areas, and, given that they will not have kept up their knowledge of, and they will have little, if any, useful experience in, insolvency processes outside their specialist field, does it really do the profession or the public any favours for them to be indistinguishable from an IP who has worked hard to maintain strong all-round knowledge and experience? Surely it would be more just and transparent for such specialists to hold limited licences, wouldn’t it?

From my perspective as a former IPA regulation manager, I believe that there would also be less risk in limited licences. As things currently stand, an IP could have passed the JIEB Administration paper years’ ago (even when it was better known as the Receivership paper) and never have touched an Administration in his life, but (Ethics Code principle of professional competence aside) tomorrow he could be talking to a board of directors about an Administration, pre-pack, or CVA. Personally, I would prefer it if IPs who specialise were clearly identified as such. Then, if they encountered a situation that exceeded their abilities, which they would be less likely to encounter because everyone could see that they had a limited licence, at least they would be prohibited from giving it a go.

Clearly, with so many facets to this issue, it is a good thing that the Committee has recommended that the clause proposing limited licences be the subject of further consultation!

The other insolvency-related clauses in the draft Bill have sat silently, but presumably if limited licences stall for further consultation, the other provisions – such as fixing the Administration provisions that gave rise to the Minmar/Virtualpurple confusion and modifying the bankruptcy after-acquired property provision, which allegedly is behind the banks’ reluctance to allow bankrupts to operate a bank account – will gather dust for some time to come.

SIP3.2 (CVA): a preview of the final SIP3 (IVA)?

I found the November consultation on a draft SIP3.2 for CVAs interesting, as I suspect that this gives us a preview of what the final SIP3 for IVAs will look like: the JIC’s winter 2013 newsletter explained that the working group had reviewed the SIP3 (IVA) consultation responses to see whether there should be any changes made to the working draft of SIP3 (CVA). Consequently, it seems that there will be few changes to the consultation draft of SIP3 (IVA)… although that hasn’t stopped me from drawing from my own consultation response to the draft SIP3 (IVA) and repeating some of those points in my consultation response to the draft SIP3 (CVA). I was pleased to see, however, that few of my issues with the IVA draft had been repeated in the CVA draft – it does pay to respond to consultations!

I’ve lurked around the LinkedIn discussions on the draft SIP3.2 and been a bit dismayed at the apparent differences of opinion about the role of the advising IP/nominee. Personally, I believe that the principles set out in the Insolvency Code of Ethics and the draft SIP3.2 handle it correctly and fairly clearly. In particular, I believe that an IP’s aim – to seek to ensure that the proposed CVA is achievable and strikes a fair balance between the interests of the company and the creditors – as described in Paragraph 6 of the draft SIP3.2 – is appropriate (even though, as often it will not be the IP’s Proposal, this may not always be the outcome). In my mind, this does not mean that the IP is aiming for some kind of mid-point between those interests, as the insolvent company’s interests at that time necessarily will have particular regard for the creditors’ interests, and so I do not believe that the SIP supports any perception that the advising IP/nominee sides inappropriately with the directors/company. However, given that apparently some have the perception that this state exists, perhaps it would be worthwhile for the working group to see whether it can come up with some wording that makes the position absolutely clear, so that there is no risk that readers might misinterpret the careful responsibility expected of the advising IP/nominee.

I would urge you to respond to the consultation, which closes on 7 January 2014.

The JIC Newsletter: all bark and no bite?

Well, what do you think of the JIC’s winter 2013 newsletter? I have to say that, having been involved in reviewing the fairly inconsequential reads of previous years whilst I was at the IPA, I was pleasantly surprised that at least this newsletter seemed to have something meaningful to say. Personally, I wish it had gone further – as really all it seems to be doing is reminding us of what the Ethics Code already states – but I am well aware of the difficulties of getting something even mildly controversial approved by the JIC members, their respective RPBs, and the Insolvency Service: it is not a forum that lends itself well to the task of enacting ground-breaking initiatives. And anyway, if there were something more than the Ethics Code or SIPs that needed to be said, a newsletter is not the place for it.

Nevertheless, I would still recommend a read: http://www.ion.icaew.com/insolvencyblog/post/Joint-Insolvency-Committee-winter-2013-newsletter (I’d love to be able to direct people to my former employer’s website, but unfortunately theirs requires member login).

Bill Burch quickly off the mark posted his thoughts on the Commissions article: http://complianceoncall.blogspot.co.uk/2013/12/dark-portents-from-jic-for-commissions.html, which pretty-much says it all. Personally, I hope that this signifies a “right, let’s get on and tackle this issue!” attitude of revived enthusiasm by the regulators, but similarly I fear that some offenders may just seem too heavy-weight to wrestle, at least publicly, although that does not mean that behaviours cannot be changed by stealth. Many would shout that this is unfair, but it has to be better than nothing, hasn’t it?

My main concern, however, is how do the regulators go about spotting this stuff? Unless a payment is made from an insolvent estate, it is unlikely to reach the eyes of the monitor on a routine visit. It’s all well and good asking an IP where he gets his work from, if/how he pays introducers, and reviewing agreements, but if someone were intent on covering their tracks..? I know for a fact that at least one of the examples described in the JIC newsletter was revealed via a complaint, so that would be my personal message: if you observe anyone playing fast and loose with the Ethics Code, please take it to the regulators, and if you don’t want to do that personally, then get in touch with R3 and they might help do it for you. If you don’t, then how really can you cry that the regulators aren’t doing enough to police your competitors?

However, the theoretic ease with which inappropriate commissions could be disguised and the multitude of relatively unregulated hangers-on to the insolvency profession, preying on the desire of some to get ahead and the fear of others of losing out to the competition, do make me wonder if this issue can ever be tackled successfully. But the JIC newsletter at least appears to more clearly define the battle-lines.

Insolvency Service Update to the BIS Committee: all good things come to those who wait

Jo Swinson’s response to the House of Commons’ Select Committee is available at: http://www.parliament.uk/documents/commons-committees/business-innovation-and-skills/20131030%20Letter%20from%20Jo%20Swinson%20-%20Insolvency%20Service%20update.pdf. It was issued on 30 October so by now many items have already moved on, but I wanted to use it as an opportunity to highlight some ongoing and future developments to look out for.

Regarding “continuation of supply”, which was included in the Enterprise and Regulatory Reform Act 2013 but which requires secondary legislation to bring it into effect, Ms Swinson stated: “We intend to consult later this year on how the secondary legislation should be framed”. I had assumed simply that the Insolvency Service’s timeline had slipped a bit – understandably so, as there has been plenty going on – but I became concerned when I read the interview with Nick Howard in R3’s winter 2013 Recovery magazine. He stated: “We are in the process of consulting on exactly how that [the supply of IT] works because the power in the Act is fairly broad and we want to ensure we achieve the desired effect”. Have I missed something, or perhaps there’s another “informal consultation” going on?

I’m guessing the Service’s timeline has slipped a bit in relation to considering Professor Kempson’s report on fees, however, as Ms Swinson had planned “to announce the way forward before the end of the year” in relation to “a number of possible options for addressing this fundamental issue [that “the market does not work sufficiently where unsecured creditors are left to ‘control’ IP fees”], by both legislative and non-legislative means. Still, I imagine this isn’t far away, albeit that Ms Swinson is now on maternity leave.

This might be old news to those with their ears to the ERA ground, but it was news to me that the Insolvency Service will be implementing the Government’s Digital by Default strategy in the RPO “with a digital approach to redundancy claims anticipated to be launched in the autumn of 2014”. My experience as an ERA administrator may date back to the 1990s when people were comforted more by the feel of paper in their hands, but I do wonder how well the news will go down with just-laid-off staff that they need to go away and lodge their claims online. A sign of the times, I guess…

Finally, don’t mention the Draft Insolvency Rules!

No summary of regulatory goings-on would be complete without referring to the draft Insolvency Rules, on which the consultation closes on 24 January 2014. And no, I’ve still not started to look at them properly; it feels a bit futile even to think about starting now. But then, if we don’t pipe up on them now, we won’t be able to complain about the result, even if that may be yet years’ away…


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Tomlinson: IPs caught in the cross-fire

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Banks have become the 21st century pariahs. It seems that they can do nothing right and they cannot afford to do anything wrong. Lawrence Tomlinson may have banks, and RBS in particular, sighted in his cross-hairs, but is there much in his report that should concern the IP regulators or may herald changes for IPs?

Tomlinson’s published report can be found at: http://www.tomlinsonreport.com/docs/tomlinsonReport.pdf.

The IP’s role: pre-appointment

A large part of the report raises issues regarding companies’ routes into the RBS’ Global Restructuring Group and how, once there, companies find it almost impossible to escape it alive. IPs become wrapped into this argument via Tomlinson’s observations over the opaque nature of the Independent Business Review process: the bank selects the IP and usually only the bank sees the report. When you add to this the fact that the cost of the IBR is passed to the company, I can see how this may rankle, although I am not sure that this makes the whole process flawed.

Tomlinson raises the issue of conflict of interest: he states that “it is easy to see how these reports may be used to protect the bank’s interests at the expense of the business. Much of the high value work received by these firms comes from the banks so it is naturally in their interest to protect the bank’s financial position”. Inevitably, the work of the IBR IP is fraught – can they really act independently? But who really is expecting them to do so? The IP’s client is the bank, not the company, so, at a time when the bank’s and the company’s interests cease to be aligned, it would seem to me to be foolish to assume that the IP introduced by the bank is not advising first and foremost the bank on how to protect its interests. If the company wants its own advice, then it should instruct its own IP. Of course some do, although Tomlinson fails to mention the barriers to some companies and their instructed IPs working to find a solution acceptable to the bank.

The appointment of administrators

Tomlinson writes that there are many occasions when the IBR IP later is appointed administrator. This seems to be a general comment rather than RBS-targeted, which might have been difficult to make stack up, as I understand that it is RBS’ policy not to appoint the IBR IP as administrator, is it not?

It is also not clear whether the cases involving directors who feel mistreated by the banks are the same cases in which the IBR IP later became the administrator. I think this is important because, on its own, an IBR IP becoming administrator is not an heinous act. On the other hand, if we take one of Tomlinson’s worst case scenarios, where a business was only considered insolvent because of a property revaluation, the directors were frozen out of any opportunity to offer solutions, and they protested that the IBR leading to the bank’s decision to appoint an administrator was flawed, then one might expect the IP to decline the appointment.

The Insolvency Code of Ethics states: “Where such an investigation was conducted at the request of, or at the instigation of, a secured creditor who then requests an Insolvency Practitioner to accept an insolvency appointment as an administrator or administrative receiver, the Insolvency Practitioner should satisfy himself that the company, acting by its board of directors, does not object to him taking such an insolvency appointment. If the secured creditor does not give prior warning of the insolvency appointment to the company or if such warning is given and the company objects but the secured creditor still wishes to appoint the Insolvency Practitioner, he should consider whether the circumstances give rise to an unacceptable threat to compliance with the fundamental principles.” If an IP still decides to accept the appointment amidst protestations, clearly he should be prepared to encounter a complaint and perhaps worse.

Tomlinson makes the point that “once an administrator has been appointed, the directors lose their right to legal redress”. Whilst directors lose their management powers and the administrator acquires the power to bring any legal proceedings on behalf of the company – and I should point out that I’m not a solicitor – there is precedent for directors to take some actions, e.g. challenging the validity of the administrator’s appointment, as demonstrated in Closegate (http://wp.me/p2FU2Z-4I). Challenges may also be made to court by shareholders (or creditors) (Paragraph 74 of Schedule B1 of the Insolvency Act 1986) and courts can order the removal of administrators (Paragraph 88). Of course, these measures cost money and probably will not reverse any damage done.

The IP’s role: post-appointment

More to the point, I think, is the risk of conflict of interest for bank panel IPs generally. Tomlinson puts it this way: “The relationship between the bank, IPs, valuers and receivers should undergo careful analysis. The interdependency of these businesses on banks for generating custom establishes a natural loyalty and bend towards the interests of the banks. Often the bank recommends or instructs the IP directly, so their preferential treatment is critical to their clientele. Maintaining independence and a fair hand for all parties involved appears extremely difficult.”

We’ve seen this argument play out in the pre-pack arena: if directors are in control of appointing an IP as administrator, how can creditors be confident that the IP, on appointment, will be acting with due regard for their interests? Similarly, how can other stakeholders be confident that an IP will not be persuaded by this “natural loyalty” towards the bank controlling their appointment to act contrary to his duties as administrator? In a number of cases, I would suggest that it is academic: if the bank is the only party with any real interest – or it shares that with the unsecured creditors looking to a prescribed part – then any bias towards the bank will achieve the same result as if there were none… although this may overlook the first objective of an administration, which is to rescue the company as a going concern.

Tomlinson is right: maintaining the IP’s balance here is extremely difficult, although I would be inclined to take receivers out of the equation, as there is no real change of “hat” for IPs in those cases. Until now, we have depended on the professionalism of the parties and the legal and regulatory processes to wield a stick towards any who stray, but I guess that we live in an age when that is no longer seen as adequate.

Tomlinson highlights another risk of conflict of interest in relation to selling assets: “RBS is in a particularly precarious position given its West Registrar commercial portfolio under which it can make huge profits from the cheap purchase of assets from ‘distressed’ businesses… Others have stated that they believe their property was purposefully undervalued in order for the business to be distressed, enabling West Registrar to buy assets at a discount price.” This is a new one on me and I’m not aware of any other bank being in a similarly “precarious position”. Although I would have thought that there would be little criticism levelled against IPs selling to West Registrar where it represents the best deal – and Tomlinson does not appear to be suggesting transactions at an undervalue by administrators – as we all know, there is a risk of getting caught up in allegations of stitch-ups wherever there is a connected party sale, whether that involves a director’s purchase in a pre-pack or a party connected to an appointing creditor.

The Repercussions

The most IP-relevant solution suggested by Tomlinson is:

“It is also important that the wider potential conflicts of interest between the banks, IBRs, valuers, administrators, insolvency practitioners and receivers are given careful consideration. Where these conflicts occur, it does so at the expense of the business. If collusion did not happen between these parties and their relationships were more transparent, then better fairness between the parties could be ensured. This requires further investigation and consideration by the Government to ensure that the law is being upheld and these conflicts do not impact on the businesses ability to operate.”

As mentioned previously, the Insolvency Code of Ethics covers specifically the scenario of an IP carrying out an IBR then contemplating an insolvency appointment. Personally, I think it does this rather well – it addresses not only how to view an objection by the directors, but also how the IP has acted prior to the insolvency appointment, how he has interacted with the company, whether he made clear who his client was etc. However, there is no ultimate ban on the IP accepting the appointment; as with most ethical issues, it is left to the IP to consider whether the threats can be managed or they render his appointment inappropriate. I would not be surprised if, down the line, there were a call for there to be a ban that an IBR IP could not be appointed as administrator. If it were a legislative measure, we could have fun and games defining such items as what constitutes IBR work and for how long a subsequent appointment would be prohibited, but it could be done.

But would it have the desired effect? It would certainly increase the costs of some administrations, as the built-up knowledge and in many respects positive relationships of the IBR IP would be lost to the administrator. It might also have limited effect, as the “natural loyalty” could persist in any IP who has the prospect of more than one bank appointment, be it a case on which he carried out an IBR or a case on which he’d had no prior connection. I believe it is a natural tendency in all professions and trades to protect one’s clients and work sources and I do not believe it is something that can be avoided entirely.

As with pre-packs, I would prefer the solution to involve those who feel mistreated doing something about it, calling to account anyone who acted contrary to their duties, ethical or otherwise. As with pre-packs, however, the devil is in establishing a clear understanding of what is and what is not acceptable behaviour, rather than simply trusting a gut feeling. Tomlinson has aired a few relevant issues, but also some irrelevant ones, I think, which unfortunately cloud the picture.

But is anyone listening? The FT reported yesterday (http://www.ft.com/cms/s/0/550c5360-5c31-11e3-931e-00144feabdc0.html#ixzz2mVVnGjFz) that George Osborne has washed his hands of the report, although Mr Cable seems more convinced that there are genuine problems. However, whatever the conclusions of the FCA’s skilled person’s review, I am sure that insolvency regulators already are contemplating their next step. Some will see the Tomlinson report as an opportunity to renew calls for the end to bank panels of IPs. With a revision of the Insolvency Code of Ethics moving up the agenda of the Joint Insolvency Committee, I can see the ethics of the move from pre-appointment work to a subsequent appointment again being the subject of debate.

(01/02/14 UPDATE: BBC4’s File on Four programme, “Design by Default?”, can be accessed at http://www.bbc.co.uk/iplayer/episode/b03q8z4f/File_on_4_Default_by_Design/)


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Two cases of marshalling; support for ETO dismissals; a flawed Chairman’s report fails to help a debtor escape her IVA; and a Company’s challenge of its Administrators’ appointment

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Although I have promised myself an article on the Scottish Bankruptcy Bill and I see that the Deregulation Bill has not gone smoothly through the House of Commons Committee, I should catch up with some recent decisions:

• Crystal Palace v Kavanagh: dismissals for an ETO reason are possible after all.
• Smith-Evans v Smailes: is an IVA a nullity, if a Chairman’s report on the requisite majority achieved is challenged long after the S262 period?
• Highbury v Zirfin: marshalling and the difference between equity of exoneration and the right of subrogation…
• Szepietowski v the NCA: … but sometimes marshalling is restricted by the terms of the deal.
• Closegate v McLean: the Company/directors were entitled to challenge the Administrators’ appointment.

Back to the future: dismissals can be for an ETO reason even where the objective remains a going concern sale

Crystal Palace FC Limited & Anor v Mrs L Kavanagh & Ors (13 November 2013) ([2013] EWCA Civ 1410)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/1410.html

This successful appeal has been the subject of some helpful articles already, such as that written by Dr James Bickford Smith for R3’s Recovery News. My summary of the history up to this Appeal Court decision can be found at: http://wp.me/p2FU2Z-2R.

The Court of Appeal stressed the case-sensitive natures of both this case and Spaceright Europe Limited v Baillavoine, which had formed the basis for the previous EAT’s decision to the contrary. Lord Justice Briggs highlighted the need, per Regulation 7 of the Transfer of Undertakings (Protection of Employment) Regulations 2006, to analyse the “sole or principal reason” for dismissals “so that the Employment Tribunal needs to be astute to detect cases where office holders of insolvent companies have attempted to dress up a dismissal as being for an ETO reason, where in truth it has not been” (paragraph 26).

This Court agreed with the original ET’s analysis in this case that, whilst the Administrator’s ultimate objective remained the sale of the Club (as, Briggs LJ pointed out, would be the case in almost all Para 3(1)(b) Administrations), he made the dismissals because he needed to reduce the wage bill in order to continue running the business, i.e. they were for an ETO reason. This was contrasted with the facts of the Spaceright case, which had decided that the sole or principal reason behind the dismissal of the CEO was to make the business more attractive to a purchaser, illustrating how dismissals could fall outside of an ETO reason.

(UPDATE 15/06/14: On 14 May 2014, the Supreme Court refused permission to appeal this decision.)

If a Chairman’s report states that the IVA was approved and no S262 challenge is raised, does the IVA exist if the requisite majority had not been achieved?

Smith-Evans v Smailes (29 July 2013) ([2013] EWHC 3199 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3199.html

I make no apologies for the length of this summary or the numerous quotes: I believe that this is a somewhat surprising and material outcome so that I felt it was wise to draw heavily from the judgment.

In a nutshell, the debtor appealed against her bankruptcy order, which was made as a consequence of a breached IVA. The debtor claimed that the IVA was a nullity, as the requisite majority had not voted in favour at the S257 meeting.

Two creditors, RBS and HSBC (who had voted via TiX), had voted to restrict the IVA’s duration to 2 years, but, although immediately after the meeting the Chairman had written to TiX “pointing out the divergences from the instructions received” (paragraph 15), in the absence of a reply the Chairman reported that the IVA was approved and its duration was 3 years. HH Judge Purle QC stated that “whilst the chairman of the meeting did not initially, in May 2008, have authority to cast the RBS and HSBC votes in the way subsequently indicated, RBS and HSBC have unequivocally ratified his actions by voting (albeit in the minority) for a determination upon the footing that the IVA was in place” (paragraph 17), referring to the creditors’ voting years’ later on the subject of how the Supervisor should react to the debtor’s breach of the IVA terms.

Purle HHJ commented on the application of the decision in Re Plummer, in which Registrar Baister described his view of the differences between a material irregularity and something that invalidates an IVA approval. Registrar Baister had provided as an example a case where the chairman had wrongly calculated the votes and reported approval when the requisite majority had not been achieved. He had said that this goes further than a material irregularity; in reality, there never was approval. “It cannot be that in those circumstances section 262(8) could be said to overcome the problem by making real that which simply never was. The reason it cannot is because of its wording, which presupposes approval: it is ‘an approval given at a creditors’ meeting’ which ‘is not invalidated’. Non-approval cannot, however, be transformed into approval” (paragraph 28).

However, Purle HHJ held a different view. He reflected on another example in which a requisite majority is obtained on a vote marked objected to: “But let us suppose that no creditor in fact challenges the result. We are left with an IVA which has been approved on a disputed debt, which turns out later never to have been owed. Then, just as much in that case as in the example given by Registrar Baister, it can be said that there never was, as a matter of fact and law, the requisite majority. It would follow that the debtor could, when in breach of the IVA, let us say two years later, turn round and say: ‘There was no IVA and I cannot be made bankrupt for being in breach of its terms’, thus making the time-limited right of challenge or appeal redundant. It seems to me that that is such a startling result that it cannot possibly have been intended by Parliament and the draftsman of the Rules. For my part, I would not and do not construe this part of the 1986 Act or the rules as giving rise to those consequences. I would on the contrary construe section 262(8) and rule 5.22(6) as precluding that result” (paragraph 29).

Consequently, in relation to decisions made at, or in relation to, a S257 meeting, Purle HHJ concluded that “If those decisions are not challenged, in my judgment, they should stand once the relevant report has been made. The time limits, which are tight, set out in both the Act and the Rules, should be applied and not subverted by a collateral attack months or even years down the line” (paragraph 32). In this case, he therefore decided that “as there was no challenge under section 262, the matter cannot be taken now by the debtor. Likewise, there was no challenge (assuming there could have been one) under paragraph 5.22, under which the court’s power is expressly exercisable only if the circumstances giving rise to the appeal are such as to give rise to unfair prejudice or material irregularity. There is no unfair prejudice in holding the debtor to an IVA which he promoted nor was the irregularity material in light of the affected creditors’ knowledge and subsequent ratification” (paragraph 36).

Marshalling and the difference between equity of exoneration and the right of subrogation

Highbury Pension Fund Management Company & Anor v Zirfin Investments Management Limited & Ors (3 October 2013) ([2013] EWCA Civ 1283)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/1283.html

I summarised the first instance decision at http://wp.me/p2FU2Z-23. The key conclusion of that decision – that Highbury had a right to marshal securities, even though there was no common debtor (the claims attached to properties of the debtor and the guarantors) – was not the subject of the appeal. Highbury sought to appeal Norris J’s conclusion that its rights over the properties charged to Barclays could not be exercised until Barclays had been paid in full, because Highbury’s rights were restricted so by the wording of the guarantee.

The Appeal judges agreed that the guarantee did not restrict the application of the principle of marshalling. Lord Justice Lewison explained the difference between (i) Zirfin’s right to become subrogated to Barclays’ rights by reason of the guarantee but only after Barclays had been paid in full and (ii) the right of equity of exoneration existing between Zirfin and the Affiliates (the primary debtor): “Where two persons are liable to a creditor for the same debt, but as between themselves one of them is primarily liable and the other is only secondarily liable, the debtor with the secondary liability is entitled to be exonerated from liability by the primary debtor. This equity, unlike the remedy of subrogation, is not dependent on actual payment by the secondary debtor. As soon as the liability is crystallised he is entitled to go to a court” (paragraph 19).

Consequently, it was decided that, on the application of the principle of marshalling, Highbury was entitled to realise the securities notwithstanding that Barclays had not been paid in full, Barclays still retaining priority to repayment over Highbury.

Marshalling again: it can come down to the wording

Szepietowski v The National Crime Agency (formerly SOCA) (23 October 2013) ([2013] UKSC 65)

http://www.bailii.org/uk/cases/UKSC/2013/65.html

In 2005, the Assets Recovery Agency (which later became SOCA and, later still, the NCA) pursued assets acquired by Mr Szepietowski and this resulted in a settlement involving the granting of a second charge in favour of SOCA over a property, which was charged also to RBS, entitling SOCA to recover up to £1.24m from the proceeds of sale of the property. In 2009, the property was sold but, after RBS’ debt was paid off, SOCA received only £1,324. Consequently, SOCA sought to invoke the right to marshal against another property charged to RBS (“Ashford House”). The lower courts had held that SOCA’s marshalling claim was well-founded and Mrs Szepietowski appealed to the Supreme Court.

Although the Supreme Court unanimously allowed the appeal, the justices’ reasons for doing so fell roughly into two camps.

Three justices held that marshalling failed partly because the charge did not create, or acknowledge the existence of, any debt from Mrs Szepietowski to SOCA; it simply provided that she was bound to pay SOCA an amount up to £1.24m from the sale proceeds. Lord Neuberger concluded that “where the second mortgage does not secure a debt owing from the mortgagor to the second mortgagee, the right to marshal should not normally exist once the common property is sold by the first mortgagee and the proceeds of sale distributed, because there would be no surviving debt owing from the mortgagor to the second mortgagee. In such a case, equity should proceed on the basis that the second mortgagee normally takes the risk that the first mortgagee will realise his debt through the sale of the common property rather than the sale of the other property” (paragraph 56). He could not conceive of a case, but did not rule out its existence in exceptional circumstances, in which marshalling effectively could create a secured debt, where in the absence of marshalling no debt existed at all.

However, the two other justices did not consider that the existence or non-existence of a personal liability was the key to deciding whether marshalling was possible. Lord Carnwath agreed that the appeal should be allowed because the terms of the settlement entitled SOCA to recover a sum from property with the specific exclusion of Ashford House and the wording impliedly excluded recourse to any source for payment other than those identified. “If SOCA had wished to include Ashford House as potentially recoverable property, they should have done so specifically, rather than hope to bring it in later by an equitable backdoor” (paragraph 91).

Company/directors were entitled to challenge Administrators’ appointment (but failed in any event)

Closegate Hotel Development (Durham) Limited & Anor v McLean & Ors (25 October 2013) ([2013] EWHC 3237 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3237.html

The companies challenged the validity of the Administrators’ appointments by a QFCH on the basis that the floating charge was not enforceable.

Firstly, the companies had to overcome the hurdle as to whether they had authority to make the application, given that Paragraph 64 of Schedule B1 states that, without the Administrators’ consent, a company may not exercise management power – defined as a power that interferes with the exercise of the Administrators’ powers. Richard Snowden QC did not see this as a difficulty for the companies: “I do not think that paragraph 64 is intended to catch a power on the part of the directors to cause the company to make an application challenging the logically prior question of whether the administrators have any powers to exercise at all” (paragraph 6).

The facts of this case involved lengthy exchanges between the companies and the bank in relation to the companies’ complaints against the bank subject to litigation and proposals to settle the debt due to the bank, which ended with the bank’s appointment of Administrators. It was the companies’ case that “the Companies reasonably understood the communications from the Bank and the course of conduct between them to be a representation that neither side should take any action whilst negotiations between them were continuing” (paragraph 44) and thus the bank had been estopped from taking the action of appointing Administrators. Mr Snowden QC decided on the evidence presented that the companies stood no real prospect of establishing that the bank’s statements or conduct amounted to a clear and unequivocal representation that the bank would not exercise its rights to take enforcement action and therefore the bank was not estopped from appointing Administrators.


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It’s all happening in Scotland!

2314 Eungella

Over the past few months, I have accumulated a pile of papers annotated as if they belonged in a 1970s stellar observatory, although most of my Wow!s have arisen from a feeling of horrific incredulity.

I apologise in advance if I have got any details wrong; this post is nothing more than an English-person’s reaction to the Scottish Government’s proposed changes to the personal insolvency landscape across the border. I’m sure that Scottish IPs are well-acquainted with the changes, but some Englanders might like to scan this; it might make you feel more grateful for the current state of affairs down here!

Here are the key new pieces of legislation affecting the Scottish personal insolvency regimes:

• The Debt Arrangement Scheme (Scotland) Amendment Regulations 2013, which came into force on 2 July 2013.
• The Protected Trust Deed (Scotland) Regulations 2013, which are due to come into force on 28 November 2013. The draft Regulations can be found at: http://www.legislation.gov.uk/sdsi/2013/9780111021361/contents.
• The Bankruptcy and Debt Advice (Scotland) Bill, which is working its way through Scottish Parliament, Stage 1 oral evidence sessions having concluded on 6 November 2013.

In this post, I deal with the first two items. In a later post, I hope to cover the Bill.

Debt Arrangement Scheme (“DAS”)

The Chief Executive of the Accountant in Bankruptcy (“AiB”), Rosemary Winter-Scott, is quoted to have said: “DAS is the only Scottish Government-backed scheme that offers a way for people who are in debt to regain control of their finances again” (http://www.scottishfinancialnews.com/index.asp?cat=NEWS&Type=&newsID=7331#7331).

That article also publicises the amount of money that has been paid via DAS: £13m in six months. Whilst that is pretty impressive, I am not entirely convinced that this is evidence enough that DAS is the success that the Scottish Government (“SG”) and AiB would have us believe. How many debtors have exited DAS debt-free? May we have some figures on that, AiB, please? If DAS is simply a statutory debt management plan (“DMP”) with no end date, is it really the solution for all the thousands of debtors that are being encouraged down that route?

The AiB’s 2012 DAS review stated that the average duration of all Debt Payment Plans (“DPPs”) is 7 years 2 months (http://www.aib.gov.uk/sites/default/files/publications/DAS%20Review%202012%20-%20published%203%20December%202012.pdf), although I noted that this is the original scheduled duration and the review shows a few DPPs scheduled to last over 20 years, even the odd one or two over 30 years! Given that this statutory process does not have the flexibility of a non-statutory DMP that might be used as a temporary stop gap, I do wonder how this can be considered the “fair and reasonable” solution.

In my mind, the DAS Regulations 2013 at least have provided a light at the end of the tunnel for some debtors. Before the Regulations, the debts had to be paid in full (less up to 10% in fees). The Regulations introduced an element of composition (actually, “re-introduced”, as it had been an original provision back in 2004): where a debtor has been making payments for 12 years (excluding any payment breaks) and has repaid at least 70% of the total debt outstanding when the DPP was approved, the debtor would be eligible to make an offer of composition to creditors. Of course, creditors don’t have to accept – and the offer takes effect only with the acceptance or silence of every creditor – but if a debtor has been paying for 12 years, one would hope that they’d show some mercy..?

Much has been said also of the Regulations’ bringing-forward of the point when interest and charges on debts is frozen: to the date at which the DPP is applied for by the debtor, “potentially saving people in debt up to six weeks interest” (http://www.aib.gov.uk/news/releases/2013/07/new-regulations-place-debt-arrangement-scheme-das). Some commentators had hoped that the Regulations could have been amended so that it occurred earlier than that, but I was interested to read what might have been the real motivation behind the change: the DAS newsletter 3 points out that the change should avoid the “high volume of applications for variations to correct the level of debt included in a DPP where interest and charges have accumulated over the application process” (http://www.dasscotland.gov.uk/news/debt-arrangement-scheme-newsletter-edition-3), so maybe it hasn’t been all about debtors…

Still, I shouldn’t be surly. However, it’s not all good news for debtors: the DAS newsletter 4 reported that some banks have reacted to this change by restricting or suspending debtors’ access to bank accounts on receipt of a DPP proposal (http://www.dasscotland.gov.uk/debt-arrangement-scheme-newsletter-edition-4). Now who’s being surly..?!

Alan McIntosh brought attention to the numbers of DPPs that have been revoked (http://www.firmmagazine.com/scotlands-bankrupt-debt-strategy/) and the numbers just keep going up: the number of approved applications to revoke in Q1 2013/14 was up 31.5% on the previous quarter and up 93.8% on the quarter of the previous year. I guess it’s not surprising that the figures are increasing, given the current squeeze on consumers and that the numbers agreeing DPPs are generally also on the rise. I just think it’s a bit rich that the Enterprise Minister, Fergus Ewing, continually hails DAS as a success in view of the fact that more and more people are accessing it, but there seems to be no attention given to the people that are (or are not) leaving it.

Protected Trust Deeds (“PTDs”)

Proposed changes to the PTD process have been rumbling on for a number of years with the SG’s express motivation being to “drive up the performance of PTDs”. Although it has sought to do this by tackling “the trend of rising costs associated with delivering PTDs alongside disappointing dividend returns” (http://www.aib.gov.uk/protected-trust-deed-update), it seems intent on achieving this by dealing with what it seems to see as rip-off costs, but it does nothing tangible to help address the real costs. What I mean is: the SG seems to think that, by relegating pre-TD costs to the status of unsecured claims, outlawing fees on a time costs basis, and layering yet more requirements on the Trustee, the “trend of rising costs” will be reversed. Aren’t we all facing a trend of rising costs in every aspect of our lives? The AiB experiences rising costs – of course, the statutory costs on PTDs continue to increase – but somehow IPs are supposed to have a magic cure for this problem..?

Having said that, I’m not completely blind to the effects of the market in debtors, the anecdotal stories of which suggest a crazy world of surely unviable sums being sought. I do wonder if the situation isn’t so grim in England because creditors have exerted more pressure on fees in IVAs. However, personally I don’t see a statutory bar on pre-TD costs as a panacea. After all, that only controls the monies in the insolvency estate.

Fergus Ewing does not see PTDs “as a sustainable debt relief solution for either creditors or debtors if more than half of all the receipts are spent on costs”. Unfortunately, the Chinese whispers have led to this message becoming even more extreme in front of the Scottish Parliament’s Economy, Energy and Tourism Committee: “A key issue with PTDs in recent years has been that, in some cases, they offer insufficient returns to creditors because most of the value in the debtor’s estate is used to pay the trustee’s fees” (http://www.scottish.parliament.uk/parliamentarybusiness/CurrentCommittees/68799.aspx). Please, will someone start talking some sense?! Firstly, the AiB’s statistics focus on total costs, not just Trustees’ fees. And we’re not talking mainly about DAS candidates here, are we? How many bankruptcies return more than half the pot to creditors? Does the lack of such a dividend make them unfair?

I also find some of the fantastically biased AiB releases staggering. They repeatedly quote ABCUL, which refers to Trustees having “so often pocketed” the vast bulk of realisations and welcomes the “new measures to clamp down on abuses of protected trust deeds” (http://www.aib.gov.uk/news/releases/2013/09/changes-protected-trust-deeds). They absurdly misrepresent statistics, such as quoting Fergus Ewing in the same release: “the costs of protected trust deeds… are increasing by more than 25 per cent. The latest figures show this is happening in up to 84 per cent of cases”, when the figures show that this is happening in only 25% of cases! (The 84% comes from one firm’s figures alone. You could say it is “up to 100% of cases”, if you’d picked the right cases!) Thank goodness that IPs are strong professionals that will not let this kind of criticism demoralise them into stopping doing a decent job. Sometimes cases that appear straightforward on day one just get complex or assets appear – such as PPI refunds – that weren’t originally envisaged and the effort just needs to be expended, by IPs, agents and solicitors… to improve returns! Or would Mr Ewing prefer Trustees to walk away from tricky or new assets for fear that their costs might increase?

Right, I must start getting objective about this. Otherwise, I’ll never get to the end of this article!

Some of the PTD Regulation changes detailed in the AiB releases are:

• A trust deed will be ineligible to be protected if the debtor’s total debts can be repaid in full within a 48 month period (i.e. from the full amount of the debtor’s surplus income, as calculated by means of the Common Financial Statement).
• “Pre-trust deed fees, such as fact-finding fees,” will be excluded “so that these can no longer be charged separately and will be treated the same as other debts”. The AiB release refers to “fees”, but I think this should be “outlays”, shouldn’t it; I don’t think that even the AiB is expecting an IP to prepare a Trust Deed free of charge, is she?!
• Trustees’ fees will be charged on the basis of a single fixed upfront fee and a percentage of funds ingathered. The fixed fee may be increased either with a majority in value of creditors (that is, an absolute majority, not a majority of those voting) or by the AiB.

But other changes have not been given top-billing by the AiB:

• The acquirenda period for Trust Deeds will be 4 years. Considering that, at least for a couple of years until the Bill becomes Act, bankrupts will only have to pay for 3 years (, are discharged after 1 year and are only exposed to a 1 year acquirenda period), some are predicting that PTD candidates will choose Sequestration. Personally, I doubt this, as it did not happen in England when 5-year IVAs became commonplace, but then IVAs are seen as some debtors’ best efforts to do the right thing by their creditors; I’m not sure that PTDs have the same image.
• Debtors’ contributions will be determined using the Money Advice Trust’s Common Financial Statement.
• Irrespective of creditors’ wishes regarding the Trust Deed achieving protected status, the AiB will have the power to refuse to register the Trust Deed, if she is not satisfied that the debtor’s expenditures and contributions are at appropriate levels.
• The Regulations fix the equity of heritable property as at the date that the Trust Deed is granted, but they raise all kinds of questions about how equity realisation or contributions in lieu of equity are to work.
• The AiB will have power to give directions, whether on the request of the Trustee, debtor, or creditors, or on the AiB’s own initiative. The Scottish Parliament Committee report mentioned above notes ICAS’ concerns that “the AiB is not best placed to take decisions in place of and over-ruling highly experienced and qualified IPs”, but all that it records the Minister saying in response is that “the AiB was undergoing significant restructuring to ensure that certain staff who would be involved in such decisions and appeals would be ring-fenced from those taking the original decisions” – that doesn’t deal with the concerns!

The (brief) Regulatory Impact Assessment suggests that, whilst the AiB will incur costs of £1.3m over the first 5 years, which will be recovered through a statutory fee, the Regulations are not expected to impact on IPs’ costs, as the Regulations are not expected to restrict the level of IPs’ fees, just revisit the basis on which they are calculated. Does the SG truly believe that the Regulations will result in no additional expense on IPs?!

For more details on the issues with the Regulations, I’d recommend ICAS’ written evidence, accessible at: http://icas.org.uk/Current_Insolvency_Issues.aspx (thank you, ICAS, for making available such an enlightening summary).

Phew! Right – those are the imminent changes. The Bill proposes some more incredible changes and I know that ICAS and others are expending a lot of effort in an attempt to refine its contents. You have my sympathy!


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Setting the Scene for Game and other decisions

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I have a nagging suspicion that I’ve been keeping up with reading court judgments in an effort to postpone the job of looking at the draft Rules. I know that I’ll have to look at them sometime, but for now here’s my usual round-up:

• Setting the scene (1): the landlords’ appeal in Game that threatens the Goldacre and Luminar decisions
• Setting the scene (2): the SoS’ appeal of the redundancy consultation requirements in Woolworths and Ethel Austin
• Subtle variation in definitions between Scottish and English statute makes all the difference for a bankrupt living alone
• Limitation period not a barrier to breach of fiduciary duty claim
• Shareholder “acting unreasonably” by not pursuing alternative remedy to deadlock

One to look out for: the landlords’ appeal in the Game Group of Companies

Jervis v Pillar Denton Limited (Game Station) & Ors ([2013] EWHC 2171 (Ch)) (1 July 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2171.html

Most of you will already be keeping an eye open, but I thought I’d cover it here, as BAILII now has published the first instance decision that, in light of the outcomes of Goldacre and Luminar, was pretty-much a foregone conclusion and to which all parties seemed to accept there would be an appeal.

To set the scene: Administrators were appointed on Game Stores Group Limited on 26 March 2012, the day after quarterly rents became due for payment in advance. A licence to occupy a number of properties was granted to Game Retail Limited when the business was sold to it on 1 April 2012. One further property was never occupied by Game Retail Limited, but was effectively abandoned by the Administrators when they removed goods from the property over the first five days of the Administration.

Of course, under Goldacre and Luminar, the rent that fell due prior to Administration is not payable as an expense of the Administration, notwithstanding any use of the property by the Administrators after appointment. In addition, any rents that fall due during the Administration are payable in full as expenses of the Administration even if the Administrators stop using the properties before the end of the relevant quarter. Nicholas Lavender QC made an order to this effect.

The landlords have been granted permission to appeal (and Game Retail Limited to cross-appeal), the key proposed ground being that the Lundy Granite principle and the decision in Re Toshoku Finance UK Plc should result in just and equitable treatment of the rent relating to the period when the property is being used beneficially for the purposes of the Administration as ranking as an expense of the Administration.

The case tracker suggests that the appeal will be heard in February 2014.

(UPDATE: The Game appeal judgment was released on 24 February 2014 (http://www.bailii.org/ew/cases/EWCA/Civ/2014/180.html), the general conclusion being that post-appointment rent (accruing on a daily basis) constitutes an Administration or Liquidation expense, if the property is occupied for the benefit of the Administration or Liquidation. Whilst some of the press coverage suggested that this was a victory for landlords over nasty office-holders, I think that the general mood amongst IPs is that this is a return to a just and sensible approach with which most are comfortable (although a Supreme Court appeal remains a possibility). For a summary of the appeal and its consequences, I would recommend: http://lexisweb.co.uk/blog/randi/landlords-can-rejoice-following-the-game-administration-decision/.)

Another one to look out for: the Secretary of State’s appeal in the Woolworths/Ethel Austin Employment Tribunals

USDAW & Anor v Unite the Union, WW Realisations 1 Limited and the Secretary of State for Business, Innovation & Skills ([2013] UKEAT 0548/12) (10 September 2013)

http://www.bailii.org/uk/cases/UKEAT/2013/0548_12_1009.html

This one is a lot less critical for IPs, but has the potential to reverse a fairly ground-breaking decision nevertheless.

In an earlier post (http://wp.me/p2FU2Z-3I), I reported on the original Tribunal of 30 May 2013, which decided that S188 of TULRCA (relating to the consultation requirements where redundancies are expected to affect “20 or more employees at one establishment”) was more restrictive than the EC Directive and that the consultation requirements should apply if 20 or more redundancies in total were planned, irrespective of the employees’ locations. These conclusions meant that some 4,400 former employees of Woolworths and Ethel Austin Limited (in two originally unconnected Tribunal cases) became entitled to 60 or 90 days’ pay… which, of course, fell at BIS’ door.

BAILII has now published the outcome of the Secretary of State’s application for permission to appeal, which was unique inasmuch as the SoS had declined expressly the court’s invitation to attend the previous hearing. However, HH Judge McMullen QC recognised that the previous judgment “made a substantial change in the outlook to this legislation, and it is in the interests of all that this issue be clarified as soon as possible” (paragraph 13). He also had no problem with the technicality that in fact the SoS was not a party at first instance to the Ethel Austin appeal, but only to the Woolworths one. He also imposed a stay on the order that arose out of the earlier appeal pending the SoS’ appeal.

A key issue for the appeal will be the outcome of the CJEU’s considerations of the case of Lyttle v Bluebird UK Bidco 2 Limited (C-182/13 NIIT, http://www.bailii.org/nie/cases/NIIT/2013/555_12IT.html), a February 2013 Northern Ireland Tribunal case, which covers the same ground.

(UPDATE (09/03/14): On 22 January 2014 (http://www.bailii.org/ew/cases/EWCA/Civ/2014/142.html), the Court of Appeal agreed to make a reference so as to give the CJEU an opportunity to join these cases to the Lyttle case with a view to producing a single judgment. Lord Justice Maurice Kay felt that this was appropriate, as there are no employee representations in the Lyttle case and it could be that a judgment on Lyttle alone might not resolve the issues arising in these cases in any event.)

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

Different Scottish and English treatments of bankrupt’s home do not lead to unfairness

McKinnon v Graham ([2013] EWHC 2870 (Ch)) (20 September 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2870.html

This case nicely demonstrates a subtle difference between the English and Scottish laws relating to a bankrupt’s home: both provide that the property revests in the debtor after three years, but the provisions apply in different circumstances.

S40(4)(a) of the Bankruptcy (Scotland) Act 1985 defines “family home” as: “any property in which at the relevant date the debtor had (whether alone or in common with any other person) a right or interest being property which was occupied at that date as a residence by the debtor and his spouse or civil partner or the debtor’s spouse or former spouse or civil partner (in any case with or without a child of the family) or by the debtor with the child of the family”, but the corresponding S283A of the Insolvency Act 1986 applies “where property comprised in the bankrupt’s estate consists of an interest in a dwelling-house which at the date of the bankruptcy was the sole or principal residence of the bankrupt, the bankrupt’s spouse or civil partner or a former spouse or civil partner of the bankrupt”. Consider the position of a property occupied only by the debtor: under English law the property would revest after three years, but under Scottish law it would not.

This case centred around such a property to which the Trustee of Mr Graham’s sequestration had been granted an order for possession. Mr Graham appealed, arguing that the judge had been wrong to apply Scottish law, which must give rise to situations that are manifestly unfair and thus offends public policy. HHJ Behrens endorsed the original decision, satisfied that the judge had correctly concluded that this was not an exceptional case requiring departure from the principle of modified universalism; he had been correct to apply Scottish law. “The fact that Scottish law chose to do this by reference to ‘the family home’ rather than the English law reference to ‘the sole or principal residence of the bankrupt, the bankrupt’s spouse or civil partner or a former spouse or civil partner of the bankrupt’ does not seem to me to come within a measurable distance of offending public policy or a fundamental principle of English insolvency law. As I have indicated the only difference between the 2 sections are the rights afforded to the bankrupt where he alone occupies the family home. Both jurisdictions provide protection where there is occupation by a spouse, civil partner or children. To my mind this difference is not fundamental to English insolvency law, nor does it offend public policy or create manifest unfairness” (paragraph 26).

Limitation period not applicable in case of director dishonesty

Vivendi SA & Anor v Richards & Bloch ([2013] EWHC 3006 (Ch)) (9 October 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3006.html

Claims for breach of fiduciary duty succeeded against a director and shadow director in a fairly complex, but not extraordinary, case. However, personally what I learned from it was that the usual six-year limitation period did not apply as Mr Justice Newey had concluded that the director and shadow director had engaged in dishonest conduct. The payments in question were made between March 2004 and February 2005 and the company went into liquidation in the middle of 2005, but proceedings were not issued until May 2011.

Winding up order not the only solution for “deadlock” company

Maresca v Brookfield Development and Construction Limited & Anor ([2013] EWHC 3151 (Ch)) (16 October 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3151.html

Mrs Maresca sought the winding up of Brookfield Development and Construction Limited (“BDC”) on the ground that its affairs had been conducted in a way that was unfairly prejudicial to her or alternatively on the just and equitable ground.

The personal relationship between Mrs Maresca and the other shareholder/director had broken down and Mr Justice Norris did consider “that on Mrs Maresca’s contributories’ petition she is entitled to relief by the winding up of the company and (in the absence of any other remedy) it would be just and equitable that the company should be wound up. However I consider that there is another remedy available to her and that she would be acting unreasonably in seeking to have BDC wound up instead of pursuing that other remedy: section 125(2) Insolvency Act 1986” (paragraph 40). With aplomb, Norris J then proceeded to quantify Mrs Maresca’s claim as a creditor based on the facts before him, leading to an order that, if BDC paid her £10,000 by 1 December 2013, then she is bound to transfer her share in BDC to the other shareholder and BDC is not to be wound up.

Norris J ended his judgment with a lesson: “I would readily acknowledge that there is a degree of approximation in this. But I have seen my task as providing a just outcome according to law by the application of resources appropriate to the dispute. Further refinement would come at a cost that would be ruinous to the parties (who have probably devoted to this case more than it is worth). Those who present petitions of this sort for companies like BDC must understand that that is likely to be the approach adopted: and would be wise to adopt the same approach in settlement negotiations” (paragraph 51).


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SIP16: A Clean Slate

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Will this new SIP16 quench the fires burning for pre-packagers? Will it improve the transparency of, and confidence in, pre-packs, which was the stated aim three Secretaries of State ago when this SIP16 revision process began? Who knows, but woe betide any IP who turns out a non-compliant SIP16 disclosure after 1 November!

So what changes do firms need to make over the next four weeks?

Diaries

The new SIP16 timescale is half that of Dear IP 42: the explanation should be provided with the first notification to creditors and in any event within seven calendar days of the transaction (paragraph 11).

The “Information Disclosure Requirements”

Now that there are 25 disclosure points (as compared with the previous 17), I think there is no practical way of ensuring compliance unless templates stick rigidly to the list in the SIP; personally, I think that’s a shame, but there it is. To avoid any possible confusion, perhaps it is best to create a standalone document, which can form an appendix/attachment/enclosure to the letter to creditors and to the administrator’s proposals, as SIP16 now requires that the statement is provided in proposals (although I think most IPs are doing this already).

You may find that some disclosure points that look familiar to those in the current SIP have acquired subtle differences – e.g. not only does “any connection between the purchaser and the directors, shareholders or secured creditors of the company” need to be disclosed under the new SIP, but “or their associates” has been added. Therefore, rather than trying to edit SIP16 lists appearing in existing templates, perhaps it’s as well to tear them up and start afresh. Also, the new SIP16 groups points under sub-headings, which creates a better structure for the disclosure than the previous SIP, so I think it would help coherence (and help anyone checking off compliance) to follow the SIP’s order.

The old SIP’s paragraph 8, which was so loved by the regulators as encapsulating what the SIP16 disclosure was all about, appears almost word-for-word as a key principle in this new SIP. Paragraph 4 states: “Creditors should be provided with a detailed explanation and justification of why a pre-packaged sale was undertaken, to demonstrate that the administrator has acted with due regard for their interests”. Although the Information Disclosure Requirements seem all-encompassing, could someone argue that ticking all those boxes does not meet the paragraph 4 requirement but that, in some cases, a bit more fleshing-out is required? Now that they have been beefed up, I don’t think there’s much risk that the Insolvency Service/RPBs would expect more than those Information Disclosure points, but it does suggest that a degree of sense-checking would be valuable: perhaps someone in the IP’s firm (but not involved in the case) could cold-read draft SIP16 disclosures and see whether they hang together well or whether they leave the reader with questions. I know that it’s a practice that some IP firms already conduct in the interests of transparency.

Other Required Disclosures

I think it would be easy to focus exclusively on the “Information Disclosure Requirements”, but that would be a mistake as there are other items nestled within the SIP that need to be taken care of.

• Paragraph 3 states: “An insolvency practitioner should differentiate clearly the roles that are associated with an administration that involves a pre-packaged sale (that is, the provision of advice to the company before any formal appointment and the functions and responsibilities of the administrator). The roles are to be explained to the directors and the creditors.” Although a similar paragraph appeared in the old SIP with regard to communicating with directors, it might be well to double-check that this, as well as the additional points in paragraph 5 of the SIP, are covered off in the engagement letter to directors. And note that, now, the distinction between the roles of the IP also needs to be explained to the creditors.

• Paragraph 9 introduces a new requirement. It states that the pre-pack explanation should include “a statement explaining the statutory purpose pursued and confirming that the sale price achieved was the best reasonably obtainable in all the circumstances”.

As in the old SIP16, if the disclosure points are not provided, the administrator should explain why. There are a couple of other required explanations for not providing things that are new:

• If the seven day timescale is not met for the SIP16 disclosure, the administrator should “provide a reasonable explanation for the delay” (paragraph 11). If this timescale cannot be met, the SIP requires the administrator to provide a reasonable explanation of the delay. Although the SIP does not state it, presumably you would provide this explanation within your SIP16 disclosure that you would send as swiftly as possible, albeit late.

• If the administrator has been unable to meet the requirement to seek the requisite approval of his proposals as soon as reasonably practicable after appointment, he should explain the reasons for the delay (paragraph 12), again presumably within the proposals whenever they are issued.

Internal Documents

The new SIP pretty-much repeats the old SIP’s requirements for some internal documents:

• Under the heading, Preparatory Work, paragraph 7 states: “An administrator should keep a detailed record of the reasoning behind the decision to undertake a pre-packaged sale” (this was in the old SIP’s introductory paragraphs).

• Under the heading, After Appointment, paragraph 8 states: “When considering the manner of disposal of the business or assets as administrator, an insolvency practitioner should be able to demonstrate that the duties of an administrator under the legislation have been considered”. Okay, it doesn’t mention explicitly internal documents, but it seems to me that contemporaneous file notes – justifying the manner of disposal as in the interests of creditors as a whole or, if the administrator does not believe that either of the first two administration objectives are achievable, that it does not unnecessarily harm the interests of the creditors as a whole (i.e. Paragraphs 3(2) and 3(4) of Schedule B1 of the Insolvency Act 1986) – should help demonstrate such consideration.

The Future

So is there anything in the old SIP that has been left out of the new SIP? No, nothing of any real consequence, although it did strike me how far we’ve come – that it was felt that the 2008 SIP16 needed to explain, with case precedent references, that administrators have the power to sell assets without the prior approval of the creditors or court. Have we moved on sufficiently from those days, do you think?

When you think of it, it wasn’t too long ago when we were faced with draft regulations requiring three days’ notice to creditors of any pre-pack; they were set to come into force on 1 October 2011. And I don’t think the other ideas, for example that all administrations involving pre-packs should exit via liquidation with a different IP/OR appointed liquidator, have completely disappeared.

However, I think that what this new SIP does is provide us with a clean slate. To some extent, we can file away the Insolvency Service’s statistics of non-compliance with the old SIP16 along with our copies of Dear IP 42 and we can concentrate on getting it right this time. However frustrated and irritated we might feel at having to meet these rigid disclosure requirements, I hope that IPs will strive hard to meet them. It may not silence the critics – let’s face it, it won’t – but it will give them one less stick with which to beat up the profession.


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Administration Order Applications All At Sea

1007 Borneo 186

I really do want to write about all the changes the Scottish Government is proposing to make to personal insolvency north of the border, but every time I think I’ve got a handle on it all, the AiB produces something more! So for now I’ll have to settle for some case summaries:

• Data Power Systems v Safehosts London: another administration application ends in a winding up order
• Information Governance v Popham: yet another failed administration application
• UK Coal Operations: “reasonable excuse” for avoiding administration proposals and meeting
• Times Newspapers v McNamara: access to bankruptcy file granted in the public interest

Another failed administration application results in a winding up order

Data Power Systems Limited & Ors v Safehosts (London) Limited (17 May 2013) ([2013] EWHC 2479 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2479.html

The library of precedents for courts rejecting applications for administration orders is building: we’ve have Integeral Limited (http://wp.me/p2FU2Z-3C) and UK Steelfixers Limited (http://wp.me/p2FU2Z-t) and here is a third. What makes this particularly interesting is that no one was asking for a winding up order, but that’s what the judge decided to do.

So where did it all go wrong this time..?

• HHJ Simon Barker QC stated that there was no explained basis for one of the applicant’s expressed belief that the company could be rescued as a going concern. He stated that the forecasts, which were prepared (or perhaps only submitted) by “an experienced insolvency practitioner”, were “merely numbers on a piece of paper and of no greater evidential value than that” (paragraph 17).
• The judge stated that the strategy proposed by the second set of proposed administrators (nominated by the major creditor, as an interested party to the application) was “with all due respect, no more than an outline of the sort of tasks that administrators would be focusing upon in any administration, it does not appear to be tailored in any way to the particular position of the company” (paragraph 18).
• The judge also saw no evidence “that the creditors are at all likely to benefit either from a rescue or from any dividend in the event that the company is placed in administration” (paragraph 20), but the evidence did include a statement that the asset realisations likely would be swallowed up by the costs of the administration.
• As there were no secured creditors and no evidenced preferential creditors (and even if there were any, they would be highly unlikely to receive a distribution), there was not even a prospect that the third administration objective might be achieved.
• Consequently, although the judge accepted that the threshold set by Paragraph 11(b) of Schedule B1 of the Insolvency Act 1986 “is not a high one; it is simply not crossed. The circumstances of this case serve as a reminder that insolvency alone is not sufficient to engage the jurisdiction for an administration order to be made, and further that the requirement of paragraph 11(b) of Schedule B1 is not a mere formality capable of being satisfied by assertion unsupported by cogent credible evidence sufficient to enable the Court to be satisfied that, if an administration order is made, the purpose of administration is reasonably likely to be achieved” (paragraph 23).

What was the outcome in this case? The judge had contemplated adjourning the application to enable further evidence to support the suggestion that the company could be rescued to be presented, but he noted that “the essence of an administration is speed and that is made clear at paragraph 4 of Schedule B1 – ‘The administrator of a company must perform his functions as quickly and efficiently as is reasonably practicable’. Delay should be completely contrary to the purpose of an administration” (paragraph 25). Although no one had been bidding for a winding-up order, that is what the judge decided to do: Paragraph 13(1)(e) empowered him to treat the application as a winding-up petition. He also contemplated ordering that the OR be appointed provisional liquidator, but he ended up appointing the major creditor’s nominated IPs.

The postscript to this case: the provisional liquidators generated asset realisations far in excess of that previously estimated, presumably with the prospect of a dividend to creditors, after all. Although that’s a positive outcome of course, it is a shame that the funds could not be distributed to creditors without incurring Insolvency Service fees as an expense of the winding-up.

Yet another failed administration application

Information Governance Limited v Popham (7 June 2013) ([2013] EWHC 2611 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2611.html

This case isn’t really in the same league as the other three rejected administration applications I’ve mentioned, but it highlights an interesting hiccup for the applicant.

The sole director issued an application for an administration order, but before it was heard, two shareholders made themselves directors, validly in the court’s opinion. These new directors opposed the application, taking the view that there was a possibility that the company could trade out of its difficulties. Although Mr Justice David Richards was satisfied that the court had jurisdiction to make the administration order on the basis that, on the face of it, the company could not pay its debts and that an administration purpose was achievable, he did “not think it right in all the circumstances to take that step” (paragraph 17) that day and dismissed the application.

Swift move to CVL equals “reasonable excuse” for avoiding administrators’ proposals and creditors’ meeting

Re. UK Coal Operations Limited & Ors (9 July 2013) ([2013] EWHC 2581 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2581.html

Is there any point in issuing proposals to creditors on a case whose rationale has already been explained to the court (for it to make an administration order in the first place) and when the company is to be moved swiftly to CVL? HH Judge Purle thinks not.

I should qualify that: in this case, the restructuring of four companies was to take place via administrations followed, within a few days, by Para 83 moves to CVL so that some onerous liabilities could be disclaimed. In Purle J’s view, these circumstances gave rise to a reasonable excuse for not complying with the statutory requirements to issue proposals and convene creditors’ meetings, “to avoid the pointless expense” (paragraph 5).

Whilst I’m sure that, in the context of these cases, unsecured creditors are not feeling hard done by – maybe they’re content not to have any information regarding the events leading to insolvency or the financial condition of the companies, which would have been provided in administrators’ proposals or in a S98 report in a standard CVL – but the principle just doesn’t sit well with me. Something else I find surprising is that the court seemingly granted the administration orders purely on the basis that the speed with which the process could be carried out, when compared with that to hold a S98 meeting, meant that the administrations were likely to achieve the objective of a better result for creditors as a whole than on winding up. It also seems to me that Purle J was too focussed on the long-stop timescale of proposals being 8 weeks “by which time the company will be in liquidation” (paragraph 4), whereas, as we all know, Para 49(5) requires the proposals to be issued “as soon as reasonably practicable after the company enters administration”. Having said that, I note from Companies House that the CVL was registered three days after the administration, which, given that the Form 2.34B has to reach Companies House first, does seem extremely fast work, so perhaps I should be applauding this case as demonstrating a novel and successful use of the administration process.

Journalist allowed access to bankruptcy file to explore legitimate public interest in bankruptcy tourism

Times Newspapers Limited v McNamara (13 August 2013) ([2103] EWHC B12 (Comm))

http://www.bailii.org/ew/cases/EWHC/Comm/2013/B12.html

The Times sought access to the court file on the bankruptcy of Mr McNamara, an Irish property developer, on the basis that the circumstances surrounding his and his companies’ amassing of debts of some €1.5 billion and his justification for his COMI being in England were matters of public interest.

Mr Registrar Baister noted that there have been no cases dealing with the permission of someone who was not party to the insolvency proceedings to have access to the court file, as provided in Rule 7.31A(6), introduced to the Insolvency Rules 1986 in 2010. However, he drew up some principles based on the leading authority on access to court documents (R. (on the application of Guardian News and Media Limited) v City of Westminster Magistrate’s Court, [2012] EWCA Civ 420), which he felt applied to proceedings of all kinds, including insolvency proceedings and which he hoped would assist courts consider requests for permission under R7.31A(6) in future:

“(a) that the administration of justice should be open, which includes openness to journalistic scrutiny;
(b) that such openness extends not only to documents read in court but also to documents put before the judge and thus forming part of the decision-making process in proceedings;
(c) that openness should be the default position of a court confronted with an application such as this;
(d) however, there may be countervailing reasons which may constitute grounds for refusing access;
(e) the court will thus in each case need to carry out a fact-specific exercise to balance the competing considerations” (paragraph 23).

In the circumstances of this case, Registrar Baister stated: “It is entirely appropriate for the press to seek to delve into the mind of the registrar (to the extent that it can) and to comment on what the court has done or appears to have done. The bankruptcy tourism question remains very much alive and is a legitimate matter of public interest in this country, in Ireland, in Germany and in Europe generally” (paragraph 36). Consequently, he granted the Times access to the court file of McNamara’s bankruptcy.


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What will “Transparency & Trust” mean for IPs?

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My thanks to Mr Cable for re-appearing in the headlines and making this two month old consultation suddenly seem current again. The proposal in his “Transparency & Trust” paper that got everyone talking was the attempt to curb future excesses of the banks and demand by legislation that their directors take care to be socially responsible, but is there anything in the paper for IPs..?

The consultation can be found at https://www.gov.uk/government/consultations/company-ownership-transparency-and-trust-discussion-paper, although regrettably it closed to responses yesterday. Well, it’s been a busy summer!

Identifying Beneficial Owners

I’ve been doing a bit of work recently on compliance with the Money Laundering Regs and it has reminded me of the rigmarole around identifying, and verifying the identities of, an insolvent company’s beneficial owners. Identifying the >25% shareholders is the easy bit (although, of course, it gets a bit more complicated where the shareholders are corporate entities), but how, on day minus-one of an insolvency appointment, are you supposed to identify other beneficial owners, those who “otherwise exercise control over the management of the company”? People don’t often stand up and introduce themselves as shadow directors. The consultation describes other complications to identifying the beneficial owners, such as where a number of shareholders have agreed to act in concert.

BIS’ suggested solution: let’s make it a requirement for companies to disclose their beneficial owners. The consultation considers the details of such a system: when companies would be required to make such disclosure; to which companies it would apply; what about trusts; what powers would need to be granted and to whom to ensure compliance; whether such a registry would be publicly available or restricted only to law enforcement and tax authorities… but what I cannot help asking myself is: if a company is being misused for illegal purposes by some hidden beneficial owner, would the company really have complied with the legislation and disclosed him/her? Or is it more likely that such requirements would just put more burden on law-abiding companies in ensuring that their registers of beneficial owners, in which no one is really interested (the information only really has any value if money laundering has taken place, doesn’t it?), are kept up-to-date?

Although, personally, I cannot see such a system doing anything much to help prevent illegal activity, at least if IPs are able to see information on companies’ beneficial owners, it might help in their Anti-Money Laundering checks, and I think that anything that helps with that chore would be a bonus. So how likely is it that the information would be made public? It seems from the consultation that it is the Government’s preference and, even if that doesn’t happen, the second option is that it might be accessible to “regulated entities”, i.e. anyone who is required to make MLR checks.

There’s a sting in the tail, however. Slipped into the consultation is: “If they were given access to the registry, regulated entities would incur additional costs if they were required to check and report any inconsistencies between their own data and that held on the register” (paragraph 2.74). Can you imagine? Would they seriously require office holders to inform whoever that a defunct company’s register of beneficial owners was not up to date? My perception is that IPs do not really feature as a separate group in the minds of those who oversee the MLR, so I doubt that they would see the pointlessness of such a task.

Changing Directors’ Duties

Okay, this proposal won’t directly affect IPs, but I couldn’t help passing a quick comment. As no doubt you’ve heard, the proposal is to amend the directors’ duties in the CA06 “to create a primary duty to promote financial stability over the interests of shareholders” (page 61). It is noticeable that more consultation space is taken up listing the potential drawbacks of the proposal than its advantages. In addition to the described issues of how to enforce such a duty, how shareholders would react, how UK corporate banks would fare competing against banks not caught by the CA06, I was wondering how you could measure promoting financial stability: it seems to me that it would depend on whether you were to ask Vince Cable or George Osborne.

The consultation includes many other proposals, which would affect the disqualification regime – some of these are:

• whether the regime should be tougher on directors where vulnerable people have suffered loss (is the absence of a jubilant Christmas for a Farepak customer a more worthy cause than that for a redundant employee who’d worked hard up to the end of an insolvent company’s life?)
• whether the courts should take greater account of previous failures, even if no action has been taken on them (surely the just and socially-responsible solution would be to fund the Service adequately to tackle any misconduct of the first failure?)
• whether to extend the time limit for disqualification proceedings from two to five years (what about the Service’s method of prioritising cases? I appreciate that this is a gross simplification, but don’t they hold a big pile of potentials and progress those that they feel are in the public’s greatest interest, leaving the rest in the pile until it gets to the critical time when they have to make a decision one way or the other? Won’t the extension to five years simply mean that their potential pile holds four years’ worth of cases, rather than one year’s? Again, unless the Service is granted more resources, I cannot see that this measure would really help. I also object to the consultation’s comment that “it can quite easily be several months before the relevant insolvency practitioner reports to the Secretary of State detailing the areas of misconduct that may require investigation. In such cases, the limitation period might mean that misconduct is not addressed” (paragraph 12.2))
• whether “sectoral regulators”, such as the Pensions Regulator, FCA and PRA, should be granted the ability to ban people from acting as a director in any sector.
• whether directors who had been convicted/restricted/disqualified overseas should be prevented from being a director in the UK.

“Improving Financial Redress for Creditors”

The Government anticipates that, if liquidators and administrators (as the Red Tape Challenge outcome proposes to extend the power to take S213/4 actions to administrators) were entitled to sell or assign fraudulent and wrongful trading actions, a market for them would develop. Do you think so..?

BIS has thought about the possibility that directors (or someone connected to them) might bid for the action and, although they suggest an, albeit not water-tight, safeguard, they also point out that, if the director did buy the right of action, at least the estate would benefit from the sale consideration. Although, personally, I’d feel uncomfortable with that – and I’m not sure what the creditors would say (but, of course, the office holder could ask them, and maybe that would be a better safeguard?) – I guess it makes commercial sense.

The consultation also proposes to give the court the power to make a compensatory award against a director at the time it makes a disqualification order. The consultation states: “This measure could potentially affect the timeliness of obtaining disqualifications if it deterred directors from offering a disqualification undertaking and therefore resulted in more disqualification cases needing to be taken to court” (paragraph 11.16), but personally, I would have thought that this measure would increase exponentially the number of director undertakings, as there seems to be no suggestion that an undertaking would expose a director to the risk of an award.

It is envisaged that the award would not be used to cover the general expenses of the liquidation and “there is a question as to who should benefit from any compensatory award. This could be creditors generally or it could be left to the court to determine based on the facts of the case” (paragraph 11.14), although I assume that, if it were for the general body of creditors, the office holder would be expected to pay the dividend. I wonder how the office holder’s fees and costs would be viewed, if he had to keep the case open purely for the purposes of seeing through the outcome of any such action.

The consultation also states that “Liquidators would still be expected to consider whether there are any actions they could bring themselves, as they ought to now” (paragraph 11.15). Could liquidators be criticised for taking actions, the proceeds of which would settle first their costs, when, if it were left to the court on the back of a disqualification order, the creditors would see the full amount? It is a liquidator’s function to get in and realise the assets, so probably not, but administrators..?

The same paragraph states: “If by the time the disqualification action comes before the court, liquidators have successfully recovered monies from the directors, that is something the court would be expected to take into account when deciding whether or not to make a compensatory award (or in setting the amount of it)” – it could get fun if the actions were running in parallel.

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Despite my quibbles, generally I think the proposals are a step in the right direction. However, I wonder how those in the Service’s Intelligence and Enforcement Directorate feel about the proposals, which would lead to so much more work and high expectations laid upon them. Let’s hope that these proposals give them a sound case for increasing their access to funds and people.


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Hats Off

0520 Goblins

Having recently spent a week or so in Somerset enjoying the unseasonal blue skies (but yes, you’re right, the photo is not Somerset!), I’ve managed to accumulate quite a pile of BAILII reports. I don’t want to skip them entirely, as one day I do want to create a searchable index of my posts, so I’ve tried to give credit where I can to other write-ups of the judgments. Much is old news, therefore, but if you missed them the first time around…

• Olympic Airlines – failure to meet “establishment” test of European Insolvency Regulation rules out secondary insolvency proceedings.
• Jetivia v Bilta – argument that the company, by its liquidators, could not pursue claims based on a fraud to which it was party failed.
• Tchenguiz v SFO – liquidators’ reports not subject to litigation privilege, as litigation was not the dominant purpose for their production.
• Southern Pacific Personal Loans – liquidators were not data controllers for data processed by company pre-liquidation and, subject to certain conditions, they could destroy the data.
• JSC BTA Bank v Usarel Investments – useful comments regarding the absence of inevitable bias of court-appointed receivers when faced with prospect of taking action against party that sought their appointment.
• Bestrustees v Kaupthing Singer – reversal of administrators’ part-rejection of pension scheme claim, as changes in assets and liabilities after the actuary’s certificate “irrelevant”.
• Wood & Hellard v Gorbunova – receivers’ indemnity out of assets restricted, as respondent’s costs increased due to receivers’ “inappropriate conduct of the application”.
• JSC BTA Bank v Ablyazov – subject’s drawing down of £40m loans not “assets” for the purposes of a freezing order.

The Trustees of the Olympic Airlines SA Pension & Life Insurance Scheme v Olympic Airlines SA (6 June 2013) ([2013] EWCA Civ 643)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/643.html

A successful appeal against a secondary winding-up in England provides clarification of the meaning of “establishment” of the European Insolvency Regulation, but makes it difficult to call on the PPF where a scheme is exposed to an insolvency with main proceedings in another EU/EEA state.

A couple of good summaries (although with differing views on how things may change on the revision of the EIR) are provided by Malti Shah of Taylor Wessing (http://goo.gl/0m0aDZ), and Justin Briggs & Charles Crowne of Burges Salmon (http://goo.gl/P0I3G4).

(UPDATE 07/08/14: The enactment of the Pension Protection Fund (Entry Rules) (Amendment) Regulations 2014 have opened the way for this scheme to access the PPF. The Regulations cease to have effect on 21 July 2017 and set down such specific criteria that it seems unlikely that it will help many more schemes access the PPF. For a more detailed analysis, see Mayer Brown’s article at: http://goo.gl/Xzyx5q)

(UPDATE 21/05/15: the Supreme Court considered an appeal and swiftly dismissed it, endorsing the Court of Appeal’s earlier decision that having three employees in the country involved only in winding up the company’s affairs did not amount to “economic activity”.  The judgment, given on 29 April 2015, can be found at: http://www.bailii.org/uk/cases/UKSC/2015/27.html)

Jetivia SA & Anor v Bilta UK Limited (in liquidation) & Ors (31 July 2013) ([2013] EWCA Civ 968)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/968.html

Bilta, by its liquidators, brought claims for conspiracy and dishonest assistance against the appellants, who sought to defeat the claims on the basis that, as Bilta was party to the illegal act, it could not bring the claims (the ex turpi causa principle). The appeals were dismissed.

Tom Henderson of Herbert Smith Freehills LLP has produced a good summary of the case, I think: http://www.lexology.com/library/detail.aspx?g=ead603c4-454c-4d19-ae54-4ed2196ec771

Tchenguiz & Ors v Director of the Serious Fraud Office & Ors (26 July 2013) ([2013] EWHC 2297 (QB))

http://www.bailii.org/ew/cases/EWHC/QB/2013/2297.html

The court found that the joint liquidators’ reports were not subject to litigation privilege, as the judge was not convinced that the dominant purpose for which the reports were originally produced was for obtaining information or advice in connection with pending or contemplated litigation, or for conducting or aiding in the conduct of such litigation.

Timothy Wright and Nicholas Greenwood of Morgan Lewis & Bockius LLP – http://www.lexology.com/library/detail.aspx?g=c1be8860-2d7d-466b-a1b7-3d3be7b93431 – have produced a pretty good summary of the case.

(UPDATE 15/10/13: this decision is subject to an appeal by the liquidators.)
(UPDATE 16/03/14: the liquidators’ appeal, heard on 20/02/14, was dismissed: http://www.bailii.org/ew/cases/EWCA/Civ/2014/136.html. As in the first instance, the judge emphasised “the need to establish which of dual or even multiple purposes was dominant if a plausible claim to privilege was to be made out” (paragraph 22), and felt that the appellants had not demonstrated that the dominant purpose of the communications was for use in actual or anticipated litigation. He agreed with Counsel for the respondents that, even with liquidations of this nature, it cannot be right to assume that everything that a liquidator does is in contemplation of litigation.)

Re. Southern Pacific Personal Loans Limited (8 August 2013) ([2013] EWHC 2485 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2485.html

Liquidators estimated that the costs of responding to data subject access requests (“DSARs”) on a case amounted to £40,000 per month. Thus, they sought directions on whether there was a way of avoiding this ongoing expense.

Mr Justice David Richards concluded that the rights to control the data remained vested in the company and the company remained under a statutory obligation to deal with the DSARs. He stated that, as the liquidators acted as agents of the company, they were not data controllers in respect of the data processed by the company prior to liquidation.

In considering application of the fifth data protection principle – that personal data should not be kept for longer than is necessary for the purposes for which it was processed – David Richards J directed that the liquidators might dispose of all personal data in respect of which the company is the data controller subject to two qualifications: (i) that the company retained sufficient data to enable it to respond to DSARs made before the disposal of data; and (ii) that the liquidators retained sufficient data to enable them to deal with any claims that might be made in the liquidation.

JSC BTA Bank v Usarel Investments Limited (24 June 2013) ([2013] EWHC 1780 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1780.html

The circumstances of this case – involving a litigation receiver seeking a ruling that his appointment to defend an action gave him power to conduct an appeal (which was not granted) – are unlikely to arise often, if at all, but I thought that Mr Justice Warren’s comments on the integrity of court-appointed receivers were worth repeating.

Warren J felt that the receivers and managers (who were appointed after the litigation receiver) were just as competent to decide on whether an appeal should be pursued as the litigation receiver. He stated: “I do not consider that it can be said that, whenever the Court appoints a receiver and manager nominated by an applicant for such an appointment, there is inevitably a justified perception of bias if the appointed nominee needs to consider whether to pursue litigation against the person who applied for his appointment. His position, as an officer of the Court, is different from that of a receiver or manager appointed for instance by the holder of a charge over the company’s assets. A perhaps justified perception of bias in relation to a receiver or manager appointed out of Court should not be allowed to infect the perception of an officer of the court” (paragraph 37).

Bestrustees Plc v Kaupthing Singer & Friedlander Limited (in Administration) (31 July 2013) ([2013] EWHC 2407 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2407.html

Bestrustees appealed against the Administrators’ decision to reduce its proof of debt by £2 million. The Administrators’ reason for reducing the proof was because the actuary had certified that the deficit of the occupational pension scheme (“the section 75 debt”) was £74,652,000, but they had attributed no value to the £2 million deposited by the scheme with the company in a trust account, which at that time was subject to legal proceedings but the funds were paid to the scheme later.

The Administrators were ordered to reverse the £2 million reduction to the proof, primarily because they had not challenged the amount of the section 75 debt, as certified by the actuary, and they had not challenged the nil value attributed to the deposit subject to pending litigation at that time. The Chancellor of the High Court, Sir Terence Etherton, observed: “the Employer Debt Regulations require the assets and liabilities of a pension scheme to be valued, for the purposes of ascertaining the section 75 debt, in a notional exercise immediately before the trigger event, here KSF entering into administration on 8 October 2008. Changes in the value of assets or the extent of liabilities after that time are irrelevant. In the present case, just as the value of the £2 million deposit increased after 8 October 2008 as litigation progressively clarified the rights of those, including the Trustee, entitled to the money in the trust account, so the evidence also shows that the scheme’s ‘buy out’ liabilities, that is to say the notional cost of going into the market to purchase the annuities which would match the scheme’s liabilities to its pensioners and members, also increased substantially after that date” (paragraph 35).

Wood & Hellard v Gorbunova & Ors (5 July 2013) ([2013] EWHC 1935 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1935.html

Receivers were indemnified out of the assets only to the extent of two thirds of the costs of one respondent (and 85% of another’s) on the basis that the respondent’s costs “increased by reason of the inappropriate conduct of the application by the receivers” (paragraph 66).

Mr Justice Morgan acknowledged the “difficulties the receivers found themselves in and their proper desire to get the receivership moving” (paragraph 68), but he felt that the receivers had been unwise in seeking wide-ranging orders, some elements of which were dropped later by the receivers, and that they had persuaded themselves that the respondent was being recalcitrant when the judge felt that the respondent had behaved properly throughout and simply had been subject to legitimate constraints in delivering up papers.

JSC BTA Bank v Ablyazov (25 July 2013) ([2013] EWCA Civ 928)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/928.html

A freezing order was drafted in a standard form to prohibit Mr Ablyazov from in any way disposing of, dealing with, or diminishing the value of his assets. The bank sought to persuade the court that the loan facility agreements entered into by Mr Ablyazov, which enabled him to instruct the lenders to pay £40 million direct to third parties, were “assets” for the purposes of the freezing order.

The court at first instance agreed that they were choses in action, but its decision that not all choses in action were assets was appealed by the bank. Lord Justice Beatson agreed with the earlier judgment: “a man who is entitled to borrow and does so ‘is not ordinarily to be described as disposing of or dealing with an asset’. As Sir Roy Goode has stated, albeit in the context of section 127 of the Insolvency Act 1986, ‘[i]f there is one thing that is still clear in the increasingly complex financial scene … it is that a liability is not an asset and that an increase in a liability is not by itself a disposition of an asset’” (paragraph 72).