Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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The case of the missing…

0922 Dune 45 (2)

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

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

When is an MVL not an MVL?

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

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

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

Can a lien be exercised over an electronic database?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Contract terms permit agent and distributor to retain customer payments

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

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

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

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

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

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

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

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

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

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

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


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Not the Game appeal

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Plenty of comprehensive summaries of the Game appeal have been produced, so I cover here some lesser-known judgments:

Salliss v Hunt – a Deputy Registrar’s approval of a Trustee’s fees basis being switched from percentage to time costs comes under scrutiny
LSI 2013 Limited v The Solar Panel (UK) Company Limited – how presenting contingent creditors in a CVA proposal may have unintended consequences
Credit Lucky Limited v NCA – a Company’s attempt to escape a winding-up in favour of an Administration Order fails
Day v Shaw & Shaw – spouse entitled to an equity of exoneration even though the co-owner was not the principal debtor

A couple of useful summaries of the Game appeal can be found at: http://lexisweb.co.uk/blog/randi/landlords-can-rejoice-following-the-game-administration-decision/ and http://www.11sb.com/pdf/insider-note-cofa-game-decision-26-feb-2014.pdf.

(UPDATE: Game Retail’s application for permission to appeal to the Supreme Court is expected to be heard in November 2014.)

(UPDATE 02/11/2014: The Supreme Court refused Game Retail permission to appeal on the basis that “the application does not raise an arguable point of law of general public importance which ought to be considered by the Supreme Court at this time bearing in mind that the case has already been the subject of judicial decision and reviewed on appeal.” (http://goo.gl/cWWuDs))

Baister’s Practice Statement applied to Trustee’s request to switch fees basis from percentage to time costs

Salliss v Hunt (10 February 2014) ([2014] EWHC 229 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/229.html

The Chancellor of the High Court opened his judgment by calling this a “regrettable case of litigation”, which should have been avoided.

Mr Salliss had been made bankrupt in 1993 on the petition of Barclays Bank plc, which appeared to have been owed over £2m originally. The creditors approved the Trustee’s fees as the first £2,000 realised and thereafter on the OR’s scale.

The only assets were pension plans. These had not been realised, but when Mr Salliss reached 65 in 2007 he began working on an annulment so that he could draw down on the pensions. He paid the claims of his creditors other than Barclays, which had not submitted a proof of debt and, when pressed, confirmed that it had withdrawn its right to claim in the bankruptcy due to the age of the case.

Then the court applications began…

Salliss applied for an annulment, but the Trustee’s report indicated that his time costs were almost £40,000 and other costs and expenses were £24,000. Salliss put forward an accountant’s report that stated that strictly the Trustee was not entitled to any remuneration, in view of the basis agreed by creditors.

The Trustee applied for an order that Salliss sign the necessary forms so that the Trustee could realise his interest in the pensions. The Trustee also applied to change the basis of his fees from the agreed percentage basis to time costs. Nine months on, the Trustee’s fees and costs had increased from £64,000 to over £150,000.

All three applications came before the Deputy Registrar, who rejected the annulment application, but granted the Trustee’s two applications. He considered that time costs was the only appropriate basis “because even though the bankruptcy commenced more than 19 years ago there is still uncertainty as to what might be realised and when if it continues and in any event the extent of the time necessarily and unavoidably spent by Mr Hunt and his staff already is such that a percentage basis of any kind could not, in my view, result in appropriate remuneration, especially as yet further time would have to be spent the amount of which cannot be anticipated” (paragraph 35). He had also been reluctant to ignore Barclays’ debt entirely, given the precedent of Gill v Quinn, which had involved the rejection of an annulment because of a number of creditors’ silence to invitations to prove their debts.

At the appeal, the Chancellor’s view was that this case was quite different to Gill v Quinn and that the evidence showed that Barclays had taken “an informed policy decision that it would not then or in the future lodge a proof in respect of any debt in Mr Salliss’ bankruptcy” (paragraph 41) and therefore Barclays’ debt was irrelevant to the annulment application.

He also felt that the Deputy Registrar’s approach to the remuneration application was flawed. He felt that insufficient regard had been given to Chief Registrar Baister’s Practice Statement on the fixing and approval of the remuneration of appointees, which, contrary to the Deputy Registrar’s view, he felt was relevant to applications to have a fees basis changed as well as fixed by the court. With the Practice Direction in mind, the Chancellor stated that the proper approach “is to begin by asking what has changed and was not foreseen and could not have been foreseen when the creditors made their decision” (paragraph 51). In this case, it had always been known that the assets were limited, but the Trustee had been content to continue to act under the creditors’ resolution. The Chancellor commented that “the usual and proper course should be for the trustee to apply to the court for a change in the basis of remuneration as soon as it becomes clear that an application will be necessary in order to make the remuneration (in the words of the Practice Direction) fair, reasonable and commensurate with the nature and extent of the work properly to be undertaken by the appointee. In other words, the application should, so far as practicable, be prospective and not retrospective. Unless there is some good and proper reason to do otherwise, it is not appropriate for the trustee to wait until all the work is done and then apply to the court as a ‘fait accompli’ for a retrospective change in the remuneration resolved by the creditors” (paragraph 53).

The Chancellor decided that the annulment and the remuneration applications should be set aside, although he felt unable to determine them on the appeal. He did, however, draw attention to “the considerable increase in the bankruptcy fees and expenses… in substance due to the time, cost and expense of litigating over the costs, expenses and remuneration at the date of the Trustee’s Report” (paragraph 52) and questioned whether the matter could have been brought to a swift conclusion far earlier, when the pension plans’ lump sum might have been sufficient to meet all the costs and expenses.

The consequences of presenting contingent creditors in CVA proposals

LSI 2013 Limited v The Solar Panel (UK) Company Limited (14 January 2014) ([2014] EWHC 248 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/248.html

The Company appealed a winding-up order on the ground that the Deputy District Judge had been wrong to treat the petitioning creditor as a contingent creditor, when the petition debt was genuinely disputed on substantial grounds.

At the appeal, counsel for the petitioning creditor focussed on a draft proposal for the Company’s CVA, which had listed the petitioner as a contingent creditor, albeit only for £1, and did not refer to the claim as disputed; the IP who had drafted the CVA proposal clearly would have understood the distinction between contingent claims and disputed debts. Consequently, the Deputy District Judge had accepted that the Company was insolvent and that the petitioning creditor was a contingent creditor and thus the winding-up petition had been granted.

His Honour Judge Hodge QC felt that the Deputy District Judge had attached too much weight to the reference in the CVA proposal – which was described as draft and had not been signed by the director – that the creditor was contingent and, in any event, it also stated that £1 was the total claim the creditor would have in a terminal insolvency. Hodge HHJ also noted that the petition had not been founded on the petitioner being a contingent creditor and that the Deputy District Judge had not considered the counter-claim. The outcome was that the winding-up order was set aside and the case was remitted to the Bristol District Registry with a view to considering the merits of the dispute.

No escaping a winding-up order in favour of administration

Credit Lucky Limited & Anor v National Crime Agency (29 January 2014) ([2014] EWHC 83 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/83.html

The Company applied for the winding-up order against it to be rescinded, varied or reviewed, or alternatively stayed. Amongst its arguments were that the director wanted to pursue a tax assessment appeal, which the liquidator regarded without merit and did not intend to pursue and that, if the tax assessment were challenged successfully, the director felt that there was every prospect of the creditors being paid in full. The director also intended to apply for an Administration Order so that the Company’s goodwill, name and database could be sold to a third party, which had made an offer conditional on the winding-up order being rescinded.

The judge had several concerns over the conditional offer, which led him to reject the application for rescission. He also did not see why someone should only be prepared to purchase the goodwill, name and database from an administrator and not from a liquidator. He felt that it was implausible that these assets would be more valuable if the Company “‘cleared its name’ by prosecuting and winning the tax appeal” (paragraph 40).

He also felt it was inappropriate to grant a stay: although the liquidator is obliged to take all reasonable steps the maximise asset realisations and therefore is entitled to decide whether to pursue an action in the name of the Company, if the Company or another interested party believes that the tax appeal should be pursued, “it is open to them to apply to the court for a direction which would enable them to prosecute the Tax Appeal in the name of the company or the liquidator. That being so it is difficult to see how – on the assumption that there is, contrary to the liquidator’s view, some merit in the Tax Appeal – the refusal of a stay would result in irremediable loss” to the Company or its shareholder (paragraph 64).

Equity of exoneration with a twist

Day v Shaw & Shaw (17 January 2014) ([2014] EWHC 36 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/36.html

This case differed from the usual equity of exoneration scenario in that the principal debtor to the secured creditor was, not a co-owner of the property, but Mr Shaw’s limited company, “Avon”, that had gone into liquidation and that, although Mr and Mrs Shaw had granted a charge over their property, the debt to the bank was also secured by reason of personal guarantees by Mr Shaw and the couple’s daughter, Mrs Shergold. Mr Day’s interest in the case arose because he had obtained a charging order over Mr Shaw’s interest in the property, so he was keen to contend that Mrs Shaw was not entitled to an equity of exoneration, but that the debt due to the bank should be borne equally by the shares of Mr and Mrs Shaw in the proceeds of the sale of the property.

At first instance, the judge had decided that Mrs Shaw was entitled to an equity of exoneration. On the appeal, Mr Day contended that, if the judge had treated Avon as the principal debtor, the conclusion would have been that the equity of exoneration did not apply to the property jointly owned by Mr and Mrs Shaw.

The question for Mr Justice Morgan was whether Mr Shaw and Mrs Shergold, as guarantors, and Mr and Mrs Shaw, as mortgagors, were all sureties of the same rank or was one group effectively sub-sureties for the other? The conclusion he reached was that “it is clear that in substance, Mr Shaw and Mrs Shergold were sureties for the debt of Avon and Mr and Mrs Shaw, as mortgagors, were sub-sureties. I do not consider that the guarantors and the mortgagors can be considered to be co-sureties equally liable for the principal debt. The result is that the sub-sureties (Mr and Mrs Shaw) are entitled to be indemnified by the sureties (Mr Shaw and Mrs Shergold) in just the same way as a surety is entitled to be indemnified by a principal debtor” (paragraph 26). It follows that for the purposes of the equity of exoneration, Mrs Shaw can establish that she is entitled to be indemnified by Mr Shaw in relation to the debt owed to Barclays” (paragraph 30).


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Two bankruptcy annulments, two council debts, and a decision “of potential interest to all insolvency practitioners”

1136 Swakop

Some questions answered by a few of the recent cases in the courts:

Kaye v South Oxfordshire District Council – if an insolvency commences mid-year, how much of the year’s business rates rank as an unsecured claim?
Yang v The Official Receiver – can a bankruptcy order be annulled if the petition debt is later set aside?
Oraki & Oraki v Dean & Dean – on the annulment of a bankruptcy order, if the petitioning creditor cannot pay the Trustee’s costs, who pays?
Bristol Alliance Nominee No 1 Limited v Bennett – can a company escape completion of a surrender agreement if the process is interrupted by an Administration?
Rusant Limited v Traxys Far East Limited – is a “shadowy” defence sufficient to avoid a winding up petition in favour of arbitration?

A decision “of potential interest to all insolvency practitioners and billing authorities for business rates”

Kaye v South Oxfordshire District Council & Anor (6 December 2013) ([2013] EWHC 4165 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4165.html

HHJ Hodge QC started his judgment by stating that this decision is “of potential interest to all insolvency practitioners and billing authorities for business rates” (paragraph 1), as he disagreed with advice that appears to have been relied upon by billing authorities and Official Receivers for quite some time. This may affect CVAs, which were the subject of this decision, and all other insolvency procedures both corporate and personal.

The central issue was: how should business rates relating to a full year, e.g. from 1 April 2013 to 31 March 2014, be handled if an insolvency commences mid-year?

In this case, the council had lodged a proof of debt in a CVA for a claim calculated pro rata from 1 April to the date of the commencement of the CVA, but the Supervisor had observed to the council that he believed that the full year’s business rates ranked as an unsecured claim.

The council responded that the company had adopted the statutory instalment option (whereby the full year’s rates are paid in ten monthly instalments commencing on 1 April) and that, as this was still effective at the commencement of the CVA, the unsecured claim was limited to the unpaid daily accrued liability – with the consequence, of course, that the council expected to be paid ongoing rates by the company in CVA. The council stated that, had the right to pay by instalments been lost at the time of the CVA (by reason of the debtor’s failure to bring instalments up to date within seven days of a reminder notice), the whole year’s balance would have become due and this would have comprised the council’s claim. [This seems perverse to me: it would mean that companies would be better off postponing proposing a CVA until the business rates become well overdue, as the full year would then be an unsecured claim, rather than accruing as a post-CVA expense.] The Supervisor applied to the court for directions.

In support of the council’s view was advice (not directly related to this case) from the Insolvency Service of early 2010, which stated that, unless a bankrupt had failed to comply with a reminder notice, the Official Receiver would reject a claim for council tax for the portion of the year following a bankruptcy order. The council also provided what was said to be the current view of the Institute of Revenues and Valuation, which followed a similar approach in relation to a company’s non-domestic rates.

Hodge HHJ felt that the decision in Re Nolton Business Centres Limited [1996] was of no real assistance, because, although this had resulted in a liquidator being liable for rates falling due after appointment, he stated that it merely demonstrated the “liquidation expenses principle”: “the question was not whether the debt had been incurred before, or after, the commencement of the winding up, but whether the sums had become due after the commencement of the winding up in respect of property of which the liquidator had retained possession for the purposes of the company” (paragraph 38).

Although, in this case, the full year’s rates had not fallen due for payment by the time of the commencement of the insolvency, Hodge HHJ viewed it as “a ‘contingent liability’, to which the company was subject at the date of the [CVA]” (paragraph 54). Therefore, he felt that the full year’s non-domestic rates were “an existing liability incurred by reason of its occupation of the premises on 1st April 2013. It, therefore, seems to me that the liability does fall within Insolvency Rule 13.12” (paragraph 55) and, by reason of the CVA’s standard conditions, were provable. He also commented that it seemed that this would apply equally to liquidations and bankruptcies.

The judge decided that the council should be allowed to prove in the CVA for the full amount of unpaid rates and he felt that the company would have a good defence to the existing summons for non-payment of post-CVA rates.

My thanks to Jo Harris – I’d originally missed this case, but she’d mentioned it in her February technical update.

(UPDATE 22/07/2014: For an exploration of the application of this case to IVAs, take a look at my more recent post at http://wp.me/p2FU2Z-7y)

Absence of petition debt – council tax liability that was later set aside – was not a ground to annul bankruptcy order

Yang v The Official Receiver & Ors (1 October 2013) ([2013] EWHC 3577 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3577.html

Yang was made bankrupt on a petition by Manchester City Council for unpaid council tax of £1,103. After the bankruptcy order, Yang discharged the liability orders but also challenged the liability on the basis that the council had incorrectly classed the property as a house in multiple occupation. Subsequently, the valuation tribunal ordered the council to remove Yang from the liability.

Yang then sought to have the bankruptcy annulled, but the court ordered that the bankruptcy order be rescinded; the annulment was refused, as the court decided that there was no ground for the contention that, at the time the bankruptcy order was made, it ought not to have been: at that time, the multiple occupation assessment stood and Yang had not challenged it.

In considering Yang’s appeal, HHJ Hodge QC felt that the Council Tax (Administration and Enforcement) Regulations 1992 were relevant, which state that “the court shall make the [liability] order if it is satisfied that the sum has become payable by the defendant and has not been paid” (paragraph 20) and the court cannot look into the circumstances of how the debt arose, although the debtor is entitled to follow the statutory appeal mechanism. The judge stated: “It seems to me that the fact that a liability order is later set aside does afford grounds for saying that, at the time the bankruptcy order was made, there was no liability properly founding the relevant bankruptcy petition within the meaning of Section 282(1)(a) of the 1986 Act. But that does not mean that a bankruptcy order made on a petition founded upon such a liability order ‘ought not to have been made’” (paragraph 22) and therefore he was content that the bankruptcy order was rescinded, rather than annulled, although there remain three further grounds of the appeal to consider another day.

Innocence is relative

Oraki & Oraki v Dean & Dean & Anor (18 December 2013) ([2013] EWCA Civ 1629)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/1629.html

After a long battle, the Orakis’ bankruptcies were annulled on the basis that the orders should not have been made: the petition debt related to fees charged by a man who was not a properly qualified solicitor and was not entitled to charge fees. At the same time, the judge ordered that the Trustee’s costs should be paid by the Orakis, although they were open to seek payment from the solicitor firm (Dean & Dean) and to challenge the level of the Trustee’s remuneration.

The Orakis appealed the order to pay the Trustee’s costs on the basis that they were completely innocent. Floyd LJ agreed that the Orakis were wholly innocent “as between Dean & Dean and the Orakis”, however “the confusion occurs if one seeks to carry those considerations across to the costs position as between the trustee and the Orakis. There is no clear disparity, at least at this stage, between the ‘innocence’ of the two parties” (paragraphs 36 and 37). He also stated that, whilst it was still open for the Orakis to challenge the level of costs, which appear to have increased by some £250,000 since 2008, it seemed to him to be unlikely that the Trustee would not be able to demonstrate that he is entitled to at least some costs.

Lady Justice Arden added her own comments: “the guiding principle, in my judgment, is that the proper expenses of the trustee should normally be paid or provided for before the assets are removed from him by an annulment order” (paragraph 63) and it was not clear that the Orakis’ estates would be sufficient to discharge the expenses in full, which, absent the order, would have left the Trustee with the burden of unpaid expenses. She noted that, usually, the petitioning creditor would be ordered to pay the Trustee’s costs where a bankruptcy order is annulled on the ground that it ought never to have been made. However, unusually, in this case the petitioning creditor could not pay and therefore the judge was entitled to order that the Orakis pay.

Landlord entitled to escrow monies held for part-completed surrender interrupted by Administration

Bristol Alliance Nominee No. 1 Limited & Ors v Bennett & Ors (18 December 2013) ([2013] EWCA Civ 1626)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/1626.html

In 2010, A\Wear Limited (“the company”) entered into an ‘Agreement for surrender and deed of variation’ with the landlord (“Bristol”) of leased properties and £340,000 was held in escrow pending completion of the surrender and payment by the company of the VAT on the escrow amount. A similar arrangement was made in relation to another property with an escrow amount of £210,000. Shortly after the landlords served notice on the company requiring completion of the surrender, the company entered into administration and the company, acting by its administrators, refused to complete the surrender.

At first instance, the judge refused to make the order requested by the landlords for specific performance to enable the escrow amounts to be released to them, on the basis that it would have offended the principle of pari passu treatment of unsecured creditors. At the appeal, Rimer LJ disagreed: although the refusal of an order for specific performance would open up the possibility that the company’s contingent interest in the escrow monies might be realised, the monies were not part of the company’s assets and therefore ordering specific performance would not deprive the company of any assets then distributable to creditors. Rimer LJ stated that the effect of the refusal “was to promote the interests of the company’s creditors over those of Bristol in circumstances in which there was no sound basis for doing so”. “Prior to the administration, Bristol had a right, upon giving appropriate notice, as it did, to compel the company to complete the surrender. If such a claim had come before the court before the company’s entry into administration, there could have been no good reason for the court to refuse to make such an order; and the consequence of doing so would have been to entitle Bristol to the payment of the escrow money. It was manifestly the intention of the parties to the surrender agreement to achieve precisely such a commercial result. The company’s entry into administration cannot have resulted, and did not result, in any material change of circumstances. The principle underlying Bastable’s case shows that Bristol remained as much entitled to an order for specific performance as it had before” (paragraph 34). With the support of the other appeal court judges, the appeal was allowed.

Winding up petition “trumped” by arbitration agreement

Rusant Limited v Traxys Far East Limited (28 June 2013) ([2013] EWHC 4083 (Comm))

http://www.bailii.org/ew/cases/EWHC/Comm/2013/4083.html

Rusant Limited sought to restrain the presentation of a winding up petition against it by Traxys Far East Limited, which had issued a statutory demand for the repayment of a loan. However, the loan agreement included a term that “any dispute, controversy or claim… should be referred to and finally resolved by arbitration of a single arbitrator” and Rusant claimed that an extension to the loan repayments had been agreed.

Although Mr Justice Warren described Rusant’s defence as “shadowy” and stated that, apart from the arbitration agreement, he would not grant an injunction, “the arbitration agreement, it seems to me, trumps the decision which I would otherwise have made” (paragraph 33) and therefore, in consideration of the Arbitration Act 1996, he did not allow the petition to proceed.


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Re Parmeko Holdings Limited: when are administrators’ proposals “futile”?

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Re Parmeko Holdings Limited & Ors (In Administration) (6 September 2013) ([2013] EWHC B30 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/B30.html

Recipients of R3 Recovery News will have seen a report on this case by Amy Flavell of Squire Sanders. In her article, Amy referred to the fact that the judge passed comment on the proposals “casting doubt on the utility or effectiveness of a number of standard form proposals” used by many administrators. I’ll cover those comments here.

Background

Firstly, a summary of the case: the administrators sought direction as regards their proposals, which had attracted no response from any creditors at all. Cooke HHJ confirmed that, just as an administrator is entitled to exercise his statutory powers in such a manner as he considers best for fulfilling the purposes of administration before he puts his proposals to creditors, so too can he continue to use those powers in the event that creditors do not vote on his proposals. “If and when proposals are approved then he is required by paragraph 68 to manage the affairs of the Company in accordance with those proposals, but if no such proposals are approved then he is not so constrained and he must act in accordance with his own discretion” (paragraph 11).

This does not contradict with the earlier decision in Lavin v Swindell (http://wp.me/p2FU2Z-k), which involved administrators seeking the court’s direction because creditors had voted against their proposals and Cooke HHJ acknowledged that an administrator also may want to refer to the court in instances where “some specific question arises as to what he should do” (paragraph 13). However, the judge felt that this was not such a case, although he did acknowledge that the administrators required approval of the basis of their fees, which he granted with no particular comment.

The judge’s comments on the proposals

The judge stated that:

• No purpose is served in seeking sanction or direction to make payments, when and if available, to the secured and preferential creditors, as this is a statutory power (paragraph 16);

• He had “grave doubts as to the utility” of placing before creditors the proposals in relation to exit procedures. “The proposals as set out in this case do no more than set out the mechanisms provided by Sch B1 for exit, and leave it to the discretion of the administrator to make any choice between them that may be available in the circumstances as they transpire. That is not, in any positive sense, a proposal at all, nor does it in truth set out anything the administrator ‘envisages’” (paragraph 17);

• Stating that the administrators would become liquidators in any subsequent CVL is the default position unless the creditors nominate someone else, “so putting such a proposal to the creditors achieves little more than conveying information” (paragraph 18);

• Including a permissive proposal that the administrators may apply to court for sanction to pay a dividend to unsecured creditors simply provides “and indication to the creditors of an available option” (paragraph 19);

• “There must be some doubt as to the appropriateness of inviting the creditors at the commencement of the administration to agree a date upon which the administrators should be discharged from liability… It seems to me that the creditors can only sensibly consider this question when they know what the effect will be, which in turn means that they should be in a position to know what has gone on in the administration and form a view as to what if any potential claims might be affected by the release. They plainly cannot in most cases do this at the first meeting of creditors” (paragraph 20). The judge stated that “where as here the creditors have not fixed a discharge date, an application must be made to the court” (paragraph 21) at the appropriate stage.

• He also declined to comment on whether remuneration should be appropriately dealt with by way of proposal or by separate resolution, but he confirmed that the court could deal with it as a separate matter from the proposals.

Cooke HHJ finished by highlighting the need for administrators “to consider carefully what is the utility of an application to the court for directions” and, in his view, “it would be appropriate, if the administrator has to report to the court that his proposals have not been approved by the creditors, simply by virtue of what has been described as ‘creditor apathy’ in that the creditors did not express a view one way or the other, to say in that report whether he considers that anything useful would be served by seeking an order of the court pursuant to paragraph 55.2, and that if he does not, that he does not intend to make such an application” (paragraph 24). Personally, I think it would be a good start if the Notice of Result of Meeting of Creditors, Form 2.23B, provided for disclosure of unapproved proposals, as the current template only provides for approved or rejected outcomes, but this won’t be the first time that some fudging of a standard form has been necessary.

Comment

I think that this decision reveals a difficulty with the Rules around administrators’ proposals. Stepping back for a moment, I wonder if the drafter originally envisaged administrators’ proposals operating in a similar manner to VA proposals. It seems to me that R2.33 is a checklist of items to include in proposals resembling R1.3 and the idea in Para 53 is that the creditors would decide whether to reject or accept, with or without modifications, the administrators’ proposals… which reads very much like S4 regarding CVAs. It seems to me that the Act/Rules suggest a single statement of proposals from an administrator, which creditors are asked to reject, approve or modify as a whole, rather than the evolved practice of providing creditors with two parts: a report on the administration to date and a summary of points sometimes described as the administrators’ “formal” proposals on which creditors are asked to vote (which practice may have been a spin-off from the pre-Enterprise Act administration regime, where much of the detail was annexed to the administrator’s proposals).

However, I think there’s a key reason why this format – of creditors voting on a single statement of proposals – doesn’t really work for administrations: compared with VAs, the process, powers, and purposes of administration are far more well-defined by statute. This doesn’t seem to leave much for creditors to vote on and therefore, as Cooke HHJ observed, there is little point proposing matters to creditors which simply reflect statutory provisions. An example of this conflict arose a few years’ ago when HMRC was in the habit of seeking modifications to proposals that the administration would exit to CVL, but in some cases it was not statutorily possible for this to happen (at least not via Para 83), because the administrator did not think there would be a dividend. I understand that HMRC now seeks modifications that the exit be some form of liquidation, which gets around this problem, but I think it raises an issue: what exactly is up for modification?

The way the Rules are designed, it seems that we risk creditors trying to force administrators to act contrary to statute by seeking modifications to proposals, as statute seems designed so that the entire statement of proposals, covering all R2.33 items, is up for consideration, even though many items are merely for information purposes, either because they are statements of fact or because they simply describe what the administrator is bound to do by statute; I’m thinking, in particular, of Para 3 which describes the hierarchy of objectives, which the administrator must pursue. In some respects, ‘creditor apathy’ may have avoided more applications to court for directions.

Another issue identified by this decision is: what are administrators to do if their way is not clear at the time of issuing the proposals? For example, as Cooke HHJ observed, proposing to creditors that they approve a plan to leave the administrators with full discretion to decide the appropriate exit route is pretty futile. However, if the administrators truly do not know how best to exit when the proposals are due, what do the Act/Rules expect them to do: seek the court’s sanction to postpone their proposals until they are certain or perhaps plump for a sensible exit route and, if that later turns out to be inappropriate, ask creditors to approve revised proposals? Both these options seem a waste of time and expense to me and in conflict with the idea of being up-front and honest with creditors. So, given that R2.33 requires an administrator’s proposals to include “how it is proposed that the administration shall end”, it really does seem to me that the most sensible approach would be to make a best guess at the most likely appropriate exit route and seek to retain the discretion to choose an alternative route (but not exits that clearly will not be appropriate to the case in hand), if things change. I can see that this isn’t much of a proposal, but I suggest that, just as Cooke HHJ felt that creditors should not be asked to agree a discharge date at such an early stage in the administration, so too should administrators not be expected to identify, at the most 8 weeks into a case, the final exit route in all cases.

I wonder if the Rules could be revised so that they more clearly distinguish between what creditors are being asked to approve and what administrators are simply going to do in order to meet their statutory obligations, including importantly, I think, the hierarchy of objectives of administration. If only we could get back to non-prescriptive, non-checklisty Rules that focus on the purpose of reports, proposals, etc…


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Just Scottish Coal Company: Scottish Liquidators’ Powers to Disclaim – back to square one

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Re The Scottish Coal Company Limited (In Liquidation) (12 December 2013) ([2013] CSIH 108)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSIH108.html

In an earlier blog post – http://wp.me/p2FU2Z-3I – I covered the judgment in the Outer House of the Court of Session, which decided that the joint liquidators were entitled to disclaim onerous land and abandon water use licences.

The Scottish Environment Protection Agency and others appealed to the Inner House with the outcome that the previous decision was recalled and the court directed that the liquidators do not have the power to abandon or disclaim the sites or the statutory licences. The consequences seem to go further than that, however, as this decision indicates that the post-appointment liabilities arising under these statutory regimes will fall as liquidation expenses.

To summarise the issue facing the liquidators: the Scottish Coal Company Limited (“SCC”) carried out open cast coal operations on some of its sites under licences granted under the Water Environment (Controlled Activities) Regulations 2005 and 2011 (“the CARs”) and permits issued under the Pollution Prevention and Control (Scotland) Regulations 2000 and 2012. The costs of continuing to meet the terms of these licences and permits were running at c.£500,000 per month. If the liquidators’ only option in escaping these were to comply with the terms of surrender, the cost would be several million pounds.

The judgment runs to 162 paragraphs and is challenging in many respects. To do it justice, I thought I’d give this its own post. I think the key bases for the court’s decision can be summarised as follows.

If a trustee can abandon property, why can’t a Scottish liquidator?

The original decision arose in part from consideration of S169(2) of the Insolvency Act 1986, which states that “in a winding up by the court in Scotland, the liquidator has (subject to the rules) the same powers as a trustee on a bankruptcy estate”: as a Scottish trustee has power to abandon heritable property (S32(9A) of the Bankruptcy (Scotland) Act 1985), so too, it was thought, should a Scottish liquidator. On appeal, the Inner House examined whether this trustee power does not translate into a liquidator’s power to rid himself of onerous property. Strictly speaking, a trustee does not abandon the property, but only “any claim to the debtor’s share and interest … in the property. No transfer of ownership is envisaged. Rather, the trustee gives up what… is a personal right to acquire ownership of (that is, a real right in) the property” (paragraph 117). When the trustee abandons this right, the property remains in the ownership of the bankrupt.

Now try applying that power to a liquidator: “Unlike the situation of a trustee, who obtains a personal right to acquire ownership of the bankrupt’s heritage upon vesting of the sequestrated estate, a liquidator acquires no such right. The company’s property, whether moveable or heritable, does not vest in him at all” (paragraph 121), thus the liquidator cannot “abandon” property in the same way as a trustee can, as he does not hold the “personal right to acquire ownership” of the property. The company remains the owner throughout. “From a practical point of view, the liquidator may elect, in certain circumstances and with appropriate sanctions, not to realise certain property, whether moveable or heritable; or he may be unable to realise it. If that remains the position as at dissolution, then so be it… The property, however, does not become separated in any legal sense from the company’s general assets in advance of that dissolution” (paragraph 123).

So, if a liquidator cannot abandon the sites, what about the licences?

The judges looked at the provisions contained in the CARs as an example of a statutory regime governing some of the many licences that the liquidators were seeking to abandon. Under the CARs, “simply by assuming the role of, for example, liquidator, the insolvency practitioner concerned becomes ‘the person who is responsible for securing compliance with the terms of [any CARs] licence’ granted to the company” (paragraph 129). “By virtue of it having applied for and been granted a CARs licence, SCC incurred onerous obligations to avoid the risk of adverse impact on the water environment and to leave it in such a state that it complies with the relevant environmental legislation. These obligations subsist notwithstanding the cessation of any or all activity on the part of SCC and, in particular, any controlled activity. Moreover, by virtue of the very clear terms of regulation 2(1) of the CARs, which as already noted include a liquidator within the definition of ‘responsible person’, those obligations are incumbent upon the liquidators” (paragraph 133).

As a Scottish liquidator has no express power to disclaim onerous property, “whether a Scottish liquidator has power specifically to abandon a CARs licence, and thereby bring an end to its onerous conditions, must depend on the terms of the CARs and the relevant licences” (paragraph 136). The CARs contain no such provision for abandonment, but instead they provide specific mechanisms for releasing a licensee, including surrender. Therefore, either the liquidator pursues a surrender – accepting the expensive conditions attached to it by SEPA – or the licences continue until the liquidators vacate office and the company is dissolved.

Ok, if the liquidators cannot disclaim the licences, can they at least avoid the obligations arising from them falling as liquidation expenses?

The judges considered the intended purpose of the CARs: “Where, as here, the relevant legislation was enacted to implement an EU Directive, it is taken to be the legislative intention to achieve the purpose of the Directive… As already noted, the CARs were made under section 20 of the 2003 Act, which was enacted in order to transpose the Water Framework Directive into domestic law. The Water Framework Directive is extensive in its scope and ambitious in its objectives. Its purposes include, for example, the establishment of ‘a framework for the protection of inland surface waters, transitional waters, coastal waters and groundwater which: …ensures the progressive reduction of pollution of groundwater and prevents its further pollution’ (art 1(a)). Where an insolvent company will in due course be dissolved, enforcing a statutory licence against a liquidator affords at best only temporary and imperfect environmental protection. Nevertheless it would seem to be beyond argument that the broad interpretation of the CARs will better achieve the desired result. As a consequence, SCC’s environmental obligations will be treated as liquidation expenses, thereby giving them priority over other obligations” (paragraphs 142 and 143).

They also pointed to other “persuasive factors in favour of giving pre-eminence to the policy of maximising environmental protection over the policy of the expeditious and equal distribution of available assets among the unsecured creditors of an insolvent company”, such as the decision in Re Mineral Resources, which included that “the interest in the protection of the environment should prevail over the interest in fair and orderly winding up of companies” (paragraph 144).

But, bearing in mind that an English liquidator may seek to disclaim a Scottish site or licence, doesn’t this overstep the mark of matters reserved to Westminster?

The judges thought not. “The purpose of the CARs as a whole, and the provisions relating to a liquidator in particular, is an environmental one. Neither the CARs as a whole, nor the provisions relating to liquidators, have as their purpose an insolvency objective. The effect on liquidators of companies possessing a CARs licence is no more than a loose or consequential connection. In all the circumstances, those provisions of the CARs which are said to restrict the power of a liquidator cannot be said to relate to reserved matters. They are, accordingly, not outwith the competence of the Scottish Parliament by reason of section 29(2)(b) of the [Scotland] 1998 Act” (paragraph 156). True, “the CARs have an effect on the practicalities of insolvency. However, more than that is required in order to place them beyond the devolved competence of the Scottish Parliament. If, contrary to the views expressed above, the CARs have modified the law on reserved matters (and in particular any of those aspects of the law of corporate insolvency which are listed under head C2 of schedule 5 to the 1998 Act), it remains the case that any such modifications are incidental to, and consequential on, provisions in the CARs relating to environmental matters, which are not reserved, and only to an extent that is necessary to give effect to the environmental purpose of the CARs” (paragraph 160).

So can an English liquidator disclaim a Scottish site or licence?

“An English liquidation may involve disclaimer of property held anywhere in the world and the liquidation process, and any final dividend upon dissolution, may proceed accordingly. However, the manner in which heritable property is actually disposed of is a matter to be determined by the lex situs (the law where the property is situated). Whatever the powers of a liquidator may be in terms of the law under which the liquidation is processed, the property will not transmit from the company unless that is achieved in accordance with the law applying where the land is located” (paragraph 126).

The Outcome

Therefore, the Inner House reversed the earlier decision and directed that the liquidators do not have the power to abandon (otherwise disclaim) the sites or the statutory licences.

Some commentators have hinted at the prospect of a Supreme Court appeal.

Personally, this outcome leaves me with the following questions:

• If the costs of meeting the ongoing obligations under such statutory licences rank as a liquidation expense, could companies involved in potentially environmentally-damaging, licensed, activities in Scotland find that their access to credit dries up?

• Although English liquidators have specific power to disclaim onerous property – and I don’t know how the English equivalent of the CARs are worded – how does this stack up against legislation implementing an EU Directive, which presumably is felt by all of the UK, with the overriding objective of environmental protection?


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

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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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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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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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Administration Order Applications All At Sea

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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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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).