Case law | Insolvency Oracle

September 28, 2013
by insolvencyoracle Leave a comment

Administration Order Applications All At Sea

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.

September 8, 2013
by insolvencyoracle Leave a comment

Hats Off

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).

July 28, 2013
by insolvencyoracle Leave a comment

Not the Nortel/Lehman Decision

I am not going to comment on the Supreme Court’s decision in Nortel and Lehman, because, as with Eurosail, it has had plenty of coverage already. Instead, I’ll cover a few lesser-known cases, with a couple of Scotland ones taking the top-billing:

• Scotland: Re The Scottish Coal Company Ltd – Liquidator entitled to disclaim land and onerous licences (UPDATE: this was overturned on 12 December 2013 ([2013]CSIH 108). A summary of that reclaiming motion is at http://wp.me/p2FU2Z-5v.)
• Scotland: Re Station Properties Ltd – judge not convinced case made out for para 80 exit from administration and administrators directed to issue revised proposals to cover change of administration objective
• Re GP Aviation Group International Ltd – appeals against tax assessments are not property capable of assignment by a liquidator
• USDAW v WW Realisations 1 Ltd – reversal of Woolworths/Ethel Austin decisions on redundancy consultation legislation: number of redundancies at each location not as relevant as total number
• Evans & Evans v Finance-U-Limited – creditor who proved in full in bankruptcy did not renounce security
• Scotland: Re William Rose – Trustee’s late application to extend 3-year period could not reverse property re-vesting
• Northern Ireland: Tipping v BDG Group Ltd – late application for protective award allowed, as ignorance of the law considered reasonable

However, if you do want to read a summary of Nortel/Lehman, I think that 11 Stone Buildings’ briefing note covers the subject well: http://www.11sb.com/news/24-july-2013—nortel—lehman-supreme-court-decision–guidance-on-insolvency-expenses-and-provable-claims.asp. I’m sure most IPs are breathing a sigh of relief and waiting, a little more comfortably now, for the Game appeal…

Finally, a Scottish precedent for a liquidator’s power to disclaim (UPDATE: … not so fast!)

Scotland: Re. The Scottish Coal Company Limited (11 July 2013) ([2013] CSOH 124)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH124.html

Liquidators sought directions on whether they could abandon or disclaim land and/or onerous water use licences, in order to avoid the substantial costs involved in maintaining and restoring the sites, which the Scottish Environment Protection Agency (“SEPA”) would require before it would accept a surrender of its licences. SEPA and other bodies made representations, conscious that, if the liquidators succeeded, significant costs might fall to the taxpayer.

Scottish readers will be aware that there is no express statutory provision available to liquidators of Scottish companies to disclaim onerous property, in contrast to the position of liquidators of English and Welsh companies who may disclaim under S178 of the Insolvency Act 1986. Counsel in this case were also unable to find any case law or textbook showing a liquidator of a Scottish company exercising such a power.

Lord Hodge drew a comparison with the position of a Trustee in a sequestration, which has power to abandon land, and contemplated its effect in relation to S169(2) of the Act, which provides 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”. The judge felt that it was not an exact comparison, as the effect of a trustee’s abandonment was to reverse the vesting so that the bankrupt owns the property. However, there is no vesting of property in a liquidator, so if he were somehow to bring to an end the company’s ownership of the property, it would become ownerless. Although the judge saw the potential for abuse as a means of avoiding obligations, he saw no reason in principle why land could not be made ownerless, given that the Crown has a right to waive ownership of bona vacantia, which would render such property ownerless.

The judge then considered whether the liquidators could avoid the obligations imposed under the Water Environment (Controlled Activities) (Scotland) Regulations 2005 (“CAR”) in seeking to surrender the licences. The judge described powerful considerations that might have persuaded him to hold that the liquidators could not disclaim the licences, one reason being that he thought “that there is a strong public interest in the maintenance of a healthy environment, the remediation of pollution and the protection of biodiversity. There is a conflict between the results sought by the directive and the insolvency regime. I do not think that the insolvency regime has any primacy which means that CAR can exclude a liquidator’s power to disclaim only if, like section 36 of the Coal Industry Act 1994, it says so expressly” (paragraph 51). However, the judge recognised that “if the relevant provisions of CAR have the effect of (a) removing a liquidator’s right to disclaim the property of a company and refuse to perform an obligation in relation to that property and (b) creating a new liquidation expense which would have to be met before the claims of preferential creditors, it seems to me that it would modify the law on reserved matters… It would also be altering the order of priority on liquidation expenses in rule 4.67 of the Insolvency (Scotland) Rules 1986 if… the remuneration of the liquidator were to rank equally with the obligation to spend money to comply with CAR” (paragraph 64).

Consequently, the judge concluded that the liquidators could disclaim the sites and abandon the water use licences along with the obligations under CAR. He also endorsed the liquidators’ proposed mechanism for effecting the abandonment, which involved giving notice to all interested parties, advertising the fact so that locals were made aware of the abandoned sites, and sending a notice to the Keeper of the Registers in Scotland.

(UPDATE 09/01/14: this decision was overturned in a reclaiming motion ([2013] CSIH 108) on 12/12/13 – see http://wp.me/p2FU2Z-5v.)

Scotland: More work required of administrators to exit via Para 80 and administrators directed to submit revised proposals to address change in objective

Re. Station Properties Limited (In Administration) (12 July 2013) ([2013] CSOH 120)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH120.html

The administrators’ proposals, which included that they thought that the objective set out in Paragraph 3(1)(c) of Schedule B1 would be achieved, were approved at a creditors’ meeting. Subsequently, it appeared to the administrators that all creditors should receive full repayment of their debts, as the directors had secured funding, and therefore they planned to exit the administration and hand control of the company back to the directors. The quantum of the claim of one creditor, Dunedin Building Company Limited (“DB”), was subject to a legal action. DB objected to the administrators’ plan arguing that they should adjudicate on its claim before ending the administration.

The administrators sought directions as to whether in the circumstances they could end the administration under Paragraph 80 of Schedule B1 on the basis that the purpose had been sufficiently achieved notwithstanding DB’s objection.

Lord Hodge felt that an administrator could not come to this conclusion “without obtaining a clear understanding of the directors’ business plan and cash flow forecasts and forming an independent view, in the light of the best evidence reasonably available, whether that plan and those forecasts are realistic” (paragraph 20). He also felt that “It would be consistent with current accountancy practice to require the directors to produce a business plan and forecasts for at least 12 months and to attempt to look into the future beyond that time to identify whether there was anything which was likely to undermine the company’s viability” (paragraph 22). The ultimate value of DB’s claim was a factor in assessing the company’s future cash flow solvency, so the judge felt either that the administrators should await the outcome of the legal action or they “should take steps to enable themselves to reach an informed and up to date view on the likely value of that claim” (paragraph 23) before they could decide whether the company had been rescued as a going concern.

Lord Hodge also felt that the administrators had to deal with the change in administration objective – from Para 3(1)(c), as set out in their proposals, to Para 3(1)(a) – by issuing revised proposals under Para 54. “I am not persuaded that the obligation on an administrator under para 4 of Schedule B1 to ‘perform his functions as quickly and efficiently as is reasonably practicable’ provides any justification for bypassing para 54 even if an administrator were of the view that a dissenting creditor would be outvoted at the creditors’ meeting” (paragraph 30).

Although personally, I see this as a significant conclusion, particularly as I don’t think I’ve seen any administrator issue revised proposals, it should be remembered that the judge felt that, in the circumstances of this case, the change in administration objective was a substantial change, particularly because DB had been in dispute with the directors regarding its claim and the change in objective could see the company reverting to the directors’ control before the claim was determined.

Right to appeal a tax assessment is not property capable of being assigned

Re. GP Aviation Group International Limited (In Liquidation): Williams v Glover & Pearson (4 June 2013) ([2013] EWHC 1447 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1447.html

Former directors asked the liquidator to appeal against HMRC’s corporation tax assessments, but the liquidator did not have the finance to fund the appeals, so the former directors asked the liquidator to assign the appeals to them. The liquidator sought directions on whether he had the power to assign the appeals.

HH Judge Pelling QC concluded that the right of appeal was not property within the meaning of the Insolvency Act and so was no capable of being assigned. He noted that the liability, to which the right of appeal related, could not be assigned and the right of appeal could not be assigned separately. He stated that, even if it had been capable of assignment, he would not have sanctioned it, as: “the assignment of the right to appeal without being able to assign or novate the liability would place the office holder in a potentially invidious position – an unreasonable and intransigent position might be adopted in relation to the appeal that might expose the Company to penalties, interest and costs that could otherwise have been avoided. This risk is not one that the court should sanction given the potential implications for creditors as a whole” (paragraph 32). The judge made it clear that his judgment applied strictly to the bare right to appeal in this case. “Different considerations may apply where the liability can be novated or where the appeal right is one that is incidental to a property right that can be assigned (for example a right to appeal a planning decision in relation to land that is sold by an office holder)” (paragraph 33).

Less than 20 redundancies at any one site did not avoid consultation requirements where more than 20 were made redundant over all sites

USDAW & Anor v WW Realisation 1 Limited & Ors (30 May 2013) ([2013] UKEAT 0547 and 0548/12)

http://www.bailii.org/uk/cases/UKEAT/2013/0547_12_3005.html

I appreciate I’m behind the times on this one, which has been widely publicised in the past couple of months.

Earlier Tribunals had decided that there was no duty to consult under TULRCA with staff who worked at different sites where less than 20 redundancies were planned at those sites even though the total number of dismissals across the company was over 20. The Tribunals dealt with two separate cases involving such redundancies of staff who had worked in Ethel Austin and Woolworths stores. The consequence had been that 4,400 workers had been excluded from awards for the companies’ failures to consult, which had been granted to c.24,000 of their former colleagues who had worked at larger stores and head offices.

These decisions were overturned on appeals, although the judge expressed some disappointment that the respondents did not attend or comment, feeling that it put the Tribunal at a disadvantage. In particular, the judge noted that, as a consequence of the appeals, the Secretary of State for BIS would be faced with the prospect of paying out 60 or 90 days’ pay for 4,400 people.

The key issue was discerning the purpose behind S188(1) of TULRCA, which refers to “20 or more employees at one establishment”, which the Appeal Tribunal decided was more restrictive than the EC Directive, which was intended to be implemented into domestic legislation by means of S188. The judge concluded that “the clear Parliamentary intention was to implement the Directive correctly” (paragraph 50). Therefore, “the only way to deliver the core objective of protection of the dismissed workers in the two cases on appeal is to construe ‘establishment’ as meaning the retail business of each employer. This is a fact-sensitive approach which may not be the same in every case but it is consistent with the core objective as applied to the facts in these two cases” (paragraph 52). However, the Tribunal preferred a solution that made “the point more clearly and simply so that it can be applied without detailed consideration of the added fact sensitive dimension. We hold that the words ‘at one establishment’ should be deleted from section 188 as a matter of construction pursuant to our obligations to apply the Directive’s purpose” (paragraph 53), although they acknowledged that this might be a step too far.

(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.)

Creditor who proved in full in a bankruptcy did not renounce its security

Evans & Evans v Finance-U-Limited (18 July 2013) ([2013] EWCA Civ 869)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/869.html

In 2007, Mr and Mrs Evans purchased a car financed by a loan from Finance-U-Limited (“FUL”) and a bill of sale granting FUL security over the car. Mr Evans went bankrupt later in 2007 and Mrs Evans went bankrupt in 2008. FUL proved in Mr Evans’ bankruptcy for the full sum due under the loan agreement; the existence of security was disclosed on the proof, but no value was put on it. The claim was admitted in full and FUL later received a small dividend. After Mrs Evans’ discharge from bankruptcy, she continued to pay monthly instalments to FUL until mid-2010. In 2012, the Evans were successful in seeking a declaration that the car was their property free from any claim by FUL on the basis that, because FUL had proved in full in Mr Evans’ bankruptcy, it no longer had a right to enforce its security over the car. FUL appealed the declaration.

Lord Justice Patten referred to the case of Whitehead v Household Mortgage Corporation Plc in which it was decided that the acceptance of a dividend from an IVA “did not amount to an agreement or election by the creditor to treat as unsecured that part of the debt in respect of which the dividend had been paid” (paragraph 20). He felt that “FUL was not therefore required to renounce its security as the price of being able to prove for the balance of the debt nor was that the effect of it proving for the entire amount due. It therefore retained its right to enforce the security following Mr Evans’ bankruptcy but did not exercise that right whilst Mrs Evans continued to meet the instalments” (paragraph 21). He therefore reversed the decision at first instance and, as the term of the loan had expired, he decided that FUL was entitled to possess the car free from any statutory requirement to give notice.

Scotland: impossible to undo the reinvesting of a family home in the debtor

Re. Sequestrated Estate of William Rose (4 June 2013) ([2013] ScotSC 42)

http://www.bailii.org/scot/cases/ScotSC/2013/42.html

The Trustee sought a warrant to serve an application under S39A(7) of the Bankruptcy (Scotland) Act 1985 on the debtor and his spouse. The debtor was sequestrated on 20 May 2008, so the Trustee sought to extend the 3-year time period after which the family home is reinvested in the debtor, albeit that the 3 years had expired before the Trustee made his application. The Trustee explained that he had failed to act sooner as a consequence of an “administrative error” (paragraph 4.3).

Sheriff Philip Mann was “unmoved” by the submissions on behalf of the Trustee: “The plain fact of the matter is that, on the Trustee’s averments, the property has already reverted to the ownership of the debtor and it is now too late to prevent that from happening. The Trustee is not trying to prevent that from happening. He is, in effect, trying to reverse that which has already happened in consequence of section 39A(2). Section 39A(7) says nothing about reversing the effect of section 39A(2)” (paragraph 5.4). The Sheriff therefore concluded that the Trustee’s application was incompetent and he refused to grant the warrant.

Northern Ireland: ignorance of remedy for company’s failure to consult was “reasonable”, thus five months’ late claim allowed

Tipping v BDG Group Limited (In Liquidation) ([2013] NIIT 2351/12) (19 April 2013)

http://www.bailii.org/nie/cases/NIIT/2013/2351_12IT.html

Whilst it is a Northern Ireland case, so of limited application, I thought it was worth mentioning briefly that the former employee succeeded in claiming compensation for the company’s failure to consult, despite his claim being lodged five months after the “primary limitation period” for lodging a complaint with the Tribunal.

The reason for the delay was that the claimant had not been aware of the protective award. “Courts and tribunals have consistently held that ignorance as to one’s entitlement to make a complaint of unfair dismissal is not reasonable ignorance. (This is on the basis that the general public now are well aware of entitlements to make unfair dismissal complaints). However, the situation is different in respect of protective award complaints. The availability of remedies in respect of collective redundancy consultation failures, the threshold (of 20 redundancies), and the circumstances in which an individual, as distinct from a trade union or employee forum representative, can seek such remedies, are all matters which are not generally well known” (paragraphs 16 and 17) and therefore the Tribunal held that it could allow the complaint, albeit that, in the judge’s view, the further period of five months was “close to the boundaries of what I consider to be ‘reasonable’” (paragraph 21).

July 11, 2013
by insolvencyoracle Leave a comment

Case summaries: Two Admin appointments; two OR cases; valuing a bank’s claim; LB Pension Scheme; and disqual

The Courts have been busy. Here’s a summary of half the recent judgments in my inbox:

• Re Care People Limited: Administrator’s appointment valid despite defective QFCH demand
• Re Integeral Limited: Proposed Administrators’ “supine approach” falls very far short of Court’s expectations
• Re Clive McNally: how to value unsecured element of bank’s claim for IVA voting purposes
• Howard v OR: OR is not Equality Act duty when deciding to revoke IVA
• LB Re Financing No. 1 Limited v Trustees of Lehman Brothers Pension Scheme: Trustees entitled to add target companies to FSD
• From Scotland: SoS for BIS v Reza: director in name only disqualified
• From Northern Ireland: OR v Gallagher: OR fails to have post-petition matrimonial order set aside as disposition

Re Care People Limited (In Administration) ([2013] EWHC 1734 (Ch)) (18 March 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1734.html

In Brief: Appointment of administrators six minutes after QFCH demand, which gave conflicting deadlines for repayment, was premature at worst. Court decided defect did not render appointment a nullity and waived, declaring appointment valid.

Ultimate Invoice Finance Limited, a QFCH, issued a written demand dated 25 February 2013 to the company and an Administrator was appointed by filing a notice of appointment at court at 12 noon on 26 February. The difficulty was that the demand gave two different timescales for repayment: in one place, two days, and, elsewhere in the same demand, by return. Under the terms of the charge, the written demand was to be considered as served 48 hours from the time of posting. The QFCH repeated the demand by emailing it at 11.54am on 26 February, i.e. just six minutes before the appointment. Consequently, the question for Judge Purle was whether the Administrator had been validly appointed.

Purle J concluded that “at least enough time, which is more than six minutes, had to elapse for the unchallenged part of the demand to be met, assuming the company could meet it. The probability, therefore, is that the appointment was not properly made at the time, but was irregular” (paragraph 13). However, the company was in no position to make the repayment in two days or at all, so “what occurred at worst therefore was a premature appointment” (paragraph 14). He felt that the defect was simply a procedural matter and did not consider it “of such fundamental importance as to render the appointment a nullity” (paragraph 15). He also believed that the prejudice to the company was limited and that there was no substantial injustice resulting from the premature appointment and thus he declared the appointment valid notwithstanding the defect.

Re Integeral Limited ([2013] EWHC 164 (Ch)) (5 February 2013)

http://www.11sb.com/pdf/re-integeral-ltd.pdf

In Brief: Proposed Administrators criticised for taking “supine approach” to flawed administration application. Court took into account creditors’ lack of confidence in any administrator proposed by director and granted winding up order.

This judgment has not yet appeared on BAILII, but the article in R3’s Summer 2013 Recovery magazine by Prav Reddy and Christopher Boardman was quite striking, so I thought I’d track it down.

Readers of Recovery magazine may recall the article, which emphasised the obligations of nominee administrators indicated by this case in which an application for an administration order was dismissed in favour of a winding-up order. The judge, Richard Snowden QC, stated that “it is of fundamental importance that any insolvency practitioner who is nominated as a potential administrator – an officer of the court – and who ventures his opinion to the court as to the prospects of an administration order, should do so carefully, with an independent mind, and on the basis of a critical assessment of the position of the company and the proposals going forward” (paragraph 69). In this case, the court granted leave for the petitioner to apply for a costs order against the nominee administrators personally on the basis that their evidence “fell very far short of these basic requirements” (paragraph 70).

Having read the judgment, I thought I’d add to the R3 article. The facts of this case were quite unusual, leading the judge to state that, in his judgment, “the administration application has been a tactical ploy by Mr Joshi to avoid or at the very least postpone the liquidation of the Company and the independent investigation of his conduct of its affairs” (paragraph 78). It sticks in the throat a bit to hear a judge refer to an “independent liquidator” and to give weight to the views of creditors who “would have no confidence in any administrator suggested by Mr Joshi”. It makes for uncomfortable reading when a judge appears to hint at a risk, or at least acknowledges the perception of some creditors, that such an IP will not do his/her job when appointed officer of the court. In Snowden’s judgment “the supine approach of both practitioners and their failure even to acknowledge the fundamental problems… is so serious as to call into question their competence and independence from Mr Joshi” (paragraph 72). It makes me question: how is a nominated administrator to function? He is not an officer of the court until appointed administrator and until then he receives his instructions from the company in assisting in putting the company into administration – I am not suggesting that this supports a “supine approach”, but it does make me wonder how an IP can manage such risks of conflict of interest, which exist in every case, at least theoretically, where he is introduced to an appointment – whether Administration, Liquidation, or CVA – by the company.

Re Clive Vincent McNally ([2013] EWHC 1685 (Ch)) (17 June 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1685.html

In brief: Bank was correct to deduct future costs of LPA receivers in valuing unsecured element of claim for purposes of voting on IVA.

McNally appealed his bankruptcy, which had followed a rejected IVA Proposal, and the rejection of his application to set aside, amongst other things, the chairman’s decision on the amount of a bank’s debt for voting purposes.

The key differences in the chairman’s/bank’s view of the value of the claim for and the view of Mr McNally were (i) the value of the property – the bank relying on a valuation of £650,000 to £750,000 and Mr McNally relying on a letter proposing to market the property at £850,000 – and (ii) the costs of realisation – the bank estimating them at £100,000 and Mr McNally at £27,000.

The judge had little difficulty in rejecting McNally’s view of the property value in favour of the bank’s on the basis of the valuation evidence. Deciding on the costs of realisation was a little less straightforward, as they comprised costs incurred prior to the IVA meeting and future costs anticipated to be incurred by LPA receivers. Judge Purle QC stated: “I would accept that the court should not proceed on the basis that exceptional or unusual costs will be incurred, but where, as here, receivers are in place, the ongoing costs associated with their appointment are inevitable and cannot be ignored… Costs which must inevitably be incurred before or in the realisation of the security must, it seems to me, be taken into account in ascertaining the unsecured balance, as the value of the security (from which the costs will be paid) is necessarily reduced by the amount of those future costs” (paragraph 33).

On this basis, the value of the bank’s unsecured claim was considered sufficient to defeat the proposed IVA and the appeal was dismissed.

R (on the application of Amanda Howard) v The Official Receiver ([2013] EWHC 1839 (Admin)) (28 June 2013)

http://www.bailii.org/ew/cases/EWHC/Admin/2013/1839.html

In Brief: OR exercised a judicial function when deciding to revoke a DRO, so not subject to public sector equality duty.

Ms Howard sought a judicial review of the OR’s decision to revoke her Debt Relief Order on the ground that the OR had failed to comply with the public sector equality duty set out in section 149 of the Equality Act 2010.

The DRO was revoked on the basis that the debtor’s disposable income during the moratorium period materially exceeded the £50 per month threshold allowed, albeit that this was a consequence of the debtor receiving three months’ underpayment of working tax credits from HMRC, but the debtor claimed that the OR had failed to take into account that she had a protected characteristic under the Equality Act 2010 – the OR had accepted that the debtor was disabled within the meaning of the Act – and that the decision to revoke amounted to direct discrimination.

The key issue was whether the OR was exercising a judicial function (within the meaning contemplated by paragraph 3 of Schedule 18 to the Act) in deciding to revoke the DRO – if so, she would not have the section 149 public sector equality duty.

Mr Justice Swaden’s judgment is one of the longest I have read, but the upshot was that the OR was exercising a judicial function – in my view, one persuasive argument was that the power to revoke a DRO is conferred on both the OR and the court and, as it was common ground that the court would be exercising a judicial function in revoking a DRO, it is difficult to see how the OR would not be also; if instead the OR were subject to the public sector equality duty, it could mean that the OR and the court would come to different conclusions on identical facts.

Consequently, the OR was not subject to the public sector equality duty in deciding to revoke the DRO and the application for judicial review was dismissed.

LB Re Financing No 1 Limited & Ors v The Trustees of the Lehman Brothers Pension Scheme & Ors ([2013] EWCA Civ 751) (214 June 2013)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/751.html

In Brief: Trustees entitled to seek addition of further target companies to FSD, despite two-year timescale from look-back date having elapsed.

Although this is a Lehman Brothers pension case, and thus I have struggled to keep up with the issues and arguments, it seems to me to be a significant outcome.

On 13 September 2010, the Determinations Panel of the Pensions Regulator issued a Financial Support Direction to six Lehman group companies. The Trustees referred the determination to the Upper Tribunal in order to increase the number of targets of the FSD by adding a further 38 Lehman group companies. The additional targets appealed on the basis that the Trustees were not “directly affected” by the determination and thus were not entitled to exercise the right to request their addition and that the 2-year period had elapsed (based on the Pensions Regulator’s Warning Notice, which identified 14 September 2008 as the look back date for any FSD determination against a target identified in the warning notice) and thus the Regulator could not issue an FSD to the other companies based on the same issue date. Both grounds of the appeal were dismissed.

Lady Justice Arden did not believe that the court should adopt a narrow interpretation of “directly affected” and thus conclude in this case that, because the Trustees’ rights were affected two or three steps after the determination, this rules them out as being “directly affected”. “They are, therefore, interested in a very real sense in the initial stage involving the determination to issue an FSD” (paragraph 22).

On the 2-year time limit issue, it was acknowledged that “there will never be another case in which the time limit imposed by section 43(9) [of the Pensions Act 2004] in its original form will fall to be applied” (paragraph 38), as it has since been amended by the Pensions Act 2011. However, Arden LJ described the “plainly undesirable consequences” that would result from the imposition of a 2-year timescale in the way argued, which “would turn the reference and appeal proceedings into a filibusterer’s paradise” (paragraph 48) and “would be to treat the time limit as an inappropriate master rather than as a good servant” (paragraph 59). She believed that the Upper Tribunal’s directions given under section 103(5) and (6) of the Pensions Act 2004 were not subject to the time limit provided in section 43(9).

Secretary of State for Business, Innovation & Skills v Ferdousi Reza ([2013] ScotCS CSOH 86) (31 May 2013)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH86.html

In Brief: Director’s abdication of all responsibility to husband resulted in two-year disqualification order. Also lesson for directors: if contemplating an undertaking, perhaps offer it before the hearing!

A disqualification order was made against Mrs Reza for two years.

Mr and Mrs Reza had both been directors. Mr Reza had already given an undertaking not to be a director for three years. The company had gone into administration after continuing to trade without paying tax, but Mrs Reza’s defence was that she had no knowledge of that, as she had no active involvement with the company but left all its affairs to her husband.

The judge commented that “over the whole of her 18 years in office as a director, the respondent failed to carry out even the most basic of her duties” (paragraph 15) and acknowledged that she had been made a director only because of the perceived tax advantages and in case her husband had been unavailable to sign documents. However, “if someone accepts a directorship and then abdicates all responsibility for the affairs of the company, on any common sense view they have demonstrated unfitness for the office to a high degree… and the case law is clear that incompetence can include inactivity” (paragraphs 17 and 19). The short disqualification period of two years was considered appropriate, given that Mrs Reza did not know of the company’s tax defaults.

Despite Mrs Reza informing the court at the end of the hearing that she would be prepared to give an undertaking, the petitioner pursued a disqualification order “not least as an example and a deterrent to others” (paragraph 21).

Official Receiver for Northern Ireland v Catherine Gallagher ([2013] NIMaster 12) (8 May 2013)

http://www.bailii.org/nie/cases/NIHC/Master/2013/12.html

In Brief: OR failed to have matrimonial order set aside as a post-petition disposition, although managed to claw back funds intended for petitioner.

Although this is a Northern Ireland case, the arguments centre around Article 257 of the Insolvency (Northern Ireland) Order 1989, which pretty-much mirrors S284 of the Insolvency Act 1986, so I thought it was worth covering.

A bankruptcy petition was presented on 31 January 2011, but an order was only made on 13 January 2012. In the interim, the bankruptcy petition was removed from the bankruptcy court to the matrimonial court and a matrimonial agreement incorporating the transfer of the debtor’s interest in a property was made an order of court on 18 November 2011. The OR sought to have the order set aside, arguing that the petition should not have been moved to the matrimonial court and it should have been dealt with more expeditiously; had it been so, the OR argued that the bankruptcy order would have been made in all likelihood before the property adjustment orders were made.

The judge decided that, as the ancillary relief proceedings were High Court proceedings, the matrimonial court’s order fulfilled the Article 257 criteria in that the property adjustment orders had been made with the consent of the High Court and were therefore not void, save for the following.

One element of the matrimonial agreement was that £21,500 should be paid to the petitioning creditor. The judge noted that this was intended to enable the petition to be dismissed. Therefore, as it was not paid and the petitioning creditor had sought and obtained the bankruptcy order, the judge concluded that the sum should be paid to the OR as it formed part of the bankruptcy estate.

June 2, 2013
by insolvencyoracle Leave a comment

(1) Legal charge for bankruptcy annulment service unenforceable; (2) Employment Appeal Tribunal acknowledges company’s conflicting statutory duties; (3) English court leaves US to decide bankrupt’s COMI; (4) company restoration did not avoid administration-liquidation time gap; (5) what are TUPE “affected employees”?; (6) more on Jersey administration appeal

Sorry guys, I’ve been storing up a few court decisions:

• Consolidated Finance v Collins: legal charge resulting from bankruptcy annulment service unenforceable
• AEI Cables v GMB: protective awards reduced in recognition of company’s conflicting statutory duties
• Kemsley v Barclays Bank Plc: English court leaves US to decide bankrupt’s COMI
• RLoans LLP v Registrar of Companies: company restoration did not avoid 2-year gap between administration and liquidation
• I Lab Facilities v Metcalfe: redundant employees in non-transferred part of business not TUPE “affected employees”
• HSBC Bank Plc v Tambrook Jersey: Court of Appeal’s reasons for reversing rejection of Jersey court’s request for administration

Out of the frying pan into the fire for bankrupts achieving annulments

Consolidated Finance Limited v Collins & Ors ([2013] EWCA Civ 473) 8 May 2013

http://www.bailii.org/ew/cases/EWCA/Civ/2013/475.html

Summary: Appellants were successful in resisting the attempts of Consolidated Finance Limited (“Consolidated”) to enforce mortgages over their homes, mortgages which had arisen as a consequence of engaging the Bankruptcy Protection Fund Limited (“BPF”, “Protection”) to secure annulments of their bankruptcies. The agreements were found to be refinancing agreements and thus subject to the Consumer Credit Act 1974, the requirements of which Consolidated had not met.

Whilst the arguments centred around the construction and effects of the agreements, of greater interest to me are the judge’s criticisms of the transactions which, at least in the case examined as typical, were in his judgment manifestly to the bankrupt’s and her husband’s prejudice. He felt that some of the companies’ literature was misleading and noted that it made no mention of the “extraordinarily high rates of interest”. He also criticised the solicitors involved in the process, questioning whether they could avoid the duty to advise their clients, who were clearly entering into a transaction that was manifestly to their disadvantage, and suggested that they may have had “a conflict of irreconcilable interests” given their relationship with Consolidated and BPF.

The Detail: Five sets of appellants sought to resist Consolidated’s attempts to enforce mortgages over their homes. The judge focussed on the facts of Mr and Mrs Collins’ case as typical of all claims.

Mrs Collins had been made bankrupt owing a total of £13,544 to her creditors. She engaged the services of BPF to help her secure an annulment, given that the equity in her jointly-owned home was more than sufficient to cover all debts. Mrs Collins’ bankruptcy was annulled by reason of BPF settling all sums due by means of funds totalling £24,674 received from Consolidated. Under the terms of a Facility Letter, Consolidated agreed to make available a loan of £32,000 (which was also used to settle BPF’s fees), which was required to be repaid within three months after drawdown. Mr and Mrs Collins were unable to refinance their liabilities under the Facility Letter supported by a Legal Charge, resulting in Consolidated filing the claim, some 2.5 years later, for a total at that time of £77,385 inclusive of interest at 4% per month after the first three months (at 2.5% per month). The Facility Letter also provided for a so-called hypothecation fee of 2.5% of the principal and an exit fee of the greater of £3,000 and 2.5% of the principal.

Amongst other things, the appellants contended that the agreements under which they were alleged to have incurred the liabilities were regulated for the purposes of the Consumer Credit Act 1974 (“the Act”) and did not comply with the requirements of the Act. Consolidated’s case was that it was a “restricted-use” agreement, which would lead it to be exempted from the requirements of the Act. The Collins’ argument was that, if anything, it was a refinancing agreement, which would mean that it was not exempt.

Sir Stanley Burton concluded from the documents that Mrs Collins was indebted to BPF for the sums advanced at least until the annulment order was made. “The effect of the Facility Letter was to replace her indebtedness to Protection, which was then payable, with that owed to Consolidated. In other words, the purpose of the agreement between Mrs Collins and Consolidated was to refinance her indebtedness to Protection” (paragraph 47). Consequently, it was a regulated agreement and it was common ground that it did not comply with the statutory requirements and was unenforceable in the present proceedings.

The judge felt inclined to air his concerns at the “unfairness” of the transactions between the Collins and BPF/Consolidated. He stated that, “at least in the case of Mr and Mrs Collins, the transactions were in my judgment manifestly to their prejudice… If they failed to refinance their liabilities to the companies, as has happened, and the Legal Charges granted to Consolidated were enforceable, it would not only be Mrs Collins’ equity in their home that would be in peril, but also that of Mr Collins. In other words, they were likely to lose their home. This was the very result that, according to the companies’ literature, entering into agreements with them would avoid, but with the added prejudice that the far greater sums sought by the companies would have to be paid out of the proceeds of sale of their home as against the sums due in the bankruptcy (for which Mr Collins had no liability)” (paragraph 56).

He also noted that the companies incur no risk in making the advance to the bankrupt, as they will only do so if there is sufficient equity in the property, and therefore “to suggest that they take any relevant risk, as they do by describing their services as ‘No win no fee’, is misleading” (paragraph 57). “Moreover, the companies’ advance literature… make no mention of the extraordinarily high rates of interest they charge, rates that are even more striking given that the indebtedness is fully secured” (paragraph 58).

The judge also criticised the solicitors who acted for Mrs Collins and who were introduced to her by BPF, a relationship which, he suggested, may have given them “a conflict of irreconcilable interests”. “It must, and certainly should, have been obvious to them that for the reasons I have given the transactions with Mr and Mrs Collins were manifestly to their disadvantage. Mrs Collins was their client. I raise the question whether in such circumstances a solicitor can properly avoid a duty to advise his client by excluding that duty from his retainer, as LF sought to do” (paragraph 59).

Employment Appeal Tribunal acknowledges insolvent employer’s Catch-22, but only drops protective awards by a third

AEI Cables Limited v GMB & Ors ([2013] UKEAT 0375/12) (5 April 2013)

http://www.bailii.org/uk/cases/UKEAT/2013/0375_12_0504.html

Summary: Having consulted IPs and failed to seek additional funding, the company decided to make employees in one division redundant and keep another division running with a view to proposing a CVA. The CVA was approved, but the dismissed employees were granted the maximum 90 days protective awards, as the company had failed completely to consult with the trade unions/employee representatives as required by the Trade Union and Labour Relations (Consolidation) Act 1992.

The company sought to have the protective awards reduced. The Appeal Tribunal acknowledged that it was unreasonable to expect the company to have continued to trade while insolvent to enable it to comply with the consultation requirements of the Act – the company could have consulted, at most, for 10 days – and that the Employment Tribunal should have considered why the company acted as it did. The protective awards were reduced to 60 days.

The Detail: Around the middle of May 2011, insolvency practitioners warned the company that, unless they took action, they risked trading whilst insolvent. Following a failure to secure additional funding from the bank, the decision was made to close the company’s cable plant, leading to the redundancy of 124 employees, but continue to trade the domestic division, which employed 189 people, and seek to agree a CVA. On 27 May 2011, the 124 employees were dismissed with immediate effect and later a CVA was approved on 24 June 2011.

An Employment Tribunal found that the company had failed to consult with trade unions and employee representatives as required by S188 of the Trade Union and Labour Relations (Consolidation) Act 1992. The company raised no special circumstances in an attempt to excuse non-compliance, but it did appeal the length of the protective awards, which had been granted for the full 90 days.

The reasoning of the Appeal Tribunal went like this: “We very much bear in mind that the purpose of making a protective award is penal, it is not compensatory. It is penal in the sense that it is designed to encourage employers to comply with their obligations under sections 188 and 189. We also bear in mind that the starting point in considering the length of a protective award is 90 days. Nonetheless Employment Tribunals are bound to take account of mitigating factors and are bound to ask the important question why did the respondent act as it did. Had the Employment Tribunal asked this question it could not possibly have ignored the fact and the conclusion that the company simply was unable to trade lawfully after the advice it had received on 25 May. In those circumstances, it is clearly wrong for the Employment Tribunal to anticipate that a 90 day consultation period could have started” (paragraph 22). In this case, the Appeal Tribunal noted that the company could have started consultation around 17 to 20 May, when it seems the company first consulted the IPs, but there had been no consultation or no real provision of information at all before the dismissals on 27 May. “However, because in our opinion the Employment Tribunal failed to have sufficient regard to the insolvency and the consequences of trading and that a consultation period of 90 was simply not possible, the award of 90 days cannot stand” (paragraph 23). The protective awards were reduced to 60 days.

English court leaves US to decide bankrupt’s COMI

Kemsley v Barclays Bank Plc & Ors ([2013] EWHC 1274 (Ch)) (15 May 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1274.html

Summary: An English bankrupt sought to have US proceedings against him restrained. The English court declined to intervene, observing that the Trustee’s ongoing application in the US Bankruptcy Court for recognition under UNCITRAL of the English bankruptcy would decide the bankrupt’s fate.

The Detail: On 26 March 2012, Kemsley was made bankrupt on his own petition. Shortly before this, Barclays commenced proceedings against him in New York (and later in separate proceedings in Florida). Kemsley’s Trustee applied to the US Bankruptcy Court for recognition under UNCITRAL of the English bankruptcy as a foreign main proceeding. At the time of this hearing, judgment on the Trustee’s application had not yet been given, but the New York proceedings had been adjourned awaiting the outcome.

Kemsley applied to the English court to restrain Barclays from continuing with either the New York or the Florida proceedings. The issue for Kemsley was that, although he would be discharged from his English bankruptcy on 26 March 2013, if Barclays were successful in the New York proceedings, that judgment would be enforceable for 20 years in the US and other jurisdictions that would recognise it.

Mr Justice Roth noted a couple of authorities, which followed the principle that “there must be a good reason why the decision to stop foreign proceedings should be made here rather than there. The normal assumption is that the foreign judge is the person best qualified to decide if the proceedings in his court should be allowed to continue. Comity demands a policy of non-intervention” (paragraph 30).

The judge noted that, if the English bankruptcy were recognised as foreign main proceedings on the basis that England was Kemsley’s COMI, the New York and the Florida proceedings would be stayed. But what if the US Court finds that Kemsley’s COMI was the USA? In that case, would it be right for the English court to intervene? As Roth J observed: “either Mr Kemsley’s COMI was in England, in which case an anti-suit injunction is unnecessary; or it was in the United States, in which case I regard such an injunction as wholly inappropriate” (paragraph 50). Consequently, Roth J dismissed the application.

In a postscript to the judgment, it was reported that the Trustee’s application for recognition was refused by the US court. The court found that, at the time of the petition, Kemsley’s COMI was in the USA.

Company restoration of no use to petitioner, as it left a 2-year gap between administration and liquidation

RLoans LLP v Registrar of Companies ([2012] EWHC B33 (Comm)) (30 November 2012)

http://www.bailii.org/ew/cases/EWHC/Comm/2012/B33.html

Summary: A creditor sought the restoration of a dissolved company to the register in order to pursue a preference claim. The company had been moved to dissolution from administration in 2010, so the petitioner sought a winding-up order that would follow on immediately from the administration so that the preference claim was not already out of time.

The judge restored the company and ordered the winding-up, but noted that this did not deal with the 2-year gap between insolvency proceedings. This was because he felt that, on filing the form under paragraph 84 of Schedule B1, the administration had ceased, dissolution being a later consequence, and so the eradication of the dissolution merely brought the company back to the position after the end of the administration.

The Detail: To enable a preference claim to be pursued, RLoans LLP sought the restoration of a company to the register and a winding-up order to take effect retrospectively from the date that the former Administrators’ notice of move to dissolution was registered. The transaction that is subject to the preference allegation occurred in March 2006; Administrators were appointed in January 2007 and they submitted the form to move the company to dissolution in June 2010. Therefore, only if the company’s restoration was accompanied by a continuation of insolvency proceedings – either a liquidation following immediately on the cessation of the administration or an extension of the original administration – would the preference claim have any chance due to the timescales involved; it would be of no use to the petitioner if the commencement of the winding-up were the date of restoration.

Mr Registrar Jones had no difficulty deciding that it was just to restore the company to the register. However, he concluded that the resultant fiction that the dissolution had not occurred had no effect on the cessation of the administration: “when paragraph 84 of Schedule B1 to the Act prescribes that the appointment ceases upon registration of the notice, it means that there is no longer any administration in existence. The cessation is not dependent upon dissolution taking place” (paragraph 26). Therefore, there would still be a gap of over two years between the end of the administration and the start of any winding-up, which would not help the petitioner. The judge also felt that the solution did not lie in extending retrospectively the original administration, because the company had ceased to be in administration before its dissolution; all the current direction could do was to restore the company to the position it was in before dissolution.

In the absence of the recipient of the alleged preference, the judge was not prepared to consider suspending the limitation period between the end of the administration and the commencement of liquidation. Therefore, all he did was restore the company to the register and order its winding-up. He also declined to order that the IP waiting in the wings be appointed liquidator: “I only have power to make the appointment if a winding up order is made ‘immediately upon the appointment of an administrator ceasing to have effect’ (see section 140 of the Act). For the reasons set out above, that has not occurred” (paragraph 61).

Another Employment Appeal Tribunal: “affected employees” narrowed for TUPE consultation purposes

I Lab Facilities Limited v Metcalfe & Ors ([2013] UKEAT 0224/12) (25 April 2013)

http://www.bailii.org/uk/cases/UKEAT/2013/0224_12_2504.html

Summary: Staff employed in one part of the business were not “affected employees” under the consultation requirements of TUPE, because they had not been affected by the transfer of the other part of the business, but by the closure of their business. The fact that the original plan had been that their part of the business would also transfer was not relevant, but rather it was what was finally transferred that was relevant for TUPE consultation purposes.

The Detail: I Lab (UK) Limited (“ILUK”) operated a business providing rushes and post-production work to the film and television industry. On 11 June 2009, the post-production staff were given notice of redundancy, but also were told that the plan was that some of them would be hired on new contracts. However it seems that the plan changed; the company was placed into liquidation on 30 July 2009 and on 11 August 2009 assets relating to the rushes part of its business were sold to I Lab Facilities Limited and no new contracts were made with the former post-production staff.

The Employment Tribunal found that ILUK had failed to comply with regulation 13 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”), but the transferee appealed on the ground that the post-production staff were not “affected employees” for the purposes of TUPE, because that part of the business had not transferred, and thus they had not been entitled to consultation. The Appeal Tribunal agreed – the post-production staff had not been affected by the transfer, but by the closure of the business. However, Counsel for the employees argued that it had been the original plan – which would have affected the post-production staff also – that had generated the requirement to consult.

The Appeal Tribunal reasoned: “It is necessary to appreciate that the time at which an employer must comply with the obligations under regulation 13 (2) and (6) is not defined by reference to when he first ‘envisages’ that he will take the relevant ‘measures’. Rather, the obligation is to take the necessary steps ‘long enough before’ the transfer to allow consultation to take place. That being so, it can never be said definitively that the employer is in breach of that obligation until the transfer has occurred” (paragraph 20). Consequently, as the indirect impact of the actual transfer of the rushes business did not make the post-production staff “affected employees”, the appeal was allowed.

Court of Appeal re-opens the way for administrations of overseas companies

HSBC Bank Plc v Tambrook Jersey Limited ([2013] EWCA Civ 576) (22 May 2013)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/576.html

Summary: As reported in an earlier post (http://wp.me/p2FU2Z-38), the Court of Appeal overturned a rejection of an application for an Administration Order over a Jersey company.

The Detail: At first instance, Mann J said that an Administration Order could not be made under S426, as the English Court was not being asked to “assist” the Jersey Court in any endeavour as there were no proceedings afoot in Jersey.

In the appeal, Lord Justice Davis expressed the view that, with all respect to Mann J, “his interpretation and approach were unduly and unnecessarily restrictive” (paragraph 35). His first point was that “S426(4) is not by its actual wording applicable (notwithstanding the title to the section) to courts exercising jurisdiction in relating to insolvency law: it is by its wording applicable to courts having jurisdiction” (paragraph 36) and, in any event, Davis J felt that the Jersey court was engaged in an endeavour: “the endeavour was to further the interests of this insolvent company and its creditors and to facilitate the most efficient collection and administration of the Company’s assets” (paragraph 41) and thus the Royal Court of Jersey made the request that it did to the English Court.

May 9, 2013
by insolvencyoracle Leave a comment

Not the Eurosail Supreme Court judgment

In the middle of drafting today’s post, I noted the release of the Supreme Court’s decision in Eurosail. I think I need time to absorb that judgment, but you can find it here: http://www.supremecourt.gov.uk/news/latest-judgments.html.

Instead, I’ll plough on here with a few other judgments:

• SoS v McDonagh & Ors: post-CVA wages/HP claims arising on liquidation not payable from NI Fund
• HSBC v Tambrook: Jersey court asks English court to make an administration order via S426 IA86
• Tanner v Millar: does a friend’s blank cheque mean you’re not insolvent?
• Firstplus v Pervez: a lesson for mortgagees in getting the pre-action process right

Post-CVA arrears of wages and holiday pay not payable from the NI Fund when company moves into liquidation

Secretary of State for Business Innovation & Skills v Mr M V McDonagh & Ors [2013] UKEAT 0287/12 (14 February 2013)

http://www.bailii.org/uk/cases/UKEAT/2013/0287_12_1402.html

Summary: This Appeal Tribunal overturned the decisions of two separate Employment Tribunals that former employees of a company that had been in CVA were entitled to claim arrears of pay and holiday pay from the NI Fund when the company subsequently went into liquidation. The appeals judge decided that the relevant date for claims was the date that the company’s CVA had been approved, not when later it had been placed into liquidation.

The Detail: Two separate Employment Tribunals had decided that former employees of companies that had been in CVA were entitled to claim arrears of pay and holiday pay from the NI Fund when the companies subsequently went into liquidation. In each case, all the twelve claimant employees had been unaware that the company had been placed into CVA – they had continued to be paid for some time until their employment ended when, or shortly before, the companies went into compulsory liquidation, leaving them with claims for arrears of wages and holiday pay. The NI Fund rejected their claims on the basis that the relevant date of these claims was after the commencement of the company’s insolvency, which it claimed was the date the CVA was approved, not the date of the liquidation commencement.

The Honourable Mr Justice Langstaff noted that the original judge, who had decided in favour of the employees, had interpreted the Employment Rights Act 1996 in light of what he had assumed was Parliament’s intention, suggesting that, because the company in CVA could – and did – continue to pay wages, at that time it had not become insolvent for the purposes of the ERA96, but that this point had occurred only when the company had been placed into liquidation. “That is to apply a definition of insolvency which is not to be found in the Act” (paragraph 22). “It is incoherent to suggest that a company which is insolvent by statute becomes insolvent again or in addition or in any additional way when wound up. The underlying state of insolvency has not changed” (paragraph 35).

The judge also found no contradiction in the EC Directive, which invites Member States to fix a relevant date for wages claims alternative to the commencement of insolvency proceedings, which, contrary to the original judge’s opinion, include CVAs, but that the UK had not taken up that invitation.

Langstaff J recognised the apparent unfairness of his conclusions in this case, particularly where the employees had no knowledge of the CVA, but he pointed out that this decision only affected debts that were payable before the start of the insolvency proceeding. “Other debts would be payable afterwards. A period of notice pay, for instance, to which each of these Claimants was entitled was not excluded from guarantee” (paragraph 56).

According to counsel on this case this was the first time that this question has been raised before any court, which personally I find most surprising: there must have been many cases where employees have been left with the full range of claims after a company in CVA has moved into liquidation. Perhaps this is the first time, however, that an employee has sought to dispute the RPO’s rejection.

English court’s rejection of Jersey court’s request for assistance in making administration order swiftly reversed

HSBC Bank v Tambrook Jersey Limited [2013] EWHC 866 (Ch) (12 April 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/866.html

Summary: A secured creditor applied for an English administration order over a Jersey company. The application was supported by a letter from the Royal Court of Jersey asking that the English Court assist, pursuant to S426 of the IA86, by making the administration order. At first instance, the application was rejected on the basis that, as there was no insolvency proceeding either ongoing or intended in Jersey, the English Court could not “assist” the Jersey Court by making an English administration order. On appeal on 1 May, this decision was overturned, although the decision has yet to be published.

The Detail: Tambrook is a Jersey-registered and generally accepted to be Jersey-COMI company, although its main business activity is in England. None of the insolvency options available under Jersey statute were considered attractive by either the company director or the company’s secured creditor, but they saw significant advantages in an English administration.

As the company’s COMI is not England, the secured creditor sought to apply for an English administration via S426 of the IA86. S426(4) states that the English court “shall assist the courts having the corresponding jurisdiction in any other part of the United Kingdom or any relevant country or territory”. The Royal Court of Jersey had written a letter to the English High Court requesting that it assist, pursuant to S426, by making an administration order.

In the first instance decision, Mr Justice Mann declined to make an administration order on the basis that the court was being asked to provide far more than simply assistance to the Jersey Royal Court: “this court cannot ‘assist’ another court which is not actually doing anything, or apparently intending to do anything, in its insolvency jurisdiction” (paragraph 18). Mann J came to this decision despite the applicant’s counsel referring to five Jersey cases in which he claimed administration orders had been granted in similar circumstances; the judge felt that they did not assist him in any way, as no reasoned decisions were available on those cases.

Although the full judgment has yet to be published, several sources report (e.g. http://www.mourantozannes.com/news/news/breaking-news-tambrook-overturned-on-appeal.aspx) that this decision was overturned on the hearing of an appeal on 1 May 2013.

Does a blank cheque from a friend disprove insolvency?

Tanner v Millar [2013] EWHC 750 (Ch) (23 January 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/750.html

Summary: Although this was a fairly insignificant – and unsuccessful – application for permission to appeal against a transaction at an undervalue judgment, I thought it contained an unusual twist: the beneficiary of the transaction (Tanner) sought to prove that the bankrupt had not been insolvent at the time of the transaction because Tanner had been capable and willing to pay any sum to get the bankrupt out of a hole. The judge decided that this evidence probably would not have influenced the result of the case: the district judge had found that the debtor had been insolvent at the time based on the position of his own assets and liabilities.

The Detail: In an earlier judgment, the judge had found that the bankrupt had paid away substantial sums to Tanner by way of a transaction at an undervalue and thus ordered Tanner to repay the sums to the Trustee in Bankruptcy. Tanner sought permission to appeal the decision on a number of grounds. One of the grounds was that, at the time of the transaction, Tanner had had access to substantial funds and was willing to step in to provide to the bankrupt whatever funds were necessary to meet a contingent damages claim, which had been the key to the bankrupt’s insolvency.

Mr Justice Sales refused permission to appeal, deciding that this ground – and the others – did not meet the standard tests to allow fresh evidence to be admitted. In relation to this ground, Sales J decided that, even if admitted, it probably would not have an important influence on the result of the case: “It is quite clear, as the district judge found, that the bankrupt did not have sufficient assets of his own to meet his liability to pay damages. He was therefore insolvent. The fact that he had a generous friend in the form of Mr Tanner on hand who might have been prepared to help him (but had no legal obligation to do so) does not meet the point, as determined by the district judge, that the bankrupt was himself insolvent at the relevant time” (paragraph 15).

Mortgagee’s pre-action information must not be issued too early in the process

Firstplus Financial Group Plc v Mr Khalid Pervez [2013] ScotSC 27 (22 March 2013)

http://www.bailii.org/scot/cases/ScotSC/2013/27.html

Summary: In this Scottish case, the Sheriff decided that the mortgagee had not complied with the pre-action requirements for enforcing its security because it had provided the debtor with the pre-action information at the same time as the “formal requisition” letter and before the expiry of the calling-up notice. Although different Acts resulted in different interpretations of the timing of the debtor “entering into default”, each interpretation led to a conclusion that the pre-action information had been provided too early in the process. Although the Scottish Government’s guidance suggests compliance at an earlier stage, it could not take precedence over primary legislation.

The Detail: The mortgagee, Firstplus, sought orders for the possession and sale of Pervez’s residential house. The case turned on whether Firstplus had complied with the pre-action requirements of the Applications by Creditors (Pre-Action Requirements) (Scotland) Order 2010 (“PAR Order 2010”).

Firstplus had communicated the debtor a number of times, culminating in the issuing of a “formal requisition” letter on 26 May 2011. This letter had included the required pre-action information. Later still, Firstplus served a calling-up notice on 19 July 2011. In view of the fact that the PAR Order 2010 states that the pre-action information “must be provided as soon as is reasonably practicable upon the debtor entering into default”, the key question was: when had the debtor defaulted? The question is complicated by the fact that “default” has different meanings under the different Acts to which the PAR Order 2010 refers: the Conveyancing and Feudal Reform (Scotland) Act 1970 and the Heritable Securities (Scotland) Act 1894.

The 1970 Act defines default, in part, as: “(a) where a calling-up notice in respect of the security has been served and has not been compiled with (Standard Condition 9(1)(a)); (b) where there has been a failure to comply with any other requirement arising out of the security (the court’s emphasis) (Standard Condition 9(1)(b));”. In this case, the Sheriff concluded that the calling-up notice had to be served and thus the earlier default notice was invalid and ineffective. On this basis, as the expiration of the calling-up notice had occurred after the pre-action information had been sent, the Sheriff decided that the PAR Order 2010 had not been complied with.

The Sheriff also reviewed the 1894 Act. He concluded that, although the 1894 Act does not expressly define “default”, “it is plain from the express terms of section 5 of the 1894 Act that the ‘default’ envisaged by that section can only occur ‘after formal requisition’ of the principal (my emphasis). Logically, therefore, the ‘default’ and the demand for payment cannot be simultaneous” (paragraph 59). It was Sheriff S Reid’s view that there must be a short time lapse between the issuing of the demand and the conclusion that the debtor had “made default” in terms of the 1894 Act and, although in this case the Sheriff need not have decided how long that time period should be, he expressed the view that “that time is likely to be very short – probably no more than one hour in commercial cases (Bank of Baroda v Panessar [1987] Ch. 335; Sheppard & Cooper Ltd v TSB Bank plc [1996] All ER 654), perhaps no more than a few clear banking days in non-commercial cases – being, in any event, no more than is necessary, in ordinary course, for the mechanics of a monetary transfer to be instructed and effected through recognised modern banking techniques” (paragraph 67). Therefore, because in this case the pre-action information had accompanied the “formal requisition”, the Sheriff decided that the PAR Order 2010 had not been complied with.

Firstplus had argued that it had been obliged to comply with the Scottish Government’s “Guidance on Pre-Action Requirements for Creditors”, which states that the pre-action information had to be provided as soon as the debtor enters into default “for example, by falling into arrears”, which would appear to suggest a far earlier point than that indicated by the 1970 and 1894 Acts. The Sheriff’s response was that “In my judgment, while creditors must ‘have regard to’ any Guidance issued by the Scottish Ministers in this respect, they are not obliged to follow it, still less is the Guidance a binding or definitive statement of the law. If that Guidance was seeking to define ‘default’ for the purposes of the 1970 Act as comprising merely a debtor ‘falling into arrears’, it would have been, in my judgment, an incorrect statement of the law. The Guidance cannot take precedence over, or contradict the proper meaning of, primary legislation” (paragraph 84).

This judgment has left me with a question: given the different timings of default under the two Acts, what would have happened had the pre-action information been sent after the “formal requisition” but before the calling-up notice?

April 16, 2013
by insolvencyoracle Leave a comment

(1) Court-appointed receiver entitled to payment as officer of the court after discharge; (2) Mothballing business not an ETO reason for dismissals; (3) Wife’s statutory demand set aside as potentially viable defence that she was not properly advised; and (4) A VAT decision survives appeal

Still catching up post-holiday, some court decisions…

• Glatt & Ors v Sinclair: Court-appointed receiver continued as officer of the court after discharge and thus was entitled to be paid from receivership assets
• Kavanagh & Ors v Crystal Palace FC (2000) Ltd & Ors: Tribunal decision reversed: redundancies made to mothball a business with a view to a going concern sale (whether sooner or much later) did not constitute an ETO reason [UPDATE 26/11/2013: see the more recent post – http://wp.me/p2FU2Z-4I – for a summary of the Court of Appeal’s decision reversing this judgment]
• Welsh v Bank of Ireland (UK) Plc: a Northern Ireland case acting as a reminder to lenders seeking PGs from spouses
• HMRC & Ford Motor Co Ltd v Brunel Motor Co Ltd: an appeal against a VAT Tribunal decision is dismissed

Court-appointed receiver entitled to payment as officer of the court after discharge

Glatt & Ors v Sinclair [2013] EWCA Civ 241 (26 March 2013)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/241.html

Summary: Although a receiver appointed by the court under the Criminal Justice Act 1988 was discharged in 2006, he was entitled to be paid from the receivership assets his remuneration and expenses (subject to the court’s approval of the quantum) incurred after discharge on the basis that “he continues to be an officer of the court (and subject to the supervision of the court) to the extent that he still has functions to perform with a view to a final conclusion of the administration of the receivership.”

The Detail: In 2006, Mr Glatt successfully appealed against a confiscation order, which was set aside; this was swiftly followed by the discharge of a 2001 receivership order made under the Criminal Justice Act 1988. There followed a number of disputes between Mr Glatt and the former receiver, in particular regarding the Receiver’s entitlement to exercise a lien over the assets covered by the receivership order to meet his remuneration and costs. In December 2010, an order found in favour of the receiver for his costs plus interest and, after further consideration by a costs judge, another order was granted in June 2012 confirming that the 2010 order did extend to the receiver’s post-discharge remuneration, expenses and disbursements, and that the receiver was entitled to payment out of the receivership assets.

In this appeal, the appellants sought to argue that the court had no power to order payment of post-discharge remuneration and expenses.

Firstly, Lord Justice Davis did not believe it would be just to allow the appellants to argue this point. He felt that the appellants could have been in no doubt that the receiver had proceeded on the basis that he was entitled to claim post-discharge remuneration and expenses; they had had an earlier opportunity to debate the point, but had not. Nevertheless, Davis LJ proceeded to consider the question of the receiver’s entitlement.

The judge noted that there may be a number of tasks required of a receiver post-discharge, for example the preparation and filing of closing accounts, and it was his view that: “Where a receivership order made under the Criminal Justice Act 1988 is discharged, the receiver continues to be an officer of the court (and subject to the supervision of the court) to the extent that he still has functions to perform with a view to a final conclusion of the administration of the receivership. It would be a wholly unsatisfactory and arbitrary state of affairs were it to be otherwise” (paragraph 41). In this case, the significant post-discharge work of the receiver had been substantially in dealing with the appellants’ challenges on issues such as ownership of assets and the extent of the lien. “In my view, therefore, the general principle being that the receiver looks to payment from assets under the control of the court (not from the parties), the receiver here continued, after discharge, to act as an officer of the court and to be subject to its supervision in and about the enforcement of his lien” (paragraph 44), although the asset-owner was not left entirely without remedy, as the receiver’s remuneration and expenses were still subject to the court’s approval.

“Mothballing” for future going concern sale not an ETO reason for dismissals

Kavanagh & Ors v Crystal Palace FC (2000) Limited & Ors [2012] UKEAT 0354 (20 November 2012)

http://www.bailii.org/uk/cases/UKEAT/2012/0354_12_2011.html

Summary: The appeal judge decided that the Tribunal had erred in law in misapplying the facts it had found to the statutory regime. Following Spaceright v Baillavoine, an economic, technical or organisational (“ETO”) reason must be an intention to change the workforce and to continue to conduct the business, as distinct from the purpose of selling it. In this case, an intention to mothball the club with a view to selling it as a going concern – whether to purchasers already on the scene or others later – should have led the Tribunal to a conclusion that there was no ETO reason and thus the liabilities should have passed from the transferor to the transferee.

The Detail: Although an apparently old decision, it has only recently appeared on BAILII. The company’s administration began in January 2010 and over the next few months the administrator attempted to sell the club, but it proved difficult mainly because the sale was dependent upon the purchasers also acquiring the stadium, the sale of which was not in the administrator’s control.

When the sale had not been completed at the end of the football season, the administrator decided to “mothball” the club. He prepared to make the majority of the staff redundant and the potential purchasers were warned of the plan and invited to avoid this eventuality by providing ongoing funding and finalising a purchase of the stadium. In response, the potential purchasers suggested that it might be best for them to withdraw their bid in the hope that someone else might come forward in the short time left. The Honourable Mr Justice Wilkie at this appeal said: “It is clear that what was going on, to some extent, was by way of brinkmanship” (paragraph 8). The administrator explained to the press that due to lack of funds there was no alternative but to make staff redundant and that the players would have to be next, which likely would result in the potential purchasers withdrawing. The first Tribunal commented that the growing media and public pressure had the “desired effect and an agreement for sale of the stadium was made within a few days” (paragraph 11), with the club’s sale and the CVA approval following thereafter.

The first Tribunal had concluded that the administrator’s primary reason for the redundancies was to mothball the club in the hope that it could be sold some time in the future and that it was not in the administrator’s contemplation that publicity of the redundancies might lead to the swift sale of the stadium and consequently the club. Wilkie J commented that this “is a wholly surprising conclusion” that “flies in the face of the evidence” (paragraphs 29 and 30). However, he continued that this divergence in opinions between himself and the Tribunal judge made no real difference, because, either way, the administrator still intended to sell the club as a going concern, whether to the existing potential purchasers or to others some time in the future. “It is very clear from all the findings of fact that the Tribunal made that the only possible conclusion that they could draw was that the dismissal of the Claimants was for the purpose of selling the business, albeit it was not at that stage certain that there would be a sale, nor necessarily to whom the sale would be, but, in our judgment, by reason of the authorities to which we have been referred, that is not relevant for the purposes of the application of Regulations 4 and 7” (paragraph 31).

The key authority to which Wilkie J referred was the case of Spaceright Europe Ltd v Baillavoine and Anor, which concluded that “for an ETO reason to be available, there must be an intention to change the workforce and to continue to conduct the business, as distinct from the purpose of selling it”. However, in this case the administrator had no intention to continue to conduct the business as such “but to preserve it so that it could, in new hands, if that came about, resume the conduct of business” (paragraph 30). Thus the judge concluded that the Tribunal had erred in law in misapplying the facts to the statutory regime; it should have concluded that the dismissals were not for an ETO reason but with a view to sale or liquidation; and therefore the liability for the various claims should have passed from the transferor to the transferee.

[UPDATE 26/11/2013: The Court of Appeal reversed this decision on 13/11/2013 (http://www.bailii.org/ew/cases/EWCA/Civ/2013/1410.html), which is the subject of a more recent post: http://wp.me/p2FU2Z-4I. The appeal judges distinguished between the facts of Spaceright and this case, in relation to which they were satisfied that the dismissals were for an ETO reason; the dismissals had been necessary to reduce the wage bill in order to continue running the business.]

A knowledge of case law helps when giving advice!

Welsh v Bank of Ireland (UK) Plc [2013] NIMaster 6 (11 March 2013)

http://www.bailii.org/nie/cases/NIHC/Master/2013/6.html

Summary: In this Northern Ireland case, Ms Welsh succeeded in her application to have set aside a statutory demand in pursuit of monies owed under a personal guarantee of a loan to her husband. As the Bank had not evidenced that all of the core minimum requirements described in Etridge with regard to obtaining proper legal advice had been met, the judge felt that Ms Welsh had a potentially viable defence, which was sufficient cause to order the setting aside of the statutory demand.

The Detail: Ms Welsh applied to have the Bank’s statutory demand against her set aside on the ground that the Bank had constructive notice of alleged undue influence and/or misrepresentation by her husband and that she did not receive proper legal advice prior to signing the personal guarantee, which was the subject of the statutory demand.

Master Kelly noted that “an applicant debtor need only demonstrate a genuine arguable case, or a potentially viable defence to the dispute requiring investigation, to succeed in preventing legal proceedings issuing by way of insolvency proceedings. It follows therefore, that in the case of an application to set aside a statutory demand, the hearing is not for the purposes of a trial of the dispute; rather it is for the court to determine whether the applicant’s grounds for disputing the debt constitute a potentially viable defence” (paragraph 16). The judge looked to the case of The Royal Bank of Scotland v Etridge (No 2) for the core minimum requirements of a lender when a wife offers to guarantee her husband’s debts. In this case, the Bank had not evidenced any direct communication with Ms Welsh and the solicitor’s confirmation of advice in a letter after the guarantee had been signed was not sufficient evidence to prove that all the core minimum requirements had been met (it also cannot have helped that the solicitor admitted that he was not familiar with the Etridge case). Consequently, the judge felt that Ms Welsh had an arguable case that would require a full trial. As she had demonstrated a potentially viable defence, the judge ordered that the statutory demand be set aside.

And finally… briefly… a VAT case

HMRC & Ford Motor Company Limited v Brunel Motor Company Limited (in administrative receivership) [2013] UKUT 006 (TCC) (19 March 2013)

http://www.bailii.org/uk/cases/UKUT/TCC/2013/6.html

Summary: The Upper Tribunal dismissed an appeal to a First Tier Tribunal decision of September 2011 that Ford’s actions to re-possess vehicles subject to a supply agreement (which had terminated automatically due to the receivership) and issue credit notes were unilateral acts and thus there had been no agreed rescission of the agreement with the consequence that the credit notes had no effect for VAT purposes.

March 26, 2013
by insolvencyoracle 1 Comment

A brief briefing

Apologies for the silence – I’ve been enjoying the gorgeous sunshine blazing on Hawaii’s beaches and some exhilarating hikes across fresh lava fields (which is more my style)…

In an attempt to get back on track, this is a brief update on case law that had accumulated before my trip:

• Valuing contingent claims
• What documents are Provisional Liquidators entitled to recover?
• COMI: Dublin v Belfast
• Iceland v Scotland: Nice try, Landsbanki
• Judge erred in dismantling component parts of circumstantial case of gratuitous alienation

Valuing contingent claims

Ricoh Europe Holdings BV & Ors v Spratt & Milsom [2013] EWCA Civ 92 (19 February 2013)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/92.html

A group of creditors who had submitted contingent claims in an MVL believed that the liquidators should have reserved funds to cover the full possible value of their claims before paying a distribution to members. On appeal, this court agreed with the previous judge: “there are, I think, real difficulties in seeing how a liquidator who has already valued the contingent claims and so admitted them to proof in the amount of the valuation comes under a legal duty to provide for the contingency in full by making a reserve against any distribution to members” (paragraph 37).

The creditors had also disputed the value placed on the contingent claims; the liquidators had worked on the basis of an assessment of the most likely outcome, rather than a worst case scenario. The judge agreed with the liquidators’ approach: “It seems to me that any valuation of a contingent liability must be based on a genuine and fair assessment of the chances of the liability occurring… There is nothing in IR 4.86 which requires the liquidator to guarantee a 100% return on the indemnity by assuming a worst-case scenario in favour of the creditors” (paragraph 43).

What documents are provisional liquidators entitled to recover?

Caldero Trading Limited v Beppler & Jacobson Limited & Ors [2012] EWHC 4031 (Ch) (14 December 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/4031.html

The application centred around provisional liquidators’ (“PLs”) attempts to take possession of documents in the hands of the director, but his solicitors’ argument was that they should be entitled to review the documents and only provide to the PLs those that met the definition in the court order describing the PLs’ powers: “documents reasonably necessary solely for protecting and preserving the assets” of the company.

The judge decided that the court order did indeed restrict the scope of documents to which the PLs could have access: “The conclusion might be surprising, bearing in mind that prima facie the provisional liquidators have a right to call for all the books in which the company has a proprietary interest, but that prima facie right has, in my judgment, been deliberately cut down by the terms of paragraph 7.2 [of the previous court order]. Their entitlement is, therefore, to categories of document which fall within the definition. It follows that the provisional liquidators have no right, in my judgment, to call for documents which do not fall within the category as defined” (paragraph 78). However, the judge did not feel that it was appropriate that the director’s solicitors’ control the review process, but he invited the PLs to provide a more specific description of the documents of which they were seeking possession.

COMI: Dublin v Belfast

ACC Bank Plc v McCann [2013] NIMaster 1 (28 January 2013)

http://www.bailii.org/nie/cases/NIHC/Master/2013/1.html

This is another COMI case involving a business consultant who moved from the Republic of Ireland to Northern Ireland and was made bankrupt in NI the day before another creditor’s petition resulted in a second bankruptcy order in Dublin. The RoI creditor sought the annulment of the NI bankruptcy order on the ground that there had been a procedural irregularity in the hearing.

The judge found that the hearing had been procedurally irregular and should not have taken place; it should not have been an expedited hearing and, in light of the fact that there were two competing sets of bankruptcy proceedings, the court had been incapable of being satisfied that it had jurisdiction to make the NI bankruptcy order without hearing evidence from both the debtor and the RoI petitioner.

The judge also concluded on the evidence provided to him that the debtor’s COMI was not in NI. The judge made some interesting comments about the events leading to the NI petition, which was based on rent arrears of £1,402 arising from a house share agreement on the debtor’s NI address: he noted the incomplete affidavit of service of the statutory demand; the apparent lack of interest shown by the petitioner in the debtor’s ability to discharge the debt; the fact that he was in a position to pay the debt; and that “the Petitioner and the Respondent were at the very least acquaintances, if not friends” (paragraph 29).

Iceland v Scotland: Nice try, Landsbanki

Joint Administrators of Heritable Bank Plc v The Winding-Up Board of Landsbanki Islands hf [2013 UKSC 13 (27 February 2013)

http://www.bailii.org/uk/cases/UKSC/2013/13.html
Summary at: http://www.bailii.org/uk/cases/UKSC/2013/13.(image1).pdf

The joint administrators of Heritable Bank Plc (“Heritable”) rejected a claim submitted by Landsbanki Islands hf (“Landsbanki”) on the ground of set-off. Landsbanki’s winding-up board also rejected three of Heritable’s claims. Landsbanki’s winding-up board argued that, as they had rejected Heritable’s claims in the Icelandic proceedings, this decision applied to Heritable’s administration and thus Heritable had no claims available to set off against Landsbanki’s claim. They sought to rely on Regulation 5 of the UK’s Credit Institutions (Reorganisation and Winding Up) Regulations 2004, which resulted from an EC Directive.

The Supreme Court unanimously dismissed Landsbanki’s appeal. The court stated that Regulation 5 “is not concerned in the least with the effects of the mandatory choice of Scots law for the administration of Heritable in Scotland” (paragraph 58). In this case, other Regulations were relevant and these resulted in the conclusion that the general law of insolvency for UK credit institutions is UK insolvency law.

Judge erred in dismantling component parts of circumstantial case of gratuitous alienation

Henderson v Foxworth Investments Limited & Anor [2013] ScotCS CSIH 13 (1 March 2013)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSIH13.html

The Inner House upheld the liquidator’s appeal in respect of a gratuitous alienation challenge: “In this admittedly complex case it seems to me that, while the Lord Ordinary very properly acknowledged that there were unsatisfactory and indeed suspicious events and transactions, and while he recorded matters which he found inexplicable, questionable, difficult to believe, and even ‘damning’… he did not take the final step of (i) clearly recognising that there was a significant circumstantial case pointing to a network of transactions entered into with the purpose of keeping Letham Grange (valued at £1.8 million) out of the control of the liquidator, and (ii) explaining why, nevertheless, he was not persuaded that the liquidator should succeed. Rather the Lord Ordinary dismissed or neutralised individual pieces of evidence without, in my view, giving satisfactory reasons for doing so, thus dismantling the component parts of any circumstantial case which was emerging from the evidence, but without first having acknowledged the existence and strength of that circumstantial case, and then explaining why he rejected it” (paragraph 78).

.
I’ve spotted some more recent cases since my return from Hawaii – and I see that the consultations on draft revised SIPs 3, 3A, and 16 have now been issued, excellent! – but they’ll all have to keep for future posts.

March 7, 2013
by insolvencyoracle Leave a comment

Three cases: (1) What is the relevant date for IVAs suspended on a S262 challenge? (2) When is an alleged transaction at an undervalue not a “transaction”? (3) Vesting of causes of action in Trustee foils attempts to pursue misfeasance claim

• Davis & Davis v Price & Price – what is the relevant date for IVAs suspended on a S262 challenge?
• Hunt v Hosking & Ors – when is an alleged transaction at an undervalue not a “transaction”?
• Fabb & Ors v Peters & Ors – vesting of causes of action in Trustee foils attempts to pursue misfeasance claim

What exactly is a “suspended” IVA?

Davis & Davis v Price & Price ([2013] EWHC 323 (Ch)) (21 February 2013)
http://www.bailii.org/ew/cases/EWHC/Ch/2013/323.html

Summary: As a consequence of a successful S262 challenge, two debtors’ IVAs were suspended and further creditors’ meetings were convened to consider their revised Proposals. After these were approved, the S262 challengers issued statutory demands in pursuit of their costs for bringing the challenge. The appeals judge agreed that the statutory demands should be set aside on the basis that the costs were caught in the IVAs, for which the relevant date was the second meetings’ date. Contrary to the wording of the S262 order, the judge felt that the effect of suspending the original IVAs was not to continue to bind the original creditors.

The Detail: The Prices challenged the Davises’ IVAs under S262 in relation to the values of £1 attributed to their claims for the purposes of voting at creditors’ meetings held in June 2010. The challenge was successful and the District Judge ordered the suspension of the Davises’ IVAs – which would not have been approved had the Prices’ claims been admitted for voting in the sum of £35,389, the value placed on the claims for voting purposes by DJ Gamba – and required the Davises to decide whether to re-present the original Proposals or to present varied Proposals for consideration at further creditors’ meetings to be convened by the Nominee. The Davises were also ordered to pay the Prices’ costs of £7,011.

At creditors’ meetings held on 13 January 2011, the Prices again voted to reject the Proposals, which had been revised by the Davises, but the Prices only proved in the sum of £35,389. However, the requisite majorities were achieved and the revised Proposals were approved. The Prices then pursued payment of their costs of £7,011 on the argument that they were not claims in the IVAs, because they did not exist at the time of the original interim orders in April 2010.

The question at the heart of this matter was: what was the effect of the suspension of the Davises’ IVAs? In this appeal, counsel for the Prices sought to distinguish between an order revoking an IVA and one suspending it, both options available to the court under S262(4). Mr Justice David Richards noted that there was only one rule relating to entitlements to vote at a creditors’ meeting convened to consider an IVA Proposal – R5.21; the rules make no distinction as to whether this is the first time such a meeting is convened or whether it is convened on the back of a revoked IVA or a suspended IVA under S262(4). The judge considered that in this circumstance the reference in R5.21(2)(b) to the “amount of the debt owed to him at the date of the meeting” was the amount owed at the date of the January 2011 meeting convened to consider the revised Proposals and therefore the Prices had been entitled to prove also in respect of their costs in bringing the S262 challenge.

So what is the status of a suspended IVA? The wording of DJ Gamba’s order resulting from the S262 challenge had stated that, if the proposed variation was put to the vote and rejected, the approval of the IVAs on 8 June 2010 would be revoked with immediate effect “and the IVA Creditors shall ceased to be bound by the IVAs”; it further provided that, if the IVAs were reconsidered and approved, the suspension of the approval of the IVAs would be lifted with immediate effect and “the IVA Creditors shall continue to be bound by the IVAs in accordance with section 260”. However, David Richards J stated: “I do not think it is right that if the approval of an IVA is suspended, it nonetheless continues to bind creditors. Once approval is suspended, it does not seem to me possible to say that there is an ‘approved arrangement’ within the meaning of section 260(2)” (paragraph 29). He acknowledged that S262(7) grants the court power to give supplemental directions, but he did not believe that this enabled the court to substitute a different rule for R5.21 in relation to creditors’ voting rights.

12/02/2014 UPDATE: Although the appeal heard on 21/01/2014 was dismissed (http://www.bailii.org/ew/cases/EWCA/Civ/2014/26.html), it did highlight a(nother!) problem with the Act: S260, which binds creditors into an approved IVA, expressly has effect “where the meeting summoned under S257 approves the proposed” IVA. However, in this case, the meetings that led to approved IVAs were consequent to a S262 challenge and, as Lady Justice Arden put it, “if the IVAs were varied and the creditors approved those varied IVAs, those were the IVAs to come into force, not the original IVAs. In reality what happened in that event is that the varied IVAs replaced the original IVAs. The original IVAs ceased to have any legal existence after that” (paragraph 33).

Thus, were the creditors bound by S260? “The court must of course give effect to the intention of Parliament… However, where the effect of a literal interpretation of a statute is to create significant anomalies which the court is satisfied Parliament could not have intended, the court should seek to find an interpretation which avoids those anomalies” (paragraphs 38 and 39). In order to achieve this end, Lady Justice Arden interpreted the reference to a “further meeting” in S262(4)(b) to be a reference to a “further meeting under S257” so that S260 has effect.

The Company must be party to the transaction for it to be challenged at an undervalue

Hunt v Hosking & Ors ([2013] EWHC311 (Ch)) (22 February 2013)
http://www.bailii.org/ew/cases/EWHC/Ch/2013/311.html

Summary: A liquidator sought to challenge as transactions at an undervalue payments made to Mr Hosking from the Company’s client monies held by its accountants – the monies were paid to Mr Hosking in settlement of his private loan to the accountant, who appeared to be entitled to the monies by reason of two fee agreements with the Company. However, the liquidator’s S238 application failed on the basis that the payments to Mr Hosking were not “transactions” to which the Company was party. The judge pointed out that either the accountants were not authorised to pass the monies over, in which case it would be an issue of misappropriation of assets, or the challenge should be levelled at the fee agreements between the accountants and the Company.

The Detail: A firm of accountants, of which Mr Temple was the sole proprietor, held monies on behalf of its client, Ovenden Colbert Printers Limited (“the Company”), from which the accountants appeared to be entitled to draw fees pursuant to two fee agreements. A number of payments were made from the accountants’ client account to Mr Hosking, which he claims related to repayments of his private loan to Mr Temple (who later became bankrupt).

Mr Hunt, the Company’s liquidator, applied under S238 claiming that the payments made from the client account to Mr Hosking were transactions at an undervalue. The liquidator made other allegations regarding the strength of the fee agreements with a suggestion that they may have been induced under misrepresentation. However, the fee agreements were not the subject of the S238 application.

Mr Justice Peter Smith identified a fundamental difficulty with Mr Hunt’s argument that the payments to Mr Hosking were transactions at an undervalue: the Company was not a party to the payments. He illustrated it this way: “If Mr Temple held a bag of sovereigns for the Company and they were held to the Company’s order, and if he gave them away to Mr Hosking, I suggested that that would not be a transaction. It would simply be a case of misappropriation of assets. Of course, the Company through the liquidator would have any number of remedies to recover those sovereigns. Such a claim could be made not only against Mr Temple but also against Mr Hosking if he receives the sovereigns. That is not the present claim… The fundamental difficulty facing Mr Hunt is that however much he investigates; however much mud he wishes to throw at Mr Hosking; none of it is relevant to his application under section 238. This is because on the undisputed facts set out above, the Company has not entered into a transaction which the liquidator can review. The only transactions it entered into in my opinion were the two fee agreements and those are not under challenge and indeed one of them cannot be under challenge due to the passage of time. If the payments were authorised they cannot be challenged unless the two fee agreements are challenged and they are not in these proceedings. If the payments were unauthorised, there is no transaction by the Company” (paragraphs 50 and 55).

[UPDATE 26/11/2013: Hunt’s appeal against the summary judgment/strike out application was dismissed on 15/11/2013 (http://www.bailii.org/ew/cases/EWCA/Civ/2013/1408.html). It seems to me that the fundamental difficulty remained: there was no indication that the Company had been party to any relevant transaction. Thus, the Court of Appeal decided that the judge had been right to strike out the application, as the claims under S238 and S241 had no prospect of success.]

Vesting of causes of action in Trustee foils attempts to pursue misfeasance claim

Fabb & Ors v Peters & Ors ([2013] EWHC 296 (Ch)) (18 January 2013)
http://www.bailii.org/ew/cases/EWHC/Ch/2013/296.html

Summary: A claim against administrators under Paragraph 75 of Schedule B1 was struck out as an abuse of process on the basis that the claimant knew his causes of action had vested in his Trustee in Bankruptcy at the time. In addition, the fact that 96% of the administrators’ claims against Fabb had been abandoned was not sufficient to support a misfeasance claim, as judgment had been achieved in relation to the remainder.

The Detail: Fabb was made bankrupt after administrators of “Holdings” obtained judgment against him of c.£88,000 in relation to a loan account and on a conversion claim, although over 96% of the administrators’ original claim was, effectively abandoned.

Fabb asserted two causes of action against the administrators: misfeasance and, in effect, malicious prosecution of the earlier proceedings as regards the 96% of the claims that were abandoned. After the proceedings commenced, the court ordered Fabb’s Trustee to assign to Fabb the various claims, conditionally on payment of £10,000; the assignment had not yet been completed.

His Honour Judge Purle QC noted a fundamental objection to the misfeasance proceedings: “Proceedings under paragraph 75 can only (so far as presently relevant) be brought by a shareholder or creditor. Mr Fabb is neither of those things, and nor will he be either of those things even if the assignment takes place. Any interest he may have had in the shares of Holdings is now vested in his trustee. Likewise, any indebtedness formerly due to him is now vested in his trustee… There is a still further objection. These proceedings were brought at a time when Mr Fabb knew that the causes of action he wishes to assert were vested in his trustee in bankruptcy, and that he needed an assignment” (paragraphs 13 and 16). On this basis, the judge felt bound to strike out Fabb’s claim as an abuse of process.

In any event, the judge identified difficulties in relation to the merits of Fabb’s claims that the 96% claim was brought abusively, for an improper motive or an improper purpose: “What to my mind makes the claim impossible is that the proceedings in which the 96 percent claim was included were pursued to judgment. True it is that the 96 percent claim was abandoned, but the rest of the claim was pursued over an eight day hearing, I think it was, and the claim succeeded in substantial amounts, despite a fully argued defence. It is difficult to see in those circumstances how the proceedings can be characterised as malicious or an abuse, as they had to be, and were successfully, pursued to judgment, albeit in a much smaller sum than originally claimed” (paragraph 23).

February 17, 2013
by insolvencyoracle Leave a comment

Three cases: (1) Marketing failures did not amount to breach of duty to take reasonable care; (2) CVA no protection for persistent non-payer of rent; and (3) marshalling across two debtors

• Kayrul Meah v GE Home Finance Ltd – the court decided that the best price reasonably achievable for a property was obtained, despite flaws in the marketing process
• Shah Din & Sons Ltd (CVA) v Dargan Properties Management Ltd – a Northern Ireland case, which I think demonstrates the need to consider the context of a company’s activity before presenting a CVA proposal
• Highbury Pension Fund Management Company & Anor v Zirfin Investments Ltd & Ors – a case for insolvency geeks: an example of marshalling security over a second debtor

Shortcomings in marketing a property not considered fatal to discharging duty to take reasonable care to obtain the best price reasonably achievable

Kayrul Meah v GE Money Home Finance Limited ([2013] EWHC 20 (Ch)) (18 January 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/20.html

Summary: The claimant sought compensation from his mortgagee for allegedly selling a property at an undervalue. Whilst there was no formal insolvency or IP involved – the sale was conducted by the mortgagee in possession – I thought it provided some useful pointers on how the court views the duty to take reasonable care to obtain the best price reasonably achievable for a property. The judge levelled some criticisms at the marketing process, but ultimately decided that the property had been sufficiently exposed to the market.

The Detail: The property was put on the market at the beginning of 2006 for £185,000 through a local agent who had valued the property between £165,000 and £185,000. Within a matter of days, offers were received at and then above this asking price. Meah complained that the asking price had been set too low and in February 2006 GE consulted another agent who valued the property at £235,000 and suggested raising the asking price to £245,000. The local agent reluctantly did this and the property was sold in March 2006 to a developer for £221,500. Based on the value of the property post-development, Meah’s expert assessed the “true market value” of the property at the time of the sale having regard to the obvious development potential at £325,000.

The claimant’s counsel argued that the low asking price depressed offers from potential purchasers and that the low asking price had been set because the agents had failed to appreciate the property’s development potential. GE’s agent argued that the asking prices needed to be set to attract a good level of interest and that many of the recipients of the sales particulars were property developers to whom the development potential would have been obvious. The judge was not wholly convinced that putting a grossly inadequate asking price on a property to generate interest was sensible and he observed that the agent had valued the property at less than the asking price, so clearly the agent had been mistaken as to the value. Neither was the judge entirely convinced that it was sensible not even to mention the development potential in the sales particulars, although he also was not convinced that, as the claimant had argued, the agent should have gone to the length of commissioning a residual development assessment, noting that potential purchasers would carry out their own assessments. GE’s agent also came in for criticism when the court learned that he had expressed to the then front-runners who had offered £218,500 his view that the revised asking price, which he had been instructed by his clients to seek, was unrealistic. The judge referred to the principle in Raja v Austin Gray that, if the valuers were negligent, the borrower had a good claim against the receiver who did not discharge his duty of care to the borrower by entrusting the sale to apparently competent professionals.

However, notwithstanding these shortcomings, the judge concluded that the property had been sufficiently exposed to the market to enable all potential purchasers to bid for it if they so wished. With regard to the expert’s valuation of £325,000, the judge stated: “unless a bidding war developed between two or more such developers who had made similar calculations, this sum cannot be said to represent the best price reasonably achievable for the Property at that time” (paragraph 23). The judge used a phrase that IPs know well: “The market value of a property is the price which a willing purchaser is prepared to pay for the property to a willing vendor after the property has been exposed to the market for a reasonable period of time”.

It should be noted that the accepted practice of sales by mortgagee involves the advertising by so-called “public notice” in a local newspaper inviting further offers above the price accepted subject to contract. It appears that GE’s agent relied on this process to flush out the best offer, rather than seeking sealed bids.

N Ireland: CVA no protection for persistent non-payer of rent

Shah Din & Sons Limited (CVA) v Dargan Properties Management Limited ([2012] NICh 34) (5 December 2012)

http://www.bailii.org/nie/cases/NIHC/Ch/2012/34.html

Summary: Although this is a Northern Ireland case, I feel that it serves as a reminder to take care to consider the context of a company’s pursuit of a CVA, whether it is fair and whether the company’s past behaviour supports the case for its protection.

In refusing to grant relief from forfeiture in this case, the court considered “the backdrop of culpable and wilful non observance of [the company’s] obligations” (paragraph 22).

The Detail: The company in CVA applied for relief from forfeiture. The only asset in the CVA was a lease on a property that the company had vacated some six years earlier, but which the landlord had only re-entered and recovered possession of shortly before the proposal was put together. After exploring the chronology of events, the court found that the company had wilfully failed to pay rent over a number of years; Burgess J stated that the company had “to all intents and purposes taken a free ride from the outset” (paragraph 21) and he found that “the plaintiff’s attitude towards its responsibilities in the face of legal proceedings and warnings has been culpable to the highest degree” (paragraph 22). The judge also had difficulty with the terms of the arrangement, which introduced an uncertainty as to what would happen if the lease had not been assigned in the CVA’s 18-month period, noting that the landlord would continue to have to meet its obligations to the Council and to maintain the property during that time. Relief from forfeiture was refused.

A case for insolvency geeks: marshalling across two debtors

Highbury Pension Fund Management Company & Anor v Zirfin Investments Limited & Ors ([2013] EWHC 238 (Ch)) (14 February 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/238.html

Summary: This is a complex case, with which, to be honest, I only persevered out of a sense of stubbornness that I would not be beaten! It demonstrates the exception to the general rule that there must be a single debtor for marshalling. If marshalling holds no interest for you, then you might want to stop reading now… but if ever you do want to explore the principles of marshalling, this summary might come in handy.

The Detail: Barclays Bank Plc loaned monies to Zirfin Investments Limited and to four associated companies, “the Affiliates”. The loans were secured by means of legal charges over a property owned by Zirfin, “No. 31”, and properties owned by the Affiliates. As additional security for the loans to the Affiliates, Barclays also had the benefit of a guarantee from Zirfin, secured by means of the same charge over No. 31. Subsequent to Barclays’ charge, two other charges were granted over No. 31, in favour of Highbury Pension Fund Management Company and Cezanne Trading (described collectively as “Highbury”).

When Zirfin and the Affiliates defaulted on the loans, receivers were appointed over No. 31 and the eventual sale proceeds were applied to settle Zirfin’s debt to Barclays and to settle in part the Affiliates’ debt to Barclays by reason of Zirfin’s guarantee. The immediate consequence, therefore, appeared to be that Highbury had lost the benefit of their charges over No. 31 and sat as unsecured creditors in relation to the monies owed to them by Zirfin. However, this would not have been the case had Barclays looked to the Affiliates’ properties to discharge their debt, rather than calling on Zirfin’s guarantee.

To further complicate matters, the Serious Fraud Office obtained a Restraint Order over the assets of Mr Kallakis (consultant to a shareholder of Zirfin and the Affiliates) and the SFO regarded the assets held by Zirfin (including No. 31) and the Affiliates as subject to the Restraint Order.

The questions for the court were: (i) is a creditor of a guarantor entitled to marshal (or be subrogated to) securities which have been granted to another creditor of the guarantor by the primary debtor liable under the guaranteed debt and (ii) does any such claim to marshalling or subrogation take precedence over prohibitions contained in the Restraint Order?

The principle of marshalling “operates where a debtor (D) owes money to two creditors (C1 and C2), and where C1 has security over two properties (or some other call on two funds) (S1 and S2) but C2 has security over (or a right of resort to) only one (S1). In those circumstances C1 has a choice of recovering his money out of either S1 or S2. If C1 chooses to enforce the security over (or resort to) S2, then that leaves S1 available for C2. But if C1 chooses to enforce security over (or resort to) S1, then C2 has nothing to look to, and the security over S2 is not relied on at all, and becomes available to unsecured creditors (amongst whom C2 is now numbered). In that situation, in order to do justice equity applies a principle of maximum distribution and by a process akin to subrogation in effect gives C2 the benefit of C1’s unused security over S2, thereby ensuring that both C1 and C2 are paid by D as far as possible” (paragraph 15).

In this usual application of the principle, the debtor, D, is common to both creditors, C1 and C2. However, in this case, the Affiliates were debtors only to Barclays, not also to Highbury. Counsel for Highbury submitted that “although the general rule is that two or more creditors must be able to resort to two funds belonging to the debtor, this general rule is subject to an exception where… there is a common debtor who owes money to both creditors and he has a right, as between himself and a debtor who owes money to only one creditor, to ensure that the latter bears the ultimate liability” (paragraph 25). Counsel for Highbury acknowledged that there was no decided case in England and Wales that applied this principle, but relied on statements in text books and decisions in other jurisdictions.

In Norris J’s view, the doctrine of marshalling applied in this case: “Barclays has a claim against Zirfin as surety. It can look to two funds to satisfy that indebtedness. The first is the Zirfin Charge. The second is the Affiliates’ Charge. As regards Highbury’s claim to marshal, the Affiliates’ Charges can be bought into account (even though they are not over property belonging to Zirfin) because in equity Zirfin could call on the Affiliates to bear the burden of the debt and the Affiliates had the Affiliates’ Properties to enable them to do so” (paragraph 45). A limitation that Norris J noted regarding the rights acquired by Highbury on marshalling was that, “if Zirfin would not be subrogated to Barclays’ rights until such time as the Barclays debt had been entirely repaid, then Highbury cannot by a process akin to subrogation become entitled to any greater right” (paragraph 50).

Then the judge considered the SFO’s argument that Highbury has no “interest” in the Affiliates’ properties subject to the Restraint Order. Norris J did not believe that the Proceeds of Crime Act 2002 should be construed so as to “enrich the Crown by depriving Highbury of the right it otherwise would have had to marshal the securities” (paragraph 68). He therefore held “that the actions of Barclays have not deprived Highbury of the ‘interest’ which was previously recognised by the Restraint Order, and that if Highbury were to seek to bring itself within paragraph 25 of the Restraint Order or to seek a variation of the Restraint Order so as to make clear that it (rather than Barclays) was now contingently entitled to enforce the Affiliates’ Charges, the discretion given to the court ought to be exercised to permit that variation” (paragraph 70).

[UPDATE 26/11/2013: On 03/10/2013, Highbury’s appeal was allowed in relation to an element of the earlier decision that Highbury was not entitled to realise the securities until Barclays had been paid out in full (http://www.bailii.org/ew/cases/EWCA/Civ/2013/1283.html). In a more recent post, http://wp.me/p2FU2Z-4I, I summarise the appeal decision, which highlighted the difference between rights of subrogation and equity of exoneration.]

Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Category Archives: Case law