Case law | Insolvency Oracle

January 31, 2013
by insolvencyoracle Leave a comment

Supreme Court decides that logic should yield to tradition!

I have only commented on one case below, which I am aware has already been doing the rounds. Sorry guys – other matters (including some new work – woo hoo!) have led to my getting behind lately.

The question for the Supreme Court was: should legal advice privilege extend to legal advice given by accountants and perhaps even other professionals?

The Press Summary can be found at: http://www.bailii.org/uk/cases/UKSC/2013/1.(image1).pdf and the full judgment at: http://www.bailii.org/uk/cases/UKSC/2013/1.html.

R (on the application of Prudential plc and another) (Appellants) v Special Commissioner of Income Tax and another (Respondents) [2013] UKSC 1

Summary: PwC advised Prudential on a tax avoidance scheme. Following notices from the inspector of taxes for disclosure of documents between PwC and Prudential, Prudential applied for judicial review challenging the validity of the disclosure notices on the ground that the documents were excluded from disclosure by virtue of legal advice privilege (“LAP”). The court rejected the application on the ground that, “although the disputed documents would have attracted LAP… if the advice in question had been sought from, and provided by, a member of the legal profession, no such privilege extended to advice, even if identical in nature, provided by a professional person who was not a qualified lawyer” (paragraph 15). The Supreme Court, by a majority of five to two, dismissed Prudential’s appeal against this decision.

The Detail: At the outset, I should declare that I find my personal views more aligned with the opinions of the two dissenting Lords. What is the principle here? If applying the principle results in woolly boundaries, does that mean the principle should be pushed aside in favour of being able to tick a simple box? I have already seen one solicitor use this decision to warn of the dangers of seeking advice from anyone but a solicitor – forget who has the expertise to advise on the particular issue! In my view, this decision supports an unsavoury sloped playing field that favours one group of advisers simply because of their badge. Isn’t it time we grew up?

Lord Neuberger, who agreed with the previous court decisions, stated: “There is no doubt that the argument for allowing this appeal is a strong one, at least in terms of principle… LAP is based on the need to ensure that a person can seek and obtain legal advice with candour and full disclosure, secure in the knowledge that the communications involved can never be used against that person. And LAP is conferred for the benefit of the client, and may only be waived by the client; it does not serve to protect the legal profession. In light of this, it is hard to see why, as a matter of pure logic, that privilege should be restricted to communications with legal advisers who happen to be qualified lawyers, as opposed to communications with other professional people with a qualification or experience which enables them to give expert legal advice in a particular field” (paragraph 40). He then went on to admit that the principled arguments put forward to him for restricting LAP to professional lawyers appeared weak, so why did they win out?

“While I accept that it would accord with its underlying logic to extend LAP as Prudential contend, ‘[t]he life of the [common] law has not been logic’” (paragraph 48), Lord Neuberger stated, but the life of the common law has been experience. He acknowledged that the common law in this case seems outmoded; he accepts that “we are now in a world where a great deal of legal advice is tendered by professional people other than members of the legal profession” (paragraph 44). However, he believes that any question of extending LAP to non-lawyers is down to Parliament, particularly as Parliament has had several opportunities in the past to so extend LAP but has declined to do so. He also stated that “the suggestion that LAP should apply in any case where legal advice is given by a person who is a member of a ‘profession [which] ordinarily includes the giving of legal advice’ suggests to me that this is an inappropriate formulation for us to adopt, as it would carry with it an unacceptable risk of uncertainty and loss of clarity in a sensitive area of law” (paragraph 55).

As I’ve said, personally I found the dissenting Lords’ opinions more persuasive. It seems nonsensical to me that a client may rely on LAP attaching to advice given by a solicitor, but if that same advice were given by another professional – be it a tax adviser or… insolvency practitioner? – no such legal advice privilege would be afforded.

Aside from arguments such as the fact that LAP has already been extended in common law to advice given by foreign lawyers, which is not provided for by statute such as the Taxes Management Act, in my view some of Lord Sumption’s most powerful comments are:

“A mere increase in the number of people who can take advantage of an existing rule of law cannot be a good reason for failing to apply general principles coherently. Nor can it justify an arbitrary distinction between different professions performing exactly the same function” (paragraph 129).

“Legal professional privilege is a creation of the common law, whose ordinary incidents are wholly defined by the common law. In principle, therefore, it is for the courts of common law to define the extent of the privilege. The characterisation of privilege as a fundamental human right at common law makes it particularly important that the courts should be able to perform this function. Fundamental rights should not be left to depend on capricious distinctions unrelated to the legal policy which makes them fundamental” (paragraph 132).

On the question of whether the matter should be left to Parliament: “The problem at the moment is that Parliament is legislating against the background of assumptions about the common law which are contrary to principle, discriminatory and out of date. Only the courts can be expected to rectify that state of affairs” (paragraph 133) and: “In a case like this, where the suggested development conflicts with some of the assumptions of Parliament but not with its intentions, the courts should be extremely wary before acceding to invitations to leave those assumptions uncorrected when their practical application has become anomalous or incoherent in the light of modern developments” (paragraph 135).

However, we are where we are… until Parliament decides to look at it again.

January 21, 2013
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More on the ERR Bill and two cases: (1) Scottish Court shows more than the usual interest in provisional liquidator’s fees; and (2) Court avoids “unpardonable waste of scarce resources” by striking out evidence

I present a bit of a mixed bag here:
• The Enterprise & Regulatory Reform Bill – developments since my blog post of 12 January
• Nimmo – the Scottish Court of Session takes more than a passing interest in a provisional liquidator’s fees
• Secretary of State v Potiwal – despite the seeming absence of a technical argument, the court saves the taxpayers’ money in proving a case a second time

Update on the Enterprise & Regulatory Reform Bill

New Bankruptcy Application Process

On 12 January, I posted to this blog my thoughts on the insolvency parts of the ERR Bill. Last week, some interesting tweaks to the Bill had been proposed: that the adjudicator be allowed to apply to the court for directions (which might have helped if the adjudicator had been presented with a bankruptcy application with tricky COMI dimensions); and that, if the adjudicator felt that an alternative remedy were more suitable, the individual be given ten days to seek advice and potentially withdraw the bankruptcy application. Unfortunately, both these proposals were withdrawn following the House of Lords’ debate.

In relation to the subject of applying to court for directions, Viscount Younger of Leckie said: “Persons appointed as adjudicators will have the skills they need to do the job without the need for recourse to the court. It is acknowledged that the court still has a role to play. Where the adjudicator refuses to make a bankruptcy order because the criteria are not met, the debtor will have the right to appeal to the court. That provides a route to court in those cases where it is needed” (Lords Hansard on House of Lords Grand Committee 16 January 2013, http://www.publications.parliament.uk/pa/ld201213/ldhansrd/text/130116-gc0002.htm).

With regard to allowing the individual time to explore alternative solutions, Viscount Younger said: “I reassure noble Lords that before making their bankruptcy application, applicants will be strongly encouraged to take independent debt advice to ensure that bankruptcy is really the right option for them. My officials will work with the Money Advice Service and providers within the debt advice sector to ensure that applicants have the information they need to make an informed decision. Furthermore, within the electronic application process itself, we propose to include a series of warnings to ensure that applicants are made fully aware of the serious implications of bankruptcy before they make their application. We will also ensure that the process flags up any alternative debt remedies that may better suit their circumstances. The Government consider that these safeguards are sufficient to ensure that debtors are empowered to make an informed decision as to whether or not bankruptcy is the right option for them before they take the serious step of making a bankruptcy application. The Government believe that these amendments would unnecessarily complicate the process by requiring the adjudicator to exercise discretion on a case-by-case basis. That would increase administration costs with an impact on the application fee. It would also delay access to debt relief for the debtor, who would have elected for bankruptcy in full knowledge of their other options.”

Whilst I understand the government’s intention to formulate a simple administrative process to replace the current court-led debtor’s bankruptcy petition process (although those IA86 provisions are not being repealed via the Bill, presumably so that individuals who cannot/do not wish to apply online can still instigate their own bankruptcy), it seems inevitable to me that such a process will be ill equipped to deal with out-of-the-norm cases.

Continuation of contracted supplies in corporate insolvencies

It seems that R3’s “Holding Rescue to Ransom” campaign is paying off! Added to the list of proposed amendments to the Bill are the following proposed changes to S233 of IA86:

• To include “a supply of computer hardware or software or infrastructure permitting electronic communications” as another utility that must continue to be supplied (subject to the current S233 conditions) on request by the office holder.
• Utility supplies to be caught by the provisions irrespective of the identity of the supplier.
• To include that “any provision in a contract between a company and a supplier of goods or services that purports to terminate the agreement, or alter the terms of the contract, on the happening of any of the events specified in subsection (1) [i.e. administration, administrative receivership, S1A moratorium, CVA, liquidation, or appointment of a provisional liquidator] is void” – this does not seem to be limited only to utility supplies.

It remains to be seen, however, if these proposed changes survive the debate in the House of Lords (next sitting is scheduled for 28 January 2013).

Scottish Court of Session not content to take as read the court auditor’s and reporter’s recommendations of approval of provisional liquidator’s fees

Nimmo, as liquidator of St Margaret’s School, Edinburgh, Limited [2013] ScotCS CSOH 4 (11 January 2013)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH4.html

Summary: Despite both the reporter and the court auditor recommending that the provisional liquidator’s remuneration of c.£120,000 be allowed, the court sought further information in justification of the fee. Whilst IPs can take some comfort in the result that the judge allowed the fees in full, his comments suggest some lingering concern and hinted at a desire for a review of the court procedures.

The Detail: Over 20 days, a provisional liquidator managed “a high profile and extremely sensitive appointment” (paragraph 9) over a school and incurred time costs of c.£120,000. Later, the IP was appointed liquidator of the same company with his fees for the liquidation being approved by the liquidation committee. Interestingly, Lord Malcolm disapproved of the use of the word “cost” when referring to as yet unauthorised remuneration: “For the future I would advise that in reports to committees the proposed fee should not be described as ‘a cost’ already incurred by the liquidator. It should be made clear that the committee is being asked to exercise a judgment as to whether the proposed remuneration is reasonable and appropriate (or words to that effect). A proposed fee is in a different category from outlays. The scope for disagreement or questioning should be obvious to the readers of the report” (paragraph 31). The IP’s fees as provisional liquidator remained to be approved by the court.

Both the reporter and the court auditor considered that the provisional liquidator’s fees were reasonable, but the judge requested further information. Despite learning of the complexities handled by the IP, Lord Malcolm stated: “nonetheless I retain a sense of surprise and concern at a proposed fee of over £120,000 (exclusive of vat) for 20 days work, and I suspect that many will find it remarkable that the winding up of a middling size private school can generate fees of over £620,000 (again exclusive of vat)” (paragraph 31). However, the judge allowed the fee, noting that “the court cannot simply reject the clear advice of the reporter and the auditor of court without cogent and objectively justifiable reasons for doing so” (paragraph 35).

Lord Malcolm’s closing comments suggest a desire for more widespread consideration of the issue of insolvency office-holders’ remuneration: “Perhaps it is no bad thing that, now and again, an opinion is issued which shows how these matters are presented to, and addressed by the court. Generally they are resolved without any public hearing or publicity. There is at least a risk that the fee levels and general practices and procedures seen as normal in the corporate insolvency world become, when the court is asked to adjudicate, in a sense self-fulfilling. This highlights the important role of the auditor of court in the current system, given that he is not directly involved in such work. It may also be that, from time to time, and in the light of experience, the judges should review current practice to check whether there is room for improvements in the court’s procedures which might help it to exercise its jurisdiction under the insolvency rules” (paragraph 38).

Court avoids “unpardonable waste of scarce resources” by striking out director’s evidence in disqualification proceedings

Secretary of State for Business, Innovation & Skills v Potiwal (Rev 4) [2012] EWHC 3723 (Ch) (21 December 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3723.html

Summary: In relation to disqualification proceedings, the Secretary of State (“SoS”) sought to rely on the fact that a VAT Tribunal had already proven a director’s knowledge of his company’s fraud. The court found that, although the SoS’ argument that the director was estopped from denying knowledge failed because the SoS and HMRC were not privies, it agreed that it would be manifestly unfair and it would bring the administration of justice into disrepute to require the SoS to prove the director’s knowledge a second time.

The Detail: An earlier VAT Tribunal had concluded that the director knew of the company’s VAT fraud, but in evidence to defend disqualification proceedings the director denied having such knowledge. The SoS sought to have that part of the director’s evidence struck out on the grounds that he was estopped from denying that he had this knowledge; or that his denial was an abuse of process, as it would be manifestly unfair for the SoS to be put to the substantial cost and delay of proving the allegation; and/or that to permit the issue to be re-litigated would bring the administration of justice into disrepute.

For the argument of estoppel to win out, the parties to the disqualification proceedings – the SoS and the director – had to be in privity with the parties to the earlier VAT Tribunal – HMRC and the insolvent company. Given the director’s role in the company and in the VAT Tribunal proceedings, the judge had no difficulty in concluding that the director and his company were privies. However, he decided that the SoS and HMRC were not privies: “I consider that it would therefore go against the grain of the development of the law about abuse of process to identify for the first time a new class of privity of interest between two very different arms of government pursuing different aspects of the public interest, and being motivated in particular cases by different policy and funding considerations when doing so” (paragraph 21). Consequently, in relation to the first ground, Mr Justice Briggs concluded that, because there was no privity of interest between the SoS and HMRC, the proven position in the VAT Tribunal could not be carried forward into the disqualification proceedings.

However, Briggs J then considered whether “hundreds of thousands of pounds” of tax-payers’ money should be used to prove the allegation a second time. Having considered the circumstances of the VAT Tribunal, which was funded by the taxpayer throughout, the judge concluded that it would be manifestly unfair to impose the cost of re-litigating the issue on the SoS. With regard to the argument that re-litigation would also bring the administration of justice into disrepute, Briggs J stated: “Where, as here, the issue as to a director’s knowledge of a complex MTIC fraud has been fully and fairly investigated by an experienced tribunal and the director found to have had the requisite knowledge, it seems to me that right-thinking members of the public would regard it as an unpardonable waste of scarce resources to have that issue re-litigated merely because, by a simple denial and without deducing any fresh evidence, Mr Potiwal seeks to require the complex case against him to be proved all over again” (paragraph 29). Thus, he ordered that parts of the director’s evidence be struck out as an abuse of process.

January 4, 2013
by insolvencyoracle 1 Comment

Three pre-Christmas judgments: (1) Bankrupt refused suspension of discharge to pursue IVA; (2) Another failed attempt to prove England COMI; and (3) Receiver refused payment of costs after restraining order set aside

Below, I catch up on some pre-Christmas judgments:

• Bramston v Haut – reverses earlier judgment and decides that the bankrupt’s attempt to suspend his automatic discharge in order to propose an IVA fails (and includes a warning about the statutory requirements for Nominees’ reports)
• The O’Donnells v The Bank of Ireland – decision on COMI sends away Irish couple from obtaining E&W Bankruptcy Orders
• CPS v The Eastenders Group – upholds decision that Court-appointed Receiver was not entitled to be paid from third party assets, but also decides that, at least under the Proceeds of Crime Act 2002, neither should the CPS pay. Note: this is subject to a Supreme Court appeal. (UPDATE 08/05/14: The Supreme Court has allowed the Receiver’s appeal that his fees be paid by the CPS (but has maintained that the third party assets are out of his reach). For a more detailed summary, see http://wp.me/p2FU2Z-6S.)

Appeal Court sees sense in Trustee objecting to bankrupt who sought suspension of discharge to pursue IVA

Bramston v Haut [2012] EWCA Civ 1637 (14 December 2012)
http://www.bailii.org/ew/cases/EWCA/Civ/2012/1637.html

Summary: The appeal was allowed; the judge’s view was that the earlier order suspending the debtor’s discharge from bankruptcy ought to have been set aside. Lord Justice Kitchin believed that the discharge was suspended, not because of the debtor’s failure to comply with his obligations or for any other purpose that might be within S279(3), but to give the debtor time to put forward an IVA proposal. The judge stated that, it seemed to him, this was “impermissible and outside the scope of the jurisdiction conferred by S279(3)” (paragraph 52).

The judgment includes a reminder on the necessary wording of Nominees’ reports, which, although it surprised me that an IP could have slipped up on this, may serve as a warning to IPs to double-check that their own reports meet the statutory criteria.

The Detail: A good summary of the pre-appeal position is given on page 18 of Lawrence Graham’s August 2012 edition of The Angle. In brief, the debtor had applied under S279(3) for the suspension of his discharge from bankruptcy so that he could put forward an IVA proposal, but the Trustee had opposed the suspension as he had concerns about various aspects of the proposal. The previous judge had dismissed the Trustee’s challenge on the basis that approval of the IVA proposal was a matter for the creditors and he viewed the Trustee as unreasonable for refusing to make the S279(3) application himself in order to block the IVA proposal.

The judge on appeal considered that the purpose of the power conferred by S279 is to extend the bankruptcy to ensure that the bankrupt continues to suffer the disabilities of an undischarged bankrupt until he complies with his obligations. At the time that this debtor had applied for the discharge suspension, his position was that he had complied with all of the Trustee’s demands, albeit that later the Trustee contended the opposite when he sought to have the order set aside.

Kitchin LJ suggested that the debtor could have applied for an interim order under S253, which could, via S255(4), include suspension of the automatic discharge. He pointed out that, to do so, the debtor would have to have given notice of the application both to the OR and the Trustee, which he did not do.

Such an application also would have required the submission of the Nominee’s report on the IVA proposal. In this case, although a Nominee’s report was submitted, it did not comply with S256A or S256(1) as it stated merely that the debtor, not the Nominee, was satisfied that the IVA had a reasonable prospect of being approved and implemented. As I mentioned above, perhaps we should all make doubly-sure that Nominees’ reports are compliant in this regard.

Consequently, the judge concluded that, even if the debtor had applied for an interim order under S253, “it would inevitably have foundered” and thus “the judge fell into error concluding that the court had jurisdiction” to make the order suspending the discharge (paragraphs 64 and 65).
In considering whether the Trustee had been unreasonable to refuse to make an application himself under S279, Kitchin LJ stated: “I do not understand it to be one of the duties of a trustee that he must respond affirmatively to a bankrupt’s request that he co-operate in the promotion of a proposal for an IVA. Furthermore, in the circumstances of this case, the Trustee believed that Mr Haut was in continuing default of his obligations and that the Second Proposal was defective, prejudicial to the interests of the creditors who had no personal connection to Mr Haut and appeared to be designed to thwart his efforts to carry out a proper investigation into Mr Haut’s affairs. Yet the order Mr Haut invited the Trustee to seek was intended to give Mr Haut an opportunity to put the Second Proposal before his creditors and thereafter secure the annulment of his bankruptcy with all the consequences the Trustee was anxious to avoid” (paragraph 73) and he thus concluded that this was far from a case where the Trustee had acted perversely.

Another case of a failed attempt to prove an England COMI

O’Donnell & Anor v The Bank of Ireland [2012] EWHC 3749 (Ch) (21 December 2012)
http://www.bailii.org/ew/cases/EWHC/Ch/2011/3749.html

Summary: An apparent permanent move to London prior to the presentation of bankruptcy petitions was insufficient to prove that the debtors’ COMI had moved to England, because it was not ascertainable to third parties.

The Detail: The Bank opposed petitions by Mr and Dr O’Donnell for English bankruptcy orders, presented in March 2012, alleging that the debtors’ COMI had always been Ireland, where its own petitions had been adjourned awaiting outcome of the EWHC case.

The O’Donnells maintained that they had left Ireland permanently in December 2011. Dr O’Donnell said that “she did not wish to live in a ‘bankocracy’”, “‘the onslaught and negative publicity, et cetera, that the Bank of Ireland have generated against us in the media has created such an atmosphere of hate and nastiness that I think we no longer wish to live in Ireland’” (paragraph 50).

Although the judge accepted that the O’Donnells intended to stay in London, he considered that the O’Donnells’ COMI was still in Ireland when the petitions were presented, largely because that is what it seemed an objective observer would have concluded by reason of information held on the Irish Companies Registration Office, the UK Companies House, and on the website of one of the O’Donnells’ companies. Consequently, the O’Donnells’ bankruptcy petitions were dismissed.

(10/10/13 Update: The O’Donnells’ application for a review of the above decision was dismissed on 06/03/13 – see http://www.bailii.org/ew/cases/EWHC/Ch/2013/489.html – and on 28/08/13 they were adjudicated bankrupt in the High Court in Ireland – see http://www.bailii.org/ie/cases/IEHC/2013/H395.html.)

Court-appointed Receiver left out of pocket after court decides third party assets no longer caught by order

Crown Prosecution Service v The Eastenders Group & Anor [2012] EWCA Crim 2436 (23 November 2012)
http://www.bailii.org/ew/cases/EWCA/Crim/2012/2436.html

Summary: Receivership and restraining orders enabled the Receiver to realise assets of a number of companies, but later the orders were set aside and, although the court was sympathetic to the Receiver, it concluded that to allow the Receiver to discharge his costs from the third party’s asset realisations would violate that third party’s rights under the European Convention on Human Rights. The judges also concluded that the court had no power to order the Crown Prosecution Service to settle the Receiver’s costs, although it left the door open to the Receiver to seek a common law remedy. (UPDATE 08/01/2014: this is subject to a Supreme Court appeal.)

The Detail: A good summary of this case was published in Accountancy Age on 13 December 2012 (“Receivers’ remuneration not in the bag following High Court battle”), but for the sake of completeness, I thought that I would add my own version here.

Orders were granted appointing a Receiver and restraining two individuals from dealing with their assets or the assets of a number of their companies, “Eastenders”. On appeal, the orders were set aside and the court held that Eastenders’ assets were not realisable property held by the individuals. The Receiver applied for an order that his costs be paid from Eastenders’ assets, but the judge declined to grant such an order on the basis that it would violate Eastenders’ rights under Article 1 Protocol 1 of the European Convention on Human Rights (“A1P1”). At a second hearing, the court concluded that it was unacceptable to deny the Receiver payment of his costs and thus it ordered that the CPS pay the Receiver’s costs – this was the subject of this appeal.

In order to review the CPS’ liability to pay the Receiver’s costs, the judge first re-considered the basis under which it had been decided that the Receiver was not entitled to payment from Eastenders’ assets. Lord Justice Laws considered that, although the previous appeal court had decided that Eastenders’ assets were not “realisable property”, the Receiver was entitled to rely on the original order up to the point that it was set aside and thus he felt that the Receiver could recover his costs from what had been considered receivership property.

Laws LJ did not view the result in this case as a violation of Eastenders’ rights under A1P1, but this is where his view differed from the other two appeal court judges. For assets to be subject to a receivership order, there must be “reasonable cause to believe that the alleged offender has benefitted from his criminal conduct” (S40(2)(b) of the Proceeds of Crime Act 2002 “POCA”) and, on the documents presented to court, there must be “a good arguable case… for treating particular assets as the realisable property of the defendant” (CPS v Compton, as quoted in paragraph 78 of this judgment), but in this case the appeal that resulted in the setting aside of the receivership and restraint orders concluded that neither of these two conditions were met and thus the appointment of the Receiver over Eastenders’ property had been unlawful. A1P1 states that “no one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law”; in this case, the Receiver’s claim to Eastenders’ property did not meet the exception, as the Receiver’s appointment had been unlawful.

But was the Receiver entitled to payment from the CPS? The court decided that it had no power under POCA so to order, although Laws LJ noted that the Receiver had not appealed the discharge of his lien and commented that in his opinion the lien was good. In conclusion, the other two appeal judges stated: “We acknowledge that the outcome of this appeal will be clearly unsatisfactory to a receiver who has undertaken work and incurred expenses in the expectation that he would be both rewarded and recompensed out of assets identified for him by the CPS. Our judgment does not exclude the possibility that he may have a common law remedy against those who sought his appointment. All that it does is to establish that he cannot be paid out of the companies’ assets in circumstances in which the legal basis for such provision is absent” (paragraph 72).

(UPDATE 08/01/2014: an appeal lodged by the Receiver is scheduled to appear before the Supreme Court on 24 February 2014. UPDATE 08/05/2014: the Supreme Court allowed the Receiver’s appeal that his fees be paid by the CPS. For a more detailed summary, see http://wp.me/p2FU2Z-6S.)

January 2, 2013
by insolvencyoracle Leave a comment

Two Scottish Cases: (1) Heavy Criticism for a Liquidator who Bypassed the Court to Obtain Remuneration and (2) Proper Court Procedure Catches Out Administrator

Although these two cases are much more for readers north of the Border, it seems to me that principles arising from the first case – that officers of the court have greater concerns than simply getting paid and that IPs and solicitors should be always alert to conflicts of interest – are relevant to many more of us.

Heavy Criticism for a Liquidator who Bypassed the Court to Obtain Remuneration
Re Quantum Distribution (UK) Limited (In Liquidation) [2012] CSOH 191 (18 December 2012)
http://www.bailii.org/scot/cases/ScotCS/2012/2012CSOH191.html
Summary: The judge in the Court of Session hoped that the publication of his opinion “will discourage a repetition of the unacceptable events” (paragraph 1). Lord Hodge’s criticisms were leveled primarily at a liquidator who had bypassed the court to obtain his remuneration from a newly-formed liquidation committee despite a very critical report from the court reporter. He also criticised the petitioning creditor’s solicitors, who also acted for the IP on some matters, for failing to make clear to the liquidator his need to take separate legal advice when they were in a position of conflict of interest.

The Detail: The court only learned of the events when the Auditor of Court raised his concerns with Lord Hodge. The Auditor had produced “a most unusual report” that concluded that, in light of the concerns identified by the court reporter, he was unable to report what would be suitable remuneration of the liquidator.

The court reporter’s concerns included questions regarding a settlement for the insolvent company’s ultimate parent (“QC”) to pay £50,000 each to the liquidation and to the petitioning creditor (“IEL”), although it was unclear what direct claim IEL had against QC. The reporter criticised the liquidator for charging time for brokering the deal, which he suggested was not an appropriate agreement, to the general body of creditors; for failing to disclose the settlement to creditors; and for adjudicating IEL’s claim without taking into account mitigating factors. He also suggested that the petitioning creditor’s solicitors appeared to have a clear conflict of interest in also acting as the liquidator’s adviser and that the petitioning creditor “had been allowed to exert undue influence over the liquidation” (paragraph 23).

However, it appears that, despite receiving the Auditor’s report declining to report what would be suitable remuneration, the liquidator did not make enquiries into what the court reporter’s concerns were, but instead he convened a meeting of creditors to form a liquidation committee and obtained approval for his fees from the committee, which the judge considered was “not acceptable behaviour” (paragraph 36). Lord Hodge expressed concern that the liquidator and the solicitors showed “a striking disregard of their obligations to the court. It appears that nobody applied his mind to why the Auditor said what he did or showed any curiosity as to what the court reporter had said in his report. The concern, as the emails show, was simply how to get the liquidator his remuneration” (paragraph 37). The judge’s opinion was that, as officers of the court, the liquidator and the solicitors’ staff should have brought the concerns of the court reporter to the attention of the court.

The liquidator was also criticised for failing to disclose the full terms of the settlement to the liquidation committee. In addition, it seems that the liquidator had failed to recognise that the compromise needed the court’s approval.

In reviewing the solicitors’ position, Lord Hodge commented that “solicitors who act in an insolvency for both the petitioning creditor and the insolvency practitioner need to be much more alert to the dangers of conflict of interest… It may be acceptable for a firm of solicitors so to act when the petitioning creditor’s claim is straightforward and not open to dispute. But where the claim is complex and is open to question, the potential for conflict of interest should bar the solicitor from so acting. In my opinion claims for damages for breach of contract often are of that nature, particularly where, as here, they entail a claim for loss in future years” (paragraph 40).

Proper Court Procedure Catches Out Administrator
Re Prestonpans (Trading) Limited (In Administration) [2012] CSOH 184 (4 December 2012)
http://www.bailii.org/scot/cases/ScotCS/2012/2012CSOH184.html
Summary: Is it correct to seek remedy under S242 (gratuitous alienations) by means of a petition? The judge decided that it was not, but he left open the question of whether the consequence should be that the joint administrator should begin the process again, given that no prejudice, inconvenience or unfairness would flow from continuing with the petition process.

The Detail: The joint administrators petitioned that an assignation granted by the company amounted to a gratuitous alienation under S242. Counsel for the respondents sought dismissal of the petition with the argument that the remedy is available only by way of summons, not by petition.

The case turned on the interpretation of rule of court 74.15, which states that applications under any provision of the Insolvency Act 1986 during an administration shall be by petition or by note in the process of the petition lodged for the administration order. The judge compared the wording of the rule of court prior to the 2002 Act, which listed the applications that should be made by motion in the process of the petition (because, of course, pre-2002, all administrations were instigated by petitions). Lord Malcolm then concluded that rule 74.15 “covers an application which relates to the supervision of, and is incidental to the administration, such as those specifically mentioned in the pre-existing rule; and does not apply to proceedings brought by administrators under sections 242 and 243 of the 1986 Act” (paragraph 10).

However, Lord Malcolm questioned whether, in this case, it followed that the proceedings should be dismissed as incompetent. He acknowledged that, “in the present circumstance, when no prejudice, inconvenience or unfairness would flow from persisting with the current petition, it would be unfortunate if the petitioners were required to begin again before the same court, albeit in a different form of process, with all the consequential extra expense and delay” (paragraph 16), however the rule of court remains. He invited the parties to address him further on this issue and concluded that this case supported the call for the abolition of the distinction between ordinary and petition procedure in the Court of Session.

December 12, 2012
by insolvencyoracle Leave a comment

The case of an OR’s resources under pressure and another gap in the Rules

Oh dear, the Official Receiver cannot seem to get it right. In the first case, his swift handover of an appointment left the Trustee with outstanding costs and no bankruptcy, but in the second case, his delay in getting to grips with a new case that clearly warranted an IP’s appointment jeopardised the continuance of an action commenced by the Provisional Liquidators. Is this “a reflection of the enormous pressure on resources, both financial and human, under which the OR is working” (TAG Capital Ventures v Potter, paragraph 31)?

The circumstances of the Appleyard case were unique (as demonstrated by the fact that it revealed a previously unreported lacuna in the 1986 Rules) and therefore I do not think that they serve as an argument for an OR to delay passing a case to an IP. However, I would suggest that the TAG Capital Ventures case demonstrates a more obvious downside of such a delay. To ensure the most beneficial outcome for creditors, I would have thought that a swift review of each case as soon as it comes into the OR’s hands – to identify the cases that are more appropriate for IPs and to get those shifted asap – surely is the best way to work, particularly with limited resources, isn’t it? Of course, it’s easy to see what needs to be done, but not so easy to do it when one is fire-fighting and this may be a one-off, but such ‘endemic, notorious, delays’ surely warrant attention.

Appleyard v Wewelwala [2012] EWHC 3302 (Ch) (23 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3302.html

Summary: An unfortunate train of events left the Trustee in Bankruptcy with outstanding costs after the debtor’s bankruptcy was overturned on appeal. The judge’s view was that the Trustee had been “unjustly left out in the cold”; he decided that the debtor’s property should stand charged with payment of the Trustee’s costs incurred up to the point when he learned that the bankruptcy order had been set aside; and he recommended amendment to the Insolvency Rules to deal with this lacuna.

The Detail: The debtor appealed the bankruptcy order on the grounds that the petitioning creditor had unreasonably refused to accept her offer to make payments by instalments. On 14 December 2011, the court provided that the bankruptcy order be set aside and that the hearing of the petition be adjourned for twelve months on the debtor’s undertaking to pay instalments to the petitioner. The order made no provision for the Trustee’s release from office or for payment of his expenses. In fact, it may have been the case that the judge did not even know that a Trustee had been appointed.

Appleyard had been appointed Trustee by the Secretary of State – the Official Receiver believing, correctly at the time, that the debtor had been refused permission to appeal. Appleyard had not been notified of the hearing – there is no provision in statute or the CPR requiring him to be notified – and he only learned of the setting aside of the bankruptcy order when the debtor telephoned him in January 2012. The Trustee had progressed the case in the usual manner, incurring costs of some £6,500.

Mr Justice Briggs felt that, as the Trustee was simply doing his job, there was no reason in principle why the Trustee’s expenses – up to the point when he learned of the successful appeal – should not be paid. In considering from whom those expenses ought to be paid, Briggs J drew on the judgment in Butterworth v Soutter, an annulment case: if the ground for annulment was where the order ought not to have been made (S282(1)(a)), then “there must be strong argument for saying that the petitioning creditor should pay the trustee’s costs” (paragraph 25), but if it were on the ground of payment/securing of the bankruptcy debts, then there is strong argument that the bankrupt should pay. This, and the decision in Thornhill v Atherton, led Briggs J to conclude that “Mr Appleyard’s right as trustee to recover his expenses, having acted entirely properly and innocently at least until January 2012, must prevail over Mrs Wewelwala’s right to enjoy to the full her estate upon its re-vesting in her as a result of the setting aside of the bankruptcy order. This is so even if, as between her and Davenham [the petitioner], it may be Davenham which was largely to blame for the circumstances leading to those expenses being innocently incurred… I do not think that it would be right to make an order against her personally, since this is more than Mr Appleyard would have been entitled to, had he remained her trustee. Nonetheless I should direct that her property… stand charged with payment of Mr Appleyard’s reasonable expenses down to January 2012, leaving him to obtain execution in that respect in such manner as he should think fit, in the absence of agreement with Mrs Wewelwala” (paragraphs 32 and 33). The judge left it open to the debtor whether she might challenge the reasonableness of the Trustee’s fees and/or to pursue a claim for compensation against the petitioner.

However, in relation to the Trustee’s costs incurred after he had learned of the setting aside, Briggs J “reached the opposite conclusion”. It seemed to him “that he [the Trustee] should have incurred no further expense without first applying to the court for directions” (paragraph 34).

Briggs J concluded: “it is most unfortunate that it was not appreciated by either of the parties to Mrs Wewelwala’s appeal last December that Mr Appleyard’s expenses need to be addressed. A trustee in bankruptcy’s expenses are as important a matter to be dealt with on an appeal against a bankruptcy order heard after his appointment, as they are in any application for rescission or for annulment. To the extent that the Insolvency Rules fail to make this clear, consideration should be given to their amendment, or to the issue of an appropriate practice direction. In any event, it is to be hoped that the reporting of this judgment may draw this aspect of bankruptcy practice and procedure to the attention of litigants and their professional advisors” (paragraph 37).

TAG Capital Ventures Limited v Potter [2012] EWHC 3323 (Ch) (23 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3323.html

Summary: The fact that the Official Receiver had not been in a position to continue an action commenced by Provisional Liquidators and a four month delay were insufficient to conclude that continuance of the action would amount to an abuse of process of the court or to discharge a freezing order made at the outset of the action.

The Detail: Immediately following their appointment, the Provisional Liquidators applied for a freezing order against director, Potter, and commenced an action against him. A trial timetable was agreed, although neither party complied with disclosure.

Hot on the heels of the OR’s appointment as Liquidator on 25 June 2012, Potter’s solicitors asked the OR about his intentions with regard to the action. They asked again on 3 October and received the response: “Based on the information we have, and the fact that the provisional liquidators have not provided the records to date, the Official Receiver is not in a position to continue this action”.

Around the same time, the OR sent a report to creditors confirming that he did not intend calling a meeting of creditors. Shortly on receipt of this report, on 5 October, the petitioners’ solicitors contacted the OR’s office and put in train the process to have one of the former Provisional Liquidators appointed as Liquidator by the Secretary of State.

On 8 October, the date for filing the pre-trial questionnaire, Potter’s solicitors notified the OR’s office that failure to discontinue the proceedings would result in their client’s own application to have the proceedings struck out. No response was received and thus the application was made.

The IP was appointed Liquidator on 23 October and was now keen on continuing the action.

Mr Justice Warren commented that, without the OR’s statement on 4 October that he was “not in a position to continue this action”, Potter’s application would be “hopeless” (paragraph 37) and that the evidence (emails between the OR and the IP) suggested that up until the end of September “the OR had made no decision at all, a fact consistent with the suggestion made by Mr Wolman [for the claimant] that there are endemic, and he would say notorious, delays within the OR’s office” (paragraph 39). The judge suggested that, even if the conclusion were that on 4 October the Company did not intend to intend to pursue the action (a conclusion on which the judge cast significant doubt), it would be “an entirely disproportionate response” to strike out the action (paragraph 45).

In considering whether any delay in progressing the action supported the discharge of the freezing order, Warren J took no account of any delay prior to the appointment of the OR, as the Company was not in a position to act prior to this point. He also stated that “the OR must, on any footing, have been given a reasonable time after his appointment in which to consider his position in relation to the proceedings. I do not say that in all cases involving an insolvent company as claimant that a defendant simply has to accept the delays caused by the insolvency process. But in the present case, Mr Potter was the controlling mind and owner of the Company and ultimately responsible in practical terms for its demise… It would be wrong, I think, for Mr Potter to be able to rely on delay resulting from the orderly implementation of an insolvency process in order to obtain the discharge of the freezing order” (paragraph 48).

However, Warren J did observe that there seemed to be a delay over and above the “proper time for those matters” of some two months and that it may have been reasonable to expect the OR to have decided in July that, in view of the existing litigation, it would have been appropriate to hand the case to an IP, but nevertheless this small delay did not warrant the discharge of the freezing order.

The judgment includes details of exchanges between the OR’s office and the Provisional Liquidators, which demonstrate that there was no constructive dialogue between these parties throughout the OR’s term of office (which was not entirely due to delays by the OR) and leaves me wondering why the OR did not conclude swiftly on his appointment that an IP should be appointed (particularly given this case’s profile) or, failing this, why it took over three months for him to issue a Notice of No Meeting to creditors.

November 26, 2012
by insolvencyoracle Leave a comment

Four High Court Decisions: (1) how (not) to avoid personal liability; (2) LPA Receivership changes “client” for TUPE purposes; (3) out-bid Newco avoids allegations of hiving out business; and (4) discharged bankrupt refused release from family proceedings debt

I don’t think any of these judgments introduces anything new, but they might still hold a little interest:

Wright Hassall LLP v Morris – lessons in avoiding personal liability in post-administration agreements
McCarrick v Hunter – LPA Receivership results in change of client, thus no TUPE transfer of service provision
City of London Group Plc & Anor v Lothbury Financial Services Limited & Ors – out-bid Newco avoids claims from purchaser finding the “cupboard bare”
McRoberts v McRoberts – when will a court release a bankrupt from a family proceedings debt under S281(5)?

Lessons in avoiding personal liability in post-administration agreements

Wright Hassall LLP v Morris [2012] EWCA Civ 1472 (15 November 2012)

http://www.bailii.org/ew/cases/EWCA/Civ/2012/1472.html

Summary: This has been the subject of some discussion on the LinkedIn Contentious Insolvency group. The main lessons I drew from this case are that, not only should IPs take care to avoid personal liability when signing contracts/agreements as agent (SoBO?), but also to understand who – himself or the insolvent entity – is made party to legal proceedings. In this case, it seems that the IP did not think through the consequences of an action brought against him; he seemed to assume (or at least he attempted to rely on the assumption) that the successful litigant would rank pari passu with other administration expense creditors. As the IP had not appealed the order, all that was left to the judge – who was asked by the litigant for directions that it be paid in priority to the other expense creditors – was the question: was the order against the IP personally or the companies in Administration? As the companies had not been made party to the proceedings, the court on appeal concluded that it could not be the companies and thus the IP was held personally liable.

The Detail: Mr Morris, Administrator of two companies, entered into two CFAs with Wright Hassall LLP. The judgment of Lord Justice Treacy notes: “Although the heading to the agreements made plain that the two companies were in administration, and the Appellant must have understood that Mr Morris was the Administrator, when he signed the agreements he did so without any qualification as to his personal position or reservation as to his personal liability. In due course Judge Brown QC was to find that Mr Morris signed the documents without reading them” (paragraph 5). Here endeth the first lesson.

Later, the solicitors sought payment under the CFAs. The court found in favour of Wright Hassall LLP, but, as described above, when the solicitors pursued payment, Morris sought to treat them as an administration expense creditor who would need to wait along with all other expense creditors. The solicitors sought directions that they be paid in priority to the other expense creditors, but, although the issue of personal liability had not been raised before, Judge Cooke recognised that this issue was key. He decided that Morris was not personally liable, putting some weight behind the naming of the defendant as “Morris as Administrator of… Limited” and suggested that this acknowledged that Morris was acting as agent, rather than in a personal capacity. Wright Hassall LLP appealed this decision.

The problem identified by one of the appeals judges, Treacy LJ, was that the only defendant was Morris; at no stage had the companies been joined as parties to the litigation. Treacy LJ noted that there was no authority for asserting that, by describing the defendant as “Morris as Administrator of… Limited”, this recognises that he is being sued as agent. He also noted that the only way the companies could have been made party to the action was with the consent of the Administrator or by order of court, but neither of these steps had been taken. Finally, he noted that, had the companies truly been the defendants, they would have been described as “XYZ Limited (In Administration)”. As Judge Brown QC could only make an order against a party to the action before him, it followed that the order was against Mr Morris personally.

LPA Receivership results in change of client, thus no TUPE transfer of service provision

McCarrick v Hunter [2012] EWCA Civ 1399 (30 October 2012)

http://www.bailii.org/ew/cases/EWCA/Civ/2012/1399.html

Summary: I have seen some commentary on the Hunter v McCarrick Employment Appeal Tribunal ([2011] UKEAT 0167/10/DA) and, as this recent appeal was dismissed, there has been no change, but I thought it was worth a quick mention.

We are all used to the principle that, if a business switches its service provider, the people employed by the original service provider are protected under TUPE. In this case, the appointment of LPA Receivers led to employees switching employer although they provided the same services to the same properties. However, the switch of employers was not considered to be a transfer of service provision, because the “client” had changed from the borrower to the mortgagee/receivership.

The Detail: McCarrick was employed by WCP Management Limited (“WCP”), which provided management services on a group of properties. The mortgagee appointed LPA Receivers, who instructed a new property management company, King Sturge, and thus WCP stopped providing the service. McCarrick then became employed personally by Hunter, who had an interest in seeing the swift end of the receivership and who made McCarrick available to assist King Sturge in the property management at no cost to the receivership. McCarrick apparently provided the same property management services as he had before, but he was now paid by Hunter.

Subsequently, McCarrick was dismissed and he sought to claim that the dismissal was unfair. In order to do so, he needed to prove continuity of employment between WCP and Hunter. The Employment Appeal Tribunal decided – and this appeals court confirmed – that there was no transfer of service provision between WCP and Hunter. It was stated that Regulation 3(1)(b) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 envisages that the client will remain the same throughout the transfer of service provision and “it would be quite illegitimate to rewrite the statutory provisions in the very broad way suggested by the appellant” (paragraph 37), i.e. to enable the Regulations to achieve the purpose of protecting employees in this situation when there is a transfer of service provision. Therefore, as the client switched from the borrower to the mortgagee “and/or the receivership” (paragraph 27), Regulation 3(1)(b) regarding the transfer of service provision does not apply.

Out-bid Newco avoids claims from purchaser who found the cupboard bare

City of London Group Plc & Anor v Lothbury Financial Services Limited & Ors [2012] EWHC 3148 (Ch) (8 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3148.html

Summary: The post-Administration purchasers of a business alleged that they found “the cupboard was bare”, but claims against “Newco” and others for migrating the business prior to insolvency failed.

What I found particularly interesting in this case was the apparent acknowledgement of the judge that the director could take certain steps in anticipation of a pre-pack sale to Newco.

The Detail: A subsidiary of the first claimant bought the business, name and assets of Lothbury Financial Limited (“LF”) from its Administrators four days after the company was placed into Administration on application of the claimants. The claimants alleged that a former director, consultants, and employee of LF conspired to transfer the business to Lothbury Financial Services Limited (“LFS”) and thus committed serious acts of misfeasance.

Mrs Justice Proudman concluded that the claims failed. She was satisfied that the evidence demonstrated that: LFS operated as a bona fide separate business prior to the Administration of LF; LF’s clients were not misled, but chose to follow the consultants, who had no restrictive covenants, to LFS of their own accord (the business was PR); and LFS was entitled to continue to use the name after the goodwill of LF was sold to the claimant.

As far back as summer 2009 (LF was placed into Administration on 29 March 2010), the director was taking advice from an IP regarding a pre-pack Administration, although he was also attempting to re-negotiate payment terms with the claimant in order to rescue LF. The claimants alleged that LFS was set up and structured as part of the director’s exit strategy, that LFS was to be the destination for LF’s business. “The claimants argue that the allegation of a pre-pack administration is self-serving as depriving LF of its business served to ensure that the price to be paid would be minimised and rival bidders would be discouraged. However, preparing to succeed to an original business in such circumstances is in my judgment different from preparing to compete with it. It is the essence of a pre-pack management buy-out that information has to be derived from the failing company in order to structure such a buy-out” (paragraph 38).

So how much activity in preparation of a pre-pack is acceptable and over what kind of period? It is noteworthy that in this case, although there was evidence of some confusion of company names on a client’s contract and an employee was described as having “overreached herself” (paragraph 28) in explaining to the London Stock Exchange’s Regulated News Section that LF had simply changed its name to LFS and moved offices, the judge found no case against the director for breach of fiduciary duty and noted that LF suffered no loss by the actions.

When will a court release a bankrupt from a family proceedings debt under S281(5)?

McRoberts v McRoberts [2012] EWHC 2966 (Ch) (1 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2966.html

Summary: A discharged bankrupt was refused release from a bankruptcy debt arising from a family proceedings order.

Although this is not a particularly surprising outcome, the judgment provides a useful summary of the factors the court considers when deciding whether to override the default position of S281(5) of the Insolvency Act 1986.

The Detail: Mr McRoberts’ bankruptcy started in September 2006. Mrs McRoberts submitted a proof of debt for c.£245,000 being the amount owed under an order in their family proceedings in 2003 in resolution of their financial claims ancillary to their divorce. Mr McRoberts was discharged from bankruptcy in September 2007 and the bankruptcy was concluded with no distribution to creditors.

S281(5) provides that discharge from bankruptcy does not release the debtor from such a debt, but the court has jurisdiction to release it and the court in Hayes v Hayes held that the court’s discretion in this matter is unfettered and the debt can be released after the debtor’s discharge. The Hon. Mr Justice Hildyard considered the factors described in Hayes and continued: “As it seems to me, the ultimate balance to be struck is between (a) the prejudice to the respondent/obligee in releasing the obligation if otherwise there would or might be some prospect of any part of the obligation being met and (b) the potential prejudice to the applicant’s realistic chance of building a viable financial future for himself and those dependent upon him if the obligation remains in place. In striking that balance I consider that the burden is on the applicant; unless satisfied that the balance of prejudice favours its release the obligation should remain in place” (paragraphs 24 and 25). He also considered that a review of the merits or overall fairness of the underlying obligation did not come into it, but that, if any modification of the order were sought, this was a matter for the matrimonial courts.

In this case, the judge’s view was that the balance remained in favour of keeping the obligation in place – the debtor had not provided evidence that any future enterprise or activity would be blighted by the continued obligation – and thus he declined to grant release.

November 4, 2012
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Solicitors’ fees for unsuccessfully opposing a winding-up petition allowed in priority to Liquidators’ fees, but not in priority to Administrators’ fees

Neumans LLP (a firm) v Andronikou & Ors [2012] EWHC 3088 (Ch) (2 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3088.html

Although there is case precedent – Re a Company (No 004055 of 1991) [1991] 1 WLR 1004 – for allowing the company’s costs for seeking to strike out a winding-up petition to be a Liquidation expense, personally this seemed a new thought to me: that the category of Liquidation expenses at R4.218(3)(h), “the costs of the petitioner, and of any person appearing on the petition whose costs are allowed by the court”, could include the insolvent company’s costs for seeking to avoid the winding-up order.

Of course, these pre-Liquidation costs do not automatically rank in priority to the Liquidator’s fees – they have to be “allowed by the court” – but it seems to me that this case highlights yet more pre-appointment liabilities of which Liquidators need to be aware.

In contrast, the judge decided that the solicitors’ fees should not be allowed as an Administration expense.

It is perhaps important to note that the Liquidators did not object to the result (because there was no Administration surplus from which to discharge the costs). However, the judgment provides some valuable comment on the application of the Lundy Granite principle in Administrations and what kind of costs the court will allow as Liquidation expenses.

Background: In December 2009, Portsmouth City Football Club Limited (“the company”) instructed solicitors to act for it in connection with a winding-up petition presented by HMRC. The solicitors continued to act on the matter until c.12 February 2010 when the company’s instructions were withdrawn. At that time, the petition had reached an appeal stage. Administrators were appointed on 26 February 2010 and thus the winding-up petition was suspended automatically. On considering the Administrators’ (revised) proposals, the creditors approved that the company should exit Administration via Compulsory Liquidation. The original HMRC winding-up petition was restored to a hearing on 24 February 2011 when the winding-up of the company was ordered and this resulted in the ending of the Administration.

The company’s former solicitors had received part-payment from a person connected with the company, but there remained c.£267,000 owing in fees and disbursements. The solicitors sought a determination that the costs should be an expense of the Administration; alternatively, that they should be an expense of the Liquidation; and further alternatively, that they should be an expense of the CVA (which existed whilst the company was also in Administration).

Are the solicitors’ fees an Administration expense?

The solicitors’ first argument was that the court could order that the costs be paid as an Administration expense under S51 of the Senior Courts Act 1981. In part, that section states that: “the court shall have full power to determine by whom and to what extent the costs [of proceedings] are to be paid”. Morgan J decided that this did not help the solicitors: “An order for costs under section 51 is for the benefit of the company. At most, it would involve a payment by the company to the company. It would not involve the administrators making a payment to the solicitors… Section 51 does not authorise the court to order the administrators to make a payment to the solicitors. As I have explained, they did not incur costs and no order for costs is to be made in their favour” (paragraph 68).

Another argument was that the court could order that the costs be “treated” as an Administration expense. In considering this, Morgan J reviewed the list of Administration expenses at R2.67 and reflected on the impact of the Lundy Granite principle, i.e. a liability under a contract entered into before Liquidation could be treated as if it were an expense of the Liquidation, where the Liquidator had retained the benefit of the contract for the purposes of the winding-up. He stated: “If the company is under a liability to pay a sum under the Lundy Granite principle, then it seems to me that, as a matter of fact, payment of such a sum will be a necessary disbursement within rule 4.218(3)(m)” (paragraph 91) and thus it followed that “a liability which is payable in full under the Lundy Granite principle can be a necessary disbursement within rule 2.67(1)(f). Further, such a liability can be a liability incurred by the administrator under rule 2.67(1)(a)” (paragraph 93).

So were the solicitors’ costs in this case a liability under the Lundy Granite principle? Morgan J decided that they were not, as the company’s contract of retainer of the solicitors ended before the Administration began and the Administrators “did not do anything to elect to retain the benefit of the contract of retainer for the purposes of the administration. Further, if they had so elected, they would only have been liable for charges in relation to the period from the time of such election” (paragraph 95).

Morgan J concluded that the solicitors’ fees came under no category of Administration expenses per R2.67 and they were not to be “treated” as if they came within that rule.

Are the solicitors’ fees a Liquidation expense?

One of the significant differences between R2.67 for Administration expenses and R4.218 for Liquidation expenses is that the latter includes (at (3)(h)): “the costs of any person appearing on the petition whose costs are allowed by the court”. Morgan J stated: “The company comes within the reference to ‘any person’ in rule 4.218(3)(h). The company incurred costs in that it contracted, before the presentation of the winding up petition, to pay fees to the solicitors. Thus, the decision for the court is whether to ‘allow’ the costs of the company as costs within rule 4.218(3)(h)” (paragraph 115).

“On the evidence and the submissions in this case, and having regard to the fact that there was no real opposition to this course, I consider that I am able to hold: (1) the solicitors were duly instructed on behalf of the company; (2) those directing the affairs of the company at the relevant time considered that it was in the best interests of the company for the company to oppose the winding up petition in the way, and on the grounds, on which it did; (3) those directing the company were not acting in their own interests in a way which was in conflict with the best interests of the company; (4) the work done by the solicitors on behalf of the company was in fact in the best interests of the company; (5) there is no factor which would justify the court in refusing to allow the company’s costs to be an expense of the liquidation” (paragraph 128).

Which elements of the solicitors’ fees are Liquidation expenses?

In addition to the solicitors’ fees and disbursements directly related to the opposing of the winding-up petition, Morgan J considered whether the solicitors’ other fees and disbursements also should be allowed:

Costs incurred prior to the presentation of the petition: allowed to the extent that the “work ultimately proved of use and service in the application which the company later made to strike out the petition” (paragraph 133).
Costs in dealing with another creditor’s petition: allowed from the date that this petition and HMRC’s petition were ordered to be considered together; work prior to this event related to a separate matter.
Costs in advising on a possible application for a S127 validation order: Morgan J felt that these costs were “very closely bound up” with the costs of dealing with the HMRC petition and thus they were allowed.
Costs in dealing with a First-tier Tribunal regarding the company’s VAT position: the company had been pursuing a credit, which it alleged would result in a substantial cross-claim supporting its application to strike out HMRC’s petition. Morgan J felt that the arguments as to whether to allow these costs as a Liquidation expense were “very evenly balanced”, but he chose not to allow them, viewing them as “sufficiently different from the direct costs of responding to the HMRC winding up petition so that it would be wrong to give them the priority which would follow from allowing them as an expense of the liquidation” (paragraph 136).

UPDATE: Neumans’ appeal was heard on 24 July 2013 (http://www.bailii.org/ew/cases/EWCA/Civ/2013/916.html). Lord Justice Mummery dismissed the appeal, stating that the order made by Morgan J was “dead on” (paragraph 33).

November 2, 2012
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MF Global: Are Special Administrators analogous to Liquidators?

Heis & Ors (Administrators of MF Global UK Limited) v MF Global Inc [2012] EWHC 3068 (Ch) (1 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3068.html

Decision: In considering the default provisions of a repurchase agreement between the two parties, David Richards J concluded that Special Administrators appointed under the Investment Bank Special Administration Regulations 2011 are not officers analogous to a Liquidator and an application under the Regulations for a Special Administration Order is not analogous to a petition for a winding-up.

The primary consequence of this decision in this case is that, although the appointment of the Special Administrators over MF Global UK Limited (“UK”) occurred before a Trustee was appointed over MF Global Inc (“Inc”), UK has control over establishing the sums due under the agreement. This makes quite a difference: the Special Administrators provisionally suggested Inc’s claim to be in the region of £37m, whereas with Inc as the non-defaulting party, its claim had been estimated at £287m.

Background: The Special Administrators sought directions regarding the default provisions of a Global Master Repurchase Agreement (“GMRA”) between UK and Inc in order to establish which was the defaulting party, which was necessary in order to establish the sums due under the GMRA.

Special Administrators were appointed over UK approximately three hours before a Trustee was appointed over Inc under the US’ Securities Investor Protection Act 1970. The GMRA defined default events as including “an Act of Insolvency” where the non-defaulting party serves a default notice. However, where the Act of Insolvency was “the presentation of a petition for winding-up or any analogous proceeding or the appointment of a liquidator or analogous officer”, no default notice was required. As no default notice was served when UK was placed into Special Administration, it was crucial to determine whether the Special Administration was analogous to the appointment of a Liquidator. The parties were agreed that the appointment of a Trustee over Inc was analogous to the appointment of a Liquidator, so if Special Administrators were not analogous to Liquidators, then Inc would be the defaulting party.

David Richards J stated that if the basic characteristics of liquidation – of bringing the business of the company to an end, realising its assets and distributing the proceeds amongst creditors – are not present, “it would in my judgment be impossible to say that the procedure was ‘analogous to’ liquidation as contemplated by the GMRA” (paragraph 33). He then compared and contrasted the powers and objectives of Special Administrators and Schedule B1 Administrators with those of Liquidators and, not surprisingly, pointed out that “an administration and other insolvency proceedings may result in the realisation of a company’s assets and a distribution of the proceeds among creditors, but the alternative of a rescue of the company as a going concern is at least one of the purposes or objectives of those proceedings. In those cases it is understandable that the non-Defaulting Party under the GMRA would wish to have an opportunity to wait and see how the proceedings develop before deciding whether to exercise its right to serve a notice declaring an event of default and thereby close out all outstanding transactions under the GMRA” (paragraph 52). David Richards J was not persuaded that Special Administrations were analogous to Liquidation even though, as Inc’s Counsel suggested, it would be very rare, if ever, that an investment bank that had been placed into Special Administration would be rescued – one of the alternatives of Objective 3 of the Special Administration process is to rescue the investment bank as a going concern and thus it is a process which is not analogous to Liquidation.

October 28, 2012
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Two High Court decisions: (1) retrospective leave to commence proceedings; and (2) questions of admissible S235 evidence and conflicted solicitors where a petition debt is disputed but Provisional Liquidators are in office

I have covered two newly-released judgments below:

Colliers International – can the court grant retrospective permission for a creditor to commence legal proceedings after a court-based insolvency (i.e. Bankruptcy, Compulsory Winding-up, or Administration) has begun?
TAG Capital Venture – should a Provisional Liquidator’s S235 interview be excluded from evidence in relation to an opposed petition on a disputed debt? Also, in the case of a disputed petition debt, can the same solicitors act for both the petitioners and the Provisional Liquidators?

Bank of Ireland (UK) Plc v Colliers International UK Plc [2012] EWHC 2942 (Ch) (24 October 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2942.html

Decision: Richards J makes it clear that this judgment is intended to resolve uncertainties suggested by the history of previous judgments and to establish the principle that retrospective permission may be given for the commencement of proceedings under S130(2) or S285(3) of the Insolvency Act 1986 or under Paragraph 43(6) of Schedule B1 (paragraphs 35 and 36).

Background: The uncertainties are explained in Sealy & Milman’s note to S285(3) (page 340 in 15^th edition). S285(3) provides that, after the making of a bankruptcy order, creditors with provable debts may not commence any action except with leave of court (and the Act provides generally similar provisions for compulsory winding-ups and Administrations). Sealy & Milman’s note describes the case precedent: in Saunders (1997), the court granted retrospective leave, but in Taylor (2007), it was refused; then in Bank of Scotland Plc v Breytenbach (2012), the court followed the earlier decision in Saunders.

In this current case, the applicants notified the Administrators of potential claims two months after Colliers was placed into Administration. The claims relate to allegations of negligence in providing valuations on Southern Cross group care homes provided in 2006 in view of valuations obtained in 2011 indicating much reduced values. The applicants issued claim forms in September 2012. Assuming the court had jurisdiction to grant retrospective permission, Richards J stated that it was a clear case for permission to be granted (paragraph 8).

After considering the case precedent, Richards J reflected on the purpose of the statutory provisions requiring leave of court to be obtained to commence actions. He noted that there was no corresponding provision for CVLs and thus, to quote “Black LJ in Boyd v Lee Guinness Limited, ‘this section is one of a series of provisions designed to ensure that when a winding-up order has been made by the court the whole of the task of supervising the collection and distribution of the company’s assets should be committed to the winding-up court and, accordingly, that all proceedings having any bearing upon the winding-up of the company should remain under the supervision and control of that court.’ Given that purpose, it is hard to see why the court should not be permitted to grant retrospective permission if in the circumstances it is appropriate to do so” (paragraph 32).

Re TAG Capital Venture [2012] EWHC 1631 (Ch) (8 February 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/1631.html

This judgment appears to have been released last week, but it relates to a February 2012 case.

Decision: Richards J addressed two issues: (1) he rejected the director’s request that a transcript of his interview with Provisional Liquidators under S235 should be excluded from evidence on a winding-up petition; and (2) he agreed with the director that, in the circumstances of this case, the solicitors for the petitioners should not also be acting for the Provisional Liquidators.

Background: The sole director opposes the petition and disputes the petition debt, but Provisional Liquidators have been appointed. The director argued that the purpose of a S235 interview conducted by a Provisional Liquidator is to enable him to undertake his duties, which are essentially to establish underlying facts about the nature, business, liabilities and assets of the company and to ensure the preservation of its assets. The judge agreed that these were amongst the Provisional Liquidator’s duties, but an investigation into the petition debt and any contracts between the parties would be wrapped up in this purpose. Richards J stated: “If in the course of his investigations a provisional liquidator discovers or obtains evidence which is relevant to the issues to be determined in the petition, it would in my judgment be perverse if he could not place that evidence before the court whether it assisted the petitioner or those opposing the petition” (paragraph 7).

On the conflict issue, Richards J stated: “in circumstances where the petition debt is the subject of actual dispute leading to a one day hearing to determine whether the petition is well founded, there is a conflict between the positions of the provisional liquidators and the petitioners” (paragraph 12), but he continued: “in saying this, I am not suggesting that it is never appropriate for the same firm of solicitors to act both for the petitioning creditor and for provisional liquidators, or for the same firm to act for creditors and for a liquidator appointed after a company has gone into winding up. It will all depend upon the circumstances. If there is no dispute about the debt owed to the petitioning creditor then in the absence of other circumstances, there is no conflict between the petitioner’s position and the position of the provisional liquidators” (paragraph 16).

The judge also observed that, as the director knew that the same solicitors were acting for both the petitioners and the Provisional Liquidators at the time of the S235 interview, he can have no complaint that information from that interview has already passed between the parties. He also rejected the director’s argument that the solicitors should cease to act for the petitioners, but saw that the more appropriate course of action was for the Provisional Liquidators to instruct new solicitors.

October 25, 2012
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Supreme Court decides on enforceability in England of US judgment in Rubin v Eurofinance

Rubin & Anor v Eurofinance SA & Ors [2012] UKSC 46 (24 October 2012)

On 24 October 2012, the Supreme Court considered whether, and if so, in what circumstances, an order or judgment of a foreign court in proceedings to set aside prior transactions, will be recognised and enforced in England and Wales and whether the UNCITRAL Model Law has any bearing in this regard.

The Supreme Court Press Summary is available at http://www.bailii.org/uk/cases/UKSC/2012/46.(image1).pdf and the full judgment is at http://www.bailii.org/uk/cases/UKSC/2012/46.html. I have yet to read the full judgment (and if I see anything further, I shall add a comment to this blog post), but here are some points from the Press Summary.

On a 4:1 majority, the Supreme Court allowed the Rubin appeal “holding that there should not be special rules for avoidance judgements”.

The background of the appeal is that the US Federal Bankruptcy Court for the Southern District of New York had decided, in default of appearance, in respect of fraudulent conveyances and transfer and the judgment was enforced in England at common law. As the party against whom the judgment was made was neither present in the foreign country nor had it submitted to the jurisdiction, the question was “whether the Court should adopt separate rules for judgments in personam in avoidance proceedings where the judgments were central to the purposes of the insolvency proceedings or part of the mechanism of collective execution”.

The Court did not agree that there should be a more liberal rule for judgments given in foreign insolvency proceedings for the avoidance of transactions. “Such a change would not be an incremental development of existing principles, but a radical departure from substantially settled law, and more suitable for legislature than judicial innovation.” Lord Collins, with the agreement of two others, “held that the earlier Privy Council decision in Cambridge Gas Transportation Corporation v Official Committee of Unsecured Creditors of Navigator Holdings Plc [2007] 1 AC 508 was wrongly decided in that there was no basis for the recognition of the US Bankruptcy order in the Isle of Mann in that case”.

The Court also saw nothing in the Cross Border Insolvency Regulations 2006 or UNCITRAL that applied to the recognition or enforcement of foreign judgments against third parties.

The Press Summary also describes the reasons behind Lord Clarke’s dissent.

In addition, the Press Summary covers the Supreme Court’s consideration of the appeal of New Cap Reinsurance Corporation (In Liquidation) & Anor v A E Grant & Ors as Members of Lloyd’s Syndicate 991 for the 1997 Year of Account and Anor [2012] UKSC 46. This is another foreign jurisdiction case regarding a voidable transaction (this time based on a judgment in Australia), but the circumstances were quite different. The Court decided to dismiss the appeal, as the Syndicate had proven in the Australian insolvency of New Cap and thus had submitted to the jurisdiction of Australia. In the circumstances, the Court decided that the Foreign Judgments (Reciprocal Enforcement) Act 1933 applied.

My thanks go to Maurice Moses, Ernst & Young LLP, for forewarning me of this matter, as newsflashed by Allen & Overy on 23 October.

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