Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Category Archives: Case law


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Lean pickings from recent High Court decisions

My lack of blog postings has been bugging me over the past couple of weeks, but I regret that, despite my best efforts, I have failed to spot any earth-shattering news (for which we should be grateful, I guess).

Over the past weeks, I have made my personal submission to the Government’s Red Tape Challenge on insolvency (but I did not think that readers would be interested in that) and I have been exploring the thorny issues of PPI claims in IVAs, but every time I look at the issues, more questions pop up.  Nevertheless, I hope to post something on this subject shortly.

I have also been reviewing the High Court decisions as they have been released, but in my view there have been few of any particular interest to insolvency practitioners.  For the more curious amongst you, here are my lean pickings:

  • Both Odyssey and Ross River consider directors’ pre-liquidation duties.
  • Clyde & Co considers whether LLP members can be employees.
  • Tinseltime considers solicitors’ liabilities to non-party costs orders in some CFA situations.

Odyssey Entertainment Limited v Kamp & Ors (09/08/12)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2316.html

The court found that a director (“D1”) had broken his duty of good faith under S172 of the CA 2006 towards the company (now in liquidation) (“C”): “In a nutshell, I find that (1) by 4.1.09, D1 had decided that C would not provide him with the route to a capital profit which he had hoped for and that he would have better prospects in that respect working on his own account; (2) thereafter, D1 influenced the board’s stage by stage decision making process which led to the winding down of C’s business, the termination or surrender of its contracted rights, and the liquidation of C; (3) over the period 4.1.09 to 31.8.09, D1 misled C’s board as to his own true intentions and kept secret the work he undertook on his own account as a film sales agent, whilst still a director and an employee of C, as part of his plan to bring those intentions to fruition. In so doing, D1 continued to mislead C’s board (and therefore C) as to C’s true viability and prospects; (4) had C’s board not been misled by D1, C’s board would probably not have made the decisions that it did leading to its winding up on 9.9.09; and, (5) in consequence, D1 and/or D2 and/or D3 as a result of D1’s efforts secured sales agent’s rights in films that (a) would otherwise probably not have reverted to the rights owner in the case of film rights already under contract to C and (b) would otherwise probably have been acquired by C in the case of other films on which D1 had been working while a director of C” (paragraph 204).

The only point of interest I gleaned was the comment of HHJ Simon Barker QC on the position of the co-directors: “What emerged from both the written evidence and the cross-examination of [the co-directors] is that they all deferred to D1’s long experience and expertise as a film sales agent (the expert witnesses were agreed that D1 is a leading individual UK film sales agent) for guidance as to C’s sales prospects and, more generally, the market for independent sales agencies. In so doing, they were not simply accepting whatever D1 might say in disregard of their own powers of thought nor were they in dereliction of their duties as directors. Rather, they were giving due weight to the one of their number who could speak with particular authority on the general market for sales agents and the specific position of C” (paragraph 94).

Ross River Limited & Anor v Waveley Commercial Limited & Ors (06/09/12)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2487.html

The main issue before the court was the possible liability of a director (Mr Barnett) to pay a sum to RossRiver by way of equitable compensation for alleged breaches of fiduciary duties that he owed to RossRiver.  Amongst the considerations was whether the director should have wound up the company (“WCL”) earlier and before WCL had used its assets (including revenues from a joint venture with Ross River) to defend an action brought by Ross River for payment of monies due under the joint venture agreement.

Morgan J concluded that RossRiver had failed to prove entitlement to equitable compensation from the director.  In so doing, he seems to have put some weight behind the director’s consultation at an early stage with accountants, who reflected on the option of liquidation: “Mr Barnett did take advice on whether WCL should be wound up or, possibly, whether it was in Mr Barnett’s separate interests for WCL to be wound up. There is no evidence as to the advice which Mr Barnett received. In these circumstances, I consider that I ought not to decide that it was a breach by WCL or by Mr Barnett of a fiduciary duty owed to Ross River to omit to take steps to wind up WCL in early 2009” (paragraph 74), although the fact that the allegation was not pleaded nor put to the director when cross-examined may have had something to do with the judge’s decision.

Morgan J also commented: “On the face of it, WCL was entitled to defend itself and to use its own assets to do so, even though the use of those assets might produce the result that it used up all of its available funds and ended up being unable to pay any sum found to be due to RossRiver… In my judgment, both WCL and Mr Barnett were real and substantial defendants. Both were entitled to defend the claims brought against them without there being a breach of fiduciary duty owed to RossRiver. The fiduciary duties which, in my earlier judgment, I found to exist do not go so far as to restrict either WCL or Mr Barnett from putting forward their chosen stance in litigation brought by RossRiver against them. It would be a very onerous fiduciary duty which prevented a party to adversarial litigation from defending itself” (paragraphs 67 and 69).

[UPDATE 08/09/2013: For the sake of completeness, I thought I ought to report that Ross River’s appeal was allowed (http://www.bailii.org/ew/cases/EWCA/Civ/2013/910.html), although the appeal didn’t really touch on the insolvency-relevant bits of the earlier judgment.

Briefly, the difficulty that Lord Justice Lloyd had with the previous judge’s reasoning was that the funds that Waveley Commercial Limited (“WCL”) had used to defend the action were subject to a Joint Venture Agreement, which prohibited WCL from paying itself, or using for its own benefit, any part of the proceeds of the development other than in payment of proper expenses of the development or as agreed with Ross River. Lloyd LJ felt that it was sufficient that Ross River had cast doubt on the legitimacy of some of the payments and that it was for WCL and Mr Barnett to prove that payments were proper, not for Ross River to prove the contrary.]

Clyde & Co LLP & Anor v Bates Van Winkelhof (26/09/12)

http://www.bailii.org/ew/cases/EWCA/Civ/2012/1207.html

The main question before the court was: can a member of an LLP be a worker within the meaning of S230 of the Employment Rights Act 1996?

Whilst “workers” have limited rights under the ERA and do not extend to the rights to insolvency qualifying liabilities (as far as I can see) as is the case for “employees”, Elias LJ did include consideration of an LLP member’s rights as an employee also.  He commented: “I would be minded to hold [and he did so conclude in paragraph 74] that the member of an LLP would not by virtue of that status alone constitute either an employee or a worker. Whether the member could enter into some separate employment relationship with the partnership, rather in the manner that a company director can do, would be a different question. There would be no employment status arising out of the simple status of member of the firm” (paragraph 73).

(UPDATE 26/05/14: the Supreme Court issued judgment on an appeal on this case on 21 May 2014: http://www.bailii.org/uk/cases/UKSC/2014/32.html. The Supreme Court decided unanimously that the LLP member was a “worker” under the ERA96. They were not required to consider, and they declined to express an opinion on the question “of some complexity and difficulty”, whether she was also an “employee” and indeed whether members of an LLP (or a traditional partnership) could enter into an employment contract effectively with themselves, which would have made the decision more relevant to insolvency situations.)

Tinseltime Limited v Roberts & Ors (28/09/12)

http://www.bailii.org/ew/cases/EWHC/TCC/2012/2628.html

This is one more for insolvency solicitors than practitioners: does a solicitor who takes on a case for an impecunious claimant under a conditional fee agreement (CFA) where there is no after the event (ATE) insurance policy in place, and who also agrees to fund the disbursements necessary to allow the case to proceed, thereby constitute himself a non-party funder and render himself liable to a non-party costs order in the same way as if he was a commercial non-party litigation funder?

Solicitors who are alert to this issue will have been watching the progress of an appeal on another case, Flatman v Germany & Ors ([2011] EWHC 2945 (QB)), in relation to which the Law Society asked to intervene.  The judge, HHJ Stephen Davies, and the parties in this case did not find compelling reasons to wait for the outcome of that appeal (expected in December 2012).  Although it seems possible that the appeal may proceed on grounds different to those already advanced, it is interesting that HHJ Davies, after acknowledging that there may be particular aspects of the other case that led Eady J to allow the appeal, stated that “if however Eady J was holding that it would be sufficient to make a non-party costs order that the solicitor was acting under a CFA without there being an ATE policy in place under which he agreed to fund the disbursements because the client was unable to do so and in order to ensure that the client could bring his claim, then I respectfully disagree with him. I consider that something more is required to justify the making of such an order, in circumstances where it is perfectly proper for the solicitor to agree to fund the disbursements under a CFA, even if he may be taken to know that unless he agrees to do so the claim cannot proceed” (paragraph 60).

On the facts of this case, HHJ Davies concluded: that there was nothing in the evidence indicating that the solicitor (Mr Edmonson) viewed the case as a business proposition under which he could receive a substantial fee; rather, that the solicitor had failed to understand how complex and costly the case might be; that in no way can it be considered that the solicitor controlled the litigation; and that “finally, but extremely significantly in my judgment, when I come to consider the overall justice of the matter, this is a case where there is contemporaneous evidence that Mr Edmondson was not motivated solely by financial self-interest in taking on this case, but with the laudable aim of providing access to justice to Tinseltime… Mr Edmondson was prepared to provide that assistance, where other solicitors were not. He may well have been naive as matters turned out, and Mr Ridgway may well not have been deserving of the assistance which Mr Edmondson provided. But that does not detract from the fact that Mr Edmondson cannot in my judgment be criticised, let alone made personally liable for costs, for taking on a case on a basis permitted by the law in order to ensure that Tinseltime was able to present what Mr Ridgway clearly believed was a genuine claim to the court” (paragraph 67).

Earlier in the judgement, HHJ Davies had stated: “So far as I am aware there are no reported cases in which a solicitor acting under a CFA has had a non-party costs order made against him on the basis of control, but I can see how there might be circumstances where the court was able to conclude that the solicitor’s desire to achieve a successful outcome had caused him to in effect take over the running of the litigation for his own ends, and that this would justify the making of a non-party costs order against him. One example might be where the damages claimed were, or had become, modest in comparison to the costs already incurred, so that the client had for all practical purposes lost any real interest in the pursuit of the proceedings but the solicitor was wedded to pursuing them to recover his costs” (paragraph 58).


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Two Case Summaries – COMI and a Rejected Administration Order Application

Sparkasse Hilden Ratingen Velbert v Horst Konrad Benk & The Official Receiver (29 August 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2432.html

I confess that COMI cases have always left me cold, but I have tried to extract some interest from this case that appeared to me to follow principles set down in earlier cases, which Purle J usefully summarises.

In short, the court decided that the debtor’s COMI was, at all material times, Germany – the debtor purported to trade as a photographer in England (he had practised as a notary in Germany), albeit that he did not own a camera and the judge stated that the main purpose for taking golfing tours was recreation, not photography; the judge also commented that the photography business was not at the root of the insolvency, which was caused by his previous German business activities – with the consequence that the Bankruptcy Order was annulled.  However, what I found interesting was that the debtor’s original bankruptcy petition was opposed by the OR – in fact, it was a second petition, as the first Order was annulled on the application of the OR on the grounds that the debtor had provided false information – but that opposition, and a later appeal, failed.  This annulment application was brought by the German Bank, owed some Euros3 million, which contended that the debtor did no more than create the illusion of an English COMI.  It is clear that this time the court was provided with far more evidence and, whilst it is a shame that the OR’s earlier objections were unsuccessful, it is comforting to note that at least the OR remains alert to potential abuses.  It was also interesting to note that, in this case, the bankruptcy was discharged automatically on 17 June 2011, but notwithstanding this, as S282(3) provides, the Order was annulled.

UK Steelfixers Limited (23 July 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2409.html

A bit of an old case this one that I’d not covered before, as I don’t think it generates any new thoughts, but perhaps it provides a warning for IPs (or more correctly of course, directors) seeking certain Administration Orders.

The application was sought on the grounds that there was likely to be a better result for creditors than liquidation.  There was a proposed pre-pack to a company owned and controlled by an employee, Mr Harrison, and there was also an extant HMRC winding-up petition.

Purle J was “not at all happy with the history of this company” (paragraph 2).  It seems that Harrison’s company had already stepped well into the frame – Harrison’s company’s bank account had been used to receive the main customer’s payments and to discharge company debts including wages, the argument being that there was a risk the main contract would be lost, if this were not done.  “Another construction that can be put on what happened is that Mr Morrison and Mr Harrison effectively put the prepack in place before the administration occurred, thus pre-empting the court’s decision” (paragraph 3).

Purle J commented on the proposed administrator’s “very full witness statement containing all the SIP16 material” and that the proposed administrator had “reached the conclusion, no doubt genuinely, that almost any sale is better than a liquidation because the goodwill will in his professional judgment realise nothing on a liquidation, especially as the relationship between the main customer and Mr Harrison’s company is already in place” (paragraph 5).  However, it seems that Purle J was sceptical about the £5,000 round sum paid to Harrison during the post-petition period and wished to see that, and other post-petition transactions and activity, investigated.  “Proper consideration of those transactions may also reveal that the company’s goodwill has already been arrogated in whole or in part to Mr Harrison or his company, giving rise to a claim for payment or compensation for that goodwill” (paragraph 6).  Despite commenting that “there is evidence of the usual quality that the result of an administration will be better than a liquidation” (paragraph 7), the judge concluded that, in the interests of conducting such investigations, a winding-up order be made that day.


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When does an Administration convert to a CVL under Paragraph 83? The Globespan appeal

Cartwright & Anor v The Registrar of Companies [2012] EWCA Civ 1159 (24 August 2012)

http://www.bailii.org/ew/cases/EWCA/Civ/2012/1159.html

Summary

Many readers will be aware of the court decision leading to this appeal: Briggs J decided that the date of conversion from Administration to CVL is the date the Paragraph 83 notice is received by the Registrar of Companies (“RoC”).  This appeal considered the RoC’s contention that the conversion date is the date the notice is registered by it.  In short, the court of appeal agreed with the RoC and it considered the vital question arising from this conclusion: what happens if the notice is received by the RoC whilst the Administrator is in office, but is only registered after the Administrator’s term of office has ended, e.g. by effluxion of time per Para 76(1)?  The court decided that there is generally an automatic extension of the Administrator’s appointment to cover this period (provided the notice is duly filed).

The dates in this case

The Administration began on 17 December 2009.  On 13 December 2010, the Administrators signed a Para 83 notice, which was received by the RoC on 14 December 2010.  The RoC rejected it because it did not contain the Liquidators’ addresses, albeit that it contained the Administrators’, which were the same.  After some toing and froing, the RoC finally registered a Para 83 notice (the third one submitted to them) on 4 February 2011, i.e. long after the anniversary of the Administration.

Why the court decided that the conversion date is the date of registration

Lady Justice Arden provided eight reasons for this decision (paragraph 41 et seq.).  In my view, the most persuasive arguments lie in the wording of Paragraph 83(4) and (6).  Para 83(4) states that “On receipt of a notice under sub-paragraph (3), the registrar shall register it”, indicating that receipt and registration are two different events.  Para 83(6) states that “On registration of a notice under sub-paragraph (3), the appointment of an administrator in respect of the company shall cease to have effect and the company shall be wound up as if a resolution for the voluntary winding up under section 84 were passed on the day on which the notice is registered”.  Taken together, I can see why the judge concluded that the date of registration is the conversion date and the judge noted that “the most natural meaning to give it [the word “registration”] is the completion of the steps which the registrar needs to take to make the information in the notice available as part of Globespan’s file at Companies House” (paragraph 43).

In this case, because of all the toing and froing of Para 83 notices, this conclusion led to an interesting result: the Administration moved to CVL on 4 February 2011, almost two months after the anniversary of the Administration.  Fortunately for the Administrators, as Briggs J had already decided that the first Para 83 notice was valid notwithstanding the absence of the Liquidators’ addresses and the RoC had not sought to contest this, the appeal court concluded that “in registering the third conversion notice, the registrar was in fact fulfilling his obligation to register the first conversion notice. That conversion notice was executed and filed when the administrators were still in office” (paragraph 52).  Thus, it was irrelevant in this case that the third notice was sent by the IPs to the RoC long after the anniversary had passed.  I suspect that the situation would have been quite different had there been a real deficiency in the first notice, as this would have meant that any subsequently correct notice would have been filed after Para 76(1) had taken effect to end the Administrators’ appointment.

What is the status of the Administrators between the filing and the registration date?

As mentioned above, the first Para 83 notice was received by the RoC on 14 December 2010; the anniversary of the Administration was 17 December 2010; and the court decided that the move from Administration to CVL occurred on 4 February 2011.  No extension to the Administration was sought under the Act’s provisions, so the question arises: did the Administrators’ appointment end some two months before the company moved to CVL?

Lady Justice Arden decided that “the administrator’s term of office is in general automatically extended if a conversion notice under paragraph 83 is duly filed” (paragraph 58) and she provided five reasons for this judgment.  Personally, I like the judge’s argument that the Act provides for the Administrators to file a Para 83 notice at any time whilst they are in office, i.e. right up to the point when the Administration is about to end (although personally I would still be very nervous about leaving the Para 83 notice to the last minute), but Parliament’s clear intention was to provide a seamless transition between Administration and CVL.  Thus, it would make no sense to require Administrators to seek extensions to Administrations to cover the interregnum from the RoC’s receipt of the notice to the point that it is registered.

Interestingly, the judge stated “on the evidence that [registration of the notice] would normally have happened within about 3 days of 14 December 2010 [the date the notice was received by the RoC]” (paragraph 32).  I have not been at the front-end of filing documents with the RoC for a long time now, but I am surprised to see such a short timescale evidenced as normal – things must have improved a great deal since my days!  Fortunately, in view of the judge’s reasonings, it would seem to me that the length of this time between receiving and registering the notice is immaterial.  Paragraph 64 of the judgment simply states: “an administrator’s term of office is by implication from the words of paragraph 83(6) extended by filing a conversion notice from the date on which it would otherwise expire by effluxion of time until paragraph 83(6) comes into effect on registration of the conversion notice” (although, quite rightly the judge points out that this is subject to the provisions of Paragraphs 87 to 89, i.e. if the Administrator were to die, cease to be qualified etc., during this interregnum).


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What should an Administrator do if his proposals are rejected by creditors?

Lavin & Ors v Swindell [2102] EWHC 2398 (Ch) (23 August 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2398.html

The Administrator did not call a meeting to consider his proposals, as he envisaged there would be insufficient funds for a dividend to unsecured creditors.  Some creditors requisitioned a meeting at which a majority of creditors voted to reject the Administrator’s proposals.  They also voted that the Administrator should immediately petition for the compulsory winding up of the company, however the Administrator did not accept this modification to the proposals citing that there were insufficient funds to cover the petition costs.  The proceedings were commenced by a creditor in order to compel the Administrator to apply for the compulsory winding up.

Behrens J considered the notes in Lightman & Moss’ the Law of Administrators and Receivers and Sealy & Milman’s Annotated Guide to the Insolvency Legislation on Paragraph 55 of Schedule B1 of the IA86.  Lightman & Moss suggest that “the administrator is under specific duties to seek directions from or the permission of the court… where he finds that his proposals, or any revisions to them, are not approved at a creditors’ meeting”, whereas Sealy & Milman suggest that “although the administrator is required to report the failure to gain approval to the court, it does not appear essential that he should seek any ruling from the court: in particular, if revised proposals are not approved, he is surely free to continue to act under the original proposals or to draw up a new set of revised proposals and summon a further creditors’ meeting”.

Behrens J preferred Lightman & Moss’ views: “Whilst it is true that paragraph 55 does not expressly require the Administrator to bring the matter before the Court, to my mind the language of paragraph 55(2) contemplates that there will be a hearing and indeed necessarily implies that there must be a hearing. There can only be such a hearing if an application is made. That application must ordinarily be made by the Administrator. If, as here, the Administrator does not make the application, I see no reason why it should not be made by a creditor…  If, therefore, the proposals are rejected by the creditors it is difficult to see how the Administrator can manage the Company’s affairs in accordance with paragraph 68 without making an application to Court” (paragraphs 64 & 66).  Behrens J did suggest that the situation might not be quite so dire in the event that revised proposals are rejected, as the Administrator can still manage the company’s affairs in line with the original proposals.

Behrens J concluded that the court had the power, not only to direct the Administrator to present a winding up petition, but also to wind up a company without a petition, but this step should be taken only in an exceptional case.  In this case, the judge was persuaded that there were pre-Administration events that required investigation – with the consequence that it was not absolutely certain that there was no possibility of a recovery for unsecured creditors – and that had not been investigated by the Administrator.  He was satisfied that, if a petition were presented, a winding up order would result and he considered that there was a degree of urgency.  Consequently, his decision was that the Administrator’s appointment be terminated with immediate effect and a compulsory winding up order be made.