In this blog, I compare the responses to the EC Insolvency Regulation consultation – including: should Schemes of Arrangement be included? – and comment on today’s AiB release on planned changes to Bankruptcy. Also hidden within the BIS consultation responses is a view of great improvements to Gazette searches planned for this year…
Unanimous support for opting in to amended EC Insolvency Regulation
As I tweeted a week ago, the UK government has announced recently that it has decided to opt in to the proposal to amend the European Commission’s Regulation on insolvency proceedings, following unanimous support by those who responded to BIS’ consultation.
I noticed that the consultation responses were almost unanimous in one other respect; I thought that the voice for excluding Schemes of Arrangement from the Regulation’s scope – which would be possible under the revised Regulation, as currently proposed by the Commission – came through particularly loud and clear. Respondents cited the success stories that would not have been possible had Schemes been included in the Regulation; the fact that Schemes are often used for purposes other than insolvent restructurings; and that they are not always fully collective processes and thus do not really meet the criteria for proceedings included in the Regulations in any event.
There was a lone voice suggesting an alternative, however: appreciating the contentious nature of the issue, Paul Omar of Nottingham Trent University suggested a compromise whereby the jurisdictional bases for Schemes might be tightened up so that there should be more than just an arguable connection with the UK or benefit for creditors in order for UK courts to sanction such Schemes. I suspect that the other respondents will hope that such a compromise will not be necessary.
Other areas of apparent agreement between the respondents included a request for clarity over the proposed not-less-than 45 days timescale for foreign creditors to lodge claims; several parties had spotted that it was not clear whether this would apply, not only to submitting claims for dividend purposes, but perhaps also for voting purposes, which would be quite impractical, particularly for votes invited to commence proceedings. Several also asked for consideration to be given to providing mechanisms to avoid frivolous challenges to the opening of main proceedings, as these could create uncertainty and delays, which could de-rail some rescue or recovery plans.
Finally, I was interested in the response by the National Archives, which reported positively on the Gazette Platform project to improve free access to insolvency information “due for launch later this year”. The response included an illustration of one aspect of the planned new service: a timeline of insolvency events, so that all the key dates identified in Gazette notices for a single company (or insolvent individual?) appear on the same page – I like it!
More on the Scottish Bankruptcy Bill
The AiB’s equality questionnaire issued today (http://www.aib.gov.uk/publications/bankruptcy-bill-new-bankruptcy-scotland-act-2013-equality-questionnaire) includes a summary of the proposed changes in policy that are intended to materialise in the “New Bankruptcy (Scotland) Act 2013”. I haven’t cross-referred them to previous missives – and I am sure that readers who have attended an AiB stakeholder event will know these inside out – but I thought I would list those that made me raise an eyebrow:
• The AiB is continuing with the “No Income/No Asset” product for people who have been on income-related benefits for at least 6 months – and presumably this will have some benefits over LILAs, e.g. cheaper entry, swifter exit? Whilst I can see the advantages, it seems a shame that people in very low-paid employment might be barred access to a NINA.
• Mandatory advice from an approved money adviser prior to applying for any form of statutory debt relief – personally, I’m pleased to see this proposal repeated.
• “Altering the process for discharge of debtors so the trustee applies, showing cooperation with creditors (subject to appropriate appeals)” – how will this work? Does that mean that there will be no such thing as an automatic discharge period?
• Creditors will have to submit claims within 120 days of the trustee giving notice. “Where creditors do not submit their claims by this deadline, they would have to justify late submission or risk losing their dividend.” I see the advantage of putting some pressure on creditors to react more quickly, although personally I am not sure what is wrong with the current process (I’m guessing that Scotland is the same as E&W in this respect?) whereby a late-proving creditor cannot disturb a dividend, but can hope to catch up when the next dividend is declared. I also suspect that most of the difficulties in paying out complete dividends lie in creditors who have submitted claims but based on current information the trustee does not feel able to admit them.
Still, in general it’s all good stuff to see the AiB’s proposals gaining clarity and momentum.
Still catching up post-holiday, some court decisions…
• Glatt & Ors v Sinclair: Court-appointed receiver continued as officer of the court after discharge and thus was entitled to be paid from receivership assets
• Kavanagh & Ors v Crystal Palace FC (2000) Ltd & Ors: Tribunal decision reversed: redundancies made to mothball a business with a view to a going concern sale (whether sooner or much later) did not constitute an ETO reason [UPDATE 26/11/2013: see the more recent post – http://wp.me/p2FU2Z-4I – for a summary of the Court of Appeal’s decision reversing this judgment]
• Welsh v Bank of Ireland (UK) Plc: a Northern Ireland case acting as a reminder to lenders seeking PGs from spouses
• HMRC & Ford Motor Co Ltd v Brunel Motor Co Ltd: an appeal against a VAT Tribunal decision is dismissed
Court-appointed receiver entitled to payment as officer of the court after discharge
Glatt & Ors v Sinclair [2013] EWCA Civ 241 (26 March 2013)
Summary: Although a receiver appointed by the court under the Criminal Justice Act 1988 was discharged in 2006, he was entitled to be paid from the receivership assets his remuneration and expenses (subject to the court’s approval of the quantum) incurred after discharge on the basis that “he continues to be an officer of the court (and subject to the supervision of the court) to the extent that he still has functions to perform with a view to a final conclusion of the administration of the receivership.”
The Detail: In 2006, Mr Glatt successfully appealed against a confiscation order, which was set aside; this was swiftly followed by the discharge of a 2001 receivership order made under the Criminal Justice Act 1988. There followed a number of disputes between Mr Glatt and the former receiver, in particular regarding the Receiver’s entitlement to exercise a lien over the assets covered by the receivership order to meet his remuneration and costs. In December 2010, an order found in favour of the receiver for his costs plus interest and, after further consideration by a costs judge, another order was granted in June 2012 confirming that the 2010 order did extend to the receiver’s post-discharge remuneration, expenses and disbursements, and that the receiver was entitled to payment out of the receivership assets.
In this appeal, the appellants sought to argue that the court had no power to order payment of post-discharge remuneration and expenses.
Firstly, Lord Justice Davis did not believe it would be just to allow the appellants to argue this point. He felt that the appellants could have been in no doubt that the receiver had proceeded on the basis that he was entitled to claim post-discharge remuneration and expenses; they had had an earlier opportunity to debate the point, but had not. Nevertheless, Davis LJ proceeded to consider the question of the receiver’s entitlement.
The judge noted that there may be a number of tasks required of a receiver post-discharge, for example the preparation and filing of closing accounts, and it was his view that: “Where a receivership order made under the Criminal Justice Act 1988 is discharged, the receiver continues to be an officer of the court (and subject to the supervision of the court) to the extent that he still has functions to perform with a view to a final conclusion of the administration of the receivership. It would be a wholly unsatisfactory and arbitrary state of affairs were it to be otherwise” (paragraph 41). In this case, the significant post-discharge work of the receiver had been substantially in dealing with the appellants’ challenges on issues such as ownership of assets and the extent of the lien. “In my view, therefore, the general principle being that the receiver looks to payment from assets under the control of the court (not from the parties), the receiver here continued, after discharge, to act as an officer of the court and to be subject to its supervision in and about the enforcement of his lien” (paragraph 44), although the asset-owner was not left entirely without remedy, as the receiver’s remuneration and expenses were still subject to the court’s approval.
“Mothballing” for future going concern sale not an ETO reason for dismissals
Kavanagh & Ors v Crystal Palace FC (2000) Limited & Ors [2012] UKEAT 0354 (20 November 2012)
Summary: The appeal judge decided that the Tribunal had erred in law in misapplying the facts it had found to the statutory regime. Following Spaceright v Baillavoine, an economic, technical or organisational (“ETO”) reason must be an intention to change the workforce and to continue to conduct the business, as distinct from the purpose of selling it. In this case, an intention to mothball the club with a view to selling it as a going concern – whether to purchasers already on the scene or others later – should have led the Tribunal to a conclusion that there was no ETO reason and thus the liabilities should have passed from the transferor to the transferee.
The Detail: Although an apparently old decision, it has only recently appeared on BAILII. The company’s administration began in January 2010 and over the next few months the administrator attempted to sell the club, but it proved difficult mainly because the sale was dependent upon the purchasers also acquiring the stadium, the sale of which was not in the administrator’s control.
When the sale had not been completed at the end of the football season, the administrator decided to “mothball” the club. He prepared to make the majority of the staff redundant and the potential purchasers were warned of the plan and invited to avoid this eventuality by providing ongoing funding and finalising a purchase of the stadium. In response, the potential purchasers suggested that it might be best for them to withdraw their bid in the hope that someone else might come forward in the short time left. The Honourable Mr Justice Wilkie at this appeal said: “It is clear that what was going on, to some extent, was by way of brinkmanship” (paragraph 8). The administrator explained to the press that due to lack of funds there was no alternative but to make staff redundant and that the players would have to be next, which likely would result in the potential purchasers withdrawing. The first Tribunal commented that the growing media and public pressure had the “desired effect and an agreement for sale of the stadium was made within a few days” (paragraph 11), with the club’s sale and the CVA approval following thereafter.
The first Tribunal had concluded that the administrator’s primary reason for the redundancies was to mothball the club in the hope that it could be sold some time in the future and that it was not in the administrator’s contemplation that publicity of the redundancies might lead to the swift sale of the stadium and consequently the club. Wilkie J commented that this “is a wholly surprising conclusion” that “flies in the face of the evidence” (paragraphs 29 and 30). However, he continued that this divergence in opinions between himself and the Tribunal judge made no real difference, because, either way, the administrator still intended to sell the club as a going concern, whether to the existing potential purchasers or to others some time in the future. “It is very clear from all the findings of fact that the Tribunal made that the only possible conclusion that they could draw was that the dismissal of the Claimants was for the purpose of selling the business, albeit it was not at that stage certain that there would be a sale, nor necessarily to whom the sale would be, but, in our judgment, by reason of the authorities to which we have been referred, that is not relevant for the purposes of the application of Regulations 4 and 7” (paragraph 31).
The key authority to which Wilkie J referred was the case of Spaceright Europe Ltd v Baillavoine and Anor, which concluded that “for an ETO reason to be available, there must be an intention to change the workforce and to continue to conduct the business, as distinct from the purpose of selling it”. However, in this case the administrator had no intention to continue to conduct the business as such “but to preserve it so that it could, in new hands, if that came about, resume the conduct of business” (paragraph 30). Thus the judge concluded that the Tribunal had erred in law in misapplying the facts to the statutory regime; it should have concluded that the dismissals were not for an ETO reason but with a view to sale or liquidation; and therefore the liability for the various claims should have passed from the transferor to the transferee.
[UPDATE 26/11/2013: The Court of Appeal reversed this decision on 13/11/2013 (http://www.bailii.org/ew/cases/EWCA/Civ/2013/1410.html), which is the subject of a more recent post: http://wp.me/p2FU2Z-4I. The appeal judges distinguished between the facts of Spaceright and this case, in relation to which they were satisfied that the dismissals were for an ETO reason; the dismissals had been necessary to reduce the wage bill in order to continue running the business.]
A knowledge of case law helps when giving advice!
Welsh v Bank of Ireland (UK) Plc [2013] NIMaster 6 (11 March 2013)
Summary: In this Northern Ireland case, Ms Welsh succeeded in her application to have set aside a statutory demand in pursuit of monies owed under a personal guarantee of a loan to her husband. As the Bank had not evidenced that all of the core minimum requirements described in Etridge with regard to obtaining proper legal advice had been met, the judge felt that Ms Welsh had a potentially viable defence, which was sufficient cause to order the setting aside of the statutory demand.
The Detail: Ms Welsh applied to have the Bank’s statutory demand against her set aside on the ground that the Bank had constructive notice of alleged undue influence and/or misrepresentation by her husband and that she did not receive proper legal advice prior to signing the personal guarantee, which was the subject of the statutory demand.
Master Kelly noted that “an applicant debtor need only demonstrate a genuine arguable case, or a potentially viable defence to the dispute requiring investigation, to succeed in preventing legal proceedings issuing by way of insolvency proceedings. It follows therefore, that in the case of an application to set aside a statutory demand, the hearing is not for the purposes of a trial of the dispute; rather it is for the court to determine whether the applicant’s grounds for disputing the debt constitute a potentially viable defence” (paragraph 16). The judge looked to the case of The Royal Bank of Scotland v Etridge (No 2) for the core minimum requirements of a lender when a wife offers to guarantee her husband’s debts. In this case, the Bank had not evidenced any direct communication with Ms Welsh and the solicitor’s confirmation of advice in a letter after the guarantee had been signed was not sufficient evidence to prove that all the core minimum requirements had been met (it also cannot have helped that the solicitor admitted that he was not familiar with the Etridge case). Consequently, the judge felt that Ms Welsh had an arguable case that would require a full trial. As she had demonstrated a potentially viable defence, the judge ordered that the statutory demand be set aside.
And finally… briefly… a VAT case
HMRC & Ford Motor Company Limited v Brunel Motor Company Limited (in administrative receivership) [2013] UKUT 006 (TCC) (19 March 2013)
Summary: The Upper Tribunal dismissed an appeal to a First Tier Tribunal decision of September 2011 that Ford’s actions to re-possess vehicles subject to a supply agreement (which had terminated automatically due to the receivership) and issue credit notes were unilateral acts and thus there had been no agreed rescission of the agreement with the consequence that the credit notes had no effect for VAT purposes.
I sincerely apologise for overlooking an alternative – and apparently widely-held – interpretation of the Protocol Standard Terms & Conditions’ (“STCs”) provision for approving variations. In a previous blog post (http://wp.me/p2FU2Z-2a), I had indicated that the Protocol STCs apply a simple majority, whereas many believe that 75% (in value) of voting creditors is required to approve a variation. Whilst personally I still struggle with this, I want to highlight this alternative interpretation to readers and remind you that everything I write on this blog reflects my own understanding and opinion and should not be relied upon; I urge you to make independent checks.
For balance, I will set out what I believe are the arguments for each interpretation:
Clause 19(5) of the Protocol STCs (accessible from: http://www.insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/policychange/foum2007/plenarymeeting.htm) states: “Rule 5.23(1) of the Rules will apply to the creditors meeting in deciding whether the necessary majority has been obtained”. R5.23(1) states: “Subject to paragraph (2), at the creditors’ meeting, a resolution is passed when a majority (in value) of those present and voting in person or by proxy have voted in favour of it” and paragraph (2) states: “A resolution to approve the proposal or a modification is passed when a majority of three-quarters or more (in value) of those present and voting in person or by proxy have voted in favour of it”. The difficulty I have in looking to apply R5.23(2) to resolutions for variations is that they are not resolutions to approve the proposal or a modification. S436 of the Act states: “‘modifications’ includes additions, alterations and omissions and cognate expressions shall be construed accordingly”, but it is not just the absence of the word “variation” from this definition that gives me pause for thought. References in the Act and Rules to modifications in an IVA context relate to alterations to the terms of the Proposal prior to/at the time of its approval. Of course, any changes to the Proposal after its approval rest with the terms of the Proposal – the Act and Rules do not cover the mechanisms for post-approval changes – and I wonder if the Protocol STCs’ reference solely to paragraph 1 of R5.23 lends weight to the suggestion, I believe, that it is not intended that paragraph 2 be extended to apply to post-approval variations. However, I do accept that it is dangerous to attempt to discern the intentions of the drafters or indeed those of the parties to the IVA Proposal, namely the debtor and creditors.
I guess the strongest argument for a 75% majority is that there is little difference between a “modification” and a “variation”, thus under the Protocol STCs R5.23(2) applies also to post-approval variations. It has also been suggested that there should be no lower threshold to change the terms of an approved Proposal than there is to approve it in the first place and some question the validity of a Proposal term purporting to do just that. On this basis, it has been further suggested that R5.23(4) (re. associated creditors’ votes) might also apply to post-approval variations to Protocol IVAs, or at least that prudence might recommend consideration of this rule.
Whichever way this is cut, there is a risk that someone will be unhappy: for example, if a 75% threshold is used, the debtor and up to 74% creditors voting in favour of a variation will lose to the 25% creditor voting to reject a variation; if a 50% threshold is used, the up to 49% creditor voting alone may feel deprived. Going forward, perhaps it would be safer for IVA STCs simply to describe in full the majorities required for variations, much as R3’s STCs do, and then there could be no argument.
It has always bugged me that the Service produces a Liquidations graph but none for the other corporate procedures, so I thought I’d produce one myself. Unfortunately, whilst I’ve had no trouble embedding photos into my posts, I have failed to do the same with graphs, so I’m afraid you’ll have to click here to see the graphs: Graphs 03-04-13 (I’m probably teaching grandmother to suck eggs, but if you Ctrl-click onto “Graphs 03-04-13”, it will open up a new tab, which will mean that you can easily switch from text to graphs.)
A few notes on the figures of graph (i) (drawn from the Insolvency Service’s published data, linked via the Insolvency Service release referred to above):
• They have not been seasonally adjusted, which I presume explains some of the spikiness of the graph and particularly, I suspect, the more pronounced Q4 troughs and Q1 peaks.
• I have counted three sets of group company insolvencies (844 Adms in Q4 06; 729 Adms in Q4 08; and 129 CVAs in Q2 12) as only one insolvency in each case.
• Recs includes LPA Receiverships and the Insolvency Service noted a difference in their handling of the data during 2007 and thus the figures for 2007 (the most pronounced effect being on the Receivership figures) are not directly comparable.
I wonder if these complications are some of the reasons why the Service has never produced graphs for these insolvency procedures!
A few personal observations and conjectures:
• With the Enterprise Act 2002 introducing a fundamentally-revised Administration process in September 2003, it seems that it took some time for the momentum to build – Administration numbers did not seem to start levelling out until late 2005.
• Alternatively, perhaps it has something to do with the timing of post-Sept 03 debentures and that probably some of these began leading to Administration as the years rolled on (probably not coincidental that Receivership appointments were also falling in this 2003-2005 period).
• I thought the sequence of peaks in the various types of insolvency was interesting: Administrations peaked in Q4 08/Q1 09; Liquidations in Q1/Q2 09 (not included on the above graph); Receiverships in Q3 09; and CVAs in Q2 10. No doubt, commentators of recession and insolvency processes will have their own explanations for this sequence. I have my own ideas also, but as I am coming at it from such a position of ignorance, I wouldn’t dream to putting them in print!
I also looked at the figures for Administrations that moved to CVLs and compared them with the number of Administration appointments for the previous year on the assumption that, generally, if a CVL were the appropriate exit route, the Administration would move to CVL a year after appointment – the spikiness of the resultant graph probably indicates that this is a rubbish assumption! See graph (ii) of Graphs 03-04-13
I am not a statistician – it shows, doesn’t it?! – so all I think this suggests, if anything, is that the percentage of Administrations moving to CVL has held pretty steady throughout the past six years. Is that some positive news, that, despite the apparent diminished value of assets in the recession, it seems that just as many Administrations (by percentage) move to CVL, i.e. have the prospect of returning something to the unsecured creditors?
Personal Insolvencies (England & Wales)
The Insolvency Service releases tend to be very thorough when it comes to personal insolvencies, so there’s not much to add, but their data does include figures for Income Payment Orders (“IPOs”) and Income Payment Agreements (“IPAs”), at which I thought I’d take a look. As bankruptcies are recorded at the date of the order, but IPOs/IPAs occur later, I thought it only fair to look at this on a yearly basis – see graph (iii) of Graphs 03-04-13.
IPOs/IPAs look fairly proportionate to bankruptcies, don’t they? Let’s look at this in a different way – see graph (iv) of Graphs 03-04-13.
I’m not sure what – if anything – this illustrates: does it suggest that a larger proportion of bankrupts can pay something from their income? Or does it demonstrate the success of IPAs, which were introduced in April 2004? Or does it suggest that Official Receivers have become more proactive in pursuing IPO/IPAs?
Another Insolvency Service note I found interesting was: “Prior to December 2010 a proportion of surplus disposable income was allowed to be retained by the bankrupt, post December 2010 all surplus disposable income was claimed by the Official Receiver as trustee. Another change in policy was implemented at the same time in that the minimum payment sought under an IPO/IPA reduced from £50 per month to £20 per month”. Perhaps that explains the 2011 peak, but then what about the 2012 dip? I’ll be interested to see how this graph develops over the next couple of years.
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* All Q4 2012 figures are provisional.
By the way, if you’re wondering about the introduction of images… A friend suggested that I should liven up the posts (I absolutely agree they could do with it!) with photos that have a link – even if extremely tenuous – with the words. I hope it helps the readability!
Something else that I’ve been meaning to do post-holiday was sweep up all the announcements of consultations and proposals for changes to insolvency and related legislation that have been published by various government departments and agencies. Here are the ones I’ve discovered:
• AiB’s proposed changes to PTDs and DAS
• BIS TUPE consultation
• New proposal on gift voucher creditors
She has withdrawn the proposals to introduce a minimum dividend for PTDs and to deal in-house with creditors’ petitions for bankruptcy, two items that I covered in an earlier blog post: http://wp.me/p2FU2Z-V (and I know of many others who have been more vocal on the issues). The third item I covered in that post – restructuring PTD Trustees’ fees so that they can only be drawn as an upfront fixed sum plus a percentage of funds ingathered – seems to have strengthened in tone: no longer is reference made to “guidance”, so it seems possible to me that there will be a legislative change to enforce this. My personal view on this is that, although of course there are vast differences between PTDs and IVAs, straightforward IVAs have been worked on this basis for many years now and I think that, although the inevitable tension between creditors and IPs regarding the quantum of the fixed and percentage fees persists, on the whole it seems to have developed into a settled state generally acceptable to all parties. However, I see far more difficulty in moving away from charging fees on an hourly basis for complex cases – I sense that the fees in many complex IVAs and PVAs are still based on hourly rates – and I do wonder what will result from the AiB’s approach to fees for individuals with complex circumstances and unusual/uncertain assets.
The AiB has also dropped the idea that debts incurred 12 weeks prior to bankruptcy should be excluded (which also seemed to me difficult to legislate: http://wp.me/p2FU2Z-w).
So what now does she propose to introduce? Some new significant items for PTDs:
• A minimum debt level of £5,000 (previously £10,000 had been the suggestion)
• A new joint PTD solution (with a £10,000 debt minimum)
• A new requirement on the Trustee to demonstrate that a Trust Deed is the most appropriate solution for the individual. If the AiB is not satisfied with the case presented, there will be a new power to prevent it becoming Protected. As now, the Trustee could apply to the Sheriff, if they disagree with the AiB’s assessment. (Personally, I hope that the AiB will exercise this power only to deal with obvious cases of abuse. For example, looking solely from a financial perspective some individuals might be better served going bankrupt, but often they wish to avoid bankruptcy and improve their creditors’ returns, which is a commendable attitude that should not be stifled. Ultimately, is it not the debtor’s choice?)
• Pre Trust Deed fees and outlays will be excluded. Any such fees and outlays will rank with other debts. (I have some sympathy with the AiB’s apparent frustration at insolvency “hangers-on” seeming to reap excessive rewards from the process of introducing debtors to the PTD process, however I am not convinced that this is the solution. As an upfront fixed fee is going to be introduced, will it not simply send such costs underground?)
• On issuing the Annual Form 4 (to the AiB and to creditors), if the expected dividend has reduced by 20% or more, Trustees will be required to provide details of the options available and to make a recommendation on the way forward. (“Make a recommendation”? Who gets to decide what happens? Isn’t the Trustee obliged/empowered to take appropriate action?)
• Acquirenda will be standardised at 1 year for both bankruptcy and PTDs. (It makes sense to me to ensure that PTDs are not seen to be more punitive than bankruptcies, but this is quite a change, isn’t it?)
• No contributions will be acceptable from Social Security Benefits.
• Equity will be frozen in a dwelling-house at the date the Trust Deed is granted.
The AiB also has proposed some new changes to DAS, the one that caught my eye being that interest and charges will be frozen on the date the application is submitted to creditors, rather than at the later stage of the date the Debt Payment Programme is approved, as is the case currently. The AiB’s proposal also remains that a DPP might be concluded as a composition once it has paid back 70% over 12 years.
Despite the calls for legislative clarity on the application of TUPE in insolvencies, most notably in administrations, the consultation states: “the Government’s view is that the Court of Appeal’s decision in Key2law (Surrey) Ltd v De’Antiquis has provided sufficient clarity and that it is not necessary to amend TUPE to give certainty” (paragraph 6.30). I don’t know about you, but every time I ask myself what is the current position on TUPE in administrations, I have to check the date! Key2Law may well appear to have settled the issue now, but I have to remind myself every time what its conclusion was exactly.
The proposals do include some elements that may be more useful:
• BIS invites views on whether there should be a provision enabling a transferor to rely on a transferee’s ETO reason, seemingly recognising the risks that purchasers of an insolvent business run in absence of this provision (paragraph 7.72 et seq).
• It is proposed that the regulations be changed so that a transferee consulting with employees/reps, i.e. prior to the transfer, counts for the purposes of collective redundancy consultation (paragraph 7.84 et seq).
• It is proposed that, where there is no existing employee representative, small employers (suggested to be with 10 or fewer employees) will be able to consult directly with employees regarding transfer-related matters (paragraph 7.94 et seq).
Whilst on the subject, it seems timely to remind readers that it is expected that the consultation requirement where 100 or more employees at one establishment are proposed to be made redundant will be amended from 90 days to 45 days. This change appears in the draft Trade Union and Labour Relations (Consolidation) Act 1992 (Amendment) Order 2013, anticipated to come into force on 6 April 2013.
Gift Voucher Creditors
15/03/2013: R3 issued a press release entitled “Voucher holders’ proposal to become ‘preferred creditors’” (http://www.r3.org.uk/index.cfm?page=1114&element=17990&refpage=1008), but the motivation for this release, other than awareness of some stories surrounding high profile retail administrations, might not be known to you.
MP Michael McCann’s ten minute rule bill seeking consideration for gift voucher creditors to be made preferential seemed to go down well at the House of Commons on 12 February 2013 (http://www.youtube.com/watch?v=53_fN8c1f8Q&feature=youtu.be). Then on 14 March 2013, a House of Commons’ notice of amendments to the Financial Services (Banking Reform) Bill was issued, which included the following:
“(1) The Chief Executive of the Financial Services Compensation Scheme shall, within six months of Royal Assent of this Act, publish a review of the protections understanding that such payments are deposits in a saving scheme.
(2) The review in subsection (1) shall include consideration of any consequential reform to creditor preference arrangements so that any payments made in advance as part of a contract for the receipt of goods or services (such as gift vouchers, certificates or other forms of pre-payment) in expectation that those sums would be redeemable in a future exchange for such goods or services might be considered as preferential debts in the event of insolvency.”
As can be seen, a change to gift voucher creditors’ status seems a long way from becoming statute, but the wheels are now in motion for something to be done.
To me, R3’s suggested alternative of an insurance bond makes more sense. The costs of seeking, adjudicating on, and distributing on a huge number of relatively small gift voucher claims likely would appear disproportionate to the outcome… and it is not as if IPs need any more spotlight on their time costs! I appreciate that such costs will arise where claims need to be dealt with even as they are now, as non-preferential unsecured claims, but I suggest it would be unfair to other ordinary unsecured creditors if they were forced to sit in line and watch whilst realisations were whittled away in dealing with this large new class of preferential creditor. The USA Borders case demonstrates some of the difficulties in dealing with gift voucher claims (see, for example, http://www.lexology.com/library/detail.aspx?g=8298e876-f998-4777-bacf-ce781f312242 – the clue is in the name…)
There are other alternatives, of course, such as the use of trust accounts, although a paper (which now seems ahead of its time) by Lexa Hilliard QC and Marcia Shekerdemian of 11 Stone Buildings discusses the difficulties arising from these also (http://www.11sb.com/pdf/insider-gift-vouchers-jan-2013.pdf).
(UPDATE 22/05/2016: Gift vouchers became topical again with the Administration of BHS. R3 summarised the difficulties in dealing with gift vouchers in an insolvency at https://goo.gl/eN20mN. This “R3 Thinks” also brought to my attention a paper written by R3 on the subject in June 2013, accessible at https://goo.gl/GJDbNO.)
Right, that brings me up to date… almost. Just the consultation on the FCA’s regime for consumer credit remaining…
Apologies for the silence – I’ve been enjoying the gorgeous sunshine blazing on Hawaii’s beaches and some exhilarating hikes across fresh lava fields (which is more my style)…
In an attempt to get back on track, this is a brief update on case law that had accumulated before my trip:
• Valuing contingent claims
• What documents are Provisional Liquidators entitled to recover?
• COMI: Dublin v Belfast
• Iceland v Scotland: Nice try, Landsbanki
• Judge erred in dismantling component parts of circumstantial case of gratuitous alienation
Valuing contingent claims
Ricoh Europe Holdings BV & Ors v Spratt & Milsom [2013] EWCA Civ 92 (19 February 2013)
A group of creditors who had submitted contingent claims in an MVL believed that the liquidators should have reserved funds to cover the full possible value of their claims before paying a distribution to members. On appeal, this court agreed with the previous judge: “there are, I think, real difficulties in seeing how a liquidator who has already valued the contingent claims and so admitted them to proof in the amount of the valuation comes under a legal duty to provide for the contingency in full by making a reserve against any distribution to members” (paragraph 37).
The creditors had also disputed the value placed on the contingent claims; the liquidators had worked on the basis of an assessment of the most likely outcome, rather than a worst case scenario. The judge agreed with the liquidators’ approach: “It seems to me that any valuation of a contingent liability must be based on a genuine and fair assessment of the chances of the liability occurring… There is nothing in IR 4.86 which requires the liquidator to guarantee a 100% return on the indemnity by assuming a worst-case scenario in favour of the creditors” (paragraph 43).
What documents are provisional liquidators entitled to recover?
Caldero Trading Limited v Beppler & Jacobson Limited & Ors [2012] EWHC 4031 (Ch) (14 December 2012)
The application centred around provisional liquidators’ (“PLs”) attempts to take possession of documents in the hands of the director, but his solicitors’ argument was that they should be entitled to review the documents and only provide to the PLs those that met the definition in the court order describing the PLs’ powers: “documents reasonably necessary solely for protecting and preserving the assets” of the company.
The judge decided that the court order did indeed restrict the scope of documents to which the PLs could have access: “The conclusion might be surprising, bearing in mind that prima facie the provisional liquidators have a right to call for all the books in which the company has a proprietary interest, but that prima facie right has, in my judgment, been deliberately cut down by the terms of paragraph 7.2 [of the previous court order]. Their entitlement is, therefore, to categories of document which fall within the definition. It follows that the provisional liquidators have no right, in my judgment, to call for documents which do not fall within the category as defined” (paragraph 78). However, the judge did not feel that it was appropriate that the director’s solicitors’ control the review process, but he invited the PLs to provide a more specific description of the documents of which they were seeking possession.
COMI: Dublin v Belfast
ACC Bank Plc v McCann [2013] NIMaster 1 (28 January 2013)
This is another COMI case involving a business consultant who moved from the Republic of Ireland to Northern Ireland and was made bankrupt in NI the day before another creditor’s petition resulted in a second bankruptcy order in Dublin. The RoI creditor sought the annulment of the NI bankruptcy order on the ground that there had been a procedural irregularity in the hearing.
The judge found that the hearing had been procedurally irregular and should not have taken place; it should not have been an expedited hearing and, in light of the fact that there were two competing sets of bankruptcy proceedings, the court had been incapable of being satisfied that it had jurisdiction to make the NI bankruptcy order without hearing evidence from both the debtor and the RoI petitioner.
The judge also concluded on the evidence provided to him that the debtor’s COMI was not in NI. The judge made some interesting comments about the events leading to the NI petition, which was based on rent arrears of £1,402 arising from a house share agreement on the debtor’s NI address: he noted the incomplete affidavit of service of the statutory demand; the apparent lack of interest shown by the petitioner in the debtor’s ability to discharge the debt; the fact that he was in a position to pay the debt; and that “the Petitioner and the Respondent were at the very least acquaintances, if not friends” (paragraph 29).
Iceland v Scotland: Nice try, Landsbanki
Joint Administrators of Heritable Bank Plc v The Winding-Up Board of Landsbanki Islands hf [2013 UKSC 13 (27 February 2013)
The joint administrators of Heritable Bank Plc (“Heritable”) rejected a claim submitted by Landsbanki Islands hf (“Landsbanki”) on the ground of set-off. Landsbanki’s winding-up board also rejected three of Heritable’s claims. Landsbanki’s winding-up board argued that, as they had rejected Heritable’s claims in the Icelandic proceedings, this decision applied to Heritable’s administration and thus Heritable had no claims available to set off against Landsbanki’s claim. They sought to rely on Regulation 5 of the UK’s Credit Institutions (Reorganisation and Winding Up) Regulations 2004, which resulted from an EC Directive.
The Supreme Court unanimously dismissed Landsbanki’s appeal. The court stated that Regulation 5 “is not concerned in the least with the effects of the mandatory choice of Scots law for the administration of Heritable in Scotland” (paragraph 58). In this case, other Regulations were relevant and these resulted in the conclusion that the general law of insolvency for UK credit institutions is UK insolvency law.
Judge erred in dismantling component parts of circumstantial case of gratuitous alienation
Henderson v Foxworth Investments Limited & Anor [2013] ScotCS CSIH 13 (1 March 2013)
The Inner House upheld the liquidator’s appeal in respect of a gratuitous alienation challenge: “In this admittedly complex case it seems to me that, while the Lord Ordinary very properly acknowledged that there were unsatisfactory and indeed suspicious events and transactions, and while he recorded matters which he found inexplicable, questionable, difficult to believe, and even ‘damning’… he did not take the final step of (i) clearly recognising that there was a significant circumstantial case pointing to a network of transactions entered into with the purpose of keeping Letham Grange (valued at £1.8 million) out of the control of the liquidator, and (ii) explaining why, nevertheless, he was not persuaded that the liquidator should succeed. Rather the Lord Ordinary dismissed or neutralised individual pieces of evidence without, in my view, giving satisfactory reasons for doing so, thus dismantling the component parts of any circumstantial case which was emerging from the evidence, but without first having acknowledged the existence and strength of that circumstantial case, and then explaining why he rejected it” (paragraph 78).
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I’ve spotted some more recent cases since my return from Hawaii – and I see that the consultations on draft revised SIPs 3, 3A, and 16 have now been issued, excellent! – but they’ll all have to keep for future posts.
• Davis & Davis v Price & Price – what is the relevant date for IVAs suspended on a S262 challenge?
• Hunt v Hosking & Ors – when is an alleged transaction at an undervalue not a “transaction”?
• Fabb & Ors v Peters & Ors – vesting of causes of action in Trustee foils attempts to pursue misfeasance claim
Summary: As a consequence of a successful S262 challenge, two debtors’ IVAs were suspended and further creditors’ meetings were convened to consider their revised Proposals. After these were approved, the S262 challengers issued statutory demands in pursuit of their costs for bringing the challenge. The appeals judge agreed that the statutory demands should be set aside on the basis that the costs were caught in the IVAs, for which the relevant date was the second meetings’ date. Contrary to the wording of the S262 order, the judge felt that the effect of suspending the original IVAs was not to continue to bind the original creditors.
The Detail: The Prices challenged the Davises’ IVAs under S262 in relation to the values of £1 attributed to their claims for the purposes of voting at creditors’ meetings held in June 2010. The challenge was successful and the District Judge ordered the suspension of the Davises’ IVAs – which would not have been approved had the Prices’ claims been admitted for voting in the sum of £35,389, the value placed on the claims for voting purposes by DJ Gamba – and required the Davises to decide whether to re-present the original Proposals or to present varied Proposals for consideration at further creditors’ meetings to be convened by the Nominee. The Davises were also ordered to pay the Prices’ costs of £7,011.
At creditors’ meetings held on 13 January 2011, the Prices again voted to reject the Proposals, which had been revised by the Davises, but the Prices only proved in the sum of £35,389. However, the requisite majorities were achieved and the revised Proposals were approved. The Prices then pursued payment of their costs of £7,011 on the argument that they were not claims in the IVAs, because they did not exist at the time of the original interim orders in April 2010.
The question at the heart of this matter was: what was the effect of the suspension of the Davises’ IVAs? In this appeal, counsel for the Prices sought to distinguish between an order revoking an IVA and one suspending it, both options available to the court under S262(4). Mr Justice David Richards noted that there was only one rule relating to entitlements to vote at a creditors’ meeting convened to consider an IVA Proposal – R5.21; the rules make no distinction as to whether this is the first time such a meeting is convened or whether it is convened on the back of a revoked IVA or a suspended IVA under S262(4). The judge considered that in this circumstance the reference in R5.21(2)(b) to the “amount of the debt owed to him at the date of the meeting” was the amount owed at the date of the January 2011 meeting convened to consider the revised Proposals and therefore the Prices had been entitled to prove also in respect of their costs in bringing the S262 challenge.
So what is the status of a suspended IVA? The wording of DJ Gamba’s order resulting from the S262 challenge had stated that, if the proposed variation was put to the vote and rejected, the approval of the IVAs on 8 June 2010 would be revoked with immediate effect “and the IVA Creditors shall ceased to be bound by the IVAs”; it further provided that, if the IVAs were reconsidered and approved, the suspension of the approval of the IVAs would be lifted with immediate effect and “the IVA Creditors shall continue to be bound by the IVAs in accordance with section 260”. However, David Richards J stated: “I do not think it is right that if the approval of an IVA is suspended, it nonetheless continues to bind creditors. Once approval is suspended, it does not seem to me possible to say that there is an ‘approved arrangement’ within the meaning of section 260(2)” (paragraph 29). He acknowledged that S262(7) grants the court power to give supplemental directions, but he did not believe that this enabled the court to substitute a different rule for R5.21 in relation to creditors’ voting rights.
12/02/2014 UPDATE: Although the appeal heard on 21/01/2014 was dismissed (http://www.bailii.org/ew/cases/EWCA/Civ/2014/26.html), it did highlight a(nother!) problem with the Act: S260, which binds creditors into an approved IVA, expressly has effect “where the meeting summoned under S257 approves the proposed” IVA. However, in this case, the meetings that led to approved IVAs were consequent to a S262 challenge and, as Lady Justice Arden put it, “if the IVAs were varied and the creditors approved those varied IVAs, those were the IVAs to come into force, not the original IVAs. In reality what happened in that event is that the varied IVAs replaced the original IVAs. The original IVAs ceased to have any legal existence after that” (paragraph 33).
Thus, were the creditors bound by S260? “The court must of course give effect to the intention of Parliament… However, where the effect of a literal interpretation of a statute is to create significant anomalies which the court is satisfied Parliament could not have intended, the court should seek to find an interpretation which avoids those anomalies” (paragraphs 38 and 39). In order to achieve this end, Lady Justice Arden interpreted the reference to a “further meeting” in S262(4)(b) to be a reference to a “further meeting under S257” so that S260 has effect.
The Company must be party to the transaction for it to be challenged at an undervalue
Summary: A liquidator sought to challenge as transactions at an undervalue payments made to Mr Hosking from the Company’s client monies held by its accountants – the monies were paid to Mr Hosking in settlement of his private loan to the accountant, who appeared to be entitled to the monies by reason of two fee agreements with the Company. However, the liquidator’s S238 application failed on the basis that the payments to Mr Hosking were not “transactions” to which the Company was party. The judge pointed out that either the accountants were not authorised to pass the monies over, in which case it would be an issue of misappropriation of assets, or the challenge should be levelled at the fee agreements between the accountants and the Company.
The Detail: A firm of accountants, of which Mr Temple was the sole proprietor, held monies on behalf of its client, Ovenden Colbert Printers Limited (“the Company”), from which the accountants appeared to be entitled to draw fees pursuant to two fee agreements. A number of payments were made from the accountants’ client account to Mr Hosking, which he claims related to repayments of his private loan to Mr Temple (who later became bankrupt).
Mr Hunt, the Company’s liquidator, applied under S238 claiming that the payments made from the client account to Mr Hosking were transactions at an undervalue. The liquidator made other allegations regarding the strength of the fee agreements with a suggestion that they may have been induced under misrepresentation. However, the fee agreements were not the subject of the S238 application.
Mr Justice Peter Smith identified a fundamental difficulty with Mr Hunt’s argument that the payments to Mr Hosking were transactions at an undervalue: the Company was not a party to the payments. He illustrated it this way: “If Mr Temple held a bag of sovereigns for the Company and they were held to the Company’s order, and if he gave them away to Mr Hosking, I suggested that that would not be a transaction. It would simply be a case of misappropriation of assets. Of course, the Company through the liquidator would have any number of remedies to recover those sovereigns. Such a claim could be made not only against Mr Temple but also against Mr Hosking if he receives the sovereigns. That is not the present claim… The fundamental difficulty facing Mr Hunt is that however much he investigates; however much mud he wishes to throw at Mr Hosking; none of it is relevant to his application under section 238. This is because on the undisputed facts set out above, the Company has not entered into a transaction which the liquidator can review. The only transactions it entered into in my opinion were the two fee agreements and those are not under challenge and indeed one of them cannot be under challenge due to the passage of time. If the payments were authorised they cannot be challenged unless the two fee agreements are challenged and they are not in these proceedings. If the payments were unauthorised, there is no transaction by the Company” (paragraphs 50 and 55).
[UPDATE 26/11/2013: Hunt’s appeal against the summary judgment/strike out application was dismissed on 15/11/2013 (http://www.bailii.org/ew/cases/EWCA/Civ/2013/1408.html). It seems to me that the fundamental difficulty remained: there was no indication that the Company had been party to any relevant transaction. Thus, the Court of Appeal decided that the judge had been right to strike out the application, as the claims under S238 and S241 had no prospect of success.]
Vesting of causes of action in Trustee foils attempts to pursue misfeasance claim
Summary: A claim against administrators under Paragraph 75 of Schedule B1 was struck out as an abuse of process on the basis that the claimant knew his causes of action had vested in his Trustee in Bankruptcy at the time. In addition, the fact that 96% of the administrators’ claims against Fabb had been abandoned was not sufficient to support a misfeasance claim, as judgment had been achieved in relation to the remainder.
The Detail: Fabb was made bankrupt after administrators of “Holdings” obtained judgment against him of c.£88,000 in relation to a loan account and on a conversion claim, although over 96% of the administrators’ original claim was, effectively abandoned.
Fabb asserted two causes of action against the administrators: misfeasance and, in effect, malicious prosecution of the earlier proceedings as regards the 96% of the claims that were abandoned. After the proceedings commenced, the court ordered Fabb’s Trustee to assign to Fabb the various claims, conditionally on payment of £10,000; the assignment had not yet been completed.
His Honour Judge Purle QC noted a fundamental objection to the misfeasance proceedings: “Proceedings under paragraph 75 can only (so far as presently relevant) be brought by a shareholder or creditor. Mr Fabb is neither of those things, and nor will he be either of those things even if the assignment takes place. Any interest he may have had in the shares of Holdings is now vested in his trustee. Likewise, any indebtedness formerly due to him is now vested in his trustee… There is a still further objection. These proceedings were brought at a time when Mr Fabb knew that the causes of action he wishes to assert were vested in his trustee in bankruptcy, and that he needed an assignment” (paragraphs 13 and 16). On this basis, the judge felt bound to strike out Fabb’s claim as an abuse of process.
In any event, the judge identified difficulties in relation to the merits of Fabb’s claims that the 96% claim was brought abusively, for an improper motive or an improper purpose: “What to my mind makes the claim impossible is that the proceedings in which the 96 percent claim was included were pursued to judgment. True it is that the 96 percent claim was abandoned, but the rest of the claim was pursued over an eight day hearing, I think it was, and the claim succeeded in substantial amounts, despite a fully argued defence. It is difficult to see in those circumstances how the proceedings can be characterised as malicious or an abuse, as they had to be, and were successfully, pursued to judgment, albeit in a much smaller sum than originally claimed” (paragraph 23).
The Companies Act 2006 (Amendment of Part 25) Regulations 2013 are set to come into force on 6 April 2013 (subject to Parliamentary approval). The most direct impact for IPs is the introduction of new forms for receivership appointments. I set out below these, and other, changes to the regime for registering charges.
• RM01 – Notice of appointment of administrative receiver, receiver or manager (replaces form LQ01)
• RM02 – Notice of ceasing to act as administrative receiver, receiver or manager (replaces for LQ02)
Unfortunately, these forms will only be available from the Companies House website from 6 April 2013 (thanks, guys!). They will apply to all appointments and ceasings to act (except for Scottish cases, the filing for which remains unchanged) occurring after 6 April 2013, i.e. regardless of the date of the charge to which the appointment relates. Ceasings to act will need to provide either more information on the charge relating to the appointment or the Unique Reference Code (explained further below). There are also new forms for registering new charges, satisfactions and releases, which should all be used after 6 April 2013. 08/04/13 EDIT: for new forms, go to http://www.companieshouse.gov.uk/pressDesk/news/april2013DraftForms.shtml.
There will be a UK-wide regime for registration, so there will no longer be separate filing requirements for charges created over Scotland-registered companies. There is one exception: alterations to Scottish floating charges via Form 466 (S859O(4)) – there will be some changes to S466 of the Companies Act 1985, but it seems that they only affect the information required.
Consequences of Non-Registration
The criminal offence for failing to register a charge has been removed and there will no longer be a requirement for companies (except for overseas companies, which are governed by different legislation) to keep registers of their charges, although they need to keep copies of the full instruments available for inspection (S859P and Q).
Companies House’s press release states that the 21-day limit for filing the particulars of a property acquired which is subject to a charge has been removed. However, the removal of this mandatory requirement seems unlikely to have much practical effect in the world of insolvency, because, if a charge is not delivered for filing in the period of 21 days from creation (excepting where the period is extended by court application), it is void against liquidators and administrators (S859H).
Registering New Charges
A certified copy of the instrument will need to be sent to the registrar, so in future this copy instrument will be available for viewing from Companies House. Certain sensitive information, e.g. personal information, bank account numbers, can be omitted (S859G). Instruments need to be accompanied by particulars (S859D) and one advantage of the fuller particulars is that they will enable a Companies House searcher to identify whether any other UK register, e.g. the Land Register, also holds information on the charge. Companies House is also introducing Unique Reference Codes to identify each charge and these URCs (allocated by the Registrar when a new charge is registered) should be used on all forms (including the receivership forms) relating to post-6 April 2013 registered charges.
Finally, a significant change introduced by the Regulations is that, instead of listing all charges that are covered by the registration regime, they include a list of exceptions – at S859A(6) – and thus the Regulations are assumed to apply to all other charges.
With the inaudible release of R3’s revised Standard Terms & Conditions (“STC”) for IVAs and the revised IVA Protocol effective from 1 March 2013 (albeit that the STC have been out since July 2012), I thought it was timely to express my personal views on the STCs and particularly on areas where I feel they are limited and therefore where the Proposals should take over.
Bill Burch has done a great job of examining R3’s revised STC and has blogged on all the changes from the last version: http://complianceoncall.blogspot.co.uk/2013/02/hot-news-revised-r3-standard-terms-for.html. Over the past year, I had heard rumours of a revision being under way and I now regret not lobbying R3 for some more extensive changes. Thus, whilst it could be said that I only have myself to blame, it won’t stop me whinging about the fact that the issues that I’ve always had with the R3 STC remain unchanged in the current version. I have to say, however, that the two main issues I have are not unique to R3’s STC – in my view, the Protocol’s STC are equally, albeit differently, deficient – and, of course, they can be overcome by careful additions to the IVA Proposal itself, which takes precedence whether R3’s or the Protocol’s STC are used.
Trust Assets
R3’s STC state (paragraph 28(3)) that the trusts (also defined by the STC) survive the IVA’s termination and the assets shall be got in and realised by the Supervisor and any proceeds applied and distributed in accordance with the terms of the Arrangement. The Protocol STC are silent on whether the trusts (defined similarly to the R3 STC) survive, so (unless the IVA Proposal itself covers this), presumably in accordance with NT Gallagher, they usually do.
Does an IP really want to remain responsible for realising assets once an IVA has failed? Wouldn’t it be better to leave it to a subsequently-appointed Trustee in Bankruptcy? Perhaps an example of what might happen might help demonstrate the issues…
An IVA is based on five years contribution from income plus equity release from the debtor’s home in the final year. In year one, the IVA fails through non-payment of monthly contributions. What responsibilities does the (former) Supervisor have to deal with the debtor’s home? I believe it all depends on whether the house is described in the Proposal as an excluded or included asset. If the house is not an excluded asset, then the IP can find that he/she is responsible for realising any equity in the property, which now may be all the debtor’s interest in the property, not the 85% envisaged by the Protocol, and I doubt that the IP can assume that he/she can wait a few years before realising the interest, as per the original Proposal.
If funds related to property equity are included in an IVA, it usually seems that the property (or at least the debtor’s interest in it) is described as an included asset – and the Protocol’s equity clause seems to lead to this conclusion. Would it not be better for such IVA Proposals to define the property/interest as an excluded asset and simply provide that a sum equal to (rather than “representing”) 85% of the interest will be contributed to the Arrangement in Year 5? That way, at least the IP does not find he has to realise the property/interest as a trustee (with a little “t”), which could be more troublesome than if he handled it under the statutory framework as a Trustee in Bankruptcy. Then again, no bond… no annual reports… no S283A..? It could be quite liberating!
The absence of a post-termination trust provision in the Protocol creates another difficulty for IPs acting as trustees of an NT Gallagher trust. As the R3/authorising bodies’ guidance on Paymex explained, the Protocol STC do not provide for any fees to be paid under a closed IVA trust (whereas R3’s STC do), so, unless the Proposal itself addresses this, the IP acting as a trustee on termination of an IVA must seek creditors’ approval to his/her fees for so acting and may only deduct such fees from the dividend payable to consenting creditors.
Thus, I feel it is important for IPs to ensure that they do not rely solely on the STC to deal with any trusts, but ensure that Proposals themselves are worded satisfactorily.
Breach Process
Both R3 and the Protocol provide for the Supervisor to serve notice on a debtor who fails to meet his/her obligations under the Arrangement and allows some time (R3 STC allows one to two months; the Protocol allows one to three months) for the debtor to remedy the breach.
As Bill Burch has identified, the R3 terms (paragraph 71(1)) now appear to accommodate a scenario where the Supervisor has already petitioned for the debtor’s bankruptcy before he/she serves notice of breach, however it seems that the terms do not provide for the Supervisor to present a petition under any circumstance other than after the creditors have so resolved after the notice of breach process has been followed. There is a provision at paragraph 15(2), which seems to give the Supervisor power to act on directions given by “the majority or the most material of creditors”, although it would be an odd circumstance if an IP used this to move swiftly to a bankruptcy petition.
The Protocol’s STC seem a little more practical to me; at least they provide for the Supervisor to terminate the Arrangement if requested by the debtor (paragraph 9(6)). Thus, if the debtor simply wants to walk away from the ongoing commitments of the IVA, there is a swift way of bringing it to a conclusion. Without this clause, i.e. as per R3’s STC, it seems to me that, even if the debtor has no intention of remedying the breach, the Supervisor has to go through the rigmarole of serving notice of breach, waiting a month, then calling a creditors’ meeting to reach agreement as to what to do next. And what happens if the creditors’ meeting is inquorate? Under R3’s terms, the Supervisor does not appear to be authorised to terminate the Arrangement; and under the Protocol STC, I also feel it is tricky for the Supervisor, as under paragraph 9(5), the Supervisor can issue a certificate of termination or seek creditors’ views, so again I am not sure what options are left for the Supervisor on an inquorate meeting.
Minor flaws in the R3 STC
Bill has picked up on many of the STC typos and minor flaws, such as references to filings at Court, which are now only required for Interim Order IVAs following the 2010 Rules. He has also spotted – and I will repeat here for emphasis – that R3’s STC (paragraph 13(2)) seek to address the issue of the powers of Joint Supervisors, despite the fact that the 2010 Rules changed R5.25(1) so that a resolution must now be taken on this matter, i.e. a separate resolution from approval of the Proposal itself.
I also noted that R3’s STC have not been updated to reflect the 2005 Rules, which changed Rule 11.13 regarding the calculation of a dividend on a debt payable at a future time. I guess there is nothing wrong with IVAs using the pre-2005 formula, but I would have thought it would make sense to follow the bankruptcy standard.
I note that R3 has changed the majority required for variations – understandably from an excess of three-quarters to simply three-quarters or more (paragraph 65(2)) – but, I ask myself, why not have a simple majority for variations? And why add in for variations the R5.23(4) condition regarding associates’ votes? Why not follow the Protocol’s process of a simple majority to pass variations? 08/04/13 EDIT: Please note that there is an apparently widely-held view that the Protocol STCs provide for a 75% majority for the approval of variations – see blog post http://wp.me/p2FU2Z-2K.
A final techy flaw: both R3 (paragraph 71(2)) and the Protocol STC (paragraph 9(2) and (4)) continue to reference the old-style Supervisor reports on the progress and efficacy of the Arrangement, per the old R5.31, which has now been replaced by R5.31A.
Minor flaws in the IVA Protocol STC
The minor issues I have with the Protocol STC appear to have been created by the addition of terms over the years, resulting in some inconsistent treatments.
Paragraph 8(8) states that creditors must be informed within 3 months of the Supervisor agreeing a payment break with the debtor. Why the urgency, given that paragraph 9(2) states that creditors need only be told of the generation of more than 3 months’ arrears of contributions, which I would think is of more concern to creditors, in the next progress report?
Paragraph 10(9) states that the Supervisor may call a creditors’ meeting to consider what action should be taken when he/she fails to reach an agreement with the debtor regarding the treatment of “additional income”. That paragraph states that “any such creditors meeting should be convened within 30 days of the Supervisor’s review of your annual financial circumstances”, however paragraph 8(5) states that the debtor must report additional income to the Supervisor when it arises. This means that, if the Supervisor wants to call a creditors’ meeting regarding additional income arising outside of the Supervisor’s annual review, he/she may have a long time to wait!
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Despite these issues, I echo Bill’s sentiment: to err is human… although between us all we might get a little closer to perfection.
If you, like me, were dissuaded from exploring the EC’s proposal on revising the European Regulation on Insolvency Proceedings, issued on 12 December 2012, by reason of its sheer length, you might find the Insolvency Service’s recent Call for Evidence useful in summarising its potential reach into the UK.
The Insolvency Service opened its Call for Evidence on 7 February 2013, with a closing date of 25 February. Whilst this may seem a tiny window in which to contemplate such a tome of proposals, I am certain that those for whom this holds most interest already will have spent quite some time over the last two months absorbing the proposals.
The fundamental question being asked by the Service is: should the Government opt in or out of the Regulation? Even with my zero personal experience and limited understanding of the work of cross-border insolvencies, it seems to me a no-brainer (well, the way the Service has argued it anyway). The Call for Evidence also asks questions on elements of the proposals likely to impact most on UK insolvency with a view to developing a negotiating mandate for the UK.
By opting in, the UK can engage in negotiations in order to finalise the proposals, but it will not be able to opt out subsequently and so the UK will be bound by the final Regulation, whatever its form.
If the UK does not opt in, it can only observe the process; it may decide to opt in later, but it will need the Member States’ consent. If the UK does not opt in to the final Regulation at all, it may mean that the UK will remain bound by the existing Regulation. This could cause much confusion when dealing with an insolvency that crosses the border of an opted-in Member State and, as the Impact Assessment puts it, “the UK is generally considered to be a good environment for cross-border insolvency resolution, and this scenario would undermine that position” (paragraph 30).
An alternative scenario if the UK does not opt in is that the European Council may decide that the existing Regulation in its current form could no longer apply to the UK. The Service describes the consequences as: disenfranchisement of UK stakeholders from EU cross-border insolvencies; UK insolvencies failing to have EU-wide recognition; and, whilst the Model Law might help, it might involve multiple court proceedings in the different relevant jurisdictions and thus increased costs and time to get results.
From scanning commentaries on the EC proposals, it appears to me that not opting in is very unlikely. The only seriously negative vibe I’ve picked up – although even this is by no means universal – is a desire to keep Schemes of Arrangement out of the Regulation. As the EC proposes to retain the power of each Member State to decide whether a national insolvency procedure should be included, it seems to me that this is a weak reason for not opting in. And in any event, I would have thought there would be value in having Schemes of Arrangement acquire recognition across the EU. (UPDATE 16/10/2013: okay, I can see now the value of keeping Schemes out of the Regulation – see, for example, the following article by Dentons extolling the virtues of Schemes for essentially foreign companies: http://www.lexology.com/library/detail.aspx?g=3fd5d9b8-3356-4dd4-86bf-aea8980a9311&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2013-10-15&utm_term=)
Scope of the Insolvency Regulation
As alluded to above, the EC proposes to extend the scope of the Regulation wider than just “liquidation”, as presently (albeit that the Annex to the 2000 Regulation already includes Administration, VAs, Bankruptcy and Sequestration). It proposes to include proceedings “in which the assets and affairs of the debtor are subject to the control or supervision by a court. Such supervision would include proceedings where the court has no real involvement unless a creditor makes an application to review a decision” (paragraph 21) and “proceedings which include the adjustment of debt and the debtor remains in control of any assets” (paragraph 22). This is where the idea that Schemes of Arrangement will be wrapped up in the Regulation comes from.
Also as mentioned above, the Member State can decide whether to notify a particular national insolvency procedure to be included, but it is proposed there will be a new mechanism whereby the EC then will scrutinise the procedure to ensure that it fits the defined scope of the Regulation.
Jurisdiction for opening insolvency proceedings
The concept of COMI is proposed to be retained, consistent with the body of case law that has developed. The proposals seek to extend the concept to individuals.
The EC proposes to introduce a duty on the court or IP that opens the insolvency proceedings to examine the COMI of the debtor and specify the ground on which their jurisdiction is decided. Creditors from other Member States shall have the right to challenge the decision.
Secondary proceedings
It is proposed that the court receiving an application to open secondary proceedings must inform the office-holder of the main proceedings and allow him/her to be heard before the court makes its decision. The main proceedings’ office-holder will be entitled to ask for the application for secondary proceedings to be stayed, if they are not necessary to protect the interests of local creditors.
The proposal removes the restriction that secondary proceedings must be winding-up proceedings; it is proposed that they can be any proceedings available under the law of that Member State, including restructuring.
In addition, it is proposed that the courts in the main and secondary proceedings be obliged to communicate and cooperate with each other and that a similar obligation will be on the office-holder to communicate and cooperate with the court in the other Member State involved in the proceedings.
Publicity of proceedings and lodging of claims
“Each Member State will be required to maintain a public register(s) of insolvency decisions relating to companies and self-employed individuals, which must be internet based and free of charge. This requirement does not extend to insolvency proceedings concerning non-trading individuals or consumers” (paragraph 32). The register will contain basic information on the insolvency (albeit more than is currently on Companies House; for example, the information must include the court and reference number) plus a date for lodging claims. “Each register will be searchable via the European e-justice portal, with an interconnected search facility” (paragraph 33).
The EC proposes the provision of two standard forms for foreign creditors – a notice of insolvency and claim form – which will be made available (by whom? I think by the European e-justice portal) in all official EU languages. Foreign creditors must be given at least 45 days to lodge a claim, irrespective of any national laws specifying shorter timescales.
Groups of companies
The EC proposes to retain the Regulation’s entity-by-entity approach to the insolvencies of group companies, but seeks to improve coordination of efforts. Thus courts and office-holders involved in different proceedings on group companies will be obliged to communicate and cooperate.
It is proposed that the office-holder of an insolvent group company will be entitled to be heard in any opening proceedings on any other group company and will have the right to request a stay. An office-holder will also be able to participate in any insolvency proceedings on other group companies, for example in creditors’ meetings. As the EC puts it, “these procedural tools enable the liquidator [i.e. office-holder] which has the biggest interest in the successful restructuring of all companies concerned to officially submit his reorganisation plan in the proceedings concerning a group member, even if the liquidator in these proceedings is unwilling to cooperate or is opposed to the plan” (page 9 of the EC proposal).
The proposals are not intended to interfere with a strategy of pursuing a single set of insolvency proceedings over a highly integrated group of companies when it is determined that their COMI is in one jurisdiction.
Of course, this is all subject to negotiation and time… probably lots of time…
. UPDATE: On 15 April 2013, it was announced that the Government has decided to opt in to the proposal. This followed a unanimous response in favour of opting in by those who responded to the consultation. The written ministerial statement and the consultation responses can be accessed from: http://www.bis.gov.uk/insolvency/news/news-stories/2013/Apr/EUCallForEvidence
Insolvency Oracle 