Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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

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

Update on the Enterprise & Regulatory Reform Bill

New Bankruptcy Application Process

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 Unfortunately, both these proposals were withdrawn following the House of Lords’ debate.

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

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

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

Continuation of contracted supplies in corporate insolvencies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Soapboxing on the Enterprise & Regulatory Reform Bill

I don’t know about you, but I could do with a break from all these case law blog posts, so I thought I’d catch up with insolvency’s appearance in the Enterprise & Regulatory Reform Bill (“ERR Bill”).

Helpfully, John Tribe has posted extracts from the Bill (as at 18 October 2012) at http://www.jordansinsolvencylaw.com/articles/bankruptcy-applications-determination-by-adjudicators-draft-legislation; he also has reproduced the 16 October 2012 House of Commons’ debate on the insolvency part of the Bill at http://www.jordansinsolvencylaw.com/articles/interesting-recent-hansard-on-bankruptcy-hc-report-stage-debate-re-bankruptcy-amendments-16-10-12 (my references below to comments from MPs are drawn from this article). To follow the Bill’s progress through Parliament, take a look at http://services.parliament.uk/bills/2012-13/enterpriseandregulatoryreform.html. As you will see, the Bill has emerged from the House of Commons and is now working its way through the House of Lords.

What is in the Bill?

In brief, the Bill provides for an individual to apply to an “adjudicator” for a bankruptcy order, rather than petitioning the court. Adjudicators will hold office within the Insolvency Service, but will not be a role for Official Receivers. Once a bankruptcy order has been made under this route, the bankruptcy will be administered in the same manner as currently; the Bill includes consequential amendments to the Act so that the making of a bankruptcy application has the same effect as the presentation of a petition (e.g. S341 will be amended so that the relevant times for preferences and transactions at undervalue will be counted from the date the bankruptcy application is made).

To obtain a bankruptcy order, the individual must:
• be unable to pay his/her debts at the date of the adjudicator’s determination;
• not have a bankruptcy petition pending; and
• have a COMI in England/Wales or his/her COMI is not in an EC Regulation-relevant state, but he/she is: domiciled in E/W or, within the past three years, has been ordinarily resident, or has had a place of residence, or has carried on business, in E/W (the Bill also proposes to make changes to S265 so that the conditions for creditors’ petitions will be exactly the same).

The debtor must pay a fee, which Ms Swinson MP stated is anticipated to comprise an administration fee of £525, as presently, and an application fee of £70 (as compared with the current court fee of £175).

If the adjudicator is satisfied that the above criteria are met, he “must” make the bankruptcy order; if he is not so satisfied, he must refuse to make an order. During the “determination period”, the adjudicator may ask for more information to come to a conclusion, but he must either make or refuse to make an order before the end of this period.

If the adjudicator has refused to make an order, the debtor may ask him to review the information, provided the debtor’s request is made before the end of the “prescribed period”. If the adjudicator then confirms the refusal, the debtor may appeal to court before the end of the prescribed period.

The Bill does not prescribe the periods – presumably this is a detail for supporting rules to follow if/when the Bill obtains Royal Assent.

The Bill also removes S279(2) from the Act, so that bankrupts will no longer be able to be discharged early upon the filing of the Official Receiver’s notice.

Is it controversial?

A significant part of the Insolvency Service’s proposals – that consideration of creditors’ bankruptcy petitions also be moved away from the courts – proved particularly controversial and therefore has not been taken forward, demonstrating to me that responding to consultations does work!

Some also have concerns about debtors’ petitions being moved away from the courts, however the 2011/12 consultation did not ask a direct question on this matter, I presume because it had already been addressed in previous consultations. For example, 90% of those who responded to a February 2010 consultation were of the opinion that consideration of debtors’ bankruptcy applications should be the responsibility of someone within the Insolvency Service (http://webarchive.nationalarchives.gov.uk/+/http://www.insolvency.gov.uk/insolvencyprofessionandlegislation/con_doc_register/DPRefResponses/DPrefIndex.htm).

I do not believe that it is the core principle that concerns some – after all, a company can resolve to wind itself up outside of any court procedure so, arguably, why should an individual not be granted a similar power? – but it seems to me there remain some questions surrounding the proposed process.

Will the individual always understand his/her options?

Of course, it could be argued that the current debtor’s petition process does not safeguard against individuals taking the so-called last resort without adequately considering the other options. However, I do wonder whether the apparent steps to improve access to bankruptcy detract from the seriousness of the act with the result that it risks losing its “last resort” status.

In the House of Commons’ debate, Ms Swinson recognised that “for many, other debt remedies will continue to be more appropriate. We will therefore encourage debtors to take independent debt advice before making their bankruptcy applications. We will work with the Money Advice Service and providers in the debt advice sector to ensure that all debtors have the information that they need in order to make an informed decision.” Thus, there will be no requirement for individuals to have obtained advice before applying for their bankruptcy; they will simply be encouraged to do so.

In that respect, it seems to me that the Insolvency Service will be following Scotland’s lead where an individual may apply direct to the Accountant in Bankruptcy. My knowledge of Scotland’s process is scanty, but having looked on the AiB website it seems to me that an individual can download the application pack and post it off to the AiB and, provided the criteria are met (receiving independent advice seems to be a prerequisite only if the individual is taking the Certificate of Sequestration route), sequestration follows. The AiB publishes a Debt Advice and Information Package (which, personally, I feel is not a touch on the Insolvency Service’s “In Debt – Dealing with your creditors” publication) that the AiB’s Guidance for Trustees states must be provided to debtors before they sign up a Trust Deed, but this does not appear to be part of the debtor’s bankruptcy application process. Do I have this right? The application form has a warning that “the consequences of bankruptcy can be severe” – although according to the form they are limited to the effects on one’s credit rating, and possibly to employment prospects, bank accounts and utility supplies! – and a strong recommendation to seek advice with some contact details provided, but is that seen as sufficient safeguard against individuals taking the last resort when another option may be more appropriate? Coming from a world where so much diligence is expected of IPs before agreeing to help an individual propose an IVA, this seems to me somewhat lightweight. I appreciate, however, that this process has been operating in Scotland for many years, so I am sure that the Insolvency Service has access to evidence of its effectiveness in ensuring that people do not end up bankrupt when an alternative process would have been more appropriate.

Would the Post Office providing a service to bankruptcy applicants, similar to the passport application “check and send” service, further erode the image of bankruptcy as the last resort? 65% of consultation respondents said that they did not believe this was a “useful” service (perhaps the consultation should have asked if it was thought “appropriate”). However, Ms Swinson told the House of Commons: “The Post Office is looking at a wide range of ways in which it can increase its services and its revenue. Playing a wider role in identity checks, as was mentioned, is one of those… On the issues relating to advice, there are examples of more credit union facilities and a wider range of financial services being able to be accessed through post offices”.

Will access to alternatives be cut off?

Ss273 and 274 provide that, in the right circumstances, a debtor’s petition for his/her bankruptcy can result in an IVA. I understand that these provisions are very rarely used (although there are plenty of cases of IVAs being proposed after a debtor has been made bankrupt), but at least there is an opportunity for the court and debtor to consider this alternative to bankruptcy. There is no provision in the ERR Bill for the debtor to exit the bankruptcy application process with an IVA; for the debtor to withdraw from the process, if he/she decides at the last minute to propose an IVA; or for the adjudicator to suggest the possibility of an IVA – if the debtor meets the criteria, then the bankruptcy order is made.

Similarly, S274A provides for the court to stay proceedings on a debtor’s petition, if the court thinks that it would be in the debtor’s interests to apply for a Debt Relief Order. Again, there is no provision in the Bill for the new bankruptcy application process to result in a DRO.

Will “bankruptcy tourism” be tackled?

The recent case of O’Donnell & Anor v The Bank of Ireland ([2012] EWHC 3749 (Ch)), on which I commented a week ago (https://insolvencyoracle.com/2013/01/04/three-pre-christmas-judgments-1-bankrupt-refused-suspension-of-discharge-to-pursue-iva-2-another-failed-attempt-to-prove-england-comi-and-3-receiver-refused-payment-of-costs-after-restraining/), demonstrates some of the difficulties in assessing whether the court has jurisdiction to grant bankruptcy orders and there are many more cases involving diverse circumstances that give rise to COMI issues.

Although the Insolvency Service’s consultation document suggested that bankruptcy applications might be referred to court where there is a dispute, there is no such provision in the ERR Bill. I wonder if an adjudicator’s referral to court was considered unnecessary in view of the fact that the new process now is limited to debtors’ applications. The Bill only provides for a referral to court in the event that an individual wishes to appeal the adjudicator’s confirmation of refusal to make a bankruptcy order; the adjudicator has only two choices on receipt of an application: make, or refuse to make, an order.

Ms Swinson was asked about the risk of “bankruptcy tourism”. She replied: “There is no evidence of widespread abuse, but the official receiver or a creditor can apply to court to annul the bankruptcy order if abuse takes place”. Evidence of widespread abuse there may not be, but it is a shame that the valuable gatekeeper role of the court (and others, e.g. the Official Receiver, who opposed Mr Benk’s bankruptcy petition (see https://insolvencyoracle.com/2012/09/07/two-case-summaries-comi-and-a-rejected-administration-order-application/)) will be removed and then it will be up to the OR or creditors to seek to unravel the bankruptcy after the event.

Ms Swinson was also asked about the skills of the adjudicator and she responded: “On the question about the adjudicator, the Insolvency Service is already looking at this for the debt relief orders that it administers and it will be able to do exactly the same in relation to the way in which adjudicators conduct their business. On the qualifications of adjudicators, they will be making an objective decision by reference to prescribed criteria and there will be a right of appeal for an applicant if the adjudicator refuses to make an order. Obviously, they will need appropriate qualifications and experience to function effectively, and the Secretary of State will make sure that people appointed to that role are appropriately qualified. They will be based within the Insolvency Service which, as the House knows, is an executive agency of BIS, and will already have extensive experience of administering an electronic administrative process similar to the debt relief order regime”. I imagine that it is unlikely that much, if any, “DRO tourism” exists given the low level of debt criterion for a DRO, so it is worrying that the new bankruptcy application process is being put on the same footing as a DRO application. Will Insolvency Service staff really be equipped to decide on complex COMI issues, a topic which already has taken up so much court time and effort?

Will paying by instalment work?

Although the majority of consultation respondents (possibly up to 61%) were opposed to the proposal that individuals may pay the fee by instalment, Ms Swinson informed the House of Commons that this would be part of the process, although it is not clear whether this is to apply only to the application fee, anticipated at £70, or also to the administration fee of £525.

The consultation document highlighted the difficulties of refunding instalment payments, but the summary of responses did not report how the two questions on this topic were answered nor is it known what the current plan is. Presumably, an application will not be considered as having been made until the fee has been paid in full. What is the individual supposed to do in the meantime? Will it really help individuals to trickle through payments over months but without any change in their status and with the risk that the monies will not be refunded if they decide to withdraw from the process?

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Of course, we live in a world of cost-saving efforts, so it is not surprising that this process, which in most cases is simply an administrative function, is considered a candidate for change (although some of the figures in the Impact Assessment, e.g. the estimated court time in dealing with a petition, seem a little over-cooked). As always, there are risks that a “streamlined” process introduces loop-holes or is not so well-equipped to deal with extraordinary circumstances. This does not make it wrong to make changes, but those risks should be understood and managed as best they can.