Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Tag Archives: administration


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Not the Eurosail Supreme Court judgment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Does a blank cheque from a friend disprove insolvency?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Peering into the Insolvency Statistics

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Whilst clearing out my e-file, I took a few minutes to review the Insolvency Service’s insolvency statistics up to the end of 2012, released on 1 February 2013: http://www.insolvencydirect.bis.gov.uk/otherinformation/statistics/201302/index.htm. I thought I’d dig a bit deeper into the stats*.

Corporate Insolvencies (England & Wales)

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!


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A brief briefing

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

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

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

Valuing contingent claims

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

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

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

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

What documents are provisional liquidators entitled to recover?

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

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

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

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

COMI: Dublin v Belfast

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

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

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

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

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

Iceland v Scotland: Nice try, Landsbanki

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

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

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

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

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

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

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

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

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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.


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

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

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

Lessons in avoiding personal liability in post-administration agreements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

Are the solicitors’ fees an Administration expense?

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

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

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

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

Are the solicitors’ fees a Liquidation expense?

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

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

Which elements of the solicitors’ fees are Liquidation expenses?

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

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

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


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MF Global: Are Special Administrators analogous to Liquidators?

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

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

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

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

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

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

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