Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Hats Off

0520 Goblins

Having recently spent a week or so in Somerset enjoying the unseasonal blue skies (but yes, you’re right, the photo is not Somerset!), I’ve managed to accumulate quite a pile of BAILII reports. I don’t want to skip them entirely, as one day I do want to create a searchable index of my posts, so I’ve tried to give credit where I can to other write-ups of the judgments. Much is old news, therefore, but if you missed them the first time around…

Olympic Airlines – failure to meet “establishment” test of European Insolvency Regulation rules out secondary insolvency proceedings.
Jetivia v Bilta – argument that the company, by its liquidators, could not pursue claims based on a fraud to which it was party failed.
Tchenguiz v SFO – liquidators’ reports not subject to litigation privilege, as litigation was not the dominant purpose for their production.
Southern Pacific Personal Loans – liquidators were not data controllers for data processed by company pre-liquidation and, subject to certain conditions, they could destroy the data.
JSC BTA Bank v Usarel Investments – useful comments regarding the absence of inevitable bias of court-appointed receivers when faced with prospect of taking action against party that sought their appointment.
Bestrustees v Kaupthing Singer – reversal of administrators’ part-rejection of pension scheme claim, as changes in assets and liabilities after the actuary’s certificate “irrelevant”.
Wood & Hellard v Gorbunova – receivers’ indemnity out of assets restricted, as respondent’s costs increased due to receivers’ “inappropriate conduct of the application”.
JSC BTA Bank v Ablyazov – subject’s drawing down of £40m loans not “assets” for the purposes of a freezing order.

The Trustees of the Olympic Airlines SA Pension & Life Insurance Scheme v Olympic Airlines SA (6 June 2013) ([2013] EWCA Civ 643)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/643.html

A successful appeal against a secondary winding-up in England provides clarification of the meaning of “establishment” of the European Insolvency Regulation, but makes it difficult to call on the PPF where a scheme is exposed to an insolvency with main proceedings in another EU/EEA state.

A couple of good summaries (although with differing views on how things may change on the revision of the EIR) are provided by Malti Shah of Taylor Wessing (http://goo.gl/0m0aDZ), and Justin Briggs & Charles Crowne of Burges Salmon (http://goo.gl/P0I3G4).

(UPDATE 07/08/14: The enactment of the Pension Protection Fund (Entry Rules) (Amendment) Regulations 2014 have opened the way for this scheme to access the PPF. The Regulations cease to have effect on 21 July 2017 and set down such specific criteria that it seems unlikely that it will help many more schemes access the PPF. For a more detailed analysis, see Mayer Brown’s article at: http://goo.gl/Xzyx5q)

(UPDATE 21/05/15: the Supreme Court considered an appeal and swiftly dismissed it, endorsing the Court of Appeal’s earlier decision that having three employees in the country involved only in winding up the company’s affairs did not amount to “economic activity”.  The judgment, given on 29 April 2015, can be found at: http://www.bailii.org/uk/cases/UKSC/2015/27.html)

Jetivia SA & Anor v Bilta UK Limited (in liquidation) & Ors (31 July 2013) ([2013] EWCA Civ 968)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/968.html

Bilta, by its liquidators, brought claims for conspiracy and dishonest assistance against the appellants, who sought to defeat the claims on the basis that, as Bilta was party to the illegal act, it could not bring the claims (the ex turpi causa principle). The appeals were dismissed.

Tom Henderson of Herbert Smith Freehills LLP has produced a good summary of the case, I think: http://www.lexology.com/library/detail.aspx?g=ead603c4-454c-4d19-ae54-4ed2196ec771

Tchenguiz & Ors v Director of the Serious Fraud Office & Ors (26 July 2013) ([2013] EWHC 2297 (QB))

http://www.bailii.org/ew/cases/EWHC/QB/2013/2297.html

The court found that the joint liquidators’ reports were not subject to litigation privilege, as the judge was not convinced that the dominant purpose for which the reports were originally produced was for obtaining information or advice in connection with pending or contemplated litigation, or for conducting or aiding in the conduct of such litigation.

Timothy Wright and Nicholas Greenwood of Morgan Lewis & Bockius LLP – http://www.lexology.com/library/detail.aspx?g=c1be8860-2d7d-466b-a1b7-3d3be7b93431 – have produced a pretty good summary of the case.

(UPDATE 15/10/13: this decision is subject to an appeal by the liquidators.)
(UPDATE 16/03/14: the liquidators’ appeal, heard on 20/02/14, was dismissed: http://www.bailii.org/ew/cases/EWCA/Civ/2014/136.html. As in the first instance, the judge emphasised “the need to establish which of dual or even multiple purposes was dominant if a plausible claim to privilege was to be made out” (paragraph 22), and felt that the appellants had not demonstrated that the dominant purpose of the communications was for use in actual or anticipated litigation. He agreed with Counsel for the respondents that, even with liquidations of this nature, it cannot be right to assume that everything that a liquidator does is in contemplation of litigation.)

Re. Southern Pacific Personal Loans Limited (8 August 2013) ([2013] EWHC 2485 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2485.html

Liquidators estimated that the costs of responding to data subject access requests (“DSARs”) on a case amounted to £40,000 per month. Thus, they sought directions on whether there was a way of avoiding this ongoing expense.

Mr Justice David Richards concluded that the rights to control the data remained vested in the company and the company remained under a statutory obligation to deal with the DSARs. He stated that, as the liquidators acted as agents of the company, they were not data controllers in respect of the data processed by the company prior to liquidation.

In considering application of the fifth data protection principle – that personal data should not be kept for longer than is necessary for the purposes for which it was processed – David Richards J directed that the liquidators might dispose of all personal data in respect of which the company is the data controller subject to two qualifications: (i) that the company retained sufficient data to enable it to respond to DSARs made before the disposal of data; and (ii) that the liquidators retained sufficient data to enable them to deal with any claims that might be made in the liquidation.

JSC BTA Bank v Usarel Investments Limited (24 June 2013) ([2013] EWHC 1780 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1780.html

The circumstances of this case – involving a litigation receiver seeking a ruling that his appointment to defend an action gave him power to conduct an appeal (which was not granted) – are unlikely to arise often, if at all, but I thought that Mr Justice Warren’s comments on the integrity of court-appointed receivers were worth repeating.

Warren J felt that the receivers and managers (who were appointed after the litigation receiver) were just as competent to decide on whether an appeal should be pursued as the litigation receiver. He stated: “I do not consider that it can be said that, whenever the Court appoints a receiver and manager nominated by an applicant for such an appointment, there is inevitably a justified perception of bias if the appointed nominee needs to consider whether to pursue litigation against the person who applied for his appointment. His position, as an officer of the Court, is different from that of a receiver or manager appointed for instance by the holder of a charge over the company’s assets. A perhaps justified perception of bias in relation to a receiver or manager appointed out of Court should not be allowed to infect the perception of an officer of the court” (paragraph 37).

Bestrustees Plc v Kaupthing Singer & Friedlander Limited (in Administration) (31 July 2013) ([2013] EWHC 2407 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2407.html

Bestrustees appealed against the Administrators’ decision to reduce its proof of debt by £2 million. The Administrators’ reason for reducing the proof was because the actuary had certified that the deficit of the occupational pension scheme (“the section 75 debt”) was £74,652,000, but they had attributed no value to the £2 million deposited by the scheme with the company in a trust account, which at that time was subject to legal proceedings but the funds were paid to the scheme later.

The Administrators were ordered to reverse the £2 million reduction to the proof, primarily because they had not challenged the amount of the section 75 debt, as certified by the actuary, and they had not challenged the nil value attributed to the deposit subject to pending litigation at that time. The Chancellor of the High Court, Sir Terence Etherton, observed: “the Employer Debt Regulations require the assets and liabilities of a pension scheme to be valued, for the purposes of ascertaining the section 75 debt, in a notional exercise immediately before the trigger event, here KSF entering into administration on 8 October 2008. Changes in the value of assets or the extent of liabilities after that time are irrelevant. In the present case, just as the value of the £2 million deposit increased after 8 October 2008 as litigation progressively clarified the rights of those, including the Trustee, entitled to the money in the trust account, so the evidence also shows that the scheme’s ‘buy out’ liabilities, that is to say the notional cost of going into the market to purchase the annuities which would match the scheme’s liabilities to its pensioners and members, also increased substantially after that date” (paragraph 35).

Wood & Hellard v Gorbunova & Ors (5 July 2013) ([2013] EWHC 1935 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1935.html

Receivers were indemnified out of the assets only to the extent of two thirds of the costs of one respondent (and 85% of another’s) on the basis that the respondent’s costs “increased by reason of the inappropriate conduct of the application by the receivers” (paragraph 66).

Mr Justice Morgan acknowledged the “difficulties the receivers found themselves in and their proper desire to get the receivership moving” (paragraph 68), but he felt that the receivers had been unwise in seeking wide-ranging orders, some elements of which were dropped later by the receivers, and that they had persuaded themselves that the respondent was being recalcitrant when the judge felt that the respondent had behaved properly throughout and simply had been subject to legitimate constraints in delivering up papers.

JSC BTA Bank v Ablyazov (25 July 2013) ([2013] EWCA Civ 928)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/928.html

A freezing order was drafted in a standard form to prohibit Mr Ablyazov from in any way disposing of, dealing with, or diminishing the value of his assets. The bank sought to persuade the court that the loan facility agreements entered into by Mr Ablyazov, which enabled him to instruct the lenders to pay £40 million direct to third parties, were “assets” for the purposes of the freezing order.

The court at first instance agreed that they were choses in action, but its decision that not all choses in action were assets was appealed by the bank. Lord Justice Beatson agreed with the earlier judgment: “a man who is entitled to borrow and does so ‘is not ordinarily to be described as disposing of or dealing with an asset’. As Sir Roy Goode has stated, albeit in the context of section 127 of the Insolvency Act 1986, ‘[i]f there is one thing that is still clear in the increasingly complex financial scene … it is that a liability is not an asset and that an increase in a liability is not by itself a disposition of an asset’” (paragraph 72).

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SIP2 – No Spin

1303 Las Vegas

A couple of months ago, I presented a webinar for R3 on SIP2. I thought I’d make the most of my efforts and post here some key points of that presentation. There’s nothing critical or new here; it’s just offered as a reminder of the contents and application of SIP2.

For ease of reference, SIP2 (or at least the E&W copy) can be found at http://www.r3.org.uk/index.cfm?page=1746 along with R3’s Practical Guidance Note, to which I also refer below.

The Purpose of SIP2

I think there’s a risk that SIP2 is viewed sometimes as setting the standards of investigation for D-reporting purposes. That seems to be how the Insolvency Service presents it in its Guidance Notes for Completion of CDDA Reports/Returns (http://www.bis.gov.uk/insolvency/Publications/publications-by-theme/insolvency-practitioners-publications). However, that’s clearly not the emphasis of SIP2 itself. The only reference to CDDA work is way down at paragraph 18: “an office holder should be mindful of the impact of the outcome of investigations on reports on the conduct of directors”.

The key purposes behind SIP2 are set out in the introduction. One purpose is to help office holders “to carry out appropriate investigations in order to address the specific duties of the office holder” (paragraph 2), which are described as investigating “what assets there are (including potential claims against third parties including the directors) and what recoveries can be made” (paragraph 1).

The introduction also describes the need for an office holder to carry out appropriate investigations “to allay if possible the legitimate concerns of creditors and other interested parties”. In the webinar, I described what those legitimate concerns might be and how office holders could allay them, although, to be honest, I found it a difficult topic to cover: unless the office holder goes to great lengths to investigate and explain the circumstances of a company’s demise, would creditors’ concerns ever truly be allayed? And is there a risk that an office holder could spend too much time (and money) exploring creditors’ concerns, which hold out no hope of enhancing any dividend prospect? Is that really what SIP2 is endorsing?

Therefore, in the webinar I majored on what I believe is the key purpose of SIP2: to identify what assets there are, including potential recoveries from challenges to antecedent transactions. As this objective is quite different from identifying what might be appropriate for a D-report (albeit that it might reveal matters relevant to a D-report), personally I feel SIP2 should have a different place in the case administration process. I do not believe that any SIP2 review/checklist should be nestled within a CDDA review. I also believe that it should be carried out – at least informally – much earlier than the traditional timing of CDDA reviews, which pretty-much seems to happen in month 5. Identifying the potential of hidden assets is often what being an office holder is all about and it is where office holders can really demonstrate their skills and add value to the insolvency process.

The R3 Practical Guidance Note

I suspect that there are many SIP2 checklists out there that pre-date the revised SIP2, which was released in May 2011, and I can see that, apart from the extension of SIP2 to Administrations, the current SIP2 plus R3 Guidance Note do not differ much from the old SIP2. However, there was a purpose in stripping out much of the prescription that was in the old SIP2. One of the two overriding principles of the current SIP2 is that investigations should be “proportionate to the circumstances of the case”. The JIC recognised that not every checklist item in the old SIP2 was a proportionate measure on every case. I know how IPs love to create step-by-step recipes for most aspects of case administration, but I think that the motive behind the 2011 SIP2 revision included an attempt to encourage IPs to be more intelligent about investigations.

However, the downside of less prescription is a nervousness on the part of some IPs as to how the regulatory bodies would measure concepts such as proportionality. How is an IP to know whether the extent of investigations he feels are proportionate meets the RPB’s expectations? Although I have some sympathy with this, I would suggest that IPs who keep in touch with their RPBs via newsletters, roadshows, and monitoring visits, with developing case law, and with what their peers are doing, by means of a healthy exchange of competent staff and by having a friendly IP or two (or a consultant, of course) to chat things over with, should be able to make a reasonable judgment of what is acceptable and appropriate. And IPs who document their thought-processes adequately should be in a position to set out a reasonable defence of their actions, if challenged.

But, once upon a time, when SIPs were “best”, rather than required practice, the old SIP2’s prescriptive steps-to-take-for-a-successful-investigation had been useful to IPs. As a consequence, this information was reproduced in the R3 Practical Guidance Note so that it was not lost forever. But it is worth remembering that this note is only guidance – it would be wrong to follow it slavishly for every case without having regard for the specific circumstances.

The Structure

The SIP identifies a two-stage process:

• Steps expected on all cases, culminating in an “initial assessment”
• Deciding on and proposing further investigation, seeking appropriate sanction and communicating with creditors

Steps expected on all administrations and insolvent liquidations

Locate, secure and list books and records

Helpful resources (if you need/want any such material!) include:

• Insolvency Guidance Paper: “Systems for Control of Accounting and other Business Records” (March 2006): http://www.icaew.com/~/media/Files/Technical/Insolvency/insolvency-guidance-papers/tech-03-06-insolvency-guidance-paper-systems-for-control-of-accounting-and-other-business-records.pdf (strangely not publicly available on the R3, IPA or Insolvency Service websites)
• R3 Technical Bulletin 104, section 5 (June 2013)
• Dear IP 57, page 10.54 (March 2013): http://www.insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/dearip/dearipmill/hardcopy.htm. Whilst this relates to disqualification cases, it does help, I think, to convey the difficulties the Service has encountered when an IP’s record-securing process is less than robust.
• Insolvency Service’s CDDA guidance notes – again, this is not strictly SIP2 territory, but it is worth noting that, in disqualification proceedings, “the courts will expect the office holder to have made every reasonable effort to secure accounting records which inevitably means requesting them on more than one occasion” (page 19).

Invite parties to provide information

Invitations are to be sent to creditors (at the first communication/meeting – don’t forget that this applies to Administrations too), committee members, and predecessors in office. The SIP states that you’re asking them “whether prior transactions by the company, or the conduct of any person involved with the company, could give rise to action for recovery” (paragraph 6), so again the purpose is to unearth hidden assets, not to gather information for a D-report.

Make enquiries of directors and senior employees

It is pretty standard procedure for IPs to send questionnaires to the directors… but do you think about senior employees? Also, whilst standard questionnaires do the job adequately, I have seen forms tailored to the specific circumstances of a case. After all, often IPs quickly develop suspicions of where potential recoveries might be hiding – why not slip in the odd question to get right to the point?

The “Initial Assessment”

This should be done “notwithstanding any shortage of funds”, but how much work do you put into this? It might help to focus on what you’re trying to achieve. The SIP states that you should get to a position of being able to decide “whether there could be any matters that might lead to recoveries for the estate and what further investigations may be appropriate” (paragraph 10), so you’re not expected to have positively identified causes of action, but you are expected to have identified possibilities and to have an idea of what you might do to get to that stage.

The R3 Guidance Note recommends (i) comparing the SoA with the last filed/management accounts and (ii) carrying out a preliminary review of the books, records and minutes over the last 6 months. I also think it is a good idea simply to list the possible rights of action – the list of sections of the IA86 and CA06 that appears in the Guidance Note – and ask yourself: have I any suspicion that any of these might have occurred?

Over and above this, the extent of your investigations should be determined by taking account of:

• The public interest
• Potential recoveries
• The funds likely to be available to fund an investigation; and
• The costs involved (paragraph 11).

What exactly is the office holder’s public interest role and how much of an influence will this have over the extent of your investigations? Good question, particularly considering that I’m sure we all know of CDDA cases that were not taken forward on the basis that it was not in the public’s interest. I thought the comments of Mr Justice Newey in Wood & Anor v Mistry [2012] (http://www.bailii.org/ew/cases/EWHC/Ch/2012/1899.html) were helpful in noting the liquidator’s public interest role – the case involved liquidators making their own application for a disqualification under the CDDA. Newey J describes the circumstances that might prevail for such an application (paragraph 30).

Seeking Sanction

The statutory requirements for a Liquidator seeking sanction are contained in Schedule 4 of the IA86 and Rules 4.218A to E (for litigation expenses to be paid from floating charge realisations). The statutory requirements for an Administrator are..? Given that Administrators can challenge many antecedent transactions – S213 and 214 being the obvious exceptions – I’m surprised that there seems to be a perception that a Liquidator is better-placed to pursue these matters (although, of course, the duration of likely actions is a consideration). In particular, I understand that HMRC is still in the habit of modifying Administrators’ Proposals to seek the swift move into liquidation on the apparent basis that more will be done about antecedent goings-on… maybe HMRC wants the control over the office holder provided by the statutory requirements to seek sanction (yes I know, it’s highly unlikely that the HMRC appreciates this subtlety). If so, it might be disappointed to note that the recent Red Tape Challenge consultation includes the proposal that the sanction requirements on liquidators of Schedule 4 be dropped.

Although SIP2 does not add further requirements to seek sanction, it does recommend that IPs consider consulting or seeking sanction where they “conclude that the outcome is uncertain and the costs that would be incurred would materially affect the funds available for distribution” (paragraph 13). This makes sense: sometimes creditors are happy for you to spend the estate funds in pursuit of a potential recovery, especially if they think it may mean some pain for the directors, but in some cases they may prefer to cut their losses and run.

Disclosure

In order to obtain sanction, it will be necessary to provide some information on what you’re planning to do. The SIP recognises that it may be more discrete to consult with select creditors, either the major ones or committee members (subject to the statutory requirements mentioned above).

However, the SIP also sets out expectations of communicating with the entire body of creditors “regarding investigations, any action taken, and whether funding is being provided by third parties” (paragraph 17). It does acknowledge the issues of privilege and confidentiality. R3’s recent Technical Bulletin 103 provides some useful information on legal professional privilege and, in relation to confidentiality, you could do worse than consider the Insolvency Ethics Code’s description of the principle.

It may be a difficult balance to achieve, but SIP2 does require “as a minimum” that the office holder includes within the first progress report “a statement dealing with the office holder’s initial assessment, whether any further investigations or action were considered, and the outcome; and include within subsequent reports a statement dealing with investigations and actions concluded during the period and those that are continuing” (paragraph 17). It should be remembered that usually in effect creditors’ money is being used to further investigations and the Ethics Code’s principle of transparency requires office holders to observe their professional duty to report openly to those with an interest in the outcome of the insolvency. In addition, keeping in mind that SIP2 investigations are primarily concerned with identifying hidden assets, it is clear that a bland statement in progress reports such as “the office holders have complied with their requirements to report to the Insolvency Service in relation to CDDA matters but the contents of such a report are confidential” does not meet the SIP2 disclosure requirement.

Further Investigations

The R3 Practical Guidance Note suggests some areas that, “where it is agreed to conduct further investigations.., may be usefully borne in mind, depending on the circumstances of the case and the nature of the investigations”. The suggested areas are pretty-much the old SIP2 points, but my personal opinion is that, if IPs have got to this stage, they should be in an position to decide for themselves how best to conduct further investigations. Surely this is the point at which an IP’s professional judgment comes into play.


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Not the Nortel/Lehman Decision

IMGP5501

I am not going to comment on the Supreme Court’s decision in Nortel and Lehman, because, as with Eurosail, it has had plenty of coverage already. Instead, I’ll cover a few lesser-known cases, with a couple of Scotland ones taking the top-billing:

• Scotland: Re The Scottish Coal Company Ltd – Liquidator entitled to disclaim land and onerous licences (UPDATE: this was overturned on 12 December 2013 ([2013]CSIH 108). A summary of that reclaiming motion is at http://wp.me/p2FU2Z-5v.)
• Scotland: Re Station Properties Ltd – judge not convinced case made out for para 80 exit from administration and administrators directed to issue revised proposals to cover change of administration objective
Re GP Aviation Group International Ltd – appeals against tax assessments are not property capable of assignment by a liquidator
USDAW v WW Realisations 1 Ltd – reversal of Woolworths/Ethel Austin decisions on redundancy consultation legislation: number of redundancies at each location not as relevant as total number
Evans & Evans v Finance-U-Limited – creditor who proved in full in bankruptcy did not renounce security
• Scotland: Re William Rose – Trustee’s late application to extend 3-year period could not reverse property re-vesting
• Northern Ireland: Tipping v BDG Group Ltd – late application for protective award allowed, as ignorance of the law considered reasonable

However, if you do want to read a summary of Nortel/Lehman, I think that 11 Stone Buildings’ briefing note covers the subject well: http://www.11sb.com/news/24-july-2013—nortel—lehman-supreme-court-decision–guidance-on-insolvency-expenses-and-provable-claims.asp. I’m sure most IPs are breathing a sigh of relief and waiting, a little more comfortably now, for the Game appeal…

Finally, a Scottish precedent for a liquidator’s power to disclaim (UPDATE: … not so fast!)

Scotland: Re. The Scottish Coal Company Limited (11 July 2013) ([2013] CSOH 124)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH124.html

Liquidators sought directions on whether they could abandon or disclaim land and/or onerous water use licences, in order to avoid the substantial costs involved in maintaining and restoring the sites, which the Scottish Environment Protection Agency (“SEPA”) would require before it would accept a surrender of its licences. SEPA and other bodies made representations, conscious that, if the liquidators succeeded, significant costs might fall to the taxpayer.

Scottish readers will be aware that there is no express statutory provision available to liquidators of Scottish companies to disclaim onerous property, in contrast to the position of liquidators of English and Welsh companies who may disclaim under S178 of the Insolvency Act 1986. Counsel in this case were also unable to find any case law or textbook showing a liquidator of a Scottish company exercising such a power.

Lord Hodge drew a comparison with the position of a Trustee in a sequestration, which has power to abandon land, and contemplated its effect in relation to S169(2) of the Act, which provides that “in a winding up by the court in Scotland, the liquidator has (subject to the rules) the same powers as a trustee on a bankruptcy estate”. The judge felt that it was not an exact comparison, as the effect of a trustee’s abandonment was to reverse the vesting so that the bankrupt owns the property. However, there is no vesting of property in a liquidator, so if he were somehow to bring to an end the company’s ownership of the property, it would become ownerless. Although the judge saw the potential for abuse as a means of avoiding obligations, he saw no reason in principle why land could not be made ownerless, given that the Crown has a right to waive ownership of bona vacantia, which would render such property ownerless.

The judge then considered whether the liquidators could avoid the obligations imposed under the Water Environment (Controlled Activities) (Scotland) Regulations 2005 (“CAR”) in seeking to surrender the licences. The judge described powerful considerations that might have persuaded him to hold that the liquidators could not disclaim the licences, one reason being that he thought “that there is a strong public interest in the maintenance of a healthy environment, the remediation of pollution and the protection of biodiversity. There is a conflict between the results sought by the directive and the insolvency regime. I do not think that the insolvency regime has any primacy which means that CAR can exclude a liquidator’s power to disclaim only if, like section 36 of the Coal Industry Act 1994, it says so expressly” (paragraph 51). However, the judge recognised that “if the relevant provisions of CAR have the effect of (a) removing a liquidator’s right to disclaim the property of a company and refuse to perform an obligation in relation to that property and (b) creating a new liquidation expense which would have to be met before the claims of preferential creditors, it seems to me that it would modify the law on reserved matters… It would also be altering the order of priority on liquidation expenses in rule 4.67 of the Insolvency (Scotland) Rules 1986 if… the remuneration of the liquidator were to rank equally with the obligation to spend money to comply with CAR” (paragraph 64).

Consequently, the judge concluded that the liquidators could disclaim the sites and abandon the water use licences along with the obligations under CAR. He also endorsed the liquidators’ proposed mechanism for effecting the abandonment, which involved giving notice to all interested parties, advertising the fact so that locals were made aware of the abandoned sites, and sending a notice to the Keeper of the Registers in Scotland.

(UPDATE 09/01/14: this decision was overturned in a reclaiming motion ([2013] CSIH 108) on 12/12/13 – see http://wp.me/p2FU2Z-5v.)

Scotland: More work required of administrators to exit via Para 80 and administrators directed to submit revised proposals to address change in objective

Re. Station Properties Limited (In Administration) (12 July 2013) ([2013] CSOH 120)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH120.html

The administrators’ proposals, which included that they thought that the objective set out in Paragraph 3(1)(c) of Schedule B1 would be achieved, were approved at a creditors’ meeting. Subsequently, it appeared to the administrators that all creditors should receive full repayment of their debts, as the directors had secured funding, and therefore they planned to exit the administration and hand control of the company back to the directors. The quantum of the claim of one creditor, Dunedin Building Company Limited (“DB”), was subject to a legal action. DB objected to the administrators’ plan arguing that they should adjudicate on its claim before ending the administration.

The administrators sought directions as to whether in the circumstances they could end the administration under Paragraph 80 of Schedule B1 on the basis that the purpose had been sufficiently achieved notwithstanding DB’s objection.

Lord Hodge felt that an administrator could not come to this conclusion “without obtaining a clear understanding of the directors’ business plan and cash flow forecasts and forming an independent view, in the light of the best evidence reasonably available, whether that plan and those forecasts are realistic” (paragraph 20). He also felt that “It would be consistent with current accountancy practice to require the directors to produce a business plan and forecasts for at least 12 months and to attempt to look into the future beyond that time to identify whether there was anything which was likely to undermine the company’s viability” (paragraph 22). The ultimate value of DB’s claim was a factor in assessing the company’s future cash flow solvency, so the judge felt either that the administrators should await the outcome of the legal action or they “should take steps to enable themselves to reach an informed and up to date view on the likely value of that claim” (paragraph 23) before they could decide whether the company had been rescued as a going concern.

Lord Hodge also felt that the administrators had to deal with the change in administration objective – from Para 3(1)(c), as set out in their proposals, to Para 3(1)(a) – by issuing revised proposals under Para 54. “I am not persuaded that the obligation on an administrator under para 4 of Schedule B1 to ‘perform his functions as quickly and efficiently as is reasonably practicable’ provides any justification for bypassing para 54 even if an administrator were of the view that a dissenting creditor would be outvoted at the creditors’ meeting” (paragraph 30).

Although personally, I see this as a significant conclusion, particularly as I don’t think I’ve seen any administrator issue revised proposals, it should be remembered that the judge felt that, in the circumstances of this case, the change in administration objective was a substantial change, particularly because DB had been in dispute with the directors regarding its claim and the change in objective could see the company reverting to the directors’ control before the claim was determined.

Right to appeal a tax assessment is not property capable of being assigned

Re. GP Aviation Group International Limited (In Liquidation): Williams v Glover & Pearson (4 June 2013) ([2013] EWHC 1447 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1447.html

Former directors asked the liquidator to appeal against HMRC’s corporation tax assessments, but the liquidator did not have the finance to fund the appeals, so the former directors asked the liquidator to assign the appeals to them. The liquidator sought directions on whether he had the power to assign the appeals.

HH Judge Pelling QC concluded that the right of appeal was not property within the meaning of the Insolvency Act and so was no capable of being assigned. He noted that the liability, to which the right of appeal related, could not be assigned and the right of appeal could not be assigned separately. He stated that, even if it had been capable of assignment, he would not have sanctioned it, as: “the assignment of the right to appeal without being able to assign or novate the liability would place the office holder in a potentially invidious position – an unreasonable and intransigent position might be adopted in relation to the appeal that might expose the Company to penalties, interest and costs that could otherwise have been avoided. This risk is not one that the court should sanction given the potential implications for creditors as a whole” (paragraph 32). The judge made it clear that his judgment applied strictly to the bare right to appeal in this case. “Different considerations may apply where the liability can be novated or where the appeal right is one that is incidental to a property right that can be assigned (for example a right to appeal a planning decision in relation to land that is sold by an office holder)” (paragraph 33).

Less than 20 redundancies at any one site did not avoid consultation requirements where more than 20 were made redundant over all sites

USDAW & Anor v WW Realisation 1 Limited & Ors (30 May 2013) ([2013] UKEAT 0547 and 0548/12)

http://www.bailii.org/uk/cases/UKEAT/2013/0547_12_3005.html

I appreciate I’m behind the times on this one, which has been widely publicised in the past couple of months.

Earlier Tribunals had decided that there was no duty to consult under TULRCA with staff who worked at different sites where less than 20 redundancies were planned at those sites even though the total number of dismissals across the company was over 20. The Tribunals dealt with two separate cases involving such redundancies of staff who had worked in Ethel Austin and Woolworths stores. The consequence had been that 4,400 workers had been excluded from awards for the companies’ failures to consult, which had been granted to c.24,000 of their former colleagues who had worked at larger stores and head offices.

These decisions were overturned on appeals, although the judge expressed some disappointment that the respondents did not attend or comment, feeling that it put the Tribunal at a disadvantage. In particular, the judge noted that, as a consequence of the appeals, the Secretary of State for BIS would be faced with the prospect of paying out 60 or 90 days’ pay for 4,400 people.

The key issue was discerning the purpose behind S188(1) of TULRCA, which refers to “20 or more employees at one establishment”, which the Appeal Tribunal decided was more restrictive than the EC Directive, which was intended to be implemented into domestic legislation by means of S188. The judge concluded that “the clear Parliamentary intention was to implement the Directive correctly” (paragraph 50). Therefore, “the only way to deliver the core objective of protection of the dismissed workers in the two cases on appeal is to construe ‘establishment’ as meaning the retail business of each employer. This is a fact-sensitive approach which may not be the same in every case but it is consistent with the core objective as applied to the facts in these two cases” (paragraph 52). However, the Tribunal preferred a solution that made “the point more clearly and simply so that it can be applied without detailed consideration of the added fact sensitive dimension. We hold that the words ‘at one establishment’ should be deleted from section 188 as a matter of construction pursuant to our obligations to apply the Directive’s purpose” (paragraph 53), although they acknowledged that this might be a step too far.

(UPDATE 08/03/15: the European Advocate General’s opinion suggests that ‘at one establishment’ does have a purpose and is compatible with EU law.  Although it is likely, it remains to be seen whether the ECJ will follow the Advocate General’s opinion.  For a summary of the position as it stands at present, take a look at http://goo.gl/HhjHPN or http://goo.gl/MsfGFZ.)

Creditor who proved in full in a bankruptcy did not renounce its security

Evans & Evans v Finance-U-Limited (18 July 2013) ([2013] EWCA Civ 869)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/869.html

In 2007, Mr and Mrs Evans purchased a car financed by a loan from Finance-U-Limited (“FUL”) and a bill of sale granting FUL security over the car. Mr Evans went bankrupt later in 2007 and Mrs Evans went bankrupt in 2008. FUL proved in Mr Evans’ bankruptcy for the full sum due under the loan agreement; the existence of security was disclosed on the proof, but no value was put on it. The claim was admitted in full and FUL later received a small dividend. After Mrs Evans’ discharge from bankruptcy, she continued to pay monthly instalments to FUL until mid-2010. In 2012, the Evans were successful in seeking a declaration that the car was their property free from any claim by FUL on the basis that, because FUL had proved in full in Mr Evans’ bankruptcy, it no longer had a right to enforce its security over the car. FUL appealed the declaration.

Lord Justice Patten referred to the case of Whitehead v Household Mortgage Corporation Plc in which it was decided that the acceptance of a dividend from an IVA “did not amount to an agreement or election by the creditor to treat as unsecured that part of the debt in respect of which the dividend had been paid” (paragraph 20). He felt that “FUL was not therefore required to renounce its security as the price of being able to prove for the balance of the debt nor was that the effect of it proving for the entire amount due. It therefore retained its right to enforce the security following Mr Evans’ bankruptcy but did not exercise that right whilst Mrs Evans continued to meet the instalments” (paragraph 21). He therefore reversed the decision at first instance and, as the term of the loan had expired, he decided that FUL was entitled to possess the car free from any statutory requirement to give notice.

Scotland: impossible to undo the reinvesting of a family home in the debtor

Re. Sequestrated Estate of William Rose (4 June 2013) ([2013] ScotSC 42)

http://www.bailii.org/scot/cases/ScotSC/2013/42.html

The Trustee sought a warrant to serve an application under S39A(7) of the Bankruptcy (Scotland) Act 1985 on the debtor and his spouse. The debtor was sequestrated on 20 May 2008, so the Trustee sought to extend the 3-year time period after which the family home is reinvested in the debtor, albeit that the 3 years had expired before the Trustee made his application. The Trustee explained that he had failed to act sooner as a consequence of an “administrative error” (paragraph 4.3).

Sheriff Philip Mann was “unmoved” by the submissions on behalf of the Trustee: “The plain fact of the matter is that, on the Trustee’s averments, the property has already reverted to the ownership of the debtor and it is now too late to prevent that from happening. The Trustee is not trying to prevent that from happening. He is, in effect, trying to reverse that which has already happened in consequence of section 39A(2). Section 39A(7) says nothing about reversing the effect of section 39A(2)” (paragraph 5.4). The Sheriff therefore concluded that the Trustee’s application was incompetent and he refused to grant the warrant.

Northern Ireland: ignorance of remedy for company’s failure to consult was “reasonable”, thus five months’ late claim allowed

Tipping v BDG Group Limited (In Liquidation) ([2013] NIIT 2351/12) (19 April 2013)

http://www.bailii.org/nie/cases/NIIT/2013/2351_12IT.html

Whilst it is a Northern Ireland case, so of limited application, I thought it was worth mentioning briefly that the former employee succeeded in claiming compensation for the company’s failure to consult, despite his claim being lodged five months after the “primary limitation period” for lodging a complaint with the Tribunal.

The reason for the delay was that the claimant had not been aware of the protective award. “Courts and tribunals have consistently held that ignorance as to one’s entitlement to make a complaint of unfair dismissal is not reasonable ignorance. (This is on the basis that the general public now are well aware of entitlements to make unfair dismissal complaints). However, the situation is different in respect of protective award complaints. The availability of remedies in respect of collective redundancy consultation failures, the threshold (of 20 redundancies), and the circumstances in which an individual, as distinct from a trade union or employee forum representative, can seek such remedies, are all matters which are not generally well known” (paragraphs 16 and 17) and therefore the Tribunal held that it could allow the complaint, albeit that, in the judge’s view, the further period of five months was “close to the boundaries of what I consider to be ‘reasonable’” (paragraph 21).


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Case summaries: Two Admin appointments; two OR cases; valuing a bank’s claim; LB Pension Scheme; and disqual

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The Courts have been busy. Here’s a summary of half the recent judgments in my inbox:

Re Care People Limited: Administrator’s appointment valid despite defective QFCH demand
Re Integeral Limited: Proposed Administrators’ “supine approach” falls very far short of Court’s expectations
Re Clive McNally: how to value unsecured element of bank’s claim for IVA voting purposes
Howard v OR: OR is not Equality Act duty when deciding to revoke IVA
LB Re Financing No. 1 Limited v Trustees of Lehman Brothers Pension Scheme: Trustees entitled to add target companies to FSD
• From Scotland: SoS for BIS v Reza: director in name only disqualified
• From Northern Ireland: OR v Gallagher: OR fails to have post-petition matrimonial order set aside as disposition

Re Care People Limited (In Administration) ([2013] EWHC 1734 (Ch)) (18 March 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1734.html

In Brief: Appointment of administrators six minutes after QFCH demand, which gave conflicting deadlines for repayment, was premature at worst. Court decided defect did not render appointment a nullity and waived, declaring appointment valid.

Ultimate Invoice Finance Limited, a QFCH, issued a written demand dated 25 February 2013 to the company and an Administrator was appointed by filing a notice of appointment at court at 12 noon on 26 February. The difficulty was that the demand gave two different timescales for repayment: in one place, two days, and, elsewhere in the same demand, by return. Under the terms of the charge, the written demand was to be considered as served 48 hours from the time of posting. The QFCH repeated the demand by emailing it at 11.54am on 26 February, i.e. just six minutes before the appointment. Consequently, the question for Judge Purle was whether the Administrator had been validly appointed.

Purle J concluded that “at least enough time, which is more than six minutes, had to elapse for the unchallenged part of the demand to be met, assuming the company could meet it. The probability, therefore, is that the appointment was not properly made at the time, but was irregular” (paragraph 13). However, the company was in no position to make the repayment in two days or at all, so “what occurred at worst therefore was a premature appointment” (paragraph 14). He felt that the defect was simply a procedural matter and did not consider it “of such fundamental importance as to render the appointment a nullity” (paragraph 15). He also believed that the prejudice to the company was limited and that there was no substantial injustice resulting from the premature appointment and thus he declared the appointment valid notwithstanding the defect.

Re Integeral Limited ([2013] EWHC 164 (Ch)) (5 February 2013)

http://www.11sb.com/pdf/re-integeral-ltd.pdf

In Brief: Proposed Administrators criticised for taking “supine approach” to flawed administration application. Court took into account creditors’ lack of confidence in any administrator proposed by director and granted winding up order.

This judgment has not yet appeared on BAILII, but the article in R3’s Summer 2013 Recovery magazine by Prav Reddy and Christopher Boardman was quite striking, so I thought I’d track it down.

Readers of Recovery magazine may recall the article, which emphasised the obligations of nominee administrators indicated by this case in which an application for an administration order was dismissed in favour of a winding-up order. The judge, Richard Snowden QC, stated that “it is of fundamental importance that any insolvency practitioner who is nominated as a potential administrator – an officer of the court – and who ventures his opinion to the court as to the prospects of an administration order, should do so carefully, with an independent mind, and on the basis of a critical assessment of the position of the company and the proposals going forward” (paragraph 69). In this case, the court granted leave for the petitioner to apply for a costs order against the nominee administrators personally on the basis that their evidence “fell very far short of these basic requirements” (paragraph 70).

Having read the judgment, I thought I’d add to the R3 article. The facts of this case were quite unusual, leading the judge to state that, in his judgment, “the administration application has been a tactical ploy by Mr Joshi to avoid or at the very least postpone the liquidation of the Company and the independent investigation of his conduct of its affairs” (paragraph 78). It sticks in the throat a bit to hear a judge refer to an “independent liquidator” and to give weight to the views of creditors who “would have no confidence in any administrator suggested by Mr Joshi”. It makes for uncomfortable reading when a judge appears to hint at a risk, or at least acknowledges the perception of some creditors, that such an IP will not do his/her job when appointed officer of the court. In Snowden’s judgment “the supine approach of both practitioners and their failure even to acknowledge the fundamental problems… is so serious as to call into question their competence and independence from Mr Joshi” (paragraph 72). It makes me question: how is a nominated administrator to function? He is not an officer of the court until appointed administrator and until then he receives his instructions from the company in assisting in putting the company into administration – I am not suggesting that this supports a “supine approach”, but it does make me wonder how an IP can manage such risks of conflict of interest, which exist in every case, at least theoretically, where he is introduced to an appointment – whether Administration, Liquidation, or CVA – by the company.

Re Clive Vincent McNally ([2013] EWHC 1685 (Ch)) (17 June 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1685.html

In brief: Bank was correct to deduct future costs of LPA receivers in valuing unsecured element of claim for purposes of voting on IVA.

McNally appealed his bankruptcy, which had followed a rejected IVA Proposal, and the rejection of his application to set aside, amongst other things, the chairman’s decision on the amount of a bank’s debt for voting purposes.

The key differences in the chairman’s/bank’s view of the value of the claim for and the view of Mr McNally were (i) the value of the property – the bank relying on a valuation of £650,000 to £750,000 and Mr McNally relying on a letter proposing to market the property at £850,000 – and (ii) the costs of realisation – the bank estimating them at £100,000 and Mr McNally at £27,000.

The judge had little difficulty in rejecting McNally’s view of the property value in favour of the bank’s on the basis of the valuation evidence. Deciding on the costs of realisation was a little less straightforward, as they comprised costs incurred prior to the IVA meeting and future costs anticipated to be incurred by LPA receivers. Judge Purle QC stated: “I would accept that the court should not proceed on the basis that exceptional or unusual costs will be incurred, but where, as here, receivers are in place, the ongoing costs associated with their appointment are inevitable and cannot be ignored… Costs which must inevitably be incurred before or in the realisation of the security must, it seems to me, be taken into account in ascertaining the unsecured balance, as the value of the security (from which the costs will be paid) is necessarily reduced by the amount of those future costs” (paragraph 33).

On this basis, the value of the bank’s unsecured claim was considered sufficient to defeat the proposed IVA and the appeal was dismissed.

R (on the application of Amanda Howard) v The Official Receiver ([2013] EWHC 1839 (Admin)) (28 June 2013)

http://www.bailii.org/ew/cases/EWHC/Admin/2013/1839.html

In Brief: OR exercised a judicial function when deciding to revoke a DRO, so not subject to public sector equality duty.

Ms Howard sought a judicial review of the OR’s decision to revoke her Debt Relief Order on the ground that the OR had failed to comply with the public sector equality duty set out in section 149 of the Equality Act 2010.

The DRO was revoked on the basis that the debtor’s disposable income during the moratorium period materially exceeded the £50 per month threshold allowed, albeit that this was a consequence of the debtor receiving three months’ underpayment of working tax credits from HMRC, but the debtor claimed that the OR had failed to take into account that she had a protected characteristic under the Equality Act 2010 – the OR had accepted that the debtor was disabled within the meaning of the Act – and that the decision to revoke amounted to direct discrimination.

The key issue was whether the OR was exercising a judicial function (within the meaning contemplated by paragraph 3 of Schedule 18 to the Act) in deciding to revoke the DRO – if so, she would not have the section 149 public sector equality duty.

Mr Justice Swaden’s judgment is one of the longest I have read, but the upshot was that the OR was exercising a judicial function – in my view, one persuasive argument was that the power to revoke a DRO is conferred on both the OR and the court and, as it was common ground that the court would be exercising a judicial function in revoking a DRO, it is difficult to see how the OR would not be also; if instead the OR were subject to the public sector equality duty, it could mean that the OR and the court would come to different conclusions on identical facts.

Consequently, the OR was not subject to the public sector equality duty in deciding to revoke the DRO and the application for judicial review was dismissed.

LB Re Financing No 1 Limited & Ors v The Trustees of the Lehman Brothers Pension Scheme & Ors ([2013] EWCA Civ 751) (214 June 2013)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/751.html

In Brief: Trustees entitled to seek addition of further target companies to FSD, despite two-year timescale from look-back date having elapsed.

Although this is a Lehman Brothers pension case, and thus I have struggled to keep up with the issues and arguments, it seems to me to be a significant outcome.

On 13 September 2010, the Determinations Panel of the Pensions Regulator issued a Financial Support Direction to six Lehman group companies. The Trustees referred the determination to the Upper Tribunal in order to increase the number of targets of the FSD by adding a further 38 Lehman group companies. The additional targets appealed on the basis that the Trustees were not “directly affected” by the determination and thus were not entitled to exercise the right to request their addition and that the 2-year period had elapsed (based on the Pensions Regulator’s Warning Notice, which identified 14 September 2008 as the look back date for any FSD determination against a target identified in the warning notice) and thus the Regulator could not issue an FSD to the other companies based on the same issue date. Both grounds of the appeal were dismissed.

Lady Justice Arden did not believe that the court should adopt a narrow interpretation of “directly affected” and thus conclude in this case that, because the Trustees’ rights were affected two or three steps after the determination, this rules them out as being “directly affected”. “They are, therefore, interested in a very real sense in the initial stage involving the determination to issue an FSD” (paragraph 22).

On the 2-year time limit issue, it was acknowledged that “there will never be another case in which the time limit imposed by section 43(9) [of the Pensions Act 2004] in its original form will fall to be applied” (paragraph 38), as it has since been amended by the Pensions Act 2011. However, Arden LJ described the “plainly undesirable consequences” that would result from the imposition of a 2-year timescale in the way argued, which “would turn the reference and appeal proceedings into a filibusterer’s paradise” (paragraph 48) and “would be to treat the time limit as an inappropriate master rather than as a good servant” (paragraph 59). She believed that the Upper Tribunal’s directions given under section 103(5) and (6) of the Pensions Act 2004 were not subject to the time limit provided in section 43(9).

Secretary of State for Business, Innovation & Skills v Ferdousi Reza ([2013] ScotCS CSOH 86) (31 May 2013)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH86.html

In Brief: Director’s abdication of all responsibility to husband resulted in two-year disqualification order. Also lesson for directors: if contemplating an undertaking, perhaps offer it before the hearing!

A disqualification order was made against Mrs Reza for two years.

Mr and Mrs Reza had both been directors. Mr Reza had already given an undertaking not to be a director for three years. The company had gone into administration after continuing to trade without paying tax, but Mrs Reza’s defence was that she had no knowledge of that, as she had no active involvement with the company but left all its affairs to her husband.

The judge commented that “over the whole of her 18 years in office as a director, the respondent failed to carry out even the most basic of her duties” (paragraph 15) and acknowledged that she had been made a director only because of the perceived tax advantages and in case her husband had been unavailable to sign documents. However, “if someone accepts a directorship and then abdicates all responsibility for the affairs of the company, on any common sense view they have demonstrated unfitness for the office to a high degree… and the case law is clear that incompetence can include inactivity” (paragraphs 17 and 19). The short disqualification period of two years was considered appropriate, given that Mrs Reza did not know of the company’s tax defaults.

Despite Mrs Reza informing the court at the end of the hearing that she would be prepared to give an undertaking, the petitioner pursued a disqualification order “not least as an example and a deterrent to others” (paragraph 21).

Official Receiver for Northern Ireland v Catherine Gallagher ([2013] NIMaster 12) (8 May 2013)

http://www.bailii.org/nie/cases/NIHC/Master/2013/12.html

In Brief: OR failed to have matrimonial order set aside as a post-petition disposition, although managed to claw back funds intended for petitioner.

Although this is a Northern Ireland case, the arguments centre around Article 257 of the Insolvency (Northern Ireland) Order 1989, which pretty-much mirrors S284 of the Insolvency Act 1986, so I thought it was worth covering.

A bankruptcy petition was presented on 31 January 2011, but an order was only made on 13 January 2012. In the interim, the bankruptcy petition was removed from the bankruptcy court to the matrimonial court and a matrimonial agreement incorporating the transfer of the debtor’s interest in a property was made an order of court on 18 November 2011. The OR sought to have the order set aside, arguing that the petition should not have been moved to the matrimonial court and it should have been dealt with more expeditiously; had it been so, the OR argued that the bankruptcy order would have been made in all likelihood before the property adjustment orders were made.

The judge decided that, as the ancillary relief proceedings were High Court proceedings, the matrimonial court’s order fulfilled the Article 257 criteria in that the property adjustment orders had been made with the consent of the High Court and were therefore not void, save for the following.

One element of the matrimonial agreement was that £21,500 should be paid to the petitioning creditor. The judge noted that this was intended to enable the petition to be dismissed. Therefore, as it was not paid and the petitioning creditor had sought and obtained the bankruptcy order, the judge concluded that the sum should be paid to the OR as it formed part of the bankruptcy estate.


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Three cases: (1) What is the relevant date for IVAs suspended on a S262 challenge? (2) When is an alleged transaction at an undervalue not a “transaction”? (3) Vesting of causes of action in Trustee foils attempts to pursue misfeasance claim

• 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

What exactly is a “suspended” IVA?

Davis & Davis v Price & Price ([2013] EWHC 323 (Ch)) (21 February 2013)
http://www.bailii.org/ew/cases/EWHC/Ch/2013/323.html

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

Hunt v Hosking & Ors ([2013] EWHC311 (Ch)) (22 February 2013)
http://www.bailii.org/ew/cases/EWHC/Ch/2013/311.html

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

Fabb & Ors v Peters & Ors ([2013] EWHC 296 (Ch)) (18 January 2013)
http://www.bailii.org/ew/cases/EWHC/Ch/2013/296.html

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).