Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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The 2015 Fees Rules: One Year On

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In November last year, I gave a presentation at the R3 SPG Forum: a look back at one year under the new fees regime. Although I don’t have the benefit of my co-presenter, Maxine Reid, I thought I would set out some of my main points here, as well as some new and improved observations on Administrators’ Proposals:

  • Do more recent Proposals indicate a move away from time costs?
  • How are creditors voting now?
  • How do time costs incurred compare to fees estimates?
  • Are progress reports and excess fee requests compliant with the rules and SIP9?
  • Is the picture any clearer now on what the regulators’ expectations are on some of the finer points of the rules and SIP9?

Is there a move away from time costs?

My analysis of Proposals issued in early 2016 (https://goo.gl/bvebTz) showed that time costs was still the preferred choice: 75% of my sample (108 Proposals) had proposed fees based on time costs.

To see whether things had changed more recently, I reviewed another 67 Proposals issued between July and September 2016 (no more than two from each insolvency practice). This is how the fee bases proposed compared:

feebasis2

This suggests that not a lot has changed, which isn’t too surprising I guess as there are only a few months’ difference between the two sets of Proposals. I also suspect that, if I looked at CVLs, I’d see quite a different picture. There does seem to be a bit more experimenting going on though, especially involving percentage fees, which is a topic I’ll come back to later.

How are creditors voting?

The filing of progress reports on my early Administration sample enabled me to fill in the gaps regarding how secured creditors and committees had voted on fees:

feecaps

Although I accept that my sample is small, I think that this is interesting: the average reduction in fees approved is the same whether the decision was made by unsecured or secured creditors. I’d better explain the committee percentage: in these cases, the committees were approving fees only on the basis of time costs incurred, not on the estimated future time costs, which is also interesting: it isn’t what the fees rules envisaged, but I think it is how most committees are accustomed to vote on fees.

Have creditors’ decisions changed more recently?

As I only have the Results of Meeting to go on for the more recent cases, this is not a complete picture, but this is how the two samples compare:

  • Jan-Mar 2016 (67 Results of Meeting):
    • 11 modified; 1 rejected
    • 7 early liquidations; 4 independent Liquidators
    • 1 Administrator replaced
    • 6 fees modified (average reduction 29%)
  • Jul-Sept 2016 (55 Results of Meeting):
    • 5 modified
    • 2 early liquidations; no new IPs
    • 1 fee modified (reduction 48%)

Again, it’s only a small sample, but it seems to me that creditors’ enthusiasm to modify Proposals or cap fees has waned, although c.10% of Proposals were still modified, which is fairly substantial.

How have actual time costs compared to fees estimates?

With the filing of 6-monthly progress reports, I was able to compare time costs incurred with the fees estimates:

timecosts

Over the whole case sample, the mean average was 105%, i.e. after only 6 months of the Administration, on average time costs were 105% of the fees estimate included in the Proposals. This graph also shows that, on a couple of cases, the time costs incurred at 6 months were over 250% of the fees estimate, although to be fair a large number were somewhere between 50% and 100%, which is where I’d expect it to be given that Administration work tends to be front-loaded.

You can see that I’ve distinguished above between cases where unsecured creditors voted on the fees and the “para 52” cases where the secured (and possibly preferential) creditors voted. The graph appears to indicate that time costs exceeding the estimate is more marked in cases where unsecured creditors approve fees.

Of course, fees estimates and fees drawn are entirely different worlds, so the fact that time costs have exceeded estimates will be of no practical consequence – at least, not to creditors – where a case has insufficient assets to support the work. In around only half of the cases where time costs exceeded estimates did the progress report disclose that the Administrator was, or would be, seeking approval to excess fees. This suggests that in the other half of all cases the IPs were prepared to do the work necessary without being paid for it, which I think is a message that many insolvency onlookers (and the Insolvency Service) don’t fully appreciate.

How compliant are progress reports and excess fee requests?

Firstly, I think it’s worth summarising what the Oct-15 Rules and the revised SIP9 require when it comes to progress reports. The Rules require:

  • A statement setting out whether:
    • The remuneration anticipated to be charged is likely to exceed the fees estimate (or additional approval)
    • The expenses incurred or anticipated to be incurred are likely to exceed, or having exceeded, the details given to creditors
    • The reasons for that excess

SIP9 requires:

  • Information sufficient to help creditors in understanding “what was done, why it was done, and how much it costs”
  • “The actual costs of the work, including any expenses incurred, as against any estimate provided”
  • “The actual hours and average rate (or rates) of the costs charged for each part should be provided for comparison purposes”
  • “Figures for both the period being reported upon and on a cumulative basis”

It is clear from the above that the old-style time costs breakdown alone will not be sufficient. For one thing, some automatically-produced old-style breakdowns do not provide the average charge-out rate per work category. I also think that simply including a copy of the original fee estimate “for comparison purposes” falls short as well, especially where the fees estimate uses different categories or descriptions from the time costs breakdown.

What is required is some narrative to explain where more work was necessary than originally anticipated. The best examples I saw listed each work category (or at least those categories for which the time costs incurred exceeded the fees estimate) and gave case-specific explanations, such as that it had proven difficult to get the company records from the IT providers or that the initial investigations had revealed some questionable transactions that required further exploration.

I also saw some useful and clear tables comparing the fee estimates and actual time costs per work category. As mentioned above, in some cases, the progress reports were accompanied by a request for additional fees and in these cases the comparison tables also factored in the future anticipated time costs and there was some clear narrative that distinguished between work done and future work.

Reporting on expenses to meet the above requirements proved to be a challenge for some. Admittedly, the Rules are not ideal as they require fees estimates to provide “details of expenses” likely to be incurred and some IPs had interpreted this to require a description only of who would charge the expense and why, but it is only when you read the progress report requirements that you get the sense that the anticipated quantum of expenses was expected. For example, where an Administrators’ Proposals had stated simply that solicitors’ costs on a time costs basis were likely, it is not easy to produce a progress report that compares this with the actual costs or that states whether the actual expense had exceeded the details given previously.

What do the regulators expect?

A year ago, the regulators seemed sympathetic to IPs grappling with the new Rules and SIP9. Do they consider that a year is sufficient for us all to have worked out how to do it?

I get the sense that there may still be some forbearance when it comes to complying with every detail of the SIP, but understandably if there is a fundamental flaw in the way fees approval has been sought, it is not something on which the RPBs can – or indeed should – be light touch. Fees is Fees and the sooner we know our errors, the less disastrous it will be for us to fix them.

The S98 Fees Estimate question seems to have crystallised. There seems to be general consensus now amongst the regulators and their monitoring teams that, whilst there are risks in relying on a fees resolution passed at the S98 meeting on the basis of fees-related documentation issued prior to appointment as a liquidator, the regulators will not treat such a fees resolution as invalid on this basis alone. Fortunately, the 2016 Rules will settle this debate once and for all.

The trouble with percentage fees

From my conversations with a few monitors and from the ICAEW Roadshow last year, I get the feeling that the monitors are generally comfortable with time cost resolutions. There is a logical science behind time costs as well as often voluminous paper-trails, so the monitors feel relatively well-equipped to review them and express a view on their reasonableness. The same cannot always be said about fees based on a percentage – or indeed on a fixed sum – basis.

In her 2013 report, Professor Kempson expressed some doubts on the practicalities of percentage fees, observing that creditors could find it difficult to judge the reasonableness of a proposed percentage fee. When the Insolvency Service’s fees consultation was issued in 2014, R3 also remarked that fixed or percentage fees were not always compatible with unpredictable insolvencies and could result in unfair outcomes. The recent shift towards percentage fees, which appears more pronounced in CVLs, has put these concerns into the spot-light.

In the ICAEW Roadshow, Allison Broad expressed her concerns about fees proposed on the basis of (often quite substantial) percentages of unknown or undisclosed assets. I can see Allison’s point: how can creditors make “an informed judgment about the reasonableness of an office holder’s request” if they have no information?

Evidently, some IPs are proposing percentage fees as a kind of mopping-up strategy, so that they do not have to go to the expense of seeking creditors’ approval to fees later when they do have more information and they feel that creditors can take comfort in knowing that the IPs will not be drawing 100% of these later-materialised assets. Although a desire to avoid unnecessary costs is commendable, the message seems to be that compliance with SIP9 requires you to revert to creditors for fee-approval only when you can explain more clearly what work you intend to do and what financial benefit may be generated for creditors, e.g. what are the assets that you are pursuing or investigating.

Another difficulty with percentage fees is the quantum at which they are sometimes pitched. I have heard some stories of extraordinary percentages proposed, although I do wonder if, taken in context, some of these are justifiable, e.g. where the percentage is to cover the statutory work as well as asset realisations. Regardless of this, the message seems to be that some of us could improve on meeting SIP9’s requirement “to explain why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken”… and you should not be lulled into a false sense of security that 15% of everything, which of course is what the OR can now draw with no justification (and indeed with no creditor approval), is always fair and reasonable.

Looking on the bright side

Although getting to grips with the Oct-15 Rules has not been easy, I guess we should count our blessings: at least we have had this past year to adapt to them before the whole world changes again. If there’s one thing we don’t want to get wrong, it is fee-approval, so at least we can face the April Rules changes feeling mildly confident that we have that one area sorted.

If you would like to hear and see more on this topic (including some names of Administration cases that I found had particularly good progress reports and excess fee requests registered at Companies House), I have recorded an updated version of my R3 SPG Forum presentation, which is now available for Compliance Alliance subscribers. For more information, email info@thecompliancealliance.co.uk.

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Reflecting on New Fees Proposals

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I reckon that Administrations are the most complex insolvency procedures and the Oct 15 fees Rules made them a whole lot worse.  However, Administrators’ Proposals provide valuable indications of how IPs – and creditors – have reacted to the new fees regime over insolvencies as a whole.

Only for Administrations are the fees proposals filed at Companies House, so they were ripe for review. I have gleaned many lessons on what not to do and I’ve also gathered a view of how IPs in general are structuring fees proposals in this brave new world.

I shared the fruits of my review at the R3 SPG Technical Reviews. If you missed my presentation, I set out here some of the highlights.  The full presentation is also available as a webinar via The Compliance Alliance (see the end of this article for more details).

 

How many IP practices have I looked at?

Using the Gazette and Companies House, I have gathered 108 sets of Administrators’ Proposals on 2016 cases:

  • Proposals from 69 different IP practices where unsecured creditors were asked to approve fees (i.e. a creditors’ meeting was convened or business was conducted by correspondence)
  • Proposals from 39 different IP practices where fees-approval was limited to secured creditors (and in some cases preferential creditors)
  • In total, 85 different IP practices are represented, from “SPG-sized” (i.e. using R3’s smaller practices criteria) to Big 4.

 

Time costs basis is still king

Ok, so that’s not a bombshell. I also accept that, if I were to look at CVL fees proposals, I might see a different picture.

However, this is the spread of fee bases for my Administration sample:

Feebasis

I’d be interested in running the exercise again, say in January 2017, to see if the picture has changed at all. I think that it depends, however, on whether creditors are looking any more kindly on non-time costs fees.

 

How are creditors voting?

Where unsecured creditors voted on fees proposals:

  • 58 fees resolutions were passed by creditors with no modifications
  • 6 fee proposals were modified
  • Creditors’ committees were formed in two other cases
  • One set of Proposals was rejected

The modified fees look like this:

  1. A fixed fee was reduced from £55K to £47.5K.
  2. A fixed fee of £10K plus 50% of realisations of uncharged assets was limited to the fixed £10K alone.
  3. A fixed fee of £33K plus all future time costs was restricted to a fixed sum of £40K.
  4. A time costs fee with an estimate of £30K was limited to £20K.
  5. A time costs fee with an estimate of £1.26m was subject to a complicated cap which effectively meant a reduction of c.6%.
  6. A time costs fee with no estimate was limited to the WIP at the date of the meeting of c.£20K.

I think it is interesting that proportionately more non-time costs fee cases were capped – 50% of all capped fees cases involved fixed/% fees, whereas fixed/% fees cases represent only 27% of the whole.  It was a fixed/% case that suffered the greatest cut: a hefty 79%!  The average reduction was 29% of the fees requested.

Four of the cases listed above also involved new IPs being appointed – in three cases as the subsequent liquidators and, in the other case, the administrator was replaced. In these cases, the original IPs were forced to vacate office early, so it is understandable that the proposed fees were clipped.

However, the IP who had been clobbered with a 79% reduction was not being fairly remunerated in my opinion. I found this case doubly depressing, as the Proposals were of good quality, lots of useful information was given and it was clear that the IP had worked hard.  On the other hand, I saw lots of Proposals that at best were clumsy and vague and at worst contained fundamental breaches of statutory requirements.

 

Statutory and SIP slip-ups

My presentation included some examples of seriously scary statutory breaches that really should never have happened, but I will spare the authors’ blushes by covering them here. However, we’re all trying hard to comply with Rules and SIPs that often make you go “hmm…”, so I can understand why slip-ups happen.

Sharing only some information with unsecured creditors, because fees are being approved by the secured creditors alone

Do you need to provide full details of the fees that you are seeking in your Administrator’s Proposals, if the Act/Rules only require you to seek secured creditors’ approval? My sample indicates that a couple of IPs at least believe not.

Personally, I think that the Oct 15 Rules are clear: the office holder must, “prior to the determination of which of the [fees] bases… are to be fixed, give to each creditor of the company of whose claim and address the administrator is aware” either the fees estimate (if time costs are being sought) or details of the work the office holder proposes to undertake (if another base is being sought) and in all cases details of current/future expenses.

I do not think it complies with statute to state that this information is only going to be given to the secured creditors (or indeed to a committee, which is a similar scenario). Of course, this does not mean that you must provide all this information in the Administrators’ Proposals – although remember that R2.33 requires Proposals to include the “basis on which it is proposed that the Administrator’s remuneration should be fixed”.  The fees-related information (to support a request for approval of the basis) could be provided under separate cover, but it does need to be sent to all creditors.

Failing to justify fixed/% fees

I think that some IPs have been caught out by the SIP9 requirement that we need to “explain why the basis requested is expected to produce a fair and reasonable reflection of the work that the office holder anticipates will be undertaken”.

Some Proposals seemed to lack any attempt to provide this explanation. This included one set of Proposals on which the fees were proposed on a time cost basis plus a “success fee” of 7.5% of asset realisations on top, which clearly needed substantial justification.

Other Proposals simply included a statement such as “I consider the proposed basis is a fair and reasonable reflection of the work that I propose to undertake” – not good enough, in my opinion.

The R3 SIP9 Guidance Note suggests referring to “prevailing market rates”. Before the new OR fees had been announced, I wondered how this might work in practice, but now I think that many fixed/% fees can be more than justified by comparing them to the OR’s starting point of £6,000 + £2,000 to £5,000 + 15% of all realisations (what, even cash at bank?).

Personally, though, I do think that time costs is generally a fair and reasonable reflection of work undertaken, so I think that comparison of a fixed/% fee to what the time costs might be is justification, isn’t it? I don’t mean that you need to include time costs information, but simply a statement that you would not expect a time costs basis to be any cheaper… although make sure that you can back this up internally, as I understand that some monitors are querying the quantum of some fixed/% fees.

 

Presentation problems

There is no doubt that over the years many layers have been added to statutory reports such that Administrators’ Proposals and progress reports for all case types have become ridiculously unwieldy – and of course very expensive to create and check. Then, we have the SIPs that layer on yet more requirements to reports.  And don’t get me started on the R3 SIP9 Guidance Note!

With this backdrop, I have to bite my lip whenever I hear/read a regulator or similar express the opinion that items such as fees proposals can be dealt with in short order. I’ve even read that, for simple cases, a fees estimate could be “little more than a few lines of text”! I am ever conscious, however, that it is a temptation of compliance specialists to throw kitchen sinks at statutory and SIP requirements.

Although I accept that Administrators’ Proposals involve often lengthy schedules such as creditors’ lists, my sample had an average length of 41 pages and the longest was 97 pages! It has become silly, hasn’t it?

The mass of information provided in Proposals leads to presentation problems over and above simply helping creditors to trawl through it all.

Documents that just don’t match up

Administrators’ Proposals involving fees proposed on a time costs basis should contain the following numerical items:

  • A receipts and payments account
  • A statement of affairs (“SoA”) or estimated financial position
  • An estimated outcome statement (“EOS”) (optional)
  • A fees estimate
  • A schedule of anticipated expenses (“expenses estimate”)
  • A time costs breakdown (proportionate to the costs incurred)
  • A statement of pre-administration costs

A common problem in my sample was that all these documents did not cross-check against each other. Most frequently, the expenses on the EOS did not match the expenses estimate.  The picture was generally worse in non-time cost cases where sometimes an expenses estimate (or at least “details” of expenses anticipated to be incurred) was missing altogether.  Another issue in non-time cost or mixed bases cases was that my calculation of the expected fee did not match that listed in the EOS.

It is not surprising that mistakes happen with so many schedules to produce and I do realise that we need to manage costs and get these documents out reasonably swiftly, but I do think that a failure to get all these items cross-referring correctly is an easy way to get on the wrong side of a voting creditor (and RPB monitor).

Estimating dividends

I don’t wish to discourage you from providing anticipated dividend figures – especially as we now have the SIP9 requirement that “where it is practical, you should provide an indication of the likely return to creditors” – but it was noticeable that some Proposals that included estimated dividend figures were fraught with difficulties.

How can you estimate the dividend from an Administration if:

  • you only disclose fees on a milestone basis, e.g. for the first six months; or
  • where a non-prescribed part dividend is anticipated, you only estimate the Administrator’s fees, not the fees and expenses of the subsequent CVL?

In these cases, I think you need to make it clear that the bottom line of any EOS does not equate to a dividend, not even to a “surplus available for creditors”, but perhaps the balance after six months (or whatever the milestone happens to be) or the estimated funds to be transferred to the liquidator.

The worst case I saw was an EOS that suggested a 14p in the £ dividend, but when the rest of the Proposals were factored in (especially some expenses that hadn’t made their way to the EOS), it was evident that there would be no dividend and the IP would not recover his time costs in full.

I think it is important to manage creditors’ expectations; do not set yourself up for a fall.

Liquidation estimates

Few Proposals included clear information on the subsequent Liquidators’ fees and expenses: this was present in 10 Proposals out of 63 that indicated a likely non-prescribed part dividend. That is fine, this information is optional under the Rules.

What concerned me, however, was how muddy the water looked in some of the other 53 cases. For example, one Proposal listed adjudicating on claims and paying a (non-prescribed part) dividend in the work to be undertaken, but the surrounding text suggested that the estimate was for the Administration only.

I think it is important to be clear on what the fee estimate covers and also what it does not cover, especially if non-routine investigation work is to be dealt with separately or later.

Although the Rules provide that the basis of the Administrators’ fees carries over automatically to the Liquidation (provided that the IP is the same and that both the Administration and the Liquidation commenced after 1 Oct 15), it seems to me that the quantum of fees that have been approved could be a little trickier to determine.  This does not just concern time costs: when you start working through an actual case, you realise that the Rules are very woolly (and I believe even conflict in some respects) as regards Liquidators’ fees approved on a fixed/% basis in the prior Administration.

The narrative

I am the first to confess that I struggle to get the balance right as regards the Rules and SIP9 requirements for narrative. As my blogs demonstrate, I’m not known for being concise!

My review of over 100 Proposals, however, has led me to the following personal conclusions:

  • A good EOS can tell the story far better than pages of text. I hated seeing an EOS or an SoA with strings of “uncertain” assets.
  • I guess we need to include some narrative to explain the statutory and general administration tasks, but, really, once you’ve read one, you’ve read them all. Yawn!
  • The R3 SIP9 Guidance Note suggests adding the number of creditors, number of statutory reports, returns etc. to your narrative. In view of the costs incurred in tailoring this information to each individual case, I really don’t see that it is effort well spent. Will creditors really thank us?
  • Ok, yes, explaining prospective/past asset realisations is the meat of our reports. Especially if you do not have an EOS or if realisation values truly are uncertain, fleshing out what you have to realise and how you are going to go about unusual realisations would be valuable.
  • What to do about Investigations? I wriggled a bit when I was asked this question at the R3 event. Many IPs are being sensibly cagey when it comes to proposing what Investigations will involve. This is an area where proportionality really is key: if you are expecting to charge a lot, then I think you do need to give creditors some of the story, although you will want to be careful of your timing and the risk of potentially giving the game away.

 

Other Insights

In my presentation, I also shared other insights from my Proposals dataset, such as whether the amounts of proposed fees tallied with the expected realisations and what was the average and range of charge-out rates, but I think it would be insensitive to share the detail so publicly here.

Nevertheless, here are some general observations from my review:

  • I saw no real difference in the ratio of fees proposed to asset realisations where unsecured creditors controlled approval as compared to that where secured creditors were in control. Although I am no statistician, I think this is interesting in view of the OFT’s conclusion in 2010 that fees were higher when unsecured creditors were in control.
  • Although time costs are still overwhelmingly preferred, other and mixed bases are being proposed in a variety of cases, including some with substantial assets.
  • Only 26% of time cost fee estimates broke down anticipated time into staff member/grade, i.e. to the level of detail suggested in the R3 SIP9 Guidance Note. I am yet to be persuaded that it is in creditors’ interests to go to the expense of providing this level of detail, which I do not believe is required by the Rules or SIP9.

 

Personally, I’ve learnt a lot from the review – what can go wrong, where some seem to be getting into a muddle, how IPs and creditors have reacted to the new fees regime. Although I spent many (sad) evenings trawling through Proposals, I shall be doing this again sometime to see whether things have changed.

If you would like to listen to the full webinar (£250+VAT for firm-wide access to all our webinars for one year), please drop a line to info@thecompliancealliance.co.uk.


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Mopping Up: courts clarify “apparent bias”, “fair and proper price”, and “unfair harm”, but blur “debenture”

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Oh dear, I’m slacking – even the R3 Technical Bulletin has beaten me to it this time! I will try to avoid much of the same ground in this batch of judgment summaries…

Pathania v Adedeji – lack of evidence as regards an OR becoming trustee calls into question when the bankrupt’s estate vested
Dryburgh v Scotts Media Tax – if a company does not know it has a claim against a director, does the clock tick?
Northern Bank v Taylor – where an IP is free of actual bias, how important is apparent bias?
O’Connell v Rollings – what makes a “fair and proper price” obtained for fixed-charge assets?
Fons HF v Corporal – court’s definition of “debenture” brings into question unregulated lenders’ and borrowers’ activities
Registrar of Companies v Swarbrick – under what circumstances can replacement Administrators’ Proposals be filed?
Top Brands v Sharma – can a former liquidator apply to have an adjudicated creditor’s claim expunged?
Eastenders v HMRC – can HMRC detain goods pending investigations into their duty status?
Hockin v Marsden – can an administrator cause “unfair harm” to creditors’ interests and be acting reasonably?

Scanty OR records leave estate-vesting shrouded in mystery

Pathania v Adedeji & Anor (21 May 2014) ([2014] EWCA Civ 681)
http://www.bailii.org/ew/cases/EWCA/Civ/2014/681.html

Mr Pathania obtained judgment against Dr Adedeji at a time when the court did not know that Mr Pathania had been made bankrupt six months earlier. Dr Adedeji appealed on the ground that a bankrupt claimant cannot maintain legal proceedings under his own name, but these should have fallen to his trustee.

Although the bankruptcy order had been made in June 2010 – and the judgment made in December 2010 – it was not until April 2011 that an IP was appointed. The questions arise: what was the status of the OR in December 2010? Was he a trustee or simply the receiver and manager of the estate pending appointment of a trustee? The questions are important, as S306(1) provides that the bankrupt’s estate vests in the trustee on his appointment or when the OR becomes trustee. S293(3) provides that the OR becomes trustee when he gives notice of his decision not to convene a meeting of creditors. So when did the OR give such notice, if he ever did?

Lord Justice Floyd, using “moderate language”, stated that it was “highly unsatisfactory that the question of whether or not Mr Pathania’s assets had vested in a trustee should still be shrouded in any degree of mystery” (paragraph 50). Granted, it seems to have taken three or four years for the importance of the timing of the vesting of the bankrupt’s estate to have been appreciated; this seems to have been time enough for holes to develop in the OR’s records. The OR’s system suggested that he became trustee of 28 August 2010 and the file contained an undated report to creditors (although it seems that it may have been under cover of a letter dated 23 August 2010), which referred to a notice ‘attached’ but there was no attachment, leading the judge to states that “there is, as it seems to me, still no clear evidence that the formalities necessary for the appointment of the official receiver as trustee were complied with in this case” (paragraph 51). He also noted other indications in the case that he was not so appointed, including the document appointing the IP as trustee, which “contains no reference to a previous trustee or his discharge” (- does it ever?).

Although the judge was not persuaded on the evidence that the OR had become trustee around August 2010, he noted that this was not the be-all and end-all: Dr Adedeji “must show that Mr Pathania knew that the official receiver had become trustee, that his estate had become vested in the official receiver and that he knew that was so before judgment on the claim was entered” (paragraph 53). He also observed that, had Mr Pathania’s bankruptcy been disclosed before judgment, the action likely would have been stayed and, given that the (IP) trustee later assigned the action to Mr Pathania, the chances are that he would have been authorised to continue with it sooner or later. Consequently, De Adedeji’s appeal seeking to have the judgment set aside was dismissed.

Error or deliberate contrivance: either way, the clock didn’t tick whilst the director withheld information from his company

Dryburgh v Scotts Media Tax Limited (In Liquidation) (23 May 2104) ([2014] CSIH 45)
http://www.bailii.org/scot/cases/ScotCS/2014/2014CSIH45.html

The liquidator brought proceedings against the company’s two directors for breach of fiduciary duties in depriving the company (“SMT”) of c.£750,000 and breach of the common law duties to exercise reasonable skill, care and diligence in relation to the SMT’s payment of a dividend at a time when it had insufficient distributable assets to justify it.

SMT had ceased trading in late 2001, but it had not been placed into liquidation until September 2005 (as an MVL, which converted into CVL in March 2007). The transactions challenged by the liquidator occurred in September and November 2001. The liquidator had been given leave to bring proceedings in January 2009. At first instance, although the Lord Ordinary had held that the director/respondent had been in breach of his duties, he dismissed the principal action as he had concluded that the claims “had prescribed”, i.e. they were out of time as a consequence of the Prescription and Limitation (Scotland) Act 1973, which provides a time limit of 5 years.

Section 6(4) of the 1973 Act states: “In the computation of a prescriptive period in relation to any obligation for the purposes of this section: (a) any period during which by reason of
(i) fraud on the part of the debtor or any person acting on his behalf, or
(ii) error induced by words or conduct of the debtor or any person acting on his behalf,
the creditor was induced to refrain from making a relevant claim in relation to the obligation… shall not be reckoned as, or as part of, the prescriptive period”.

The Inner House judges concluded that this section applied in this case: SMT had been induced to refrain from making a claim by error induced by the director’s conduct and also by fraud on his part. Therefore, the commencement of proceedings in January 2009 was well within the period of 5 years from the winding-up in 2005. The judges added that it was also possible that the delay during which SMT was induced not to make a claim continued throughout the MVL until it had been converted into CVL.

The court explained it this way: “if the respondent was unaware of SMT’s right to make a claim for breach of fiduciary duty, the result following the rules of attribution is that the company was in error as to its legal rights and section 6(4)(a)(ii) applies. If the respondent was aware of SMT’s right to make a claim against him, his failure to alert to the company to its right was a deliberate contrivance to ensure that his breach of fiduciary duty was not challenged… That in our opinion falls within the concept of fraud, in the sense of a course of acting that is designed to disappoint the legal rights of a creditor, SMT. In our view that falls squarely within the underlying purpose of section 6(4), namely to excuse delay caused by the conduct of the debtor. As a result of the respondent’s failure to draw attention to SMT’s rights, SMT was induced to refrain from making a claim. It follows that either SMT’s inaction was the result of an error induced by the actings of the respondent, or it was the result of the respondent’s failure to inform the company of its rights (“fraud” in the technical sense described above). Either way, the prescriptive period does not run” (paragraph 31).

Apparent bias works against nominee’s appointment as administrator

Northern Bank Limited v Taylor & Donnelly (4 April 2014) ([2014] NICh 9)
http://www.bailii.org/nie/cases/NIHC/Ch/2014/9.html

Two IPs were prepared to act as administrator of a partnership: one was the nominee of the partners’ proposed interlocking IVAs that had been rejected; and the other was the choice of the largest creditor. There are no prizes for guessing which of the two IPs had the court’s favour, but I thought this case serves a useful reminder.

Although it could be argued that the nominee had acquired valuable knowledge of the partnership and its assets, the judge did not feel that the costs of getting the other IP up to speed was going to make a fundamental difference. He considered that “the choice of the only (or main) creditor should carry great weight” (paragraph 16).

The judge wanted to emphasise that there was no suggestion of actual bias on the nominee’s part, but he felt that apparent bias did exist. He described this generally (per Porter v Magill (2002)) as “‘where the fair-minded and informed observer, having considered the facts, would conclude that it was a real possibility of bias’… In some cases the circumstances may be such where the directors’ nominee is in a position where the issue of apparent bias can arise because of his previous dealings with the directors. In such circumstances, even where he has acted blamelessly, he should stand down” (paragraph 15).

Court satisfied that Administrators’ marketing and sales process led to fair and proper price

O’Connell v Rollings & Ors (21 May 2014) ([2014] EWCA Civ 639) (Re Musion Systems Limited (In Administration))
http://www.bailii.org/ew/cases/EWCA/Civ/2014/639.html

Online articles (e.g. http://www.mercerhole.co.uk/blog/article/administration-fixed-charge-creditors-rights) have highlighted the key outcome of this case: the dismissal of the charge-holder’s appeal against the order under Para 71 permitting Administrators to sell assets as if they were not subject to the fixed charge. The judgment is valuable in illustrating how the court measures the fine balance between the prejudice to the charge-holder caused by an order and the interests of those interested in the promotion of the purposes of the administration.

The other points that I found interesting in the judgment are:

• The judge had to be (and was) satisfied that the Administrators were proposing to sell the assets for a “proper price” (paragraph 49). Absence of reference to “best price” is interesting to me, in view of the fact that the Administrators did not pursue a somewhat tentative sale to a party, who on the face of it was offering a larger sum (but which would have involved deferred consideration due from an overseas company). Personally, I have never liked the concept of achieving a “best price” sale; apart from the practical difficulties of measuring against a superlative “best”, it’s not just about the quantum.
• In the circumstances – limited cash, ongoing liabilities to 17 employees, and quarter-day rent looming – the Administrators could not be criticised for deciding to pursue a sale by means of a contract race.
• Although the appellant argued that the company’s intellectual property rights were valued at “very substantially more than the Administrators achieved” (paragraph 62), the judge was “satisfied that the Administrators did ascertain the value of the business and assets of the company, including its intellectual property rights, such as they were, by testing the market, and doing so in a perfectly sensible and adequate way. Faced with rising costs and diminishing assets, they were naturally concerned to secure a sale as soon as reasonably possible. That is precisely what they did and I am satisfied that, in doing so, they obtained a proper price” (paragraph 63).
• Although the judge recognised “that the urgency of the situation and commercial pressures will sometimes require administrators to make a decision before a meeting [of creditors] can be convened. But in any such case it may still be possible for the administrators to consult with the creditors and, so far as circumstances permit and it is reasonable to do so, that is what they should do” (paragraph 80).

Implications of apparent widening of “debentures” definition

Fons HF (In Liquidation) v Corporal Limited & Anor (20 March 2014) ([2014] EWCA Civ 304)
http://www.bailii.org/ew/cases/EWCA/Civ/2014/304.html

Fons made unsecured loans to Corporal Limited under two shareholder loan agreements. The question for the Court of Appeal was: did the loans fall under Fons’ charge-holder’s security, either as “debentures” or “other securities” under the charge’s definition of “shares” (“…also all other stocks, shares, debentures, bonds, warrants, coupons or other securities now or in the future owned by the chargor in Corporal from time to time or any in which it has an interest”)?

Having reviewed the historic use of the word debentures, Patten LJ concluded: “As a matter of language, the term can apply to any document which creates or acknowledges a debt; does not have to include some form of charge; and can be a single instrument rather than one in a series” (paragraph 36). It seems that the previous judge gave “debentures” a narrower meaning because it appeared in a list ending: “other securities”. However, Patten LJ pointed out that other items in that list may be considered a security, if “securities” is synonymous with “investments” and thus he could not see why a reasonable observer should regard “other securities” as limiting “debentures” to a meaning that would exclude the shareholder loan agreements. The appeal judges were unanimous in the decision to allow the appeal.

The implications of this judgment have been summarised in a letter from the City of London Law Society to HM Treasury dated 4 June 2014 (http://goo.gl/2F9tpH). The Society wished to raise its “serious concerns in respect of the significant legal uncertainty” caused by this decision: “In holding that loan agreements are debentures in that, whether or not the relevant loan is drawn, the agreements acknowledge or create indebtedness, the judgment appears to have the effect of regulating loans in a manner not previously adopted.”

The Society’s key concern is that, if loan agreements are debentures, then they could be caught as regulated investments under the Financial Services and Markets Act 2000 (“FSMA”). If this is the case, then unless a party is authorised or exempt under the FSMA, they are at risk of criminal sanctions – this might apply, not only to unregulated lenders, but also borrowers as well as secondary traders of loans.

Consequently, the Society has asked the Treasury to “take action (a) immediately to clarify HM Treasury’s policy intentions on this topic and (b) as soon as practicable act so as to provide clarity in law.”

(UPDATE 25/08/14: The Society has released a copy of the FCA’s response to the Loan Market Association (17/07/14), which states that the FCA has considered the judgment in this case and, in the FCA’s view, it does not impact the regulatory perimeter prescribed by the FSMA: http://goo.gl/vO99NT )

(UPDATE 31/08/14: well, it was there!  It seems to have been pulled down again; I don’t know if that means the FCA has had second thoughts…)

(UPDATE 20/11/14: the letter is back at http://goo.gl/ek9Td6 )

Registrar of Companies’ resistance to file replacement Proposals overcome

The Registrar of Companies v Swarbrick & Ors (13 May 2014) ([2014] EWHC 1466 (Ch)) (Re Gardenprime Limited (In Administration))
http://www.bailii.org/ew/cases/EWHC/Ch/2014/1466.html

11 Stone Buildings has produced a good summary of this case: http://www.11sb.com/pdf/insider-rewriting-the-register-gardenprime-sc-may-2014.pdf.

The Registrar of Companies (“RoC”) applied to set aside an order that the administrators’ original Proposals be removed from the register and replaced with another set of Proposals, which omitted certain information in view of a confidentiality clause in a share purchase agreement.

The RoC’s central challenge was whether, and to what extent, the court could intervene in the performance of the RoC’s duties and powers: the RoC had carried out its duty in registering the Proposals that had been delivered to it and the original Proposals had not been found to be non-compliant or containing “unnecessary material” (per S1076 of the CA 2006) and thus in want of removal and replacement. Accordingly, it was argued, the RoC had no statutory power to accept the amended Proposals as a replacement and could not be required to do so.

Does R2.33A, which provides for an administrator to apply for an order of limited disclosure in respect of Proposals, only apply in advance of filing? In other words, once Proposals have been filed, is it too late to apply for a R2.33A order? The judge stated: “in my judgment on the correct construction of Rule 2.33A the jurisdiction of the court to make an order limiting disclosure of the specified part of the statement as otherwise required by Paragraph 49(4) is not exhausted the moment the statement has been sent. On the contrary, an application for such an order may be made even after that event, and an order may be made with retrospective effect” (paragraph 52).

But how does such an order fit in with the RoC’s powers under the CA2006 as regards removing documents containing “unnecessary material” from the register? The judge’s conclusion was that the effect of the R2.33A order was to render the disputed material as “unnecessary material” under the CA2006 and thus the RoC was empowered to remove it.

Technicality blocks IP’s attempts to reverse her decision

Top Brands Limited & Anor v Sharma (8 May 2014) ([2014] EWHC 1454 (Ch)) (Re Mama Milla Limited (In Liquidation))
http://www.bailii.org/ew/cases/EWHC/Ch/2014/1454.html

I have seen other commentaries on this case focus on the repercussions of being slow in dealing with court matters, but I will look at the case’s once-in-a-blue-moon technical intricacy.

A liquidator rejected a creditor’s claim, the creditor appealed to court, and then the two of them submitted to a consent order by which the liquidator reversed her decision to reject and agreed to admit the claim. The liquidator, having been replaced by another IP at a creditors’ meeting, now faces a S212 action. The (now former) liquidator sought to adjourn the trial so that she could pursue a claim to set aside the consent order on the basis that it was procured by fraudulent misrepresentation. If the creditor’s claim were to be rejected, then its standing to pursue the S212 application might be thwarted.

The difficulty for the former liquidator was that R4.85 sets out who can apply to have a claim expunged: the liquidator or (where the liquidator declines to act) the creditor. As the former liquidator was neither, she had no jurisdiction. Simon Barker HHJ accepted that “such a conclusion would be troubling in the light of there being a real prospect that neither [of the two applicants] are creditors” (paragraph 48), but for the facts that the current liquidator, who was still investigating matters, had jurisdiction and the former liquidator had “a reasonable window of opportunity” to take action under R4.85 after the S212 application had commenced but before she had been removed as liquidator. He also stated that, even in the event that the current liquidator did not intend to investigate the matter (although, of course, the liquidator will be duty-bound to satisfy himself that any distributions made by him are made to genuine creditors), “the court simply does not have jurisdiction to act in disregard of R4.85”.

Lack of hindsight does not hamper HMRC’s powers of detention

Eastenders Cash and Carry Plc & Ors v The Commissioners for HM Revenue & Customs; First Stop Wholesale Limited v The Commissioners for HM Revenue & Customs (11 June 2014) ([2014] UKSC 34)
http://www.bailii.org/uk/cases/UKSC/2014/34.html

HMRC detained the companies’ goods, citing S139(1) of the Customs & Excise Management Act 1979 as their authority for doing so, but they later returned some of the goods when the officers’ enquiries as regards the goods’ duty status proved inconclusive. In the Eastenders case, the court had previously found that the officers had had reasonable grounds to suspect that duty had not been paid on the goods, but in First Stop’s case, the goods were detained pending investigations into whether duty had been paid. The question arising was: could only goods that were actually liable to forfeiture be detained, i.e. was it unlawful for HMRC to detain goods that turned out not to be (or not proven to be) liable to forfeiture?

The Supreme Court judges all agreed that S139(1) of the 1979 Act should be interpreted so that “detention of goods is unlawful whenever the goods are not in fact liable to forfeiture” (paragraph 24). The difficulty flowing from this is that, of course, at the time of detention, officers may well suspect that the goods are liable to forfeiture, but further enquiries sometimes will establish that this is not the case. Hindsight is a wonderful thing!

But does this mean that the officers had no statutory power at all to detain the goods? In creating the S139(1) power of detention, was the power to detain, which had previously been held to arise by necessary implication from statutory powers of examination, abolished? The judges could not see “why Parliament should have conferred upon the Commissioners and their officers a wider range of intrusive investigatory powers than any other public body, but should at the same time have chosen to deprive them of a means of preventing goods from being disposed of until they have completed their examination and decided whether the goods should be seized” (paragraph 45).

Consequently, the Supreme Court judges concluded that the limited circumstances in which goods could be detained under S139(1) was not the only source of the officers’ powers of detention. In the Eastenders case, “since the officers were carrying out a lawful inspection of the goods for the purpose of determining whether the appropriate duties had been paid, and had reasonable grounds to suspect that duty had not been paid, they were in our view entitled by virtue of section 118C(2) to detain the goods for a reasonable period in order to complete the enquiries necessary to make their determination” (paragraph 49). Even in the First Stop case, the judges considered that “the examination was not completed until the necessary enquiries had been made, and that the power of examination impliedly included an ancillary power of detention for a reasonable time while those enquiries were made” (paragraph 49).

Administrators compelled to assign mis-selling claim

Hockin & Ors v Marsden & Anor (19 March 2014) ([2014] EWHC 763 (Ch)) (Re London and Westcountry Estates Limited (In Administration))
http://www.bailii.org/ew/cases/EWHC/Ch/2014/763.html

The R3 Technical Bulletin 107 has covered this case, which resulted in a direction that administrators assign potential mis-selling claims to the shareholders (one of which was also a creditor). As the Bulletin pointed out, the judge did not criticise the administrators for declining to pursue the claims themselves, but he felt that, as the terms of the proposed assignment included that the estate would share the benefit from any success, it would unfairly harm the creditors if the claims were simply lost and thus he felt that there was a basis to the creditor’s Para 74 claim.

A further point that I found interesting in this case was the judge’s reaction to the administrators’ criticism of the consideration offered under the proposed assignment. The judge could see no practical alternative to effecting the assignment in the terms proposed: once the court had expressed itself in favour of an assignment, faced with no other potential assignees the administrators had no real negotiating position, and the court could not compel the shareholders/creditor to fix the consideration at a higher figure.


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A Collection of Two Halves – Part 1: New Cases

0531 Caiman

It’s been a while since I blogged on case law, so I’ve divided my pile into two posts. In this one, I summarise some decisions that I’ve not seen covered widely elsewhere:

Re Coniston Hotel – an Administration challenge, which may have stoked Tomlinson’s embers, fails to ignite.
Holgate v Reid – more Administrators’ actions are challenged: dispute over a Para 52(1)(b) statement.
Shaw v Webb – post-petition dispositions persuade the court to choose winding-up over Administration.
Thomas v Edmondson – can an IPO be granted after a short IPA is completed?
Barnes v The Eastenders Group – Supreme Court decides CPS must pay Receiver after failed restraint order.

West Registrar case hits a wall

Re Coniston Hotel (Kent) LLP (In Liquidation) (8 April 2014) ([2014] EWHC 1100 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/1100.html
The long-running claims of the members of the LLP that the Administrators, RBS, and property agents, had conspired to defraud came to a head in this application brought by the former Administrators in which they sought the striking-out of the members’ proceedings.

The judge’s summary of the members’ claims leaves the reader in little doubt as to what the punchline might be: “The Members’ criticisms are not about professional negligence by the Administrators or by the valuers whom they instructed or by the agents whom they instructed to sell the Hotel, nor are there criticisms about the mode of sale, nor the handling and outcome of the negotiations for the sale. Instead the Members have pleaded a very different kind of challenge to the sale… [They] say that the marketing process was a sham. They do not identify the respects in which it was a sham, but they say it was a sham. They say it was a pretence and they say that it was pursuant to a conspiracy to defraud… All the conspirators knew, so it is alleged, that the Hotel was worth £7 million. It is quite clear that the Bank’s duty and the Administrators’ duty would have been to get the open market value for the Hotel and to achieve the market value. However, so it is alleged, the Bank was not prepared to see the Hotel sold for its full value and the debt owed to the Bank paid. What the Bank wanted instead was that the Hotel should be sold at around 50 per cent of its true value and not sold in the open market to a fortunate purchaser, but sold to an associated company of the Bank, West Register Limited. In order to carry this fraud to fruition, it was necessary to have Knight Frank place a value on the Hotel, which was about 50 per cent of what Knight Frank fully appreciated was the true value, about 50 per cent of £7 million. Armed with that fraudulent valuation from Knight Frank, the conspirators would then pretend to market the hotel, there would be a sham marketing process and the Hotel would be sold to the predetermined purchaser, West Register. I suppose one can see what was in it for West Register. They would acquire something at half its true value. It is less obvious what was in it for the Bank, because their debt, which exceeded the sale price that came about, would not be paid in full, but, perhaps, the Bank would be content that its associate had profited in that way. It is difficult to see what Knight Frank’s motive for this very serious act of dishonesty and wrongdoing would have been. It is submitted to me that they had motive enough: they wanted to please the Bank. It is also difficult to see what the Administrators’ motive would have been for participation in this fraud. This fraud is of the gravest and most serious character. However, it is submitted to me that I should see the force of the point, that the Administrators simply wanted to please the Bank” (paragraph 28).

Nevertheless Morgan J acknowledged that “it is a strong thing for a judge to strike out a case or give summary judgment, particularly in a case where there is an allegation of serious wrongdoing” (paragraph 33) and he also noted “a most disturbing report” (paragraph 25) written by Lawrence Tomlinson, by which he was “sufficiently disturbed… to give the Members a chance to take legal advice as to whether they had a properly pleadable case at an undervalue” (paragraph 50).

In relation to the allegation that the marketing was a sham, the judge stated that it was “utterly fanciful. It is an allegation put forward by someone (the Members) who simply refuse to face up to the reality of what has happened here” (paragraph 43). In dealing with the allegations that the prospective Administrators’ communications with the Bank were improper, the judge noted that the letter of instruction was “really very clear indeed” as regards the relationships between the parties and there was a “complete lack of material to indicate that [the IPs] were guilty of this very serious fraud”. In view of this, Morgan J also had strong words for counsel for the members: “his professional duty was to decline to plead the allegation which he did plead, alternatively, to withdraw from the case” (paragraph 49).

Consequently, the judge dismissed the conspiracy to defraud or, alternatively, the undervalue claim, along with the members’ Para 75 claim, which was quickly dismissed on the basis that the members did not have a pecuniary interest in the relief sought.

(UPDATE: the judgment on the appeals was given on 13/10/2015 ([2015] EWCA Civ 1001).  The involvement of West Registrar made Lady Justice Arden “scrutinise what happened with scepticism, but at the end of the day it is impossible for the appellants to get round the evidence as to the way the respondents marketed the hotel”.  The appeals were dismissed.)

Another challenge of Administrators’ actions

Holgate & Holgate v Reid & Dawson (20 February 2013) ([2013] EWHC 4630 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4630.html
This is a fairly old judgment, but it has only recently been published on BAILII.

The Holgates are creditors and members of a company over which Joint Administrators were appointed by the QFCH. The Administrators included a Para 52(1)(b) statement in their Proposals. Mr Holgate requisitioned a creditors’ meeting, but then withdrew his request, having received the Administrators’ request for an indemnity to cover the costs of convening a meeting, estimated at £21,900. Shortly thereafter, the Administrators issued notice that the Proposals were deemed to have been approved.

Some time later, the Holgates applied to court under Para 74 to order the Administrators not to sell the company’s business and assets as they planned; to revoke the deemed approval of the Proposals and the basis of the Administrators’ fees as fixed under R2.106(5A); and to require a Para 51 creditors’ meeting to be held. The Holgates submitted that the company could, and should, be rescued as a going concern by means of a CVA and thus the Administrators should not have made a Para 52(1)(b) statement. They also submitted that there had been a fundamental change of circumstances since the Administrators’ Proposals, because since then the FSA had announced that the major banks had agreed to provide redress on mis-sold interest rate hedging products and that such redress may well negate the bank’s claim against the company. The Administrators countered that the business had been trading at a loss both before and after Administration and that, whilst they had instructed solicitors to investigate the mis-selling claim, they were not in funds to pursue it. They were also keen to conclude the business sale for fear that it would otherwise fall away.

The Holgates failed to persuade Hodge HHJ that the Administrators’ evidence that the company could not be traded profitably was wrong. Thus the judge concluded that, on the evidence, it could not be said that the Administrators did not genuinely hold the opinion that the company had insufficient property to enable a distribution to be made to unsecured creditors other than out of the prescribed part and therefore they acted properly in dispensing with a creditors’ meeting by reason of the Para 52(1)(b) statement in their Proposals.

The judge found that the costs within the estimate of £21,900 in relation to a requisitioned meeting “may well have proved exaggerated; but I am not satisfied that they were deliberately exaggerated by the administrators with a view to deterring Mr Holgate from pursuing his requisition of a meeting. In my judgment, the administrators were acting cautiously in looking at a worst case scenario for the costs” (paragraph 38) and, in any event, the creditors’ meeting could have resolved that these costs be paid from the estate.

Hodge HHJ also considered the Holgates’ application in relation to Para 74(6)(c), i.e. that no order may be made if it would impede or prevent the implementation of proposals approved more than 28 days earlier. The judge felt that this applied as much to deemed approved proposals and that, as the Holgates were asking the court to resist the business sale, which was “the whole tenor of the proposals” (paragraph 44), he should dismiss the application. As an alternative, he was also not inclined to exercise the court’s discretion, as he felt that Mr Holgate had acted unreasonably in not pursuing the requisition for an initial creditors’ meeting and he pointed out that Mr Holgate had the right even then, under Para 56, to requisition a meeting given the apparent level of his claim as creditor.

As regards the suggestion that the FSA announcement supported a change in circumstances that might persuade the court to make a direction under Para 68, Hodge HHJ did not agree: “the existence of the FSA review merely relates to the means by which the mis-selling claim may be pursued. It is not clear whether it applies in the present case, or will secure sufficient satisfaction for the company even if it does. In any event, because I am not satisfied that the rescue of the company as a going concern is a viable proposition, it does not seem to me that there is any proper basis for the court to give any directions under paragraph 68 with regard to the holding by the administrators of a meeting of creditors” (paragraph 51).

Despite a consenting winding-up petitioner, the court declines to make an administration order and instead appoints a provisional liquidator

Shaw v Webb & Ors (10 April 2014) ([2014] EWHC 1132 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/1132.html
HHJ Simon Barker QC acknowledged that, “on paper the criteria or preconditions for making an administration order, which are set out at paragraph 11 of Schedule B1, are made out: (a) there is no question but that [the company] is unable to pay its debts, and (b) the evidence of Mr Webb points to it being reasonably likely that the purpose of administration (in this case a better result for the creditors than would be likely on liquidation) will be achieved if an administration order is made” (paragraph 18). In addition, neither the petitioning creditor nor the QFCH opposed the making of an administration order. Therefore, why did the judge decline to make the administration order, but instead appointed Mr Webb as provisional liquidator, allowing the winding-up petition to proceed?

The judge felt that the payment of £115,000 that occurred post-petition “cries out for satisfactory explanation and justification” (paragraph 23); he felt similarly concerning the purchase of the company’s sole share post-petition; and he wondered whether there were other dispositions that may be unjustifiable, expressing surprise that the bank statements for the post-petition period were not in evidence (another item to add to the administration order application shopping list?)

Consequently, in view of the fact that the making of an administration order would neutralise the effect of S127 in relation to post-winding up petition dispositions, Simon Barker HHJ felt that it was appropriate to call the winding-up petition on for hearing. A winding-up order has since been granted.

Can an Income Payments Order be made after a short Income Payments Agreement is completed?

Thomas & O’Reilly v Edmondson (12 May 2014) ([2014] EWHC 1494 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/1494.html

A bankrupt had entered into an Income Payments Agreement (“IPA”) with the Official Receiver, which effectively gave the OR the benefit of the bankrupt’s NT tax code up to the end of the tax year in which the debtor had been made bankrupt.

Later, Joint Trustees were appointed and, after failing to agree a further IPA with the debtor, they applied for an IPO in the amount of £10,000 per month for three years from the date of the IPO. The District Judge concluded that the Trustees were not entitled to an IPO on the basis that there had already been an IPA. The Trustees appealed.

Mrs Justice Aplin considered at length the effect of the introduction of S310A by means of the Enterprise Act 2002: were the intentions to limit the period of income payments to a maximum of three years and to provide that either an IPA is agreed or an IPO is sought?

The judge’s conclusion was that the court remains entitled to grant an IPO notwithstanding the previous IPA. She said: “It seems to me that the plain and ordinary meaning of section 310 is clear and that there is no reason to go beyond it. Furthermore, had the legislature intended that jurisdiction be limited in the way which is suggested, it seems to me that it would have said so at the time of the express amendments made by sections 259 and 260 of the Enterprise Act 2002” (paragraph 25).

As regards the issue of whether the combined maximum of income payments is three years, the judge said: “It seems to me that even if the Respondent is correct and it was Parliament’s intention that a bankrupt should not be required to pay part of his income to his trustee in bankruptcy for more than 3 years, the potential for an anomaly if there is jurisdiction to make an Income Payments Order despite an Income Payments Agreement having already been entered into is met by the existence of the discretion of the judge when exercising the jurisdiction whether to make the subsequent order and if so, the length of the order in question” (paragraph 28)… so I guess it remains to be seen whether the Trustees will be granted a full 3-year IPO on top of the 5-month IPA.

The Supreme Court upholds a Receiver’s right to be paid notwithstanding a quashed restraint order

Barnes v The Eastenders Group & Anor (8 May 2014) ([2014] UKSC 26)

http://www.bailii.org/uk/cases/UKSC/2014/26.html
I summarised the lead up to this Supreme Court appeal in an earlier post (http://wp.me/p2FU2Z-1H). Briefly, a Receiver was appointed over third party assets along with the CPS’ application for a POCA restraint order, which subsequently was set aside. The outcome of earlier court decisions was that the Receiver was not permitted to draw his fees and costs from the third party assets on the basis that the party’s right to peaceful enjoyment of its possessions under Article 1 of Protocol 1 of the European Convention of Human Rights (“A1P1”) took precedence, but also there was no basis under the POCA or the Human Rights Act 1998 for the CPS to be required to pay the Receiver’s fees and costs. The Receiver appealed to the Supreme Court.

In a unanimous judgment, the Supreme Court supported the previous decision that, as in this case there was no reasonable cause to regard the third party’s assets as the defendant’s at the time of the order, it would be a disproportionate interference with the third party’s A1P1 rights for the Receiver’s fees to be drawn from that party’s assets.

However, the judges felt that to leave the Receiver without a remedy would be to substitute one injustice for another and violate the Receiver’s A1P1 rights: “a receiver who accepts appointment by a court is entitled to know that the terms of his appointment will not be changed retrospectively. Moreover it is an ordinary part of receivership law that a receiver has a lien for his proper remuneration and expenses over the receivership property. To take away that right without compensating him would violate the receiver’s rights under A1P1” (paragraph 96). However, Lord Toulson agreed that there was no power in the POCA to order the CPS to pay the Receiver’s fees and costs.

The judge considered that the solution lay in the concept of unjust enrichment. The IP had agreed to act as Receiver on the basis that his agreement with the CPS provided for him to be paid from the defendant’s assets over which he would be entitled to a lien. The enrichment arose from the CPS’ perception that there would be a benefit to the public in the party’s assets being removed from its control and placed in the hands of the Receiver whilst its investigations were proceeding, but it was unjust enrichment as there was a total failure of consideration in relation to the Receiver’s rights over the assets, which was fundamental to the basis on which he was to act. Thus, the Receiver was entitled to look to the CPS for payment of his fees and costs.

Lord Toulson had some “lessons for the future” for the CPS. He noted that in the Court of Appeal judgment, the judge had “deplored the fact that the original application was made at short notice to a judge who was in the middle of conducting a heavy trial with only a limited time available for considering it” (paragraph 118) and stressed that, in view of the fact that such serious applications are made ex parte, the CPS had a special burden of candour and, because of the potential to cause serious harm, a material failure to observe the duty of candour could be regarded as serious misconduct.


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Re Parmeko Holdings Limited: when are administrators’ proposals “futile”?

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Re Parmeko Holdings Limited & Ors (In Administration) (6 September 2013) ([2013] EWHC B30 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/B30.html

Recipients of R3 Recovery News will have seen a report on this case by Amy Flavell of Squire Sanders. In her article, Amy referred to the fact that the judge passed comment on the proposals “casting doubt on the utility or effectiveness of a number of standard form proposals” used by many administrators. I’ll cover those comments here.

Background

Firstly, a summary of the case: the administrators sought direction as regards their proposals, which had attracted no response from any creditors at all. Cooke HHJ confirmed that, just as an administrator is entitled to exercise his statutory powers in such a manner as he considers best for fulfilling the purposes of administration before he puts his proposals to creditors, so too can he continue to use those powers in the event that creditors do not vote on his proposals. “If and when proposals are approved then he is required by paragraph 68 to manage the affairs of the Company in accordance with those proposals, but if no such proposals are approved then he is not so constrained and he must act in accordance with his own discretion” (paragraph 11).

This does not contradict with the earlier decision in Lavin v Swindell (http://wp.me/p2FU2Z-k), which involved administrators seeking the court’s direction because creditors had voted against their proposals and Cooke HHJ acknowledged that an administrator also may want to refer to the court in instances where “some specific question arises as to what he should do” (paragraph 13). However, the judge felt that this was not such a case, although he did acknowledge that the administrators required approval of the basis of their fees, which he granted with no particular comment.

The judge’s comments on the proposals

The judge stated that:

• No purpose is served in seeking sanction or direction to make payments, when and if available, to the secured and preferential creditors, as this is a statutory power (paragraph 16);

• He had “grave doubts as to the utility” of placing before creditors the proposals in relation to exit procedures. “The proposals as set out in this case do no more than set out the mechanisms provided by Sch B1 for exit, and leave it to the discretion of the administrator to make any choice between them that may be available in the circumstances as they transpire. That is not, in any positive sense, a proposal at all, nor does it in truth set out anything the administrator ‘envisages’” (paragraph 17);

• Stating that the administrators would become liquidators in any subsequent CVL is the default position unless the creditors nominate someone else, “so putting such a proposal to the creditors achieves little more than conveying information” (paragraph 18);

• Including a permissive proposal that the administrators may apply to court for sanction to pay a dividend to unsecured creditors simply provides “and indication to the creditors of an available option” (paragraph 19);

• “There must be some doubt as to the appropriateness of inviting the creditors at the commencement of the administration to agree a date upon which the administrators should be discharged from liability… It seems to me that the creditors can only sensibly consider this question when they know what the effect will be, which in turn means that they should be in a position to know what has gone on in the administration and form a view as to what if any potential claims might be affected by the release. They plainly cannot in most cases do this at the first meeting of creditors” (paragraph 20). The judge stated that “where as here the creditors have not fixed a discharge date, an application must be made to the court” (paragraph 21) at the appropriate stage.

• He also declined to comment on whether remuneration should be appropriately dealt with by way of proposal or by separate resolution, but he confirmed that the court could deal with it as a separate matter from the proposals.

Cooke HHJ finished by highlighting the need for administrators “to consider carefully what is the utility of an application to the court for directions” and, in his view, “it would be appropriate, if the administrator has to report to the court that his proposals have not been approved by the creditors, simply by virtue of what has been described as ‘creditor apathy’ in that the creditors did not express a view one way or the other, to say in that report whether he considers that anything useful would be served by seeking an order of the court pursuant to paragraph 55.2, and that if he does not, that he does not intend to make such an application” (paragraph 24). Personally, I think it would be a good start if the Notice of Result of Meeting of Creditors, Form 2.23B, provided for disclosure of unapproved proposals, as the current template only provides for approved or rejected outcomes, but this won’t be the first time that some fudging of a standard form has been necessary.

Comment

I think that this decision reveals a difficulty with the Rules around administrators’ proposals. Stepping back for a moment, I wonder if the drafter originally envisaged administrators’ proposals operating in a similar manner to VA proposals. It seems to me that R2.33 is a checklist of items to include in proposals resembling R1.3 and the idea in Para 53 is that the creditors would decide whether to reject or accept, with or without modifications, the administrators’ proposals… which reads very much like S4 regarding CVAs. It seems to me that the Act/Rules suggest a single statement of proposals from an administrator, which creditors are asked to reject, approve or modify as a whole, rather than the evolved practice of providing creditors with two parts: a report on the administration to date and a summary of points sometimes described as the administrators’ “formal” proposals on which creditors are asked to vote (which practice may have been a spin-off from the pre-Enterprise Act administration regime, where much of the detail was annexed to the administrator’s proposals).

However, I think there’s a key reason why this format – of creditors voting on a single statement of proposals – doesn’t really work for administrations: compared with VAs, the process, powers, and purposes of administration are far more well-defined by statute. This doesn’t seem to leave much for creditors to vote on and therefore, as Cooke HHJ observed, there is little point proposing matters to creditors which simply reflect statutory provisions. An example of this conflict arose a few years’ ago when HMRC was in the habit of seeking modifications to proposals that the administration would exit to CVL, but in some cases it was not statutorily possible for this to happen (at least not via Para 83), because the administrator did not think there would be a dividend. I understand that HMRC now seeks modifications that the exit be some form of liquidation, which gets around this problem, but I think it raises an issue: what exactly is up for modification?

The way the Rules are designed, it seems that we risk creditors trying to force administrators to act contrary to statute by seeking modifications to proposals, as statute seems designed so that the entire statement of proposals, covering all R2.33 items, is up for consideration, even though many items are merely for information purposes, either because they are statements of fact or because they simply describe what the administrator is bound to do by statute; I’m thinking, in particular, of Para 3 which describes the hierarchy of objectives, which the administrator must pursue. In some respects, ‘creditor apathy’ may have avoided more applications to court for directions.

Another issue identified by this decision is: what are administrators to do if their way is not clear at the time of issuing the proposals? For example, as Cooke HHJ observed, proposing to creditors that they approve a plan to leave the administrators with full discretion to decide the appropriate exit route is pretty futile. However, if the administrators truly do not know how best to exit when the proposals are due, what do the Act/Rules expect them to do: seek the court’s sanction to postpone their proposals until they are certain or perhaps plump for a sensible exit route and, if that later turns out to be inappropriate, ask creditors to approve revised proposals? Both these options seem a waste of time and expense to me and in conflict with the idea of being up-front and honest with creditors. So, given that R2.33 requires an administrator’s proposals to include “how it is proposed that the administration shall end”, it really does seem to me that the most sensible approach would be to make a best guess at the most likely appropriate exit route and seek to retain the discretion to choose an alternative route (but not exits that clearly will not be appropriate to the case in hand), if things change. I can see that this isn’t much of a proposal, but I suggest that, just as Cooke HHJ felt that creditors should not be asked to agree a discharge date at such an early stage in the administration, so too should administrators not be expected to identify, at the most 8 weeks into a case, the final exit route in all cases.

I wonder if the Rules could be revised so that they more clearly distinguish between what creditors are being asked to approve and what administrators are simply going to do in order to meet their statutory obligations, including importantly, I think, the hierarchy of objectives of administration. If only we could get back to non-prescriptive, non-checklisty Rules that focus on the purpose of reports, proposals, etc…


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Administration Order Applications All At Sea

1007 Borneo 186

I really do want to write about all the changes the Scottish Government is proposing to make to personal insolvency north of the border, but every time I think I’ve got a handle on it all, the AiB produces something more! So for now I’ll have to settle for some case summaries:

Data Power Systems v Safehosts London: another administration application ends in a winding up order
Information Governance v Popham: yet another failed administration application
UK Coal Operations: “reasonable excuse” for avoiding administration proposals and meeting
Times Newspapers v McNamara: access to bankruptcy file granted in the public interest

Another failed administration application results in a winding up order

Data Power Systems Limited & Ors v Safehosts (London) Limited (17 May 2013) ([2013] EWHC 2479 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2479.html

The library of precedents for courts rejecting applications for administration orders is building: we’ve have Integeral Limited (http://wp.me/p2FU2Z-3C) and UK Steelfixers Limited (http://wp.me/p2FU2Z-t) and here is a third. What makes this particularly interesting is that no one was asking for a winding up order, but that’s what the judge decided to do.

So where did it all go wrong this time..?

• HHJ Simon Barker QC stated that there was no explained basis for one of the applicant’s expressed belief that the company could be rescued as a going concern. He stated that the forecasts, which were prepared (or perhaps only submitted) by “an experienced insolvency practitioner”, were “merely numbers on a piece of paper and of no greater evidential value than that” (paragraph 17).
• The judge stated that the strategy proposed by the second set of proposed administrators (nominated by the major creditor, as an interested party to the application) was “with all due respect, no more than an outline of the sort of tasks that administrators would be focusing upon in any administration, it does not appear to be tailored in any way to the particular position of the company” (paragraph 18).
• The judge also saw no evidence “that the creditors are at all likely to benefit either from a rescue or from any dividend in the event that the company is placed in administration” (paragraph 20), but the evidence did include a statement that the asset realisations likely would be swallowed up by the costs of the administration.
• As there were no secured creditors and no evidenced preferential creditors (and even if there were any, they would be highly unlikely to receive a distribution), there was not even a prospect that the third administration objective might be achieved.
• Consequently, although the judge accepted that the threshold set by Paragraph 11(b) of Schedule B1 of the Insolvency Act 1986 “is not a high one; it is simply not crossed. The circumstances of this case serve as a reminder that insolvency alone is not sufficient to engage the jurisdiction for an administration order to be made, and further that the requirement of paragraph 11(b) of Schedule B1 is not a mere formality capable of being satisfied by assertion unsupported by cogent credible evidence sufficient to enable the Court to be satisfied that, if an administration order is made, the purpose of administration is reasonably likely to be achieved” (paragraph 23).

What was the outcome in this case? The judge had contemplated adjourning the application to enable further evidence to support the suggestion that the company could be rescued to be presented, but he noted that “the essence of an administration is speed and that is made clear at paragraph 4 of Schedule B1 – ‘The administrator of a company must perform his functions as quickly and efficiently as is reasonably practicable’. Delay should be completely contrary to the purpose of an administration” (paragraph 25). Although no one had been bidding for a winding-up order, that is what the judge decided to do: Paragraph 13(1)(e) empowered him to treat the application as a winding-up petition. He also contemplated ordering that the OR be appointed provisional liquidator, but he ended up appointing the major creditor’s nominated IPs.

The postscript to this case: the provisional liquidators generated asset realisations far in excess of that previously estimated, presumably with the prospect of a dividend to creditors, after all. Although that’s a positive outcome of course, it is a shame that the funds could not be distributed to creditors without incurring Insolvency Service fees as an expense of the winding-up.

Yet another failed administration application

Information Governance Limited v Popham (7 June 2013) ([2013] EWHC 2611 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2611.html

This case isn’t really in the same league as the other three rejected administration applications I’ve mentioned, but it highlights an interesting hiccup for the applicant.

The sole director issued an application for an administration order, but before it was heard, two shareholders made themselves directors, validly in the court’s opinion. These new directors opposed the application, taking the view that there was a possibility that the company could trade out of its difficulties. Although Mr Justice David Richards was satisfied that the court had jurisdiction to make the administration order on the basis that, on the face of it, the company could not pay its debts and that an administration purpose was achievable, he did “not think it right in all the circumstances to take that step” (paragraph 17) that day and dismissed the application.

Swift move to CVL equals “reasonable excuse” for avoiding administrators’ proposals and creditors’ meeting

Re. UK Coal Operations Limited & Ors (9 July 2013) ([2013] EWHC 2581 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2581.html

Is there any point in issuing proposals to creditors on a case whose rationale has already been explained to the court (for it to make an administration order in the first place) and when the company is to be moved swiftly to CVL? HH Judge Purle thinks not.

I should qualify that: in this case, the restructuring of four companies was to take place via administrations followed, within a few days, by Para 83 moves to CVL so that some onerous liabilities could be disclaimed. In Purle J’s view, these circumstances gave rise to a reasonable excuse for not complying with the statutory requirements to issue proposals and convene creditors’ meetings, “to avoid the pointless expense” (paragraph 5).

Whilst I’m sure that, in the context of these cases, unsecured creditors are not feeling hard done by – maybe they’re content not to have any information regarding the events leading to insolvency or the financial condition of the companies, which would have been provided in administrators’ proposals or in a S98 report in a standard CVL – but the principle just doesn’t sit well with me. Something else I find surprising is that the court seemingly granted the administration orders purely on the basis that the speed with which the process could be carried out, when compared with that to hold a S98 meeting, meant that the administrations were likely to achieve the objective of a better result for creditors as a whole than on winding up. It also seems to me that Purle J was too focussed on the long-stop timescale of proposals being 8 weeks “by which time the company will be in liquidation” (paragraph 4), whereas, as we all know, Para 49(5) requires the proposals to be issued “as soon as reasonably practicable after the company enters administration”. Having said that, I note from Companies House that the CVL was registered three days after the administration, which, given that the Form 2.34B has to reach Companies House first, does seem extremely fast work, so perhaps I should be applauding this case as demonstrating a novel and successful use of the administration process.

Journalist allowed access to bankruptcy file to explore legitimate public interest in bankruptcy tourism

Times Newspapers Limited v McNamara (13 August 2013) ([2103] EWHC B12 (Comm))

http://www.bailii.org/ew/cases/EWHC/Comm/2013/B12.html

The Times sought access to the court file on the bankruptcy of Mr McNamara, an Irish property developer, on the basis that the circumstances surrounding his and his companies’ amassing of debts of some €1.5 billion and his justification for his COMI being in England were matters of public interest.

Mr Registrar Baister noted that there have been no cases dealing with the permission of someone who was not party to the insolvency proceedings to have access to the court file, as provided in Rule 7.31A(6), introduced to the Insolvency Rules 1986 in 2010. However, he drew up some principles based on the leading authority on access to court documents (R. (on the application of Guardian News and Media Limited) v City of Westminster Magistrate’s Court, [2012] EWCA Civ 420), which he felt applied to proceedings of all kinds, including insolvency proceedings and which he hoped would assist courts consider requests for permission under R7.31A(6) in future:

“(a) that the administration of justice should be open, which includes openness to journalistic scrutiny;
(b) that such openness extends not only to documents read in court but also to documents put before the judge and thus forming part of the decision-making process in proceedings;
(c) that openness should be the default position of a court confronted with an application such as this;
(d) however, there may be countervailing reasons which may constitute grounds for refusing access;
(e) the court will thus in each case need to carry out a fact-specific exercise to balance the competing considerations” (paragraph 23).

In the circumstances of this case, Registrar Baister stated: “It is entirely appropriate for the press to seek to delve into the mind of the registrar (to the extent that it can) and to comment on what the court has done or appears to have done. The bankruptcy tourism question remains very much alive and is a legitimate matter of public interest in this country, in Ireland, in Germany and in Europe generally” (paragraph 36). Consequently, he granted the Times access to the court file of McNamara’s bankruptcy.