Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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How risky is it to act contrary to a creditors’ committee’s wishes and other questions…

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  • Re. Brilliant Independent Media Specialists – will the court approve an Administrator’s fees when he acts contrary to the committee’s wishes?
  • Co-operative Bank v Phillips – is it an abuse of process for a charge-holder to seek possession of a property in negative equity?
  • Harlow v Creative Staging – when might a winding-up petition suspended on a QFCH appointment of Administrators come in handy?
  • JSC Bank of Moscow v Kekhman – in the absence of Russian personal bankruptcy law, is forum-shopping in England one of the “legitimate kind”?
  • Bank of Scotland v Waugh – what is the effect on Receivers where the charge has not been validly executed as a deed but has still been registered?
  • Airtours Holidays Transport v HMRC – what decides whether a company can reclaim the VAT paid on accountants’ review fees?
  • SoS v Weston – if a criminal court declines to disqualify directors, would the SoS have any better luck in the High Court?

Court fixes fees of Administrators who acted contrary to the committee’s wishes

Maxwell & Sadler v Brookes & Ors, Re Brilliant Independent Media Specialists Limited (23 September 2014) ([2014] EWHC B11 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/B11.html

The Administrators’ Proposals were approved with a modification that the Administration move to CVL within 6 months of the commencement of the Administration; the Liquidators were to be different IPs to the Administrators.

The 6-month time period ended on 31 May 2012. Immediately before this, the Administrators convened a creditors’ meeting to approve revised proposals providing that the Administration would move to CVL within 28 days of resolution of an issue regarding the quantum of a secured creditor’s claim.  The revised proposals were rejected and on 18 June 2012 the Administrators applied for directions.  Before this was heard, settlement was reached with the secured creditor and the Administration moved to CVL on 12 August 2012.

The Administrators’ fees had been approved on a time costs basis but the creditors’ committee refused to approve that the Administrators draw fees in relation to time costs incurred after 18 February 2012 (having approved fees incurred prior to this date). The committee asserted that it was never envisaged that the Administrators would carry out the vast amount of work for which remuneration was claimed; the committee felt that the Administrators should have worked simply to bring their appointment to an end and allow the Liquidators to fully investigate matters.  Consequently, the Administrators applied for the court to fix their fees.

Mr Registrar Jones’ consideration addressed a number of areas:

  •  Did the Administrators’ actions fall outside the approved Proposals?

The judge stated that “whilst the views of a creditors’ committee should be taken into account during an administration.., it is not for the committee to determine how the administration should be conducted. That is a decision for the office holder in performance of the duties and powers Parliament has thought fit to entrust to administrators. The outcome of such decision making… will depend upon the office holder’s assessment of how best to achieve the purpose of the administration in accordance with the powers conferred upon them by paragraph 59 of Schedule B1 and within Schedule 1 to the Act” (paragraph 26).

The judge then had to consider whether the work done by the Administrators was for the purposes of the Administration objective or otherwise formed part of the Administrators’ duties and responsibilities. He said: There will always be grey areas when deciding whether work will result in a better return and therefore should be carried out. It will not be a black and white scenario with a plain dividing line. The decision will depend upon all the circumstances and involve commercial judgment calls by the office holder in the exercise of his powers.  The court will normally not question the commercial judgments of an administrator. Usually a misunderstanding of law or apparent unfairness or a breach of duty will be required before the court will review such judgments” (paragraphs 30.6 and 30.7).  Consequently, the judge stated that it could not be concluded that the Administrators’ actions fell outside the Proposals.  He felt that this applied even in relation to activities that were not expressly referred to in the Proposals, such as in this case debt recovery efforts, given that a delay in recovery actions usually results in lower realisations.

  • Were the Administrators entitled to be paid fees for the period after the 6-month timescale when the approved Proposals provided for the move to CVL?

The judge recognised the commercial decisions taken by the Administrators in seeking to resolve the issue regarding the secured creditor’s claim, acknowledging that any delay would have been disadvantageous given the high interest rate attached to the debt. Consequently, the judge considered that the decision could not be described as “perverse” and it was a decision that “fell within the parameters of their commercial decision making powers” (paragraph 36.4).  However, the judge disagreed that the move to CVL could not have been done within the 6-month period; he felt that there were always more than enough funds to set aside to cover the maximum amount of the secured creditor’s claim plus interest.

  • Were the Administrators entitled to be paid fees after they had ceased to act, given that they worked to assist the Liquidators?

The Administrators sought approval for costs incurred in relation to a number of tasks including answering the Liquidators’ enquiries, assisting in the recovery of a director’s loan, other debts and overpayments, and dealing with the committee’s questions. The judge’s view was that R2.106 was limited only to remuneration of the Administrator whilst in office.  Therefore, the judge declined to fix the remuneration after the termination of the Administrators’ appointment, stating: “that is a matter between the Administrators and the liquidators” (paragraph 43).

  • What about the quantum of fees sought?

Then the judge turned to the detail of the Administrators’ application. The judge referred to the Practice Direction (2012) and in particular paragraph 20.4 as providing guidance on the information required to support the fees application and the judgment suggests that in a number of places the Administrators’ evidence failed to satisfy the judge as regards “briefly describing what was involved, why it was necessary and why it took the time it did” (paragraph 47).

For example, the Administrators sought fees of £23,473 in relation to “PKF/BDO Review”. The Administrator’s witness statement referred to the need to investigate potential claims quickly and early and thus such work could lead to actions that would produce a better outcome for creditors.  However, the judge observed: “This is wholly unspecific. There is no narrative describing and explaining the work, whether as to what it was or specifically as to why it was justified under the Objective” (paragraph 50.40).  The judge did not award any remuneration in relation to this activity.

The result of the judge’s examination of each task for which remuneration was sought was that, from a starting point request to fix fees at £389,341, fees of only £233,147 were approved.

The downsides of discontinuances

The Co-operative Bank Plc v Phillips (21 August 2014) ([2014] EWHC 2862 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/2862.html

The Bank, having a second charge over the debtor’s properties, demanded payment from Mr Phillips as guarantor of a loan to his company. Notwithstanding that Mr Phillips’ IVA Proposal (which was approved) showed that the properties attracted negative equity after the first charge, the Bank commenced possession proceedings.  Mr Phillips applied for the claims to be struck out or dismissed as an abuse of process.  The Bank later served a notice of discontinuance and the principal questions for the court related to the treatment of the costs arising from the process.

The court was asked to consider whether the Bank was seeking possession of the properties for a collateral purpose beyond its powers as a chargee and whether the Bank’s claims to possession were an abuse of process. Despite the fact that it appeared the Bank would not gain any benefit from selling the properties (although there was some argument that the Bank might have been able to raise rental income from its possession), the judge felt that the pressure on the charger and his family resulting from the possession proceedings was neither a collateral purpose outwith the Bank’s powers nor an abuse of process.  Ultimately, the proceedings were brought for the purpose of obtaining repayment of the sums secured by the charge.

However, although the charge entitled the Bank to recover its costs incurred “in taking, perfecting, enforcing or exercising (or attempting to perfect, enforce or exercise) any power under the charge” (paragraph 8), the judge decided that the Bank’s own costs, together with its liability to pay Mr Phillips’ costs arising from the discontinuance of the proceeding, were not reasonably incurred and therefore were not recoverable under the charge: “The Bank got absolutely nothing out of these proceedings, which have been a waste of time and expense from its point of view” (paragraph 75).

Finally, because the Bank had started the proceedings after Mr Phillips’ IVA had been approved, the Bank was unable to set off its liability to pay Mr Phillips’ costs against its claim in the IVA, per clause 7(4) of the IVA’s Standard Conditions (which appear to have been R3’s standard conditions).

Suspended Petition comes home to haunt the Petitioner

Harlow v Creative Staging Limited, Re. Blak Pearl Limited (23 July 2014) ([2014] EWHC 2787 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/2787.html

The Administrator had applied for the ending of the Administration, together with the dismissal of the application of Creative Staging Limited to withdrawn its winding-up petition (which, under Paragraph 40(1)(b) of Schedule B1, had been suspended on the appointment of the Administrator by the QFCH), the dismissal of the application of another creditor to be substituted as petitioner, and finally for a winding-up order on the original petition.

Why was the Administrator so keen to have the suspended petition revived, rather than to petition for the winding-up himself under Para 79? If a winding-up order were made on the original petition, then S127 would kick in to make certain pre-Administration payments (including a payment of £88,000 to the original petitioner) vulnerable to attack.  However, if the Administrator were to seek a winding-up order on a new petition, S127 would only apply from the date of presentation of the new petition.

The judge was reluctant to go to the lengths of substituting the petitioner, which would only incur additional costs. He felt that there was sufficient precedent and support under S122 enabling a court to make a winding-up order without a petition and thus the court had jurisdiction to make a winding-up order on the existing petition and under the powers of Para 79(4)(d).  The judge said (although, personally, I do wonder if he is crediting Parliament with a little too much foresight): “In all the circumstances it does seem to me that this court ought to recognise that Parliament must have intended to keep the petition in being for a reason and one of the reasons is so that an order might be made on the suspended petition, taking advantage of the doctrine of relation back, despite any objections of the Petitioner” (paragraph 53).  Thus, he allowed the appeal, waived all procedural requirements that had not otherwise been complied with, and granted the winding-up order.

Russian bankruptcy tourist entitled to escape “law of the jungle”

JSC Bank of Moscow & Anor v Kekhman & Ors (9 April 2014) (not yet reported on BAILII)

http://cisarbitration.com/wp-content/uploads/2014/08/UK-High-Court-in-Buncruptcy-Bank-of-Moscow-and-Sberbank-Leasing-v-Vladimir-Kekhman-and-others-Judgment-April-2014.pdf

At the time of his bankruptcy petition and afterwards, Mr Kekhman was a Russian citizen, domiciled and resident in the Russian Federation. He had disclosed in the petition that he was going to remain in England for only two days and he wished to be made bankrupt in England, as he had been advised that there is no personal bankruptcy law in the Russian Federation and, in view of the international reach of his affairs, “the English jurisdiction as a sophisticated jurisdiction in these matters appears appropriate to help resolve my affairs in an orderly manner that will be recognised internationally” (paragraph 11).

The matter returned to Registrar Baister, who had made the bankruptcy order, in the format of applications by two major creditors to annul or rescind the bankruptcy on the basis, amongst others, that Mr Kekhman was a ‘bankruptcy tourist’ to England, a place with which he has no real connection, in an attempt to evade Russian law. One of the creditors also contended that, contrary to Mr Kekhman’s indications that his English bankruptcy would be recognised in Russia, Russia would not recognise or enforce the bankruptcy order, which bound Mr Kekhman’s English creditors, whilst allowing his other creditors to collect in his substantial Russian assets.

Registrar Baister mentioned that, particularly in corporate contexts, “the courts here are prepared to countenance what is in reality forum shopping, albeit of a positive, by which I mean legitimate, kind… I do not see why a debtor whose petition is not governed by that restrictive jurisdictional regime should not also be able to invoke an available jurisdiction for a self-serving purpose, provided of course, that he does so properly and there are no countervailing factors to which equivalent or greater weight should be given” (paragraph 104).

Baister summarised Mr Kekhman’s connections with England, largely involving contracts providing for English law and English jurisdiction. He also put some emphasis on the purpose of bankruptcy being the debtor’s rehabilitation, observing that plenty of bankruptcy orders have been granted on English debtors’ petitions in cases where there were no likelihoods of recoveries for creditors. In any event in this case, the report of the Trustee in Bankruptcy, which explained that he was continuing to pursue certain assets, persuaded the judge that there was “utility” in the bankruptcy, Baister did not consider that utility necessarily required there to be a distribution to creditors; he found the prospect of an orderly realisation of the debtor’s assets “more attractive and more constructive that the law of the jungle advocated” by Counsel for the creditors (paragraph 141).

Baister reviewed the expert testimony of three prominent Russian academic lawyers and concluded on the balance of probabilities that the English bankruptcy order was unlikely to be recognised or enforced by the Russian courts. However, this conclusion seemed to work in Mr Kekhman’s favour: the judge noted that “if the English bankruptcy will never be recognised in Russia, then the free-for-all can continue over there in relation to the few assets that might be left over after execution; as to assets elsewhere, all the creditors will be in the same position vis-à-vis one another” (paragraph 142).

Although Baister stated that the arguments were “finely balanced”, he decided that the utility of the bankruptcy order was not outweighed by the creditors’ current complaints, “so that even if this court had known the true position regarding the problems of recognition and resulting from the arrest of the Russian assets, it still could and probably would have made the bankruptcy order on the basis that there was commercial subject matter on which it could operate, it would have enabled Mr Kekhman’s affairs to be looked into, made possible an orderly realisation of his non-Russian assets and assisted his own financial rehabilitation even if only outside the Russian Federation” (paragraph 144).

(UPDATE 14/03/15: JSC Bank’s appeal was dismissed: http://goo.gl/BkoIxd.  Although the judge agreed that the Chief Registrar had not applied the correct test, the appeal judge made his own decision that the bankruptcy order ought to have been made.  A more detailed summary of the appeal will be posted soon.)

Bank and Receivers entitled to rely on registration of a deficient deed

Bank of Scotland Plc v Waugh & Ors (21 July 2014) ([2014] EWHC 2117 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/2117.html

The Bank pursued repayment of a loan to a Trust and appointed Receivers over a property. Some time later, the Trustees applied to the Registry for cancellation of the charge over the property on the basis that the charge did not comply with the Law of Property (Miscellaneous Provisions) Act 1989, primarily because none of the signatures on the charge were attested.  Subsequently, the Bank applied for summary judgment that the Trustees be estopped from denying the validity of the charge.

The judge agreed that the charge had not been validly executed as a deed and therefore it was void for the purpose of conveying or creating a legal estate. However, the charge had been registered.  “The effect of registration of the charge was to create a charge by deed by way of legal mortgage” (paragraph 66) but if the Trustees were successful in having the register rectified, this would only operate for the future, not retrospectively.  “It follows that acts (such as the appointment of Receivers) carried out by the Bank under the charge prior to any order for rectification and acts of the Receivers are not void as alleged by Mr Waugh. Both the Bank and the Receivers were entitled to rely on the effect of registration of the charge” (paragraph 67).

On the question of estoppel, however, the judge was not persuaded by the arguments that the solicitor for the Trustees had represented the document as executed and on this basis the Bank had lent the monies; because the charge simply had not been executed as a deed, the Trustees were not estopped from relying on the invalidity of the legal charge. However, the judge stated that, notwithstanding the defects, it took effect as an equitable mortgage.  Left open for another hearing is the question of whether the Bank will succeed in obtaining an order that the Trustees execute documents to perfect the legal charge.

Company paid fees but not entitled to reclaim the VAT

Airtours Holidays Transport Limited v HMRC (24 July 2014) ([2014] EWCA Civ 1033)

http://www.bailii.org/ew/cases/EWCA/Civ/2014/1033.html

PwC had been instructed to review a financially distressed group of companies as it explored and pursued a restructuring plan. The restructuring process was successful, but HMRC disputed that the company was entitled to deduct the VAT that it had been invoiced and had paid in respect of PwC’s fees.

The First Tier Tribunal (“FTT”) reviewed PwC’s letters of engagement and terms and conditions, which effectively comprised a tri-partite contract between PwC, the Group, and the “Engaging Institutions” and found that the company, as well as the Engaging Institutions, had requested and authorised the work. However, the Upper Tribunal (“UT”) disagreed with the FTT’s approach; it concluded that the substance of the transactions was that there had been a supply of services by PwC to the Engaging Institutions and that the company had not received anything of value from PwC to be used for the purpose of its business in return for payment.

Although Lady Justice Gloster led the judgment in the Court of Appeal, she was in the minority in concluding that the company’s appeal should be allowed. She felt that the company had required PwC to provide valuable services to it for the purpose of its own business – in her view, the provision of PwC’s services was the only way that the financial institutions could be persuaded to support the company’s attempts to survive and that this was a distinctive supply of services from that supplied to the Engaging Institutions.

Lord Justice Vos, however, saw the economic reality in a different light. He felt that “it was as likely that PwC might have advised the Banks to pull the rug… The substance and economic reality was that PwC was supplying its services to the Banks in exchange for Airtours’ payments” (paragraph 87) and that the UT had been correct to conclude that the company was a party really only for the purpose of paying PwC’s bills, not to receive any service from the firm.  Lord Justice Moore-Bick also noted that, although the use of “you” in the terms and conditions suggested that PwC had certain obligations to the Group, they were a standard form document that must be applied in a way that is consistent with the letter of engagement, which is the “controlling instrument” (paragraph 96).  The question was “not whether the Group needed the report to be produced or whether it obtained a benefit as a result of its production, but whether in producing it PwC were providing a service to the Group for which the Group paid” (paragraph 99).  The majority of appeal judges decided that the service was not provided to the Group and thus the company could not reclaim the VAT input paid on PwC’s bills.

(UPDATE 14/03/15: permission to appeal to the Supreme Court has been granted.)

Court rejects attempts at second bite of the cherry

Secretary of State v Weston & Williams (5 September 2014) ([2014] EWHC 2933 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/2933.html

Two directors had been found guilty and sentenced in a criminal court, which had also been asked to consider disqualification orders, but because the matter had slipped the mind of prosecuting counsel at the original trial, this was dealt with only some two months later. The judge declined to make such orders, feeling that it would be “perhaps kicking a dog whilst he is down” (paragraph 14).

The SoS later applied to the High Court for disqualification orders under S2 of the CDDA86. S2 provides that the court may make a disqualification order where the person is convicted of an indictable offence in connection with the promotion, formation, etc. of a company.  The two year timescale for the SoS to apply for disqualification orders under the usual S6 of the CDDA86 had expired.

Counsel for the directors argued that the application was an abuse of process: the High Court was being “asked to exercise exactly the same jurisdiction as the criminal court but to decide the matter the other way” (paragraph 15). The argument for the SoS was that he had not been party to the prosecution and so had not had an opportunity to contest the original decision.

Although David Cooke HHJ recognised that the SoS was not a claimant seeking to vindicate a private right, but a restriction for the public good, he also considered what was fair to the directors. He noted that there was a wide range of potential applicants under S2 of the CDDA86, including company shareholders and creditors: “Fairness to the defendant must mean, it seems to me, that he should not be exposed to the same claim on multiple occasions by different litigants unhappy with the outcome of the earlier claim or claims” (paragraph 51) and that such subsequent claims could be described as “collateral attacks” on the first decision.

Even though the judge said that, in this case, he would have made disqualification orders (if he were found wring on the issue of abuse of process): “standing back, this claim is no more than an attempt by the Secretary of State to obtain a different decision from this court than was given on identical issues by the criminal court, which had the issues placed before it and made a positive decision to refuse an order. It is in my view unfair that the defendants should be thus exposed to the same claim on two occasions. The unfairness is not relieved by the argument that the claim is being pursued by a different entity… There is the general point that where the basis of the claim and the relief sought is essentially identical it is just as much unfair to the defendant to have to face it twice at the hands of two applicants as it would be if there were only one” (paragraph 52).

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Soapboxing on the Enterprise & Regulatory Reform Bill

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

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

What is in the Bill?

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

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

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

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

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

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

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

Is it controversial?

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

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

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

Will the individual always understand his/her options?

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

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

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

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

Will access to alternatives be cut off?

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

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

Will “bankruptcy tourism” be tackled?

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

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

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

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

Will paying by instalment work?

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

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

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