Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Standing on the Shoulders: a summary of reported court decisions

0430 Brown & Viv

I think it’s great that summaries of court decisions are more freely-available now than ever before.  I’ve wondered whether I should just drift back into the shadows and leave it to the pros… but then I remember that, even if no one reads them, authoring my own summaries helps get them fixed in my own mind.  Therefore, I shall continue:

  • Sands v Layne – should the court consider all creditors’ interests when considering whether to dismiss a petition because the debtor has reached an agreement with the petitioner alone?
  • Re Business Environment Fleet Street – as statute allows an administrator to take control of property to which he thinks the company is entitled, can he sell it?
  • Parkwell Investments v HMRC – should provisional liquidators be appointed if there is a tax assessment appeal outstanding?
  • Bear Scotland v Fulton – should non-guaranteed overtime be included in holiday pay?
  • Connaught Income Fund v Capita Financial Managers – does a liquidator have a statutory power to get in post-appointment assets?
  • Day v Tiuta International – if the charge under which receivers are appointed is invalid, can they remain in office by reason of the appointor’s subrogated rights under another charge?

Trustee fails to overturn a debtor’s deal with the petitioner

Sands v Layne & Anor (12 November 2014) ([2014] EWHC 3665 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/3665.html

Mr Layne originally sought to avoid bankruptcy by offering security over his home and payment by instalments to the petitioning creditor.  However, given the time that the debtor would have needed to pay off the debt, the judge rejected his defence that the creditor had unreasonably refused the offer and made a bankruptcy order in July 2011.  In June 2012, the parties came to an agreement as regards payment and security and, by means of a consent order, the bankruptcy order was set aside.  In June 2013, the Trustee in Bankruptcy applied for the consent order to be rescinded pursuant to S375 of the IA86, the thrust of his submission being that the debtor and creditor had sought to deal with the matter between themselves without taking into account any obligations to him or to other unsecured creditors.

The deputy judge expressed a wavering view over the conclusion leading from the decision in Appleyard v Wewelwala that S375 reviews and rescissions by first instance courts can deal with only decisions made by those courts, not also decisions emanating from appellate courts, and thus the Trustee’s application failed.  However, given the deputy judge’s “diffidence”, he considered further questions arising from the application.

How should the interests of other unsecured creditors impact on the court’s consideration of whether a petition should be dismissed under S271(3)(a), i.e. where “the debtor has made an offer to secure or compound for” the petition debt?  The deputy judge concluded that, as the first ground for dismissal under S271 involves the court being satisfied that the debtor is able to pay all his debts, “the second ground – involving an offer to secure or compound – must therefore be intended to apply even where the debtor is not so able” (paragraph 20).

The deputy judge listed the other unsecured creditors’ potential remedies, including seeking to be substituted as petitioner and challenging the security as a preference (albeit that they would need to establish a desire to prefer the original petitioner).  “In short, in so far as other unsecured creditors may be affected by the provision of the security to the petitioner, the statute provides a targeted remedy in what it considers suitable cases, and it is neither necessary nor appropriate for their interests to be addressed in the context of the bilateral dispute between the petitioning creditor and the debtor and in particular the issue whether, where security is offered and rejected, a bankruptcy order should be made or refused” (paragraph 22).

The deputy judge also observed that the Trustee’s argument “suffered from a serious dose of circularity” (paragraph 24) in that the Trustee could not have been joined as a respondent to the original appeal, which “was to decide whether the bankruptcy order should stand. If the order fell and there was no bankruptcy, all consequences dependent on it – the trusteeship and the vesting – disappeared with it” and thus he had no standing to bring the application in the first place.

Moon Beever published an article examining the role of the Trustee as illustrated by this decision: http://goo.gl/Fu62LU.

 

Court rejects Administrators’ attempts to sell third party assets

Re Business Environment Fleet Street Limited; Edwards & Anor v Business Environment Limited & Ors (28 October 2014) ([2014] EWHC 3540 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/3540.html

Administrators applied under Para 72 of Schedule B1 for leave to dispose of assets, including properties subject to subleases and equipment located at the properties, which one of the respondents claimed to own.  Under Para 72, the court can authorise administrators to dispose of “goods which are in the possession of the company under a hire-purchase agreement”, which under Para 111 extends to chattel leasing agreements.

The deputy judge examined the agreement between the Company and the respondent and concluded that the Company had not been granted possession of the assets, which remained either with the respondent or had transferred to the subtenants.  Thus, the agreement did not comprise a chattel leasing agreement, as it did not involve the bailment of goods.

The Administrators pursued an alternative ground, arguing that Paras 67 and 68 combined entitled them to manage – which would include disposal of – property to which they think the Company is entitled.  The deputy judge rejected the argument that “property” in the two paragraphs has the same meaning: it may be appropriate for an administrator to take control of assets in a hurry on his appointment, but disposal would be a step too far.  “It would confer an exorbitant jurisdiction on the administrator to convert property belonging to third parties, simply because this happened to be desirable on the balance of convenience” (paragraph 19.3).  The deputy judge also saw no support in S234, which relieves an administrator from liability for converting third party assets where he acted reasonably.

But what if the sale sought by the Administrators appeared to make sense commercially?  The Administrators’ case here was that there was considerable “marriage” value in disposing of the assets together with the properties, enhancing the purchase price by some £7m.  In this particular case, the deputy judge saw the marriage value in the proposed sale, but did not see that a delay in a sale would be detrimental and thus was not satisfied that the balance of convenience lay in ordering an immediate sale (even if he had been satisfied that the court had jurisdiction to order it).

For an alternative – and far more authoritative – analysis, you might like to read the article by Stephen Atherton QC (via Lexis Nexis) at http://goo.gl/VYFblM.

 

Attempts to “see-saw” between courts does not avoid the appointment of provisional liquidators

Parkwell Investments Limited v Wilson & HMRC (16 October 2014) ([2014] EWHC 3381 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/3381.html

This case has received some attention due to the judge’s statement that he was unable to accept the reasoning of the deputy judge in Enta Technologies Limited v HMRC (http://wp.me/p2FU2Z-6W), which if it were correct would lead to a “very undesirable consequence… namely the inability of the court to appoint anyone a provisional liquidator to a company where the company has an outstanding appeal against the assessment” (paragraph 21).

In this case, the Company had applied for the termination of the provisional liquidation and the dismissal of HMRC’s winding-up petition on the basis that the First Tax Tribunal was the place to determine its VAT position and that, as there were appeals against assessments still outstanding, it was inappropriate that the Companies Court should pre-empt the process by appointing a provisional liquidator.  Sir William Blackburne stated: “There is to my mind something highly artificial in the notion that this court has jurisdiction to entertain a winding-up petition brought by HMRC against a company founded on the non-payment of a VAT assessment… for so long as the company has taken no steps to appeal the assessment to the FTT… only to find that that jurisdiction is lost the moment the company files its notice of appeal to the tribunal or, if not lost, is no longer exercisable, irrespective of the merits of the appeal…   I cannot think that this approach is right. Jurisdiction in this court cannot arise and disappear (or be exercisable and then suddenly cease to be) in this see-saw fashion” (paragraphs 19 and 20).

The judge believed that the true question was whether the appeal to the FTT has any merit. If it has none, then the assessment continues to constitute a basis for a winding-up petition.  However, “if the court, on a review of the evidence before it, considers that the company has a good arguable appeal which will lead either to the cancellation of the assessment or to its reduction to below the winding-up debt threshold, it will dismiss the petition” (paragraph 20).  In this case, the judge concluded that the Company had failed to produce sufficient evidence to demonstrate a good arguable case and thus the provisional liquidator was allowed to continue in office.

For a more practical look at the implications of this decision, you might like to look at an article by Mike Pavitt, Paris Smith LLP, at http://goo.gl/0lZyrO.

 

Holiday pay to include non-guaranteed compulsory overtime

Bear Scotland Limited & Ors v Fulton & Ors (4 November 2014) (UKEATS/0047/13) (heard with Hertel (UK) Limited v Woods & Ors and Amec Group Limited v Law & Ors (UKEAT/0161/14)http://www.bailii.org/uk/cases/UKEAT/2014/0047_13_0411.html

None of these cases involved insolvencies, but I can see how their impact on holiday pay calculations could have consequences for IPs.  However, permission to appeal has been granted and the government has set up a taskforce to assess the possible impact of this decision (see http://goo.gl/8jmV53).

The conclusions of the Companies’ appeals against several elements of previous tribunal decisions were as follows:

  1. Normal remuneration – in relation to which holiday pay is calculated –included overtime that employees were required to work, even though the employer was not obliged to offer it as a minimum.
  2. An employer’s failure to pay holiday pay on this basis could be claimed as unlawful deductions from pay under the ERA1996, but not where a period of more than three months had elapsed between each such unlawful deduction (i.e., I think, if, say, holiday was paid short in March, August, and October of this year, only August and October could be claimed; March would not be able to be claimed, as it occurred more than three months before the August short payment).
  3. Pay in lieu of notice is not required to be calculated under the same basis, i.e. it does not include the overtime described in (1) above. This differs from the position as regards holiday pay, because it was felt that the parties’ view of what hours were “normal” at the time the contract was entered into would not have been informed by the experience of working under that contract, which described overtime as not guaranteed and not forming part of normal working hours.
  4. In two of the cases concerned, time spent travelling to work (which was paid during working times as a Radius Allowance and Travelling Time Payment) also fell within “normal remuneration” for the purpose of calculating holiday pay.

There has been some comment (e.g. Moon Beever’s article at http://goo.gl/Etay9A) that overtime other than compulsory overtime is also likely to be comprised in “normal remuneration”.  Whilst this was not dealt with by the Appeal Tribunal, the judge did highlight the principle that “‘normal pay’ is that which is normally received” (paragraph 44) and thus I can see why that conclusion might be drawn.

 

A liquidator’s power to get in post-appointment assets

The Connaught Income Fund, Series 1 v Capita Financial Managers Limited (5 November 2014) ([2014] EWHC 3619 (Comm))http://www.bailii.org/ew/cases/EWHC/Comm/2014/3619.html

The key points – and quotes – that I’d extracted from the judgment were the same as those highlighted by Pinsent Masons (http://goo.gl/QU8o9i).

The liquidators of the Fund (which was an unregulated collective investment scheme set up as a limited partnership) took an assignment of the investors’ claims, but these were resisted under a number of arguments including a challenge that the liquidators acted outside their statutory powers in taking the assignments.

The judge decided that the assignments were allowed under the liquidators’ Schedule 4 power “to do all such things as may be necessary for winding up the company’s affairs and distributing its assets”, including those that had not been assets of the partnership when it traded.

 

Receivers’ appointment sound notwithstanding that their appointor’s charge could be invalid

Day v Tiuta International Limited & Ors (30 September 2014) ([2014] EWCA Civ 1246)http://www.bailii.org/ew/cases/EWCA/Civ/2014/1246.html

This is a complicated case, which I think has been successfully summarised by Taylor Wessing LLP (http://goo.gl/YhN2ga).

Tiuta International Limited (“TIL”) agreed to lend money to Day to enable him to repay a loan provided by Standard Chartered (“SC”) and to discharge the charge to SC.  Later, due to Day’s non-payment, TIL appointed receivers under the powers of its new charge, but Day claimed damages against TIL that, if set off against the loan, would release TIL’s charge and invalidate the receivers’ appointment.  TIL argued that, even if Day were successful in escaping from its charge, TIL was still entitled to appoint receivers because it was subrogated to the SC charge by reason of its payment settling SC’s loan and charge.  Day contended that, even if this were so, TIL would need to appoint receivers again but this time in express reliance on the SC charge.

Lady Justice Gloster stated: “it is important to bear in mind that the correct analysis of the right of subrogation is that a party who discharges a creditor’s security interest and who is regarded as having acquired that interest by subrogation, does not actually acquire the creditor’s interest, but rather obtains a new and independent equitable security interest which prima facie replicates the creditor’s old interest. Subrogation does not effect an actual assignment of the discharged creditor’s rights to the subrogated creditor. What subrogation means in this context is that the subrogated creditor’s legal relations with a defendant, who would otherwise be unjustly enriched, are regulated as if the benefit of the charge had been assigned to him” (paragraph 43).

“Thus whilst TIL did not purport to rely on the SC Charge when appointing the Receivers… and purported to rely only on the TIL Charge to make the appointment, that in my judgment was immaterial…  Subrogation is a means by which the court regulates the legal relationships between parties in order to avoid unjust enrichment and the precise manner in which it operates may vary according to the circumstances of the case. In the present case, on the hypothesis that the TIL Charge was voidable, the doctrine of subrogation, in conferring a new equitable proprietary right on TIL, would have operated to entitle TIL to the notional benefit of the SC Charge for the purposes of securing repayment of the TIL Loan made under the terms of the TIL Loan Facility” (paragraph 44).  She continued that TIL was not required to follow the payment demand process as required by the SC charge, which would be “nonsensical” since SC’s liabilities had been discharged, but it was entitled to follow the process set down in the TIL loan facility and charge leading to the appointment of receivers.

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Moving Thresholds: DROs and the Creditor’s Bankruptcy Petition

Peru252

Having finally drafted my presentation for the SWSCA course later this week, I can turn to reviewing the Insolvency Service’s consultation on DROs and the creditor’s bankruptcy petition threshold. There’s still time for you to respond: the deadline is 9 October 2014.

I have to confess that my practical experience is corporate insolvency-heavy, so personally I don’t feel in a great position to comment, but, of course, that won’t stop me!

Strictly-speaking, it is not a consultation, but a call for evidence. Thus, whilst there are hints of the direction in which the Government/InsS might take the issues forward, it’s all (supposed to be) pretty open at the moment.  This also means that the emphasis is on providing data, rather than opinion – another reason why I do not feel well-placed to comment.

The call for evidence can be found at: http://goo.gl/UhT52U.

DROs: Key Questions

Fundamentally, the Service is asking: are the criteria (and the publicity/delivery of DROs) blocking out people who should be able to benefit from a DRO?  Much of the Service’s arguments seem to focus on how many people would move from bankruptcy to DRO if thresholds were moved.  I guess this helps to explore the potential consequences of any changes on suppliers who may react by raising the hurdles for people at the margins from accessing their supplies.  However, what I’m interested in is: at what stage does a bankruptcy become beneficial to creditors?  Surely, this is a key factor in deciding the DRO/bankruptcy threshold, isn’t it?  I don’t think the Service’s consultation document explores this sufficiently.

Debts and Assets

As we know, the thresholds for accessing a DRO are:

  • Total debts less than £15,000;
  • Total assets less than £300 (excluding certain items); and
  • Surplus income less than £50 per month.

Are these at the “right” levels?

The consultation illustrates these thresholds adjusted for inflation:

  • The threshold for total debts would move to between £16,200 to £18,900;
  • Total assets threshold: £325 to £380; and
  • Surplus income threshold: £54 to £63 per month.

Hmm… assuming that the 2009 levels were valid, that appears to suggest that change should be minimal.  The world seems to have changed more than this, doesn’t it?  Or is it our attitudes to debt that have changed?

The consultation also looks to the recently statute-enshrined Scottish Minimal Assets Process (“MAP”) levels:

  • Debts between £1,500 and £17,000 (and I recall that many fought to persuade the Minister to increase this from £10,000);
  • Assets less than £2,000 (again, I think this was proposed originally at £1,000); and
  • Zero disposable income (or income entirely from benefits).

The Service then examines the levels of debts and assets of the 2013/14 bankruptcies, which suggest that, if the two thresholds were adjusted in line with inflation, up to 5% of those who became bankrupt would have qualified for DROs (assuming they met the other DRO criteria). They haven’t done the same comparison to the MAP thresholds, but have illustrated that, if the asset threshold were £2,000 and the debt threshold £30,000 (interesting number to pick!), 23% of last year’s bankrupts could have had a DRO (again, assuming they met the other criteria).  That’s all very interesting, but what is the logic behind the thresholds?

Personally, I cannot see the rationale for imposing a low debt threshold. The Service states that the threshold “was designed to limit the scheme to those with low levels of unsecured debt rather than allowing debtors to discharge ‘excessive’ sums”.  What is an “excessive” sum?  I’m in no position to answer, but, from my corporate insolvency perspective, I don’t see much of the “debt-dumping” that seems to inflame the Daily Mail reader.  I suspect that the personal insolvency world is similar: individuals are in a sorry state when they have accumulated more debts than they can afford; they’re not trying to scam their creditors, simply escape from the hole.  Does it really help to make this endeavour difficult for them?

Ah, but wouldn’t an increase in the debt threshold dissuade lenders etc.? I’m guessing that some debtors suffer a substantial change in circumstances, leaving them unable to support high levels of debt, but I guess there are other debtors who manage to build up fairly high levels of debt whilst having little assets/income to back it up.  Whichever way it is, don’t suppliers at the moment accept the risks that they might not see any recovery from a proportion of those to whom they extend credit?  If these individuals simply move from a nil-return-to-creditors bankruptcy to a nil-return-to-creditors DRO, where’s the harm?  It is far more expensive for the Insolvency Service (i.e. the public purse) to administer a bankruptcy than a DRO and, if the debtor doesn’t have the assets/income to cover those costs, that’s a loss to everyone.  So who is winning from this whole process?

I hear much support for R3’s call to raise the debt threshold to £30,000 and I can see no real argument against that.

As to the level of assets, I also see no reason why it should not be £2,000 (Debt Camel – http://debtcamel.co.uk/dro-consultation/ – makes the sensible observation that computers and the like are generally accepted to be necessities in this day, especially for job-seekers).  However, I’d like to ask the question: how high do the assets and surplus income need to be in order to generate a material return to creditors?  I’ve not done the sums, but there must be a relatively simple answer, mustn’t there?

Surplus Income

The Service’s analysis of surplus income levels is a bit cloudier. Firstly, I’m surprised to read that the Service has no income data for bankrupts who are not subject to an IPO/IPA – why not?  Surely they need to have known what the debtor’s income was in order to decide not to pursue an IPO/IPA, don’t they?  Secondly, later the Service states that “under bankruptcy, an Income Payments Order will be put in place taking the whole surplus income if a bankrupt has a surplus income of more than £20 per month, subject to an allowance for emergencies and contingencies of £10 a month for each family member.”  So presumably, all bankrupts for which they have no data fall below this threshold, don’t they?  The consultation discloses 22,044 “blanks”, i.e. no data cases, which is 93% of the total bankruptcies, but the Service estimates that only 25% of all bankrupts had incomes below the DRO level.  But shouldn’t all those “blanks” be below the DRO threshold?  If not, then why isn’t the OR pursuing IPOs/IPAs from them?

The Service’s argument against increasing the surplus income threshold is pretty-much that, apart from the emergency/contingency factor mentioned above, all the debtor’s surplus income is taken in an IPO/IPA, so why should a debtor in a DRO get to keep any of it?  Well I’m sorry, Insolvency Service, but your stats indicate to me that IPOs/IPAs are so not the norm for bankrupts; it seems that there are plenty of bankrupts getting to keep at least some surplus income, so I don’t see that debtors in DRO generally are better off than their bankrupt contemporaries.

I was also surprised to read that the Insolvency Service uses the “Living Costs and Food Survey” for calculating surplus income. Considering the Service was a body that was heavily involved in the IVA and DMP Protocols, I’m wondering why they chose this tool, rather than the CFS or Step Change guidelines.  I notice that “a consultation is ongoing to produce a Common Income and Expenditure Calculator to use as an industry standard” – presumably this will be rolled out for IVAs and DMPs too and presumably these industries are engaged in this consultation?  Personally, I’ve not seen it…

Debt Camel illustrates the disparity that using different tools can generate. She states that many IPs use guidelines that are stricter than the CFS (I guess she’s referring to the Step Change guidelines?) with the result that an IVA can be proposed for £70 or £100 per month for an individual who would meet the current DRO £50 per month threshold.  Personally, I’m not surprised at this, as an individual’s actual I&E might be very different from what any model predicts they should be.  Also, just as some debtors have chosen an IVA over bankruptcy – even though, from a purely economic perspective, bankruptcy might appear the best way to go – an individual’s choice to go for an IVA over a DRO does not make it wrong.  However, given the substantial differences in downsides for the debtor, I expect that IPs dealing in low contribution IVAs would be fanatical about giving and recording thorough advice on all the options available to avoid mis-selling complaints down the line.

However, back to my question: do creditors get to see anything from £50 per month IPOs/IPAs? That’s only £1,800 over three years.  What’s the current bankruptcy admin fee: £1,715 for starters..?  If creditors only start seeing a real recovery on IPOs/IPAs at, say, £70 per month, then shouldn’t that be the threshold – for DROs and bankruptcies?

The Debtor’s Experience

The consultation then moves to examine the debtor’s experience of DROs: how much it costs them; whether it is right that they should be able to access a DRO only once in a 6 year period; whether the competent authority/intermediary model can be improved on. Personally, I cannot really add to these issues, so I won’t attempt to.

I was intrigued by Debt Camel’s comments (sorry, DC, from drawing so heavily on your post) regarding the paucity of publicity given to DROs, including on some IPs’ websites. I can see how this situation may have arisen: when DROs were introduced back in 2009, IVAs and DROs were poles apart.  IVAs were often marketed with a surplus income threshold some way above the £50 DRO limit.  Therefore, it was perhaps understandable that IVA websites rarely signposted DROs as a potential option for readers.  However, the disposable income threshold for proposing an IVA has dropped in recent times, so I can well understand that IVA providers may now look to advise individuals with a DI of c.£50.  Given this environment, it is appropriate that IP/IVA provider websites (and, of course, advisers) that purport to set out debtors’ options cover DROs.  From my own spot-check of the websites of some of the major providers, I’d say that c.50% covered DROs, although some did seem to trail after the bankruptcy blurb, which didn’t seem entirely fair and transparent.

Any lack of DRO coverage by IPs can only give weight to arguments that someone who appears to be in the region of a potential DRO candidate should be referred to an Authorised Intermediary. I also ask myself if the DRO calculator is accessible by non-Authorised Intermediaries: if IPs are to cover well DROs in possible options for a debtor, it seems to me that they must have access to it – this is another reason for addressing the lack of consistency in the tools currently in use.

DRO Revocations

The number of DROs revoked has been running consistently for the past three years at c.300 per year. Revocations most often occurred at the OR’s discretion when he felt that the debtor’s change in financial circumstances meant that he could deal with his creditors – that is how the consultation describes it anyway.  Given that the document continues to explain that 154 revocations occurred because the asset limit had been exceeded and 29 because the surplus income level had been exceeded, it seems to me that it was more all about hitting the DRO thresholds.

Interestingly, one debtor was successful in challenging the OR’s discretion. The document states that since this, “the decision to revoke following a change of circumstances is no longer being so strictly applied, with revocation now only occurring if the creditors could be expected to benefit if the DRO was revoked”.

The consultation asks whether the revocation system could be improved. My questions would be: what happens to the debtor next; are they thrown back out into the cold?  Could they not be “switched” into a bankruptcy, if the debtors consent?

DRO Discharge

The consultation asks if the Scottish MAP discharge provisions should be adopted for DRO.

Personally, I don’t understand why MAPs have different timescales: six months for discharge from debts, but with a restriction on credit for a further six months after discharge with an option to extend this restriction for a further six months. I expect that the impact of a MAP or DRO on a debtor’s credit file restricts access to credit more than the statutory provisions anyway and, if six months is considered an appropriate timescale within which windfalls should be caught for the benefit of pre-DRO/MAP creditors (although, personally, I think that one year is not too much to ask), then why not stick with that single line in the sand?

Becoming employed

Understandably, some wonder whether being in a DRO might discourage some from taking up opportunities that risk bringing them out from under that safety net – for example, taking up employment that might take their surplus income over the £50 threshold.

I think that only those who have experienced DROs – more specifically perhaps, revocations on the basis of increased income – can really answer this question. However, I wonder if such a risk might be mitigated by allowing a greater level of surplus income once someone is in a DRO.

Bankruptcy Creditor Petition Limit

Having contemplated 25 pages of DRO territory, it seemed odd to switch to this topic for the final three pages, but good on the Insolvency Service for including it. It is a simple question: the bankruptcy creditor petition limit has been £750 since 1986, so what should it be now?

The consultation sets out these facts:

  • If it were increased in line with inflation, it would now be £1,600 to £1,700.
  • Germany, Italy, The Netherlands and Spain have no limit.
  • Australia’s is £2,700.
  • Scotland’s is £3,000.
  • Republic of Ireland’s is £15,900.
  • If the limit had been £2,000, there would have been 404 (3%) fewer creditor petitions last year.
  • If the limit had been £3,000, there would have been 979 (8%) fewer creditor petitions last year.

Personally, I don’t know where I’d put the level. I sympathise with the debtors who find themselves with a hefty bankruptcy annulment bill on the back of a small petition debt.  At the same time, I can see that creditors (even Councils) are entirely justified in using the statutory tools to pursue their debts.

Clearly, an increase is well overdue, and I hope that those with evidence-based views will help the Government decide on an appropriate level.


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Case Law… but not a Blue Monkey in sight

0730 Cape Point2

As we cling to the last vestiges of summer, I thought I should summarise the last few months’ judgments.  I’m sure you’ve seen write-ups on the Blue Monkey Gaming v Hudson RoT case, but I’ve not seen the full judgment yet, so I have nothing useful to add.  However, here are some other cases:

  • Coventry v Lawrence – it’s not only Jackson that threatens IPs’ use of CFAs and ATE insurance
  • Top Brands v Sharma – how much digging should an IP do pre-appointment?
  • BAJ v SDS & AS (Scottish case) – is proof of sending sufficient to meet a requirement to inform, or is it proof of receipt?
  • Kaupthing Singer & Friedlander v UBS – do the manic first few days of an administration excuse misunderstanding balances of account?
  • DVB Bank v Isim Amin – can a lender rely on serving documents via an agent in liquidation?
  • Laverty v British Gas Trading – application of Nortel to post-administration gas and electricity supplies
  • Lock v British Gas Trading – is it right that an employee should suffer a drop in take-home pay because, when he is on holiday, he does not earn sales commission?
  • Contrarian Funds v Lomas – how accommodating should administrators be to creditors requesting more time to prove claims?
  • Bache v Zurich Insurance – if purchasers pull out because of their supplier’s failure to perform prior to the supplier’s administration, can they claim under insurance?
  • Goldtrail Travel v Aydin – can a dishonest assistant avoid returning a misfeasant payment received by setting it off against its claim as creditor?

One to look out for: new risks to recovering old CFA uplifts and ATE premium

Coventry & Ors v Lawrence & Anor (23 July 2014) ([2014] UKSC 46)http://www.bailii.org/uk/cases/UKSC/2014/46.html

This case does not involve insolvency directly, but, as Anton Smith, Ashton Bond Gigg, highlighted in a LinkedIn post (http://goo.gl/dIHyPi), it could have repercussions in the insolvency world.

Lord Neuberger was struck by the “very disturbing” figures involved in this case.  A home-owning couple took proceedings in relation to the noise emanating from a nearby speedway racing track.  Eventually, the couple were awarded damages of c.£10,000 and the respondents were ordered to pay 60% of the couple’s costs.  The couple’s costs (including their solicitors’ CFA uplift and ATE premium) amounted to over £1 million.

The respondents argued that the order that they pay 60% of the success fee and ATE premium infringes their rights under article 6 of the European Convention on Human Rights.  Interestingly, the judge pointed out a perverse (my word, not his) consequence in cases involving success fees and ATE premium: these elements will be higher for parties with seemingly weaker cases, and so parties who lose against apparently weaker opponents end up having to pay larger sums than those who lose against stronger opponents.  That certainly does not seem fair to me.

Because it is possible that the government could end up dealing with compensation claims from past “victims”, if it is found that the Convention has been breached, the Supreme Court decided that the appeal should be re-listed for hearing so that the Attorney General and Secretary of State for Justice can be notified.

This decision could affect litigation brought pursuant to CFAs made prior to April 2013 (i.e. pre LASPO Act 2012) with the effect that Courts could no longer be able to order that the CFA uplift and ATE premium be paid by the losing party.

(UPDATE 19/11/2014: this case is listed to be heard by the Supreme Court on 9 and 10 February 2015.)

(UPDATE 24/03/2015: Judgment is expected from the Supreme Court in July this year.  For an excellent analysis (both by Kerry Underwood and the many contributors of comments) of the dilemma facing the Judges, I recommend: http://goo.gl/o8CSIs.  Hill Dickinson has also posted a summary of the submissions to the Supreme Court: http://goo.gl/wSH2Qz.)

Re-writing SIP8

Top Brands & Anor v Sharma, Re. Mama Milla Limited (4 August 2014) ([2014] EWHC 2753 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/2753.html

In this hearing of a S212 proceeding against a former liquidator, the judge seems to have acknowledged that the IP appears to have been the victim of a fraud by having been deceived into paying out over £500,000 of estate funds, which she had been led to believe were trust monies.  The judge commented on where the IP seemed to have gone wrong:

  •  The IP’s enquiries pre-liquidation had been lacking: she had not enquired into the demise of the company (“MML”) further than the shadow director’s indication that it had been as a consequence of MML’s trading with a company subject to a SOCA investigation; she had not enquired into the “unusual” appointments and resignations of directors; she had not noticed the inconsistency in information about MML’s bankers, which should have been apparent from documents received by her; and she had not made contact with MML’s accountants pre-liquidation.
  • Had she reviewed the small amount of company records received pre-liquidation, she would have noted substantial transactions that did not stack up with the director’s explanations of MML’s trading, including the date that MML allegedly began trading.
  • The IP might also have made more enquiries into MML’s VAT position, including asking the director for figures for the outstanding VAT return, and she might have questioned the nil VAT output stated on previous returns.
  • MML’s financial statements also showed wage payments, but the IP did not seek any PAYE/NI records or ask about any wage-related liabilities, which the judge thought “ought to be standard [enquiries] for any competent insolvency practitioner in the process of taking on a new appointment and preparing a statement of affairs” (paragraph 84).
  • The judge criticised the deficiency account, revealing the “elementary error of double counting” and describing it as “fundamentally flawed and meaningless”.

But how much work is expected of an IP pre-appointment?  “Accepting that there is no duty on a liquidator designate to investigate the affairs of a company before appointment, any insolvency practitioner taking on the role of liquidator of MML must – or should – have appreciated that reviewing the available information and obtaining further basic, objectively reliable information (in particular bank statements and copy returns to HMRC) at a very early stage would be essential to the due performance of a liquidator’s duties” (paragraph 93).

Unfortunately for the IP (“GS”), her inquisitiveness does not seem to have become piqued even after appointment as liquidator; the judge related several other events that should have triggered warning bells, leading him to conclude: “On my findings GS conducted the liquidation of MML with a lack of thought and purpose tantamount to indifference as to the ascertainment of MML’s true obligations. GS’s approach may, on the facts, fairly be characterised as a conscious disclaimer or disregard of responsibility for the assets in her charge on a material scale. In my view, such conduct crosses the border into the territory of breach of fiduciary duty, and were it necessary to my judgment, I would so find” (paragraph 144).  

(UPDATE: the judgement on the appeal was given on 10/11/2015 ([2015] EWCA Civ 1140).  GS pleaded that the misfeasance claim was based on compensation for loss of criminal property (because the company had been engaged in VAT fraud before its liquidation) and thus the claim should be barred.  The judge decided that there was no causative relationship between the company’s illegal actions and GS’ actions that were the subject of the loss and so dismissed the appeal. )

Compliance with a requirement to “inform” should be considered from the perspective of the recipient, not the sender

BAJ v SDS & AS (8 May 2014) ([2014] ScotSC 28)http://www.bailii.org/scot/cases/ScotSC/2014/28.html

Sheriff Foulis considered a Trustee’s application for possession and sale of a property under S40 of the Bankruptcy (Scotland) Act 1985, which was defended on the basis that he had not informed the bankrupt’s non-entitled spouse of the right to petition for recall of the sequestration within the period specified under S41(1)(a).

The sheriff highlighted the difference between “inform” and “notify”: “In my opinion ‘inform’ must involve bringing the matters covered by section 41 to the attention of the non entitled spouse in order that that person can take steps to protect these rights if so desired…  The obligation to inform in terms of the section has to be looked at from the point of view of the non entitled spouse rather than the trustee. If it is not proved that the necessary information was received [by] that spouse, then the obligation in terms of the section has not been satisfied. There will be numerous ways in which that obligation can be performed. The information could, for instance, be given in a meeting with the non entitled spouse or by correspondence, written or electronic. It might even be satisfied if the information was given to a professional known to be currently representing that person. The less formal the means of communication, however, the more difficult it may be to counter an assertion that the non entitled spouse never received the information.”

In this case, the sheriff was not satisfied that the non-entitled spouse had received a letter apparently sent by the Trustee’s office.  Although the spouse had received the information, albeit around 3 months later, and the sheriff concluded that, in all the circumstances, had S41(1) been complied with, it would have been appropriate to have granted the Trustee authority to sell the property, he declined to grant the decree (although the final outcome depends on whether the Trustee applies for relief in relation to the defect under S63 or whether the action is dismissed on the basis that it is incompetent).

A lesson on how to lose US$65 million

Kaupthing Singer & Friedlander Limited (In Administration) v UBS AG (18 July 2014) ([2014] EWHC 2450 (Comm))http://www.bailii.org/ew/cases/EWHC/Comm/2014/2450.html

Just before Kaupthing Singer & Friedlander Limited (“KSF”) went into administration on 8 October 2008, it had expected to receive US$65 million from UBS AG (“UBS”), but the sum had been paid, via JP Morgan Chase (“JPMC”), by mistake to Kaupthing Bank hf (“Khf”).  Later, in November 2008, Khf went into liquidation without having paid over the $65 million to anyone.

Over the subsequent years, there were exchanges between Khf, KSF and UBS to reach agreements on other matters, but, in calculating the accounts between the companies, it seems that no thought had been given to the question of the $65 million; settlements in relation to these other matters were achieved in December 2010 and May 2012.

KSF first claimed the $65 million from UBS in August 2012.

The judge accepted UBS’ contention that KHF was estopped by convention from claiming that UBS’ payment obligation to KHF had not been discharged.  He said that “the communications between KSF and Khf on the one hand and UBS on the other hand were conducted through JPMC, and, in my judgment, those communications and in particular the message from JPMC of 9 October 2008 [regarding the planned reversal of the payment made to Khf] satisfy the requirement of estoppel by convention that communications ‘cross the line’” (paragraph 95).

But couldn’t it be argued that, in the early days of the administration, the administrators were so preoccupied with getting to grips with a company in crisis, they could not be expected to know anything much at all about the position between the companies and thus KSF could not be held subject to estoppel by acquiescence?  The judge acknowledged the “enormous task” facing the administrators and accepted that they themselves had no knowledge of the transaction.  However, he was not persuaded that this affected the ability of those in the “back office” to communicate with UBS in a normal business-like way.  In his judgment, it would be unjust to allow KSF to resile from the position to which KSF had been taken to have acquiesced.

Knowledge of an agent’s liquidation not a hindrance to good service

DVB Bank SE v Isim Amin Limited & Anor (9 May 2014) ([2014] EWHC 2156 (Comm))http://www.bailii.org/ew/cases/EWHC/Comm/2014/2156.html

A borrower had appointed a company to act as its service agent in relation to any proceeding in connection with the loan.  The judge was of the “clear view” that service of the lender’s claim had been good, despite the fact that the agent had been placed into CVL before the claim had been served… and despite the fact that the lender had known about the liquidation, but “what was not known was that the liquidators had ceased to be involved in performing their functions as such.  However, the company had not been struck off the register” (paragraph 3).

Admittedly, the judgment was obtained in default, as the borrower had not filed any defence, and I can see the argument that, technically, the lender was bound to follow the borrower’s instructions as regards their service agent.  Nevertheless, it sits a little uneasy with me that service on a company in liquidation (especially where the liquidators had vacated office) can be relied upon.

Post-appointment liability under deemed contract by statute constituted contingent liability under actual pre-appointment contract

Laverty & Ors v British Gas Trading Limited, Re PGL Realisations Plc (31 July 2014) ([2014] EWHC 2721 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/2721.html

As a consequence of the companies’ administration, British Gas Trading Limited (“British Gas”) terminated their contracts, but it continued to supply gas and electricity to the Peacocks stores under contracts deemed to arise under the Gas Act 1986 and the Electricity Act 1989.

The administrators paid for supplies provided after their appointment, but only up to the point that the stores were vacated.  Some landlords did not accept surrenders of the leases, but eventually the companies were placed into liquidation and the leases were disclaimed.  In the meantime however, British Gas’ fixed charges continued to accrue and it seems that gas and electricity continued to be used at the premises, resulting in a liability of £1.2 million.  British Gas argued that this should be paid as an administration expense on the basis that the deemed contracts came into existence after the administrators’ appointment, but the administrators argued that it ranked as an unsecured claim.

The judge highlighted the differences between deemed contracts arising under the Acts and an express contract entered into by an administrator: an express contract contains all the terms and conditions agreed by the parties, but neither the Gas Code nor the Electricity Code specifies the terms and conditions deemed to be made between the parties; neither are these negotiated, but they – including terms relating to tariffs, duration and termination – are determined and imposed by the supplier.

The court decided that the liability ranked as an unsecured claim: the moment that the consumer/owner-occupier began to receive supplies, it became bound by the framework of the two Acts, which included a contingent liability to pay for supplies pursuant to a deemed contract where the supply was otherwise than in pursuance of an actual contract.  Thus, the companies incurred the post-appointment liability by reason of an obligation incurred pre-appointment.

Another one to look out for: ECJ decides pay must take account of commission not earned during holiday period

Lock v British Gas Trading Limited (22 May 2014) ([2014] EUECJ C-539/12)    http://www.bailii.org/eu/cases/EUECJ/2014/C53912.html

Mr Lock was paid a basic salary plus commission payable several weeks or months following the completion of the sales contracts.  When Mr Lock took holiday, he was paid his basic salary plus commission maturing in relation to earlier sales. However, of course, he did not make any sales during his holiday period, which meant that, in the period after his return from holiday, his take-home pay was decreased from that he would have received had he not taken his holiday.

The European Court of Justice decided that Article 7 of Directive 2003/88/EC must be interpreted as precluding national legislation and practice under which a worker in this position is paid holiday pay composed exclusively of his basic salary, although they left it to the national court or tribunal to decide how to calculate what his holiday pay should be in these circumstances.

The case was referred to the ECJ by the Leicester Employment Tribunal, but I have not seen any reference to the ET having yet decided the case as a consequence of this decision.  (UPDATE 04/01/2015: I’ve seen a rumour that the Leicester Tribunal will be hearing the case in February 2015; see, for example, http://goo.gl/ezx8Qj.)

Enough is enough for creditor asking for more time to prove claim

Contrarian Funds LLC v Lomas & Ors (23 May 2014) ([2014] EWHC 1687 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/1687.html

In August 2013, the administrators formally rejected a creditor’s claim on the basis that, a year earlier, they had informed the creditor that they believed the contract had been with an associated company, not the company in administration, and, despite their request, the creditor had provided no further information in support of its claim.  By consent, the 21 day time period in which the creditor could appeal to court to reverse or vary the administrators’ decision was extended three times.  However, in January 2014, the administrators refused a further extension, resulting in the creditor applying to court for such an extension.

The court rejected the creditor’s request, stating that there is “clear public interest in ensuring as efficient and expeditious an administration of an insolvent estate as can reasonably be achieved. This suggests the need for all interested parties to comply with the time limits specified in the Rules, unless there are good reasons for requiring more time. Some minor delays may be tolerable but anything more will, in the absence of good reason, undermine the proper administration of the estate, to the detriment of the creditors generally and others with an interest in the estate” (paragraph 14).  The judge felt that there was no good reason in this case and that the creditor had been “seriously dilatory in its attempts to support its claim” (paragraph 42).

Responding to the creditor’s argument that the administrators still had much to do on the case, the judge pointed out that, if the administrators were to take a relaxed attitude towards the creditor, they would be required to treat all other claimants similarly, which “would result in wholly unacceptable delays in dealing with the administration” (paragraph 43).

Purchasers not barred from insurance recovery despite rescinding pre-administration

Bache & Ors v Zurich Insurance Plc (18 July 2014) ([2014] EWHC 2430 (TCC))http://www.bailii.org/ew/cases/EWHC/TCC/2014/2430.html

A couple paid a 10% deposit for a flat yet to be built.  They later wrote to the vendor asking for the return of the deposit on the basis that it had failed to complete the construction, resulting in a repudiation of the agreement.  Later, the vendor was placed into administration, which then moved to dissolution.  Zurich Insurance Plc (“Zurich”) refused to pay out under the policy, which covered a loss of deposit “due to the developer’s bankruptcy, liquidation or fraud”.  Zurich argued that this did not reach to the developer’s administration and that, for a claim to be made, the developer’s failure to complete the new home must be because of its liquidation, but in this case the failure to complete was due to the purported acceptance of the company’s alleged repudiatory breach.

Seemingly just before the hearing, Zurich did accept that dissolution would be sufficient to trigger cover under the policy, so the issue of whether insolvent administration was covered was shelved (handy – there may not be many CVAs arising from administrations, but perhaps it is no wonder that Zurich did not want to go there).

The judge observed that a developer’s failure to complete a construction is rarely going to be “due to” its liquidation, but rather due to the “actual or impending insolvency of the developer beforehand” (paragraph 27), although he accepted that insolvency alone would not engage the policy; the final liquidation terminates any possibility of the construction being completed.  He continued: “there is no obvious or logical reason why there should be a distinction between the two types of purchaser; one has the purchaser who is prepared to wait or who can not be bothered to do anything about the failure to complete the work and the purchaser who feels that he or she can not wait possibly for a very long time” (paragraph 28).  Thus, he decided that the fact that the purchasers accepted a repudiation was not a bar to recovery under the insurance policy.

Court entitled to unravel set-offs involving misfeasant payments

Goldtrail Travel Limited (in Liquidation) v Aydin & Ors (22 May 2014 ([2014] EWHC 1587 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/1587.html

The court found that the defendants dishonestly assisted the company’s sole director and shareholder in a breach of his fiduciary duties as regards the misapplication of the company’s money.

Two defendants claimed to have suffered considerably as a consequence of the director’s fraudulent activity, but the judge decided that they could not set off their losses against the misfeasant payments made to them on the basis that they were not to be treated as “dealings” under R4.90.  The judge also rejected the defendants’ argument that the court was not entitle to unravel set-offs that had occurred before administration; the defendants would have to attempt to prove in the company’s liquidation for sums owed in relation to flights arranged for the company.  In his judgment, this was the risk the defendants took when, having assisted the director in the misapplication of the company’s funds, they then allowed the company to deduct sums from the monies otherwise due for flights.


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The case of the missing…

0922 Dune 45 (2)

The case of the missing: (1) Declaration of Solvency; (2) “physical control”; (3) post-IPO income; (4) successful defence; (5) agency relationship; and (6) application to set aside a default judgment.

1. Re Wesellcnc.com Limited – what happens when a Declaration of Solvency is not made by the time the winding-up resolution is passed?
2. Your Response Limited v Datateam Business Media Limited – can a common law lien be exercised over an electronic database?
3. OR v Baker – can an Income Payment Order attach to income received by the bankrupt before the date of the IPO?
4. Appleyard v Reflex Recording Limited – who pays for the company’s legal costs in failing to resist freezing and administration orders?
5. Bailey & Anor v Angove’s Pty Limited – is an insolvent agent and distributor entitled to collect and retain customer payments despite termination of the agreement with supplier?
6. Power v Godfrey – could a doubtful default judgment be successful in extinguishing a bankruptcy petition debt?

When is an MVL not an MVL?

Re Wesellcnc.com Limited (12 December 2013) ([2013] EWHC 4577 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4577.html
A compliance review revealed that a declaration of solvency (“DoS”) had not been made at the time that the members had passed a resolution for the company’s winding-up. Therefore, even though a DoS was made a little later, the consequence under S90 was that the winding-up was a CVL, not an MVL. The liquidator sought the court’s directions, as required under S166(5).

Purle HHJ considered that he had the power to extend the time for holding a S98 meeting, but he decided against it on the basis that in this case it would be pointless: the liquidation had been going for ten months, all creditors had been paid, and, having made distributions to the shareholders, the liquidation effectively was complete. Although the judge declared that the liquidation were a CVL, he dispensed with the requirement for a S98 meeting and the Statement of Affairs. He granted the liquidator’s wish that he “continue to administer the liquidation on the basis of [an MVL]” (paragraph 14) (so presumably the liquidator was not required to submit a D-report/return) and he sanctioned the liquidator’s use of his powers, which under S166(2) technically, in the absence of the S98 meeting, he may not have exercised without the court’s sanction.

Can a lien be exercised over an electronic database?

Your Response Limited v Datateam Business Media Limited (14 March 2014) ([2014] EWCA Civ 281)

http://www.bailii.org/ew/cases/EWCA/Civ/2014/281.html

This case does not relate directly to an insolvency, but it still caught my eye as of potential interest in insolvency situations. It centred around the question of whether it is possible to exercise a common law possessory lien over an electronic database.

A publisher had instructed (albeit there was no detailed written contract) a data manager to hold and maintain its database of subscribers. The publisher ended the relationship and asked for the release of the database, but the provider refused until its outstanding fees were paid. At first instance, the judge decided that the data manager was entitled to withhold the data until its fees were paid and he rejected the argument that it is not possible to exercise a lien over intangible property, in this case electronic data.

At the appeal, Lord Justice Moore-Bick rejected the argument that the database be regarded as a physical object, as it is not “capable of possession independently of the medium in which it is held” (paragraph 19). He also considered whether it was nevertheless possible to “possess” a database in the sense that the data manager was able to exercise effective control over it as against the publisher. He stated: “Possession is concerned with the physical control of tangible objects; practical control is a broader concept, capable of extending to intangible assets and to things which the law would not regard as property at all… In the present case the data manager was entitled, subject to the terms of the contract, to exercise practical control over the information constituting the database, but it could not exercise physical control over that information, which was intangible in nature” (paragraph 23).

The judge seemed to acknowledge the limitations in the current law. In considering the opinion set out by Sarah Green and John Randall QC in The Tort of Conversion that the essential elements of possession can be exercised over electronic data, he stated: “In my view there is much force in their analysis, which, if accepted, would have the beneficial effect of extending the protection of property rights in a way that would take account of recent technological developments. However, to take the course which they propose would involve a significant departure from the existing law in a way that is inconsistent with the decision in OBG v Allan. That course is not open to us – indeed, it may now have to await the intervention of Parliament” (paragraph 27).

Although the judge was content, on the facts of this case, that the data manager had not exercised the degree of control necessary to entitle it to exercise a lien – amongst other things, it had freely allowed the publisher access to the database by means of a password – he also seemed concerned at where a common law lien on electronic data might lead: “I cannot see any basis on which the extension of the right to exercise a lien over intangible property could rationally be confined to electronic databases and for my own part I am not persuaded that it is necessary or desirable to extend this form of self-help, based on control rather than possession, to intangible property generally” (paragraph 32).

Lord Justice Davis reflected on possible unintended consequences of such a decision: “the right to such a possessory lien, if it exists, could have an impact on other creditors of the company (or individual) concerned and could confer rights in an insolvency which other creditors would not have. Further, the position of lenders could be affected: for they may well have ordered their lending arrangements and drafted their securities on the law as it is currently understood to be. Overall, given the number of IT companies and businesses in existence and the number of IT contracts being made the impact of the respondent’s arguments – if accepted – could therefore be significant” (paragraph 39) and Lord Justice Floyd suggested that it would come close to treating information as property.

Consequently, the publisher’s appeal was allowed to the extent of holding that the data manager was not entitled to refuse to provide the publisher a copy of the database.

“Twilight period” – between bankrupt receiving income and an IPO being granted – closed

Official Receiver v Baker (29 November 2013) ([2013] EWHC 4594 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4594.html
Although this case follows several precedents, not least Raithatha v Williamson, I have to say that, when I first looked at the IA86 reference, I was surprised at the outcome. As Mr Justice Warren said, the alternative “would leave a possible and possibly serious lacuna” (paragraph 46).

The story was that the OR had applied for an Income Payments Order for a single sum of £9,415, which was the sum held in Baker’s bank account, received by him after bankruptcy, less one month’s estimated essential outgoings. The deputy district judge had dismissed the application on the basis that, under S310(1), the court was being asked to make an order “claiming for the bankrupt’s estate so much income of the bankrupt during the period which the order is in force as may be specified in the order”, but in an attempt to catch income received before the date of the order. The deputy district judge decided that an IPO can only catch income received by the bankrupt after the making of the order.

At the OR’s appeal, Warren J was persuaded by the case precedent, but he also observed that, if the deputy district judge were correct, then, given that the bankrupt has 21 days in which to tell his trustee of an increase in income and that it takes at least 28 to obtain an IPO, “the bankrupt in some circumstances might quite properly be able to arrange that some income received in this twilight period, which could be a substantial amount when it is remembered that one-off payments can be income within section 307(5), could not be made the subject of an IPO and nor would they fall within section 307” (paragraph 46). He also felt that no distortion of the language of statute were necessary to lead to a conclusion that it is the claim to income, and not the receipt by the bankrupt of the income, which is the subject of the phrase “during the period for which the order is in force”. Therefore, he allowed the OR’s appeal.

Court allows company to settle legal costs of failed attempts to resist freezing and administration orders

Appleyard v Reflex Recording Limited (18 December 2013) ([2013] EWHC 4514 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4514.html
A company incurred legal costs in relation to a freezing injunction made against it. The company was not successful in resisting the freezing order and the court was asked to make an administration order.

David Cooke HHJ felt it was inappropriate to order that the company’s costs be paid as expenses of the administration, as the company had not been successful in its representations. However, he stated: “It does seem to me right, if it is possible to do so, to try and rectify the prejudice that the company’s solicitors have suffered through being willing to provide their services on credit for purposes for which it was anticipated the company would need to give them instructions and for which they have not been able to be paid for as a consequence of the court’s order itself” (paragraph 4). He allowed “the proper costs of the company in considering the administration order and whether the company can properly respond to or resist the administration order. Secondly, the proper costs to the company of complying with the terms of the freezing injunction and, again, considering whether the company can properly respond to the freezing injunction or seek to resist it or to argue that it should not have been made” (paragraph 5) to be paid from the company’s bank balance, treating them as having been transferred to the solicitors prior to the administration order.

Contract terms permit agent and distributor to retain customer payments

Bailey & Anor v Angove’s Pty Limited (7 March 2014) ([2014] EWCA Civ 215)

http://www.bailii.org/ew/cases/EWCA/Civ/2014/215.html
D & D Wines International Limited (“D&D”) acted as the sole agent and distributor of wine supplied by Angove’s Pty Limited (“Angove”). Angove terminated its agreement with D&D two days after D&D was placed in administration, the notice expressly terminating D&D’s authority to collect any further payments from two customers, who had received wine from Angove through D&D. The dispute centred around entitlement to payments made by these customers after the agreement had been terminated.

At first instance, the judge viewed the relationship between Angove and D&D as that of principal and agent, not buyer and seller, and he ordered that the sums, held in escrow, received from the customers after termination of the agreement be paid to Angove. The (now) liquidators of D&D appealed, arguing that after termination D&D remained entitled to collect payment from the customers in order to recoup its commission due under the agreement and the intervening administration then prevented it from accounting to Angove for the balance.

The difficulty for Angove was that the agreement provided that D&D should pay Angove for wine supplied to the customers regardless of whether D&D was able to recover payment from the customers. Thus, whilst at termination of the agreement D&D was required to settle its account with Angove, it did not mean that D&D was not able to pursue monies owed to it by the customers. Therefore, Lord Justice Patten decided that the escrow monies be paid over to the liquidators.

Angove sought to argue that “it would be unconscionable for the liquidators, as officers of the court, to accept payment of the Fund but not to pay in full to Angove what is due to it” (paragraph 31). However, Patten LJ stated: “Although the insolvency of D&D had unfortunate consequences for Angove (as for all its other creditors), that fact alone is insufficient to make it unconscionable for D&D to receive payment of the Fund. It is simply the product of the contractual arrangements which both parties agreed to” (paragraph 42).

(UPDATE 13/11/2014: permission to appeal to the Supreme Court was granted on 30 October 2014.)

(UPDATE 22/08/16: on 27/07/16 – http://www.bailii.org/uk/cases/UKSC/2016/47.html – the Supreme Court unanimously allowed Angove’s appeal on its first question: D&D’s agency was revoked by Angove’s termination notice. An agreement only provides for an agent’s authority to be irrevocable where (i) it states so and (ii) it secures an interest of the agent. The earlier Court of Appeal had not addressed the second criterion. In this case, the agreement allowed customers to pay Angove direct: it was D&D’s “responsibility” to collect the customers’ payments (and from it draw commission), not their “right”. Although not necessary for deciding the appeal, Lord Sumption’s comments on the second question, whether a constructive trust arose because the payee knew at the time of the agent’s imminent insolvency, were interesting: he considered such payments simply “adventitious timing”.)

Lack of action against “obviously tainted” default judgment scuppers bankruptcy petition

Power v Godfrey (5 December 2013) ([2013] EWHC 4359 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4359.html
Power appealed his bankruptcy order on the ground that he had obtained a default judgment (over two years ago) against Godfrey that was substantially greater than the debt on which he was made bankrupt. On that basis alone, it would seem that there ought not to have been a bankruptcy order made, so how then had the Deputy Registrar come to a different conclusion?

Mr Justice Morgan considered the Deputy Registrar’s decision and noted that it was apparent that he had gone behind the default judgment and assessed the underlying claim, which resulted in him effectively treating the judgment as non-existent. The Deputy Registrar had described the default judgment as “so obviously tainted and so obviously would have been set aside, that it would be bizarre if I were to adjourn this matter to give Mr Godfrey an opportunity to have it set aside” (paragraph 23). However, the questions Morgan J felt were more relevant were “whether Mr Godfrey would apply to have the default judgment set aside and if he did apply, how he would fare in relation to the question of promptness in Rule 13.3” (paragraph 26), a factor which he said is given “considerable weight at least in many such cases”. Faced with Power’s “trump card” of the default judgment and the fact that, despite the significant time that had passed, Godfrey had made no move to seek to have it set aside, the judge decided to dismiss the bankruptcy petition.


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Not the Game appeal

IMGP5838

Plenty of comprehensive summaries of the Game appeal have been produced, so I cover here some lesser-known judgments:

Salliss v Hunt – a Deputy Registrar’s approval of a Trustee’s fees basis being switched from percentage to time costs comes under scrutiny
LSI 2013 Limited v The Solar Panel (UK) Company Limited – how presenting contingent creditors in a CVA proposal may have unintended consequences
Credit Lucky Limited v NCA – a Company’s attempt to escape a winding-up in favour of an Administration Order fails
Day v Shaw & Shaw – spouse entitled to an equity of exoneration even though the co-owner was not the principal debtor

A couple of useful summaries of the Game appeal can be found at: http://lexisweb.co.uk/blog/randi/landlords-can-rejoice-following-the-game-administration-decision/ and http://www.11sb.com/pdf/insider-note-cofa-game-decision-26-feb-2014.pdf.

(UPDATE: Game Retail’s application for permission to appeal to the Supreme Court is expected to be heard in November 2014.)

(UPDATE 02/11/2014: The Supreme Court refused Game Retail permission to appeal on the basis that “the application does not raise an arguable point of law of general public importance which ought to be considered by the Supreme Court at this time bearing in mind that the case has already been the subject of judicial decision and reviewed on appeal.” (http://goo.gl/cWWuDs))

Baister’s Practice Statement applied to Trustee’s request to switch fees basis from percentage to time costs

Salliss v Hunt (10 February 2014) ([2014] EWHC 229 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/229.html

The Chancellor of the High Court opened his judgment by calling this a “regrettable case of litigation”, which should have been avoided.

Mr Salliss had been made bankrupt in 1993 on the petition of Barclays Bank plc, which appeared to have been owed over £2m originally. The creditors approved the Trustee’s fees as the first £2,000 realised and thereafter on the OR’s scale.

The only assets were pension plans. These had not been realised, but when Mr Salliss reached 65 in 2007 he began working on an annulment so that he could draw down on the pensions. He paid the claims of his creditors other than Barclays, which had not submitted a proof of debt and, when pressed, confirmed that it had withdrawn its right to claim in the bankruptcy due to the age of the case.

Then the court applications began…

Salliss applied for an annulment, but the Trustee’s report indicated that his time costs were almost £40,000 and other costs and expenses were £24,000. Salliss put forward an accountant’s report that stated that strictly the Trustee was not entitled to any remuneration, in view of the basis agreed by creditors.

The Trustee applied for an order that Salliss sign the necessary forms so that the Trustee could realise his interest in the pensions. The Trustee also applied to change the basis of his fees from the agreed percentage basis to time costs. Nine months on, the Trustee’s fees and costs had increased from £64,000 to over £150,000.

All three applications came before the Deputy Registrar, who rejected the annulment application, but granted the Trustee’s two applications. He considered that time costs was the only appropriate basis “because even though the bankruptcy commenced more than 19 years ago there is still uncertainty as to what might be realised and when if it continues and in any event the extent of the time necessarily and unavoidably spent by Mr Hunt and his staff already is such that a percentage basis of any kind could not, in my view, result in appropriate remuneration, especially as yet further time would have to be spent the amount of which cannot be anticipated” (paragraph 35). He had also been reluctant to ignore Barclays’ debt entirely, given the precedent of Gill v Quinn, which had involved the rejection of an annulment because of a number of creditors’ silence to invitations to prove their debts.

At the appeal, the Chancellor’s view was that this case was quite different to Gill v Quinn and that the evidence showed that Barclays had taken “an informed policy decision that it would not then or in the future lodge a proof in respect of any debt in Mr Salliss’ bankruptcy” (paragraph 41) and therefore Barclays’ debt was irrelevant to the annulment application.

He also felt that the Deputy Registrar’s approach to the remuneration application was flawed. He felt that insufficient regard had been given to Chief Registrar Baister’s Practice Statement on the fixing and approval of the remuneration of appointees, which, contrary to the Deputy Registrar’s view, he felt was relevant to applications to have a fees basis changed as well as fixed by the court. With the Practice Direction in mind, the Chancellor stated that the proper approach “is to begin by asking what has changed and was not foreseen and could not have been foreseen when the creditors made their decision” (paragraph 51). In this case, it had always been known that the assets were limited, but the Trustee had been content to continue to act under the creditors’ resolution. The Chancellor commented that “the usual and proper course should be for the trustee to apply to the court for a change in the basis of remuneration as soon as it becomes clear that an application will be necessary in order to make the remuneration (in the words of the Practice Direction) fair, reasonable and commensurate with the nature and extent of the work properly to be undertaken by the appointee. In other words, the application should, so far as practicable, be prospective and not retrospective. Unless there is some good and proper reason to do otherwise, it is not appropriate for the trustee to wait until all the work is done and then apply to the court as a ‘fait accompli’ for a retrospective change in the remuneration resolved by the creditors” (paragraph 53).

The Chancellor decided that the annulment and the remuneration applications should be set aside, although he felt unable to determine them on the appeal. He did, however, draw attention to “the considerable increase in the bankruptcy fees and expenses… in substance due to the time, cost and expense of litigating over the costs, expenses and remuneration at the date of the Trustee’s Report” (paragraph 52) and questioned whether the matter could have been brought to a swift conclusion far earlier, when the pension plans’ lump sum might have been sufficient to meet all the costs and expenses.

The consequences of presenting contingent creditors in CVA proposals

LSI 2013 Limited v The Solar Panel (UK) Company Limited (14 January 2014) ([2014] EWHC 248 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/248.html

The Company appealed a winding-up order on the ground that the Deputy District Judge had been wrong to treat the petitioning creditor as a contingent creditor, when the petition debt was genuinely disputed on substantial grounds.

At the appeal, counsel for the petitioning creditor focussed on a draft proposal for the Company’s CVA, which had listed the petitioner as a contingent creditor, albeit only for £1, and did not refer to the claim as disputed; the IP who had drafted the CVA proposal clearly would have understood the distinction between contingent claims and disputed debts. Consequently, the Deputy District Judge had accepted that the Company was insolvent and that the petitioning creditor was a contingent creditor and thus the winding-up petition had been granted.

His Honour Judge Hodge QC felt that the Deputy District Judge had attached too much weight to the reference in the CVA proposal – which was described as draft and had not been signed by the director – that the creditor was contingent and, in any event, it also stated that £1 was the total claim the creditor would have in a terminal insolvency. Hodge HHJ also noted that the petition had not been founded on the petitioner being a contingent creditor and that the Deputy District Judge had not considered the counter-claim. The outcome was that the winding-up order was set aside and the case was remitted to the Bristol District Registry with a view to considering the merits of the dispute.

No escaping a winding-up order in favour of administration

Credit Lucky Limited & Anor v National Crime Agency (29 January 2014) ([2014] EWHC 83 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/83.html

The Company applied for the winding-up order against it to be rescinded, varied or reviewed, or alternatively stayed. Amongst its arguments were that the director wanted to pursue a tax assessment appeal, which the liquidator regarded without merit and did not intend to pursue and that, if the tax assessment were challenged successfully, the director felt that there was every prospect of the creditors being paid in full. The director also intended to apply for an Administration Order so that the Company’s goodwill, name and database could be sold to a third party, which had made an offer conditional on the winding-up order being rescinded.

The judge had several concerns over the conditional offer, which led him to reject the application for rescission. He also did not see why someone should only be prepared to purchase the goodwill, name and database from an administrator and not from a liquidator. He felt that it was implausible that these assets would be more valuable if the Company “‘cleared its name’ by prosecuting and winning the tax appeal” (paragraph 40).

He also felt it was inappropriate to grant a stay: although the liquidator is obliged to take all reasonable steps the maximise asset realisations and therefore is entitled to decide whether to pursue an action in the name of the Company, if the Company or another interested party believes that the tax appeal should be pursued, “it is open to them to apply to the court for a direction which would enable them to prosecute the Tax Appeal in the name of the company or the liquidator. That being so it is difficult to see how – on the assumption that there is, contrary to the liquidator’s view, some merit in the Tax Appeal – the refusal of a stay would result in irremediable loss” to the Company or its shareholder (paragraph 64).

Equity of exoneration with a twist

Day v Shaw & Shaw (17 January 2014) ([2014] EWHC 36 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/36.html

This case differed from the usual equity of exoneration scenario in that the principal debtor to the secured creditor was, not a co-owner of the property, but Mr Shaw’s limited company, “Avon”, that had gone into liquidation and that, although Mr and Mrs Shaw had granted a charge over their property, the debt to the bank was also secured by reason of personal guarantees by Mr Shaw and the couple’s daughter, Mrs Shergold. Mr Day’s interest in the case arose because he had obtained a charging order over Mr Shaw’s interest in the property, so he was keen to contend that Mrs Shaw was not entitled to an equity of exoneration, but that the debt due to the bank should be borne equally by the shares of Mr and Mrs Shaw in the proceeds of the sale of the property.

At first instance, the judge had decided that Mrs Shaw was entitled to an equity of exoneration. On the appeal, Mr Day contended that, if the judge had treated Avon as the principal debtor, the conclusion would have been that the equity of exoneration did not apply to the property jointly owned by Mr and Mrs Shaw.

The question for Mr Justice Morgan was whether Mr Shaw and Mrs Shergold, as guarantors, and Mr and Mrs Shaw, as mortgagors, were all sureties of the same rank or was one group effectively sub-sureties for the other? The conclusion he reached was that “it is clear that in substance, Mr Shaw and Mrs Shergold were sureties for the debt of Avon and Mr and Mrs Shaw, as mortgagors, were sub-sureties. I do not consider that the guarantors and the mortgagors can be considered to be co-sureties equally liable for the principal debt. The result is that the sub-sureties (Mr and Mrs Shaw) are entitled to be indemnified by the sureties (Mr Shaw and Mrs Shergold) in just the same way as a surety is entitled to be indemnified by a principal debtor” (paragraph 26). It follows that for the purposes of the equity of exoneration, Mrs Shaw can establish that she is entitled to be indemnified by Mr Shaw in relation to the debt owed to Barclays” (paragraph 30).


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Two bankruptcy annulments, two council debts, and a decision “of potential interest to all insolvency practitioners”

1136 Swakop

Some questions answered by a few of the recent cases in the courts:

Kaye v South Oxfordshire District Council – if an insolvency commences mid-year, how much of the year’s business rates rank as an unsecured claim?
Yang v The Official Receiver – can a bankruptcy order be annulled if the petition debt is later set aside?
Oraki & Oraki v Dean & Dean – on the annulment of a bankruptcy order, if the petitioning creditor cannot pay the Trustee’s costs, who pays?
Bristol Alliance Nominee No 1 Limited v Bennett – can a company escape completion of a surrender agreement if the process is interrupted by an Administration?
Rusant Limited v Traxys Far East Limited – is a “shadowy” defence sufficient to avoid a winding up petition in favour of arbitration?

A decision “of potential interest to all insolvency practitioners and billing authorities for business rates”

Kaye v South Oxfordshire District Council & Anor (6 December 2013) ([2013] EWHC 4165 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4165.html

HHJ Hodge QC started his judgment by stating that this decision is “of potential interest to all insolvency practitioners and billing authorities for business rates” (paragraph 1), as he disagreed with advice that appears to have been relied upon by billing authorities and Official Receivers for quite some time. This may affect CVAs, which were the subject of this decision, and all other insolvency procedures both corporate and personal.

The central issue was: how should business rates relating to a full year, e.g. from 1 April 2013 to 31 March 2014, be handled if an insolvency commences mid-year?

In this case, the council had lodged a proof of debt in a CVA for a claim calculated pro rata from 1 April to the date of the commencement of the CVA, but the Supervisor had observed to the council that he believed that the full year’s business rates ranked as an unsecured claim.

The council responded that the company had adopted the statutory instalment option (whereby the full year’s rates are paid in ten monthly instalments commencing on 1 April) and that, as this was still effective at the commencement of the CVA, the unsecured claim was limited to the unpaid daily accrued liability – with the consequence, of course, that the council expected to be paid ongoing rates by the company in CVA. The council stated that, had the right to pay by instalments been lost at the time of the CVA (by reason of the debtor’s failure to bring instalments up to date within seven days of a reminder notice), the whole year’s balance would have become due and this would have comprised the council’s claim. [This seems perverse to me: it would mean that companies would be better off postponing proposing a CVA until the business rates become well overdue, as the full year would then be an unsecured claim, rather than accruing as a post-CVA expense.] The Supervisor applied to the court for directions.

In support of the council’s view was advice (not directly related to this case) from the Insolvency Service of early 2010, which stated that, unless a bankrupt had failed to comply with a reminder notice, the Official Receiver would reject a claim for council tax for the portion of the year following a bankruptcy order. The council also provided what was said to be the current view of the Institute of Revenues and Valuation, which followed a similar approach in relation to a company’s non-domestic rates.

Hodge HHJ felt that the decision in Re Nolton Business Centres Limited [1996] was of no real assistance, because, although this had resulted in a liquidator being liable for rates falling due after appointment, he stated that it merely demonstrated the “liquidation expenses principle”: “the question was not whether the debt had been incurred before, or after, the commencement of the winding up, but whether the sums had become due after the commencement of the winding up in respect of property of which the liquidator had retained possession for the purposes of the company” (paragraph 38).

Although, in this case, the full year’s rates had not fallen due for payment by the time of the commencement of the insolvency, Hodge HHJ viewed it as “a ‘contingent liability’, to which the company was subject at the date of the [CVA]” (paragraph 54). Therefore, he felt that the full year’s non-domestic rates were “an existing liability incurred by reason of its occupation of the premises on 1st April 2013. It, therefore, seems to me that the liability does fall within Insolvency Rule 13.12” (paragraph 55) and, by reason of the CVA’s standard conditions, were provable. He also commented that it seemed that this would apply equally to liquidations and bankruptcies.

The judge decided that the council should be allowed to prove in the CVA for the full amount of unpaid rates and he felt that the company would have a good defence to the existing summons for non-payment of post-CVA rates.

My thanks to Jo Harris – I’d originally missed this case, but she’d mentioned it in her February technical update.

(UPDATE 22/07/2014: For an exploration of the application of this case to IVAs, take a look at my more recent post at http://wp.me/p2FU2Z-7y)

Absence of petition debt – council tax liability that was later set aside – was not a ground to annul bankruptcy order

Yang v The Official Receiver & Ors (1 October 2013) ([2013] EWHC 3577 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3577.html

Yang was made bankrupt on a petition by Manchester City Council for unpaid council tax of £1,103. After the bankruptcy order, Yang discharged the liability orders but also challenged the liability on the basis that the council had incorrectly classed the property as a house in multiple occupation. Subsequently, the valuation tribunal ordered the council to remove Yang from the liability.

Yang then sought to have the bankruptcy annulled, but the court ordered that the bankruptcy order be rescinded; the annulment was refused, as the court decided that there was no ground for the contention that, at the time the bankruptcy order was made, it ought not to have been: at that time, the multiple occupation assessment stood and Yang had not challenged it.

In considering Yang’s appeal, HHJ Hodge QC felt that the Council Tax (Administration and Enforcement) Regulations 1992 were relevant, which state that “the court shall make the [liability] order if it is satisfied that the sum has become payable by the defendant and has not been paid” (paragraph 20) and the court cannot look into the circumstances of how the debt arose, although the debtor is entitled to follow the statutory appeal mechanism. The judge stated: “It seems to me that the fact that a liability order is later set aside does afford grounds for saying that, at the time the bankruptcy order was made, there was no liability properly founding the relevant bankruptcy petition within the meaning of Section 282(1)(a) of the 1986 Act. But that does not mean that a bankruptcy order made on a petition founded upon such a liability order ‘ought not to have been made’” (paragraph 22) and therefore he was content that the bankruptcy order was rescinded, rather than annulled, although there remain three further grounds of the appeal to consider another day.

Innocence is relative

Oraki & Oraki v Dean & Dean & Anor (18 December 2013) ([2013] EWCA Civ 1629)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/1629.html

After a long battle, the Orakis’ bankruptcies were annulled on the basis that the orders should not have been made: the petition debt related to fees charged by a man who was not a properly qualified solicitor and was not entitled to charge fees. At the same time, the judge ordered that the Trustee’s costs should be paid by the Orakis, although they were open to seek payment from the solicitor firm (Dean & Dean) and to challenge the level of the Trustee’s remuneration.

The Orakis appealed the order to pay the Trustee’s costs on the basis that they were completely innocent. Floyd LJ agreed that the Orakis were wholly innocent “as between Dean & Dean and the Orakis”, however “the confusion occurs if one seeks to carry those considerations across to the costs position as between the trustee and the Orakis. There is no clear disparity, at least at this stage, between the ‘innocence’ of the two parties” (paragraphs 36 and 37). He also stated that, whilst it was still open for the Orakis to challenge the level of costs, which appear to have increased by some £250,000 since 2008, it seemed to him to be unlikely that the Trustee would not be able to demonstrate that he is entitled to at least some costs.

Lady Justice Arden added her own comments: “the guiding principle, in my judgment, is that the proper expenses of the trustee should normally be paid or provided for before the assets are removed from him by an annulment order” (paragraph 63) and it was not clear that the Orakis’ estates would be sufficient to discharge the expenses in full, which, absent the order, would have left the Trustee with the burden of unpaid expenses. She noted that, usually, the petitioning creditor would be ordered to pay the Trustee’s costs where a bankruptcy order is annulled on the ground that it ought never to have been made. However, unusually, in this case the petitioning creditor could not pay and therefore the judge was entitled to order that the Orakis pay.

Landlord entitled to escrow monies held for part-completed surrender interrupted by Administration

Bristol Alliance Nominee No. 1 Limited & Ors v Bennett & Ors (18 December 2013) ([2013] EWCA Civ 1626)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/1626.html

In 2010, A\Wear Limited (“the company”) entered into an ‘Agreement for surrender and deed of variation’ with the landlord (“Bristol”) of leased properties and £340,000 was held in escrow pending completion of the surrender and payment by the company of the VAT on the escrow amount. A similar arrangement was made in relation to another property with an escrow amount of £210,000. Shortly after the landlords served notice on the company requiring completion of the surrender, the company entered into administration and the company, acting by its administrators, refused to complete the surrender.

At first instance, the judge refused to make the order requested by the landlords for specific performance to enable the escrow amounts to be released to them, on the basis that it would have offended the principle of pari passu treatment of unsecured creditors. At the appeal, Rimer LJ disagreed: although the refusal of an order for specific performance would open up the possibility that the company’s contingent interest in the escrow monies might be realised, the monies were not part of the company’s assets and therefore ordering specific performance would not deprive the company of any assets then distributable to creditors. Rimer LJ stated that the effect of the refusal “was to promote the interests of the company’s creditors over those of Bristol in circumstances in which there was no sound basis for doing so”. “Prior to the administration, Bristol had a right, upon giving appropriate notice, as it did, to compel the company to complete the surrender. If such a claim had come before the court before the company’s entry into administration, there could have been no good reason for the court to refuse to make such an order; and the consequence of doing so would have been to entitle Bristol to the payment of the escrow money. It was manifestly the intention of the parties to the surrender agreement to achieve precisely such a commercial result. The company’s entry into administration cannot have resulted, and did not result, in any material change of circumstances. The principle underlying Bastable’s case shows that Bristol remained as much entitled to an order for specific performance as it had before” (paragraph 34). With the support of the other appeal court judges, the appeal was allowed.

Winding up petition “trumped” by arbitration agreement

Rusant Limited v Traxys Far East Limited (28 June 2013) ([2013] EWHC 4083 (Comm))

http://www.bailii.org/ew/cases/EWHC/Comm/2013/4083.html

Rusant Limited sought to restrain the presentation of a winding up petition against it by Traxys Far East Limited, which had issued a statutory demand for the repayment of a loan. However, the loan agreement included a term that “any dispute, controversy or claim… should be referred to and finally resolved by arbitration of a single arbitrator” and Rusant claimed that an extension to the loan repayments had been agreed.

Although Mr Justice Warren described Rusant’s defence as “shadowy” and stated that, apart from the arbitration agreement, he would not grant an injunction, “the arbitration agreement, it seems to me, trumps the decision which I would otherwise have made” (paragraph 33) and therefore, in consideration of the Arbitration Act 1996, he did not allow the petition to proceed.


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Exercise of court’s discretion to allow creditor’s action to continue despite Interim Order and Other Judgments

1116 Sunset

Some recent court decisions:

Dewji v Banwaitt – under what circumstances will the court allow a creditor’s action to continue despite an IVA Interim Order?
Masters & Beighton v Furber – can a debtor be forced to hand over assets caught by IVA?
Ward Brothers (Malton) Limited v Middleton & Ors – does an IP acting in an informal capacity avoid TUPE?
O’Kane & O’Kane v Rooney – fixed charge receivers’ agents’ “worrying conduct” scuppers sale
Re Hotel Company 42 The Calls Limited – will the court terminate an Administration and hand back the company to the directors despite the Administrators’ wishes for it to continue?
Re ARM Asset Backed Securities SA – does the EC Regulation on Insolvency Proceedings apply when the winding-up petition is based on the just and equitable ground?
Westshield Limited v Mr & Mrs Whitehouse – which takes precedence: a CVA term requiring a Supervisor to decide on set-offs or the enforcement of an Adjudicator’s decision?

Creditor’s interim charging orders made final despite IVA Interim Order

Dewji v Banwaitt (29 November 2013) ([2013] EWHC 3746 (QB))

http://www.bailii.org/ew/cases/EWHC/QB/2013/3746.html

Mr Banwaitt had obtained judgment in proceedings against Dr Dewji for fraudulent misrepresentation in relation to an agreement under which Mr Banwaitt had paid to Dr Dewji sums for the purchase of land in Cambodia. Mr Banwaitt then obtained interim charging orders over three properties, but before the charging orders were made final, Dr Dewji was granted an Interim Order. However, at the hearing on the charging orders, the Master granted leave under S252(2)(b) of the Insolvency Act 1986 for Mr Banwaitt’s action to continue and exercised his discretion in making the charging orders final.

Dr Dewji’s request for permission to appeal the charging orders was refused. Mrs Justice Andrews accepted that usually the overriding principle would be that all creditors of a single class should rank equally once a statutory scheme had got underway. However, she noted that “there may be situations in which, despite the Interim Order, the ‘first past the post’ approach is justifiable” (paragraph 45). She suggested some scenarios: where a judgment creditor were seeking to recover monies paid under a contract that had been rescinded for fraud, “the Court might take the view when exercising its discretion that it would not be in the interests of justice to allow the debtor’s other creditors to participate in that share of his estate that was increased at the expense of the party he deceived” (paragraph 29) or where “the asset against which the judgment creditor is seeking to execute judgment falls entirely outside the IVA, so that there is no question of it being shared between the general body of creditors. Another, quite independent, example would be where the IVA was bound to fail, either because the judgment creditor had sufficient voting power to block it by himself, or because the creditors as a whole or a majority of them were bound to regard it as unattractive” (paragraph 39).

What Dr Dewji had proposed for his IVA led the judge to conclude that the Master had been justified in exercising his discretion in favour of the creditor. “The question that the Master had to determine is not whether it would be unfair to let Mr Banwaitt have an advantage over the general body of creditors. It is whether it would be unfair to let Mr Banwaitt, (who, on the evidence before the Master, was the only Investor induced to part with his money for this project by deceit, and who alone has chosen to expend costs in pursuing its recovery from Dr Dewji) obtain final charging orders over property that was not going to be distributed between Dr Dewji’s creditors, but (in the case of one property only, Dale Street) utilised to raise money to pay foreign lawyers to try and recover a substantial sum of money that would then be shared equally between Dr Dewji himself and some of those creditors, including the judgment creditor” (paragraph 47).

IVA debtor was not free to resist realisation of assets

Masters & Beighton v Furber (30 August 2013) ([2013] EWHC 3023 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3023.html

The Joint Supervisors of Mr Furber’s IVA sought an order requiring Mr Furber to allow the collection of some of his vehicles that, in accordance with the terms of the IVA, had been sold. The Joint Supervisors had also been granted a power of attorney to enable them to deal with Mr Furber’s assets. Mr Furber refused to allow the vehicles to be collected, claiming that he entered the IVA under pressure and that the vehicles had been sold at an undervalue.

Purle HHJ acknowledged that, in one sense, Mr Furber could choose to default on the IVA, with a potential consequence of being made bankrupt. However, as counsel for the applicant put it, “unless the process of disposal of the vehicles is concluded, there is a risk that the successful bidders will withdraw their bids and thereafter demand return of all monies paid, as well as possibly seeking damages. Ironically, if, as Mr Furber says, the value of the vehicles was higher than the sum that has been achieved by the online auction process then there will be a claim for loss of bargain by the successful bidders” (paragraph 9). With the risk of increasing creditors’ claims in mind, the judge agreed to order the release of the vehicles: “In my judgment, requiring Mr Furber to comply with his obligations under the IVA and the power of attorney will be in the best interests of his creditors generally and maintain the authority of the supervisors who are effectively, if not in law, officers of the court” (paragraph 11).

IPs acting in an advisory capacity not sufficient to avoid TUPE

Ward Brothers (Malton) Limited v Middleton & Ors (16 October 2013) ([2013] UKEAT 0249)

http://www.bailii.org/uk/cases/UKEAT/2013/0249_13_1610.html

Bulmers Transport Limited ceased to trade on a Friday and on the following Monday Ward Brothers (Malton) Limited started to perform Bulmers’ major contracts using some of its former employees. Before Bulmers had ceased to trade, it had been presented with a winding up petition and had sought the advice of IPs. It seems that, although Administration had been contemplated, this was abandoned around the time that trading ceased. Some ten days later, different IPs were appointed Administrators by the QFCH.

The key question for the Appeal Tribunal was: did the involvement of IPs fit the TUPE exception, “where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner” (Regulation 8(7) of TUPE)?

The Appeal Tribunal supported the original Tribunal’s conclusion that the first set of IPs had been acting only in an advisory capacity and that Bulmers had not been under the supervision of an IP at the time of the transfer.

The Appeal Tribunal also appreciated that “it is regrettable that so much uncertainty exists” (paragraph 20) as regards the application of TUPE and acknowledged “the importance of establishing, if possible, a red line”. They felt that the principles in Slater v Secretary of State for Industry, whilst not formally binding, “command considerable respect; and we respectfully agree that what is there set out is an appropriate and sensible red line and is the correct principle to apply. It is consistent with section 388, which, as we have said, provides that a person acts as an insolvency practitioner in relation to a company by acting as its liquidator, provisional liquidator, administrator or administrative receiver; if not appointed as such, then a person is not acting as an insolvency practitioner” (paragraph 23).

In the summary to the decision, it states that “an appointment (formal or informal) was necessary before there could be said to be supervision by an insolvency practitioner”. Personally, I struggle to see how an IP can be informally appointed and acting in a S388 capacity. The body of the decision states: “Clearly, that red line is not an entirely straight line. There may be disputes, for example, as to whether an insolvency practitioner was on the facts, appointed before a formal letter of appointment was provided or even drafted” (paragraph 24), so perhaps that is what is meant by an “informal” appointment.

The consequence of this decision in this case was that the appeal was dismissed: there had been a transfer that was not subject to the TUPE exclusion as regards the transfer of employee claims to the transferor.

Fixed charge receivers’ sale process tainted by agents’ “worrying conduct”

O’Kane & O’Kane v Rooney (12 November 2013) ([2013] NIQB 114)

http://www.bailii.org/nie/cases/NIHC/QB/2013/114.html

The O’Kanes sought an injunction restraining the joint fixed charge receivers from selling a property.

The judge was presented with evidence, albeit most of it hearsay but nonetheless “very strong”, which the judge described as showing “worrying conduct”, “very curious behaviour indeed”, and even “bad faith” (paragraphs 8, 9, and 10). The criticisms were levelled at the joint receivers’ agents who seemed to have discouraged some parties from bidding, provided inaccurate information, and allegedly advised the highest bidder not to increase its bid during the open bidding process, stating that the bidder would win out at the lower figure.

Although the O’Kanes’ proposal was complex and it was argued to be unrealistic, the judge viewed the previous sealed bid process to be tainted. He granted an injunction restraining the sale and directed that the property should be remarketed and sold by way of private treaty, with a bidding book being maintained and exhibited to the court for its approval of the sale. He directed that there should be no involvement of the individuals named, although he did not go so far as to require a new firm of agents to be instructed.

Administration terminated and company handed back to directors despite outstanding fees and expenses

Re Hotel Company 42 The Calls Limited (18 September 2013) ([2013] EWHC 3925 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3925.html

Joint Administrators were appointed on the application of a creditor. All creditors’ claims were paid or waived, although no monies passed through the Joint Administrators’ hands, as they were dealt with by third parties.

The shareholder and director wanted the company returned to them and the administration terminated, given that its purpose had been achieved, but the Joint Administrators were reluctant to rely simply on their statutory charge as regards their unpaid remuneration and expenses as provided by Paragraph 99 of Schedule B1 of the Insolvency Act 1986, given that the appointing creditor had been “given the run around” by an associated company for many years. There was also a separate application ongoing by the shareholder and director under Paragraphs 74 and 75 under a claim that there had been unfair harm and misfeasance by, amongst other things, the charging of excessive remuneration.

Purle HHJ did not consider that the Joint Administrators’ fears were “sufficient to justify their continuing in office when, as they themselves recognise, there is no practical reason for them to do so, and, most importantly, the administration purpose has been achieved” (paragraph 21). It was also his view that the statutory charge, which could be supported by a restriction registered against the company’s property by means of filing an agreed notice with the Land Registry, was ample to protect them.

The judge refused the relief sought by the Joint Administrators to authorise them to grant a charge to themselves and he ordered the termination of the administration. He did not order that the Joint Administrators be discharged, as the misfeasance proceedings remained unresolved.

Does the EC Regulation on Insolvency Proceedings apply when the winding-up petition is based on the just and equitable ground?

Re ARM Asset Backed Securities SA (9 October 2013) ([2013] EWHC 3351 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3351.html

A Luxembourg-incorporated company applied for the appointment of provisional liquidators under a winding up petition presented on the grounds that it would be just and equitable to wind it up.

Mr Justice David Richards was satisfied that the evidence pointed to an England COMI: it was apparent that the decisions governing the Company’s administration and management were taken in London and that this was clear to third parties. However, as the petition was based on the just and equitable ground, rather than on the Company’s insolvency, the judge had to consider whether the EC Regulation on “Insolvency Proceedings” kicked in.

Rather than reach a conclusion on this question, the question of the Company’s solvency was addressed. The circumstances of this case were not cut and dried: although it was likely that there would be insufficient funds to service in full the Company’s issued bonds, the terms of the bonds provided that the holders were entitled to recover sums only to the extent that the Company had available to it certain sums. “As a matter of ordinary language, I would take the view that if a company has liabilities of a certain amount on bonds or other obligations which exceed the assets available to it to meet those obligations, the company is insolvent, even though the rights of the creditors to recover payment will be, as a matter of legal right as well as a practical reality, restricted to the available assets, and even though, as the bonds in this case provide, the obligations will be extinguished after the distribution of available funds. It seems to me it can properly be said in relation to this company that it is unable to pay its debts. A useful way of testing this is to consider the amounts for which bond holders would prove in a liquidation of the company. It seems to me clear that they would prove for the face value of their bonds and the interest payable on those bonds” (paragraphs 31 and 32).

Consequently, although David Richards J has left open the question of whether just-and-equitable petitions are caught by the EC Regulation, he was content that the Company could and should be wound up.

(UPDATE 16/03/14: I recommend a briefing by Tina Kyriakides of 11 Stone Buildings: http://www.11sb.com/pdf/insider-limited-recourse-agreement-march-2014.pdf?500%3bhttp%3a%2f%2fwww.11sb.com%3a80%2fhome%2fhome.asp. This briefing addresses the issue as regards the application of the EC Regulation, pointing out that the decision in Re Rodenstock GmbH held that the winding up of a solvent company is governed by the Judgments Regulation 44/2001 and not by the EC Regulation. More interestingly, this briefing deals with the issue about this case that had niggled me (but which I cowardly avoided): how can liabilities that are expressly restricted to the company’s funds topple the company into insolvency? Personally, I find the conclusions of this briefing far more satisfying.)

Supervisor required to consider effect of set-off despite Adjudicator’s decision

Westshield Limited v Mr & Mrs Whitehouse (18 November 2013) ([2013] EWHC 3576 (TCC))

http://www.bailii.org/ew/cases/EWHC/TCC/2013/3576.html

The Whitehouses had some work done on their house by Westshield prior to the company entering into a CVA in December 2010. After little exchange, Westshield served a Notice of Adjudication in relation to the work done. The Whitehouses raised the issue of a substantial counterclaim and referred to the terms of the CVA, which included that the Supervisor should address the extent of mutual dealings and consider set-off. The Adjudicator decided that the Whitehouses should pay Westshield c.£133,000, but did not consider the counterclaim. The Whitehouses submitted a claim to the Supervisor of c.£200,000, but the Supervisor was reluctant to deal with it given the Adjudicator’s involvement.

Westshield then issued proceedings seeking to enforce the Adjudicator’s decision, but the Whitehouses maintained that the Supervisor would need to deal with the counterclaim.

The judge believed that Westshield had been entitled to pursue the pre-CVA debt and that, had the cross-claim not intervened, the Adjudicator’s decision would have been enforceable. However, the Whitehouses had become bound by the CVA and therefore the CVA condition requiring an account to be taken of mutual dealings and set off to be applied could be carried out by the Supervisor. “Once that exercise is done, if it shows money due to Westshield, that can be paid subject to the right which the Whitehouses have to refer the matter to Court within a short time. The Court can then consider what effect (if any) the adjudication decision may have on its decision as to what should be done. If the accounting shows money due to the Whitehouses, they will get however many pennies in the pound as are available to creditors from the CVA” (paragraph 27).

Consequently, the judge dismissed the application for summary judgment, staying any further steps until the outcome of the Supervisor’s account was known.


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Setting the Scene for Game and other decisions

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I have a nagging suspicion that I’ve been keeping up with reading court judgments in an effort to postpone the job of looking at the draft Rules. I know that I’ll have to look at them sometime, but for now here’s my usual round-up:

• Setting the scene (1): the landlords’ appeal in Game that threatens the Goldacre and Luminar decisions
• Setting the scene (2): the SoS’ appeal of the redundancy consultation requirements in Woolworths and Ethel Austin
• Subtle variation in definitions between Scottish and English statute makes all the difference for a bankrupt living alone
• Limitation period not a barrier to breach of fiduciary duty claim
• Shareholder “acting unreasonably” by not pursuing alternative remedy to deadlock

One to look out for: the landlords’ appeal in the Game Group of Companies

Jervis v Pillar Denton Limited (Game Station) & Ors ([2013] EWHC 2171 (Ch)) (1 July 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2171.html

Most of you will already be keeping an eye open, but I thought I’d cover it here, as BAILII now has published the first instance decision that, in light of the outcomes of Goldacre and Luminar, was pretty-much a foregone conclusion and to which all parties seemed to accept there would be an appeal.

To set the scene: Administrators were appointed on Game Stores Group Limited on 26 March 2012, the day after quarterly rents became due for payment in advance. A licence to occupy a number of properties was granted to Game Retail Limited when the business was sold to it on 1 April 2012. One further property was never occupied by Game Retail Limited, but was effectively abandoned by the Administrators when they removed goods from the property over the first five days of the Administration.

Of course, under Goldacre and Luminar, the rent that fell due prior to Administration is not payable as an expense of the Administration, notwithstanding any use of the property by the Administrators after appointment. In addition, any rents that fall due during the Administration are payable in full as expenses of the Administration even if the Administrators stop using the properties before the end of the relevant quarter. Nicholas Lavender QC made an order to this effect.

The landlords have been granted permission to appeal (and Game Retail Limited to cross-appeal), the key proposed ground being that the Lundy Granite principle and the decision in Re Toshoku Finance UK Plc should result in just and equitable treatment of the rent relating to the period when the property is being used beneficially for the purposes of the Administration as ranking as an expense of the Administration.

The case tracker suggests that the appeal will be heard in February 2014.

(UPDATE: The Game appeal judgment was released on 24 February 2014 (http://www.bailii.org/ew/cases/EWCA/Civ/2014/180.html), the general conclusion being that post-appointment rent (accruing on a daily basis) constitutes an Administration or Liquidation expense, if the property is occupied for the benefit of the Administration or Liquidation. Whilst some of the press coverage suggested that this was a victory for landlords over nasty office-holders, I think that the general mood amongst IPs is that this is a return to a just and sensible approach with which most are comfortable (although a Supreme Court appeal remains a possibility). For a summary of the appeal and its consequences, I would recommend: http://lexisweb.co.uk/blog/randi/landlords-can-rejoice-following-the-game-administration-decision/.)

Another one to look out for: the Secretary of State’s appeal in the Woolworths/Ethel Austin Employment Tribunals

USDAW & Anor v Unite the Union, WW Realisations 1 Limited and the Secretary of State for Business, Innovation & Skills ([2013] UKEAT 0548/12) (10 September 2013)

http://www.bailii.org/uk/cases/UKEAT/2013/0548_12_1009.html

This one is a lot less critical for IPs, but has the potential to reverse a fairly ground-breaking decision nevertheless.

In an earlier post (http://wp.me/p2FU2Z-3I), I reported on the original Tribunal of 30 May 2013, which decided that S188 of TULRCA (relating to the consultation requirements where redundancies are expected to affect “20 or more employees at one establishment”) was more restrictive than the EC Directive and that the consultation requirements should apply if 20 or more redundancies in total were planned, irrespective of the employees’ locations. These conclusions meant that some 4,400 former employees of Woolworths and Ethel Austin Limited (in two originally unconnected Tribunal cases) became entitled to 60 or 90 days’ pay… which, of course, fell at BIS’ door.

BAILII has now published the outcome of the Secretary of State’s application for permission to appeal, which was unique inasmuch as the SoS had declined expressly the court’s invitation to attend the previous hearing. However, HH Judge McMullen QC recognised that the previous judgment “made a substantial change in the outlook to this legislation, and it is in the interests of all that this issue be clarified as soon as possible” (paragraph 13). He also had no problem with the technicality that in fact the SoS was not a party at first instance to the Ethel Austin appeal, but only to the Woolworths one. He also imposed a stay on the order that arose out of the earlier appeal pending the SoS’ appeal.

A key issue for the appeal will be the outcome of the CJEU’s considerations of the case of Lyttle v Bluebird UK Bidco 2 Limited (C-182/13 NIIT, http://www.bailii.org/nie/cases/NIIT/2013/555_12IT.html), a February 2013 Northern Ireland Tribunal case, which covers the same ground.

(UPDATE (09/03/14): On 22 January 2014 (http://www.bailii.org/ew/cases/EWCA/Civ/2014/142.html), the Court of Appeal agreed to make a reference so as to give the CJEU an opportunity to join these cases to the Lyttle case with a view to producing a single judgment. Lord Justice Maurice Kay felt that this was appropriate, as there are no employee representations in the Lyttle case and it could be that a judgment on Lyttle alone might not resolve the issues arising in these cases in any event.)

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

Different Scottish and English treatments of bankrupt’s home do not lead to unfairness

McKinnon v Graham ([2013] EWHC 2870 (Ch)) (20 September 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2870.html

This case nicely demonstrates a subtle difference between the English and Scottish laws relating to a bankrupt’s home: both provide that the property revests in the debtor after three years, but the provisions apply in different circumstances.

S40(4)(a) of the Bankruptcy (Scotland) Act 1985 defines “family home” as: “any property in which at the relevant date the debtor had (whether alone or in common with any other person) a right or interest being property which was occupied at that date as a residence by the debtor and his spouse or civil partner or the debtor’s spouse or former spouse or civil partner (in any case with or without a child of the family) or by the debtor with the child of the family”, but the corresponding S283A of the Insolvency Act 1986 applies “where property comprised in the bankrupt’s estate consists of an interest in a dwelling-house which at the date of the bankruptcy was the sole or principal residence of the bankrupt, the bankrupt’s spouse or civil partner or a former spouse or civil partner of the bankrupt”. Consider the position of a property occupied only by the debtor: under English law the property would revest after three years, but under Scottish law it would not.

This case centred around such a property to which the Trustee of Mr Graham’s sequestration had been granted an order for possession. Mr Graham appealed, arguing that the judge had been wrong to apply Scottish law, which must give rise to situations that are manifestly unfair and thus offends public policy. HHJ Behrens endorsed the original decision, satisfied that the judge had correctly concluded that this was not an exceptional case requiring departure from the principle of modified universalism; he had been correct to apply Scottish law. “The fact that Scottish law chose to do this by reference to ‘the family home’ rather than the English law reference to ‘the sole or principal residence of the bankrupt, the bankrupt’s spouse or civil partner or a former spouse or civil partner of the bankrupt’ does not seem to me to come within a measurable distance of offending public policy or a fundamental principle of English insolvency law. As I have indicated the only difference between the 2 sections are the rights afforded to the bankrupt where he alone occupies the family home. Both jurisdictions provide protection where there is occupation by a spouse, civil partner or children. To my mind this difference is not fundamental to English insolvency law, nor does it offend public policy or create manifest unfairness” (paragraph 26).

Limitation period not applicable in case of director dishonesty

Vivendi SA & Anor v Richards & Bloch ([2013] EWHC 3006 (Ch)) (9 October 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3006.html

Claims for breach of fiduciary duty succeeded against a director and shadow director in a fairly complex, but not extraordinary, case. However, personally what I learned from it was that the usual six-year limitation period did not apply as Mr Justice Newey had concluded that the director and shadow director had engaged in dishonest conduct. The payments in question were made between March 2004 and February 2005 and the company went into liquidation in the middle of 2005, but proceedings were not issued until May 2011.

Winding up order not the only solution for “deadlock” company

Maresca v Brookfield Development and Construction Limited & Anor ([2013] EWHC 3151 (Ch)) (16 October 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3151.html

Mrs Maresca sought the winding up of Brookfield Development and Construction Limited (“BDC”) on the ground that its affairs had been conducted in a way that was unfairly prejudicial to her or alternatively on the just and equitable ground.

The personal relationship between Mrs Maresca and the other shareholder/director had broken down and Mr Justice Norris did consider “that on Mrs Maresca’s contributories’ petition she is entitled to relief by the winding up of the company and (in the absence of any other remedy) it would be just and equitable that the company should be wound up. However I consider that there is another remedy available to her and that she would be acting unreasonably in seeking to have BDC wound up instead of pursuing that other remedy: section 125(2) Insolvency Act 1986” (paragraph 40). With aplomb, Norris J then proceeded to quantify Mrs Maresca’s claim as a creditor based on the facts before him, leading to an order that, if BDC paid her £10,000 by 1 December 2013, then she is bound to transfer her share in BDC to the other shareholder and BDC is not to be wound up.

Norris J ended his judgment with a lesson: “I would readily acknowledge that there is a degree of approximation in this. But I have seen my task as providing a just outcome according to law by the application of resources appropriate to the dispute. Further refinement would come at a cost that would be ruinous to the parties (who have probably devoted to this case more than it is worth). Those who present petitions of this sort for companies like BDC must understand that that is likely to be the approach adopted: and would be wise to adopt the same approach in settlement negotiations” (paragraph 51).


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Red Tape? Hang out the bunting!

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Any measures to reduce insolvency regulation are most welcome and, apart from the odd item that threatens to increase the burden on IPs, the proposals of the Insolvency Service’s Red Tape Challenge consultation promise to bring in a brave new world where website communication is the norm and meetings are a thing of the past. Whether these proposals will be seen as working against the tide of opinion seeking greater creditor engagement remains to be seen, but, for me, some of these changes cannot come soon enough.

Ever conscious that my articles are getting longer and longer, I have described my Top Seven proposals from the consultation document.

The consultation document (“CD”) can be found at: http://www.bis.gov.uk/insolvency/Consultations/RedTapeChallenge?cat=open. The deadline for responses is 10 October 2013.

1. Abolition of Reg 13 Case Records, but there’s a sting in the tail

The first proposal in the document is a belter: let’s abolish the Reg 13 Case Record – yes, please! I remember spending what seemed so much wasted time ensuring that the Reg 13 (or Reg 17 in my day) schedules were complete and accurate – far more overall, I suspect, than the 1 hour per case estimated in the Impact Assessment (which strangely is assumed to apply to only 80% of all cases).

However, it seems the Service is twitchy about leaving IPs to their own devices and is recommending that “legislation should require IPs to maintain whatever records necessary to justify the actions and decisions they have taken on a case. It is not expected that such a provision would impose a new requirement, but rather codify what is already expected of regulated professionals” (paragraph 32). Scary! So instead of a simple, albeit useless, two-pager listing key filing dates etc. of the case, legislation will require IPs to retain certain records. This could go one of two ways: either the provision will be so bland (e.g. as the CD describes it: records to justify actions and decisions) as to be pointless, or it will be in the style of the 2010 Rules on Progress Reports, which will introduce a whole new industry of compliance workers whose job will be to cross-check case files against a statutory list.

Why does the Service see a need to “codify” this matter? If an IP is not already retaining a sensible breadth of records (and such an IP will be rare indeed), if only to protect themselves from the risk of challenge, do they think that a statutory provision is going to force them to do it? Do they think that there needs to be a statutory requirement to assist regulators in addressing any serious failures? Such a measure has the potential to increase the regulatory burden on IPs without, as far as I can see, bringing any advantage whatsoever.

2. Abolishing almost all meetings

Although I welcome these proposals, I do think that the Service has over-egged the savings. For example, the Impact Assessment suggests that £7m would be saved by abolishing final meetings. Although the Service recognises that there will be negligible saving in relation to drafting the final documentation – even if there is no final meeting, a final report etc. will still need to be produced – they have estimated that each case will save on room hire of £64, 1 hour of an administrator’s time, and half an hour of a manager’s time. Personally, I would be very surprised if any IP makes provision for anyone attending a final meeting – does the Service picture IP staff sitting in an empty hired room twiddling their thumbs just in case someone turns up? Ok, so IP staff will save time on drafting minutes of the meeting, but that’s little more than churning off a standard template; it’s hardly 1.5 hours worth.

So if most meetings are abolished, is everything going to be handled in a process similar to the Administration meeting-by-correspondence process? Not quite, although it seems that almost all matters that will require a positive response from creditors – approval of VAs and of the basis of remuneration in any insolvency process – may be handled either as a physical meeting or by correspondence votes. The CD indicates that in other circumstances, “deemed consent” may occur: “the office-holder will issue documents to the creditors informing them of an event (as happens now) and that the contents of these documents are approved (if approval is required for that document/event) unless 10% or more by value or by number of creditors object in writing” (paragraph 64). In what kind of circumstances might this apply? I’m struggling to come up with many instances. I am aware that several IPs seek approval of R&Ps, although personally I do not believe that they need to. The CD also proposes to revise the Act’s Schedules so that Liquidators can exercise more powers without consent, but I guess that, if that does not go ahead, they might be other instances. I guess there might also be case-specific events, e.g. to pursue an uncertain asset, which might be referred to creditors. But there’s nothing wholesale that in future might be handled by “deemed consent”, is there? Unless…

Although the CD excludes office-holder’s fees from “deemed consent”, it makes no mention of SoA/S98 fees. If under the present statute, these need creditors’ approval, might they be deemed approved in future. Personally, I think this is another area, if the fees are due to the IP/firm/connected party, that also needs positive creditor approval.

Professor Kempson reported that IPs estimated that 4% of creditors attended meetings. It is not clear in the report what kind of meetings these are, but I bet they are S98s in the main. Personally, I have always viewed S98s as good opportunities for IPs to communicate something to trade creditors about the insolvency process and to convey face-to-face something of the professionalism, competence, and integrity of IPs. If it is true that no one goes to these any more, then fair enough, but even if it is only the rare S98 that attracts an audience, I feel it could just widen the gap further between IPs and creditors if no S98 meeting were ever held again. Having said that, the Service estimates that there will be only 30% fewer meetings, but if statute no longer requires physical S98s, would they be held; could the cost be justified?

3. Communication by website

The Impact Assessment does not quantify the estimated savings from these proposals, suggesting that they will be smaller than those related to the proposals to allow creditors to opt out of receiving correspondence, but, unless I have misunderstood their proposal, personally I could see this provision being used extensively.

Firstly, a bit more about creditors opting out: the Service estimates that, if they could under statute, 20% of creditors would notify office-holders that they did not wish to receive any further information on a case. I’m sorry, but I really cannot see it: this would require creditors to take action to disengage from the insolvency process – if they’re not already engaged, why would they send back such a notification? And would some then worry that they might miss out on important news, e.g. that miraculously there’s a prospect of a dividend, even though statute might be designed to ensure that Notices of Intended Dividend (“NoID”) etc. be issued notwithstanding any creditor opt-out?

As I say, much more promising I think is the Service’s suggestion that office-holders could write once to creditors to tell them that all future documents are going to be accessible on a website, which is something that office-holders can do presently but only with a court order. Wouldn’t that be great? No more need to send one-pagers to creditors informing them that a progress report has been placed on the website – you’d just put in on the website, job done. I wonder how many hits the web page would get… On second thoughts, I don’t think I want to know; I think it would only make me cry at the realisation of the huge amount of money, time and trees that had been wasted over the decades in sending reports that almost no one read.

There are a couple of catches: the Service proposes that the office-holder could do this only when he/she “considers that uploading statutory documents to a website, instead of sending hard copies, will not unfairly disadvantage creditors” (paragraph 95). I would have thought that creditors might only be unfairly disadvantaged if they are unable to access the website, no? So are we talking here about a particular profile of creditor? Or is the Service thinking, not about the creditors, but about the importance of the documentation? I could see that it might be unfair to place a NoID on a website with no announcement, leaving it to creditors’ pot luck as to whether they spotted the notice in time to lodge a claim – and I’m guessing that NoIDs would be excluded from this provision. But in what other circumstances could creditors be unfairly disadvantaged?

In another section of the CD, which covers a proposal to reduce the number of statutory circulars (which has not made it to my Top Seven), the Service states that: “Important information is being passed – to attend a meeting, to know of its outcome – which we would not want dissipated” (paragraph 102). So does the Service believe that a notice of meeting needs to be circulated, rather than pop onto a website, for fear that creditors might not see it until the meeting had been held? Ok, but then what about progress reports, the issuing of which sets the clock ticking for challenges to fees: are these similarly too important to pop onto a website unannounced? Could creditors be considered to be unfairly disadvantaged by this action? But where would that leave us: what documents would be appropriate to post to a website unannounced?

4. Extend extensions by consent

The Service proposes to extend the period by which Administrations may be extended by consent of creditors to 12 months. They also invite views on whether this should be extended further.

My personal view is that it would seem practical, whilst not making it too easy for Administrations to stagnate, to allow creditors to extend Administrations indefinitely but only by, say, 6 months at a time.

I can think of few circumstances where an Administration should move to a Liquidation, particularly if another of the Service’s proposals – that the power to take fraudulent or wrongful trading actions be extended to Administrators – is implemented. The CD also suggests empowering an Administrator to pay a dividend from the prescribed part, although I would like to see the power extend to a dividend of any description (what’s so special about the prescribed part?). These changes would seem to remove the need to move a company from Administration to CVL (although I wonder if these changes will persuade HMRC to drop its practice of modifying proposals to require that the company be placed into liquidation of some description – why do they do that?!), but then some Administrations might need to be extended for significant periods – adjudicating on claims can be a lengthy business.

I think the Enterprise Act envisaged Administrations as a holding cell, allowing the office-holder to do what he/she could to get the best out of the situation, but once the end-result was established, the idea was that the company would move to liquidation, CVA, or even escape back to solvency. But that all seems a bit over-complicated and costly when, in many respects (e.g. specific bond, R&P and currently D-report/return), the successive CVL is a completely separate insolvency case. Why does the company need to move to CVL to pay a dividend?

5. Scrap small dividends

The Service proposes that, where the dividend payment to a creditor will be less than, say £5 or £10, the dividend is not paid to the creditor. The Service suggests that these unpaid dividends might be passed to its disqualification department or to HM Treasury.

The Service has spotted the key difficulty: should the threshold apply to each interim/final dividend payment or to the total dividend? Although it would not be impossible, it could be tricky applying the threshold to the total dividend – the office holder would need to keep a tally of small unpaid dividends at each interim payment and monitor when the sum total crossed the threshold. To be fair, I guess there are few insolvencies that involve interim dividends – I am assuming that this provision would not apply to VAs (unless the debtor specifically provided for it in the Proposal), but I believe that any increased burden on declaring interim dividends should be avoided.

6. “Minor” changes

The CD provides some annexes of so-called “minor” proposals for change:

• Extend the deadline for proxies up to, and including at, the meeting. Granted very few meetings are physical meetings, but I remember the days of holding CVA meetings and having someone stand by the office fax machine just in case any last-minute proxies came in – it’s not exactly cost-free.

• Apply the VA requisite majorities rule on connected party voting to liquidations and bankruptcies. Personally, I think this is quite a naughty proposal to slip in to this consultation, particularly at the tail-end of a “minor” proposals annex – it hardly seems in keeping with the Red Tape Challenge objective of abolishing unnecessary regulation! Why isn’t it already in liquidations and bankruptcies? I don’t know for sure, but I wonder if it is something to do with the fact that the resolutions taken at VA meetings decide the fate of the insolvent entity, whether to approve the VA or not. The provision is also in Administrations, which is a bit more difficult to rationalise (as are a lot of Administration rules!): perhaps it is because Administrators’ Proposals might also decide the fate of the company, whether the Administrator pursues its rescue by means of a CVA or otherwise (see, for example, Re Station Properties Limited, http://wp.me/p2FU2Z-3I). These decisions are fundamentally different from those taken at liquidation and bankruptcy meetings, where any connected party bias is far less relevant.

• “Clarify that, where ‘creditors’ is mentioned in insolvency regulation, only those creditors whose debts remain outstanding are being referred to. Currently, if a creditor has received payment in full, they would still be classed as a creditor in the insolvency (as they would have been a creditor at the commencement of the procedure, which fixes the use of that term legally). As the legislation refers to actions that can be carried out by or with the consent of creditors, engaging with those ‘creditors’ who have already received full payment (and may not consider themselves creditors any longer) can be difficult” (annex 6(a)). Well, I’m glad we got that cleared up! It makes a joke of the current position, though. For example, the ICAEW blogged that creditors need to receive copies of MVL progress reports (http://www.ion.icaew.com/insolvencyblog/26779). Although I dispute that this is the only interpretation of the Act/Rules, the consequence of the Service’s stance described above is that, despite what the Service apparently has told the ICAEW, even if creditors have been paid, they still receive copies of MVL progress reports – what nonsense! To my mind, however, the key issue arising from this conclusion is the application of R2.106(5A) – not only would paid secured creditors’ approval to the basis of fees need to be sought, but also paid preferential creditors. I wonder what the court would say if a paid creditor applied on the ground that the Administrator had failed to include them in an invitation to approve fees? I suspect: ”Go away and stop wasting the court’s time!” And don’t forget that the Administrator needs to seek all secured creditors’ approvals of the time of his/her discharge – personally, this seems unnecessarily burdensome to me anyway, but do we really need to seek the approval of creditors who are no longer owed anything? Also, the Act/Rules do not seem to allow the Administrator to get his/her discharge by means of anything other than a positive consent from all secured creditors. It’s a shame that this CD does not propose that silent secured creditors could be ignored, when seeking approval for discharge or for fees.

• “Consider the efficiency of the process by which administration can exit into dissolution or CVL and clarify them, if necessary” (annex 6(f)) – yes, please! Despite being tweaked and being the subject of much debate and consultation, it seems that the move to CVL process defies simplification. Now we have the unsatisfactory position that the Administrator needs to sign off and submit to Registrar of Companies (“RoC”) a final report covering the period up to the date that the company moves to CVL, but, because Administrators only learn of this event when they see it appear on the register at Companies House, they have already vacated office by the time they can sign and submit the report. Whilst Administrators can get the report pretty-much ready for signing before they vacate office – so at least they can be paid for the work! – there must be a way of avoiding this fudge, mustn’t there? I ask myself, why should the RoC be in control of the move date? Why couldn’t the Administrator sign a form with the effect that the company moves to CVL and statute simply provide that the form must be filed within a short time thereafter? After all, the dates of commencement of all other insolvency processes are fixed outside of RoC’s hands and the appropriate notices/resolutions are filed after the event.

7. Changes to D-report/return forms

I know that R3 has expended a lot of effort into seeking changes to the D-report/return forms and in putting them online, so I hope that I’m not dissing the Service’s proposals unduly out of ignorance. However, the CD left me puzzled.

Instead of asking IPs to express an opinion on whether the director “is a person whose conduct makes it appear to you that he is unfit” – because the Service believes that this can delay submission of the form, as the IP takes time to gather evidence – it proposes to ask IPs to provide “details of director behaviour which may indicate misconduct” (paragraph 209). From what I can gather, it seems there will be a tick-box list of behaviours that may indicate misconduct. But IPs will still be working on the basis of evidence in ticking the boxes, won’t they? So all that will be removed is the need for the IP to decide whether a D-return or report is appropriate (the Service’s plan is to have only one form). In fact, it could be more burdensome to IPs, as currently they use their own judgment in deciding that an action or behaviour does not, or is unlikely to, cross the threshold of misconduct, which would lead them to submit a clean return, end of story. However, under the proposed system, it seems to me that the IP would tick the box regarding the particular behaviour and the Service would then have to decide whether it warranted further investigation. Would that help anyone?

I appreciate IPs’ reluctance in expressing an opinion on misconduct, but I suggest that the main rationale for dropping this requirement is that, as currently, the Service will make its own mind up anyway, so what does it matter what the IP thinks? However, what will be lost under the new system will be the IP acting as a first-level filter, which I guess achieves the Red Tape Challenge objective, but it seems unhelpful in the greater scheme of things.

And is this tick-box approach going to be an improvement? Although the Service has promised a free text box (woo hoo!), it all sounds a bit restrictive to me.

One promising proposed change is that the Service will pre-populate returns with information that is already available (presumably from RoC). Not only will this make IPs’ lives a little easier, but also the receipt of a pre-populated return may act as a useful prompt to complete the task.

BIS is pursuing its “Digital by Default vision” and so views are sought on whether electronic submission of D-returns could be mandatory. Although personally I think it would not be a huge leap for all IPs to do this – provided the return was a moveable document that could be worked on and passed around a number of people in the IP’s office before finalisation and submission – I dislike the suggestion that there would be no other way of complying with the legislation and I did have to laugh at the image of an IP typing up his D-return in a public library (paragraph 205)!

The Service is also proposing to change the deadline to 3 months, on the assumption that this would be doable if IPs were not required to express an opinion and on the basis that “all of the information required for completion of the return will be available to the office-holder within that reduced period in the vast majority of cases” (paragraph 212). I’m not so sure, particularly if the IP encounters resistance in retrieving books and records and if directors are slow in submitting completed questionnaires – and these likely will include the cases where some misconduct has gone on. The CD does not mention what an IP’s duty would be in relation to any discoveries after the 3 months, but presumably a professional IP will go to the expense of informing the Service of material findings. I realise that resources are stretched extraordinarily within the Investigations department, but I’m not convinced that this is the best way to tackle the issue.

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Well, I had intended to avoid prattling on for too long, but I think I failed! Hopefully, this is a reflection of the interest I have in the Service’s proposals: despite my criticisms, Insolvency Service, I am grateful for your efforts in seeking to improve things – thank you.


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Not the Nortel/Lehman Decision

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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