COMI | Insolvency Oracle

January 4, 2021
by insolvencyoracle Leave a comment

Brexit brings changes even for exclusively-UK insolvencies

Have you found yourself reading articles about the effects of the end of the Brexit transition period that leave you wondering: ok, but is there anything that directly affects my bog-standard UK insolvency work?

As we have been labouring on fixing our own document packs, I thought I’d publish our to-do list.

Jo’s latest Technical Update summarised the main changes and gave a full list of useful resources. If you have bought the latest Butterworths, you’ll see that the changes have already been helpfully inserted in italics. However, you still really need to refer to the Insolvency (Amendment) (EU Exit) Regulations 2019 (at https://www.legislation.gov.uk/uksi/2019/146/contents) to see which Act sections and Rules have been affected. And then of course there’s non-insolvency legislation like the GDPR to think about.

Jo and I found that the key effects boil down to:

Determining the type of proceedings;
Ignoring member State liquidators; and
Re-defining the GDPR

New Types of Proceedings

It seems like only yesterday that we started to add to docs whether the EU Regulation (or EC Reg as it was then in 2010) applied and thus whether the proceedings in question were main, secondary, territorial or non-EU proceedings.

Unfortunately, the Brexit effect is not that this sentence can now be eliminated. Instead, we need to replace it with a statement as to whether the proceedings are (or will be):

“COMI proceedings, establishment proceedings or proceedings to which the EU Regulation as it has effect in the law of the United Kingdom does not apply”.

What defines the proceedings?

New definitions have been added to Rule 1.2:

“COMI proceedings” means insolvency proceedings in England and Wales to which the EU Regulation applies where the centre of the debtor’s main interests is in the United Kingdom;

“establishment” has the same meaning as in Article 2(10) of the EU Regulation;

“establishment proceedings” means insolvency proceedings in England and Wales to which the EU Regulation applies where the debtor has an establishment in the United Kingdom

Dear IP no. 116 explains that effectively COMI proceedings are the new “main” proceedings: the COMI tests are very similar to the previous ones and so, where a company’s principal place of business and registered office are in the UK, this will be the reason why the proceedings are COMI proceedings.

Dear IP no. 116 also explains that similarly establishment proceedings occur where the COMI is elsewhere but the insolvent has an establishment in the UK, where previously this would have resulted in secondary or territorial proceedings.

“Proceedings to which the EU Regulation as it has effect in the law in the United Kingdom does not apply” will be encountered where, per Dear IP no. 116, “one of the UK’s other grounds for the opening of insolvency proceedings has been relied upon”.

What documents are affected?

The documents affected (excluding those that an IP’s solicitors would draft, such as Admin order applications and winding-up petitions) are:

As regards the last document listed above, in fact there has been no change to R8.24(2)(c), which requires the Nominee’s report on the consideration of the IVA Proposal to “state whether the proceedings are main, territorial or non-EU proceedings and the reasons for so stating”… but we assume that this was mistakenly omitted.

Member State Liquidators: blink and you’ll have missed them

In June 2017, the Act and Rules were amended to require office holders to engage with member State liquidators involved with the debtor. For example, office holders needed to send to the member State liquidator copies of all their notices to the court, Companies House or the OR and liquidators and administrators needed to seek the member State liquidator’s consent to the dissolution of the company prior to filing the final docs at Companies House.

All those obligations have now been removed.

Even if you have never dealt with a member State liquidator before and your checklists never even referred to them, there is one change that you need to make to documents as a consequence: R15.8(3)(j) requires decision procedure notices in CVAs and IVAs to state the effects of R15.31 about the calculation of voting rights. R15.31(7) and (9) have been changed to remove reference to the rights of a member State liquidator to vote, so likewise you will need to tweak your CVA and IVA R15.8 notices.

The GDPR: what is it called now?

The EU’s GDPR (i.e. EU 2016/679) forms part of the UK’s law as a consequence of the European Union (Withdrawal) Act 2018. The Data Protection, Privacy and Electronic Communications (Amendments etc) (EU Exit) Regulations 2019 define the product of this action as the “UK GDPR”. These Regulations also make the necessary amendments to the GDPR to reflect the fact that the UK is not a member State.

Does this mean that we now need to start referring to the “UK GDPR”? Personally, I don’t think so. “GDPR” was a colloquial term in any event, so I don’t think this has ceased to be relevant… unless you’re communicating with someone in the EU about the GDPR, of course. Certainly, I don’t think there is any need to go editing internal checklists and I don’t think there’s any pressing need to change documents that refer in passing to the GDPR… although you might like to take this opportunity to replace “GDPR” with something more generic like “data protection legislation” to future-proof it in case the EU GDPR and the UK GDPR diverge materially over time.

So no changes are required for the GDPR switch then?

Almost none. If you have any documents that accurately define the EU GDPR, then you should update this. For example, many letters of engagement make specific reference to the General Data Protection Regulation EU 2016/679 in setting out the parties’ obligations as data controllers (such as the style clause for engagement letters that was issued in 2018 by ICAS at https://www.icas.com/regulation/guidance-and-helpsheets/preparing-for-gdpr). If so, then it would be correct to update this to refer to the effect of the 2019 Regulations.

You should also check what your privacy notice says about transferring data outside the EU. Some notices are specific about when this would happen (if ever). Of course, now the data you process are already outside the EU and if you were to transfer any of it to any of your service providers (e.g. ERA providers or debt collectors) in the UK, it would be a transfer outside the EU. Other than making sure that your privacy notice describes this reality, it’s not a big deal, as you would still be transferring data in accordance with the data protection legislation, wouldn’t you..?

What about GDPR-compliant contracts?

To be honest, I’ve encountered a staggering diversity in the levels of concern about the creation of GDPR-compliant contracts with data processors. I suppose that’s not surprising when even some RPB reviewers have chosen not to explore GDPR compliance to any great degree.

But if you do ensure that the data processors that are engaged by you, your firm, or the insolvents over which you are appointed are wrapped into a GDPR-compliant contract, then you may want to revisit the wording of your standards, especially around the conditions for transferring data outside the EU.

Fortunately, as far as we can see, those are the only practical effects on day-to-day UK insolvency work. What with all the changes to documents and processes in consequence of the CIGA and HMRC secondary preferential creditor changes, I think we could all do with a break from largely unhelpful tinkering for a while.

December 31, 2013
by insolvencyoracle Leave a comment

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

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.

September 28, 2013
by insolvencyoracle Leave a comment

Administration Order Applications All At Sea

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

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

Another failed administration application results in a winding up order

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

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

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

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

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

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

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

Yet another failed administration application

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

June 2, 2013
by insolvencyoracle Leave a comment

(1) Legal charge for bankruptcy annulment service unenforceable; (2) Employment Appeal Tribunal acknowledges company’s conflicting statutory duties; (3) English court leaves US to decide bankrupt’s COMI; (4) company restoration did not avoid administration-liquidation time gap; (5) what are TUPE “affected employees”?; (6) more on Jersey administration appeal

Sorry guys, I’ve been storing up a few court decisions:

• Consolidated Finance v Collins: legal charge resulting from bankruptcy annulment service unenforceable
• AEI Cables v GMB: protective awards reduced in recognition of company’s conflicting statutory duties
• Kemsley v Barclays Bank Plc: English court leaves US to decide bankrupt’s COMI
• RLoans LLP v Registrar of Companies: company restoration did not avoid 2-year gap between administration and liquidation
• I Lab Facilities v Metcalfe: redundant employees in non-transferred part of business not TUPE “affected employees”
• HSBC Bank Plc v Tambrook Jersey: Court of Appeal’s reasons for reversing rejection of Jersey court’s request for administration

Out of the frying pan into the fire for bankrupts achieving annulments

Consolidated Finance Limited v Collins & Ors ([2013] EWCA Civ 473) 8 May 2013

http://www.bailii.org/ew/cases/EWCA/Civ/2013/475.html

Summary: Appellants were successful in resisting the attempts of Consolidated Finance Limited (“Consolidated”) to enforce mortgages over their homes, mortgages which had arisen as a consequence of engaging the Bankruptcy Protection Fund Limited (“BPF”, “Protection”) to secure annulments of their bankruptcies. The agreements were found to be refinancing agreements and thus subject to the Consumer Credit Act 1974, the requirements of which Consolidated had not met.

Whilst the arguments centred around the construction and effects of the agreements, of greater interest to me are the judge’s criticisms of the transactions which, at least in the case examined as typical, were in his judgment manifestly to the bankrupt’s and her husband’s prejudice. He felt that some of the companies’ literature was misleading and noted that it made no mention of the “extraordinarily high rates of interest”. He also criticised the solicitors involved in the process, questioning whether they could avoid the duty to advise their clients, who were clearly entering into a transaction that was manifestly to their disadvantage, and suggested that they may have had “a conflict of irreconcilable interests” given their relationship with Consolidated and BPF.

The Detail: Five sets of appellants sought to resist Consolidated’s attempts to enforce mortgages over their homes. The judge focussed on the facts of Mr and Mrs Collins’ case as typical of all claims.

Mrs Collins had been made bankrupt owing a total of £13,544 to her creditors. She engaged the services of BPF to help her secure an annulment, given that the equity in her jointly-owned home was more than sufficient to cover all debts. Mrs Collins’ bankruptcy was annulled by reason of BPF settling all sums due by means of funds totalling £24,674 received from Consolidated. Under the terms of a Facility Letter, Consolidated agreed to make available a loan of £32,000 (which was also used to settle BPF’s fees), which was required to be repaid within three months after drawdown. Mr and Mrs Collins were unable to refinance their liabilities under the Facility Letter supported by a Legal Charge, resulting in Consolidated filing the claim, some 2.5 years later, for a total at that time of £77,385 inclusive of interest at 4% per month after the first three months (at 2.5% per month). The Facility Letter also provided for a so-called hypothecation fee of 2.5% of the principal and an exit fee of the greater of £3,000 and 2.5% of the principal.

Amongst other things, the appellants contended that the agreements under which they were alleged to have incurred the liabilities were regulated for the purposes of the Consumer Credit Act 1974 (“the Act”) and did not comply with the requirements of the Act. Consolidated’s case was that it was a “restricted-use” agreement, which would lead it to be exempted from the requirements of the Act. The Collins’ argument was that, if anything, it was a refinancing agreement, which would mean that it was not exempt.

Sir Stanley Burton concluded from the documents that Mrs Collins was indebted to BPF for the sums advanced at least until the annulment order was made. “The effect of the Facility Letter was to replace her indebtedness to Protection, which was then payable, with that owed to Consolidated. In other words, the purpose of the agreement between Mrs Collins and Consolidated was to refinance her indebtedness to Protection” (paragraph 47). Consequently, it was a regulated agreement and it was common ground that it did not comply with the statutory requirements and was unenforceable in the present proceedings.

The judge felt inclined to air his concerns at the “unfairness” of the transactions between the Collins and BPF/Consolidated. He stated that, “at least in the case of Mr and Mrs Collins, the transactions were in my judgment manifestly to their prejudice… If they failed to refinance their liabilities to the companies, as has happened, and the Legal Charges granted to Consolidated were enforceable, it would not only be Mrs Collins’ equity in their home that would be in peril, but also that of Mr Collins. In other words, they were likely to lose their home. This was the very result that, according to the companies’ literature, entering into agreements with them would avoid, but with the added prejudice that the far greater sums sought by the companies would have to be paid out of the proceeds of sale of their home as against the sums due in the bankruptcy (for which Mr Collins had no liability)” (paragraph 56).

He also noted that the companies incur no risk in making the advance to the bankrupt, as they will only do so if there is sufficient equity in the property, and therefore “to suggest that they take any relevant risk, as they do by describing their services as ‘No win no fee’, is misleading” (paragraph 57). “Moreover, the companies’ advance literature… make no mention of the extraordinarily high rates of interest they charge, rates that are even more striking given that the indebtedness is fully secured” (paragraph 58).

The judge also criticised the solicitors who acted for Mrs Collins and who were introduced to her by BPF, a relationship which, he suggested, may have given them “a conflict of irreconcilable interests”. “It must, and certainly should, have been obvious to them that for the reasons I have given the transactions with Mr and Mrs Collins were manifestly to their disadvantage. Mrs Collins was their client. I raise the question whether in such circumstances a solicitor can properly avoid a duty to advise his client by excluding that duty from his retainer, as LF sought to do” (paragraph 59).

Employment Appeal Tribunal acknowledges insolvent employer’s Catch-22, but only drops protective awards by a third

AEI Cables Limited v GMB & Ors ([2013] UKEAT 0375/12) (5 April 2013)

http://www.bailii.org/uk/cases/UKEAT/2013/0375_12_0504.html

Summary: Having consulted IPs and failed to seek additional funding, the company decided to make employees in one division redundant and keep another division running with a view to proposing a CVA. The CVA was approved, but the dismissed employees were granted the maximum 90 days protective awards, as the company had failed completely to consult with the trade unions/employee representatives as required by the Trade Union and Labour Relations (Consolidation) Act 1992.

The company sought to have the protective awards reduced. The Appeal Tribunal acknowledged that it was unreasonable to expect the company to have continued to trade while insolvent to enable it to comply with the consultation requirements of the Act – the company could have consulted, at most, for 10 days – and that the Employment Tribunal should have considered why the company acted as it did. The protective awards were reduced to 60 days.

The Detail: Around the middle of May 2011, insolvency practitioners warned the company that, unless they took action, they risked trading whilst insolvent. Following a failure to secure additional funding from the bank, the decision was made to close the company’s cable plant, leading to the redundancy of 124 employees, but continue to trade the domestic division, which employed 189 people, and seek to agree a CVA. On 27 May 2011, the 124 employees were dismissed with immediate effect and later a CVA was approved on 24 June 2011.

An Employment Tribunal found that the company had failed to consult with trade unions and employee representatives as required by S188 of the Trade Union and Labour Relations (Consolidation) Act 1992. The company raised no special circumstances in an attempt to excuse non-compliance, but it did appeal the length of the protective awards, which had been granted for the full 90 days.

The reasoning of the Appeal Tribunal went like this: “We very much bear in mind that the purpose of making a protective award is penal, it is not compensatory. It is penal in the sense that it is designed to encourage employers to comply with their obligations under sections 188 and 189. We also bear in mind that the starting point in considering the length of a protective award is 90 days. Nonetheless Employment Tribunals are bound to take account of mitigating factors and are bound to ask the important question why did the respondent act as it did. Had the Employment Tribunal asked this question it could not possibly have ignored the fact and the conclusion that the company simply was unable to trade lawfully after the advice it had received on 25 May. In those circumstances, it is clearly wrong for the Employment Tribunal to anticipate that a 90 day consultation period could have started” (paragraph 22). In this case, the Appeal Tribunal noted that the company could have started consultation around 17 to 20 May, when it seems the company first consulted the IPs, but there had been no consultation or no real provision of information at all before the dismissals on 27 May. “However, because in our opinion the Employment Tribunal failed to have sufficient regard to the insolvency and the consequences of trading and that a consultation period of 90 was simply not possible, the award of 90 days cannot stand” (paragraph 23). The protective awards were reduced to 60 days.

English court leaves US to decide bankrupt’s COMI

Kemsley v Barclays Bank Plc & Ors ([2013] EWHC 1274 (Ch)) (15 May 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1274.html

Summary: An English bankrupt sought to have US proceedings against him restrained. The English court declined to intervene, observing that the Trustee’s ongoing application in the US Bankruptcy Court for recognition under UNCITRAL of the English bankruptcy would decide the bankrupt’s fate.

The Detail: On 26 March 2012, Kemsley was made bankrupt on his own petition. Shortly before this, Barclays commenced proceedings against him in New York (and later in separate proceedings in Florida). Kemsley’s Trustee applied to the US Bankruptcy Court for recognition under UNCITRAL of the English bankruptcy as a foreign main proceeding. At the time of this hearing, judgment on the Trustee’s application had not yet been given, but the New York proceedings had been adjourned awaiting the outcome.

Kemsley applied to the English court to restrain Barclays from continuing with either the New York or the Florida proceedings. The issue for Kemsley was that, although he would be discharged from his English bankruptcy on 26 March 2013, if Barclays were successful in the New York proceedings, that judgment would be enforceable for 20 years in the US and other jurisdictions that would recognise it.

Mr Justice Roth noted a couple of authorities, which followed the principle that “there must be a good reason why the decision to stop foreign proceedings should be made here rather than there. The normal assumption is that the foreign judge is the person best qualified to decide if the proceedings in his court should be allowed to continue. Comity demands a policy of non-intervention” (paragraph 30).

The judge noted that, if the English bankruptcy were recognised as foreign main proceedings on the basis that England was Kemsley’s COMI, the New York and the Florida proceedings would be stayed. But what if the US Court finds that Kemsley’s COMI was the USA? In that case, would it be right for the English court to intervene? As Roth J observed: “either Mr Kemsley’s COMI was in England, in which case an anti-suit injunction is unnecessary; or it was in the United States, in which case I regard such an injunction as wholly inappropriate” (paragraph 50). Consequently, Roth J dismissed the application.

In a postscript to the judgment, it was reported that the Trustee’s application for recognition was refused by the US court. The court found that, at the time of the petition, Kemsley’s COMI was in the USA.

Company restoration of no use to petitioner, as it left a 2-year gap between administration and liquidation

RLoans LLP v Registrar of Companies ([2012] EWHC B33 (Comm)) (30 November 2012)

http://www.bailii.org/ew/cases/EWHC/Comm/2012/B33.html

Summary: A creditor sought the restoration of a dissolved company to the register in order to pursue a preference claim. The company had been moved to dissolution from administration in 2010, so the petitioner sought a winding-up order that would follow on immediately from the administration so that the preference claim was not already out of time.

The judge restored the company and ordered the winding-up, but noted that this did not deal with the 2-year gap between insolvency proceedings. This was because he felt that, on filing the form under paragraph 84 of Schedule B1, the administration had ceased, dissolution being a later consequence, and so the eradication of the dissolution merely brought the company back to the position after the end of the administration.

The Detail: To enable a preference claim to be pursued, RLoans LLP sought the restoration of a company to the register and a winding-up order to take effect retrospectively from the date that the former Administrators’ notice of move to dissolution was registered. The transaction that is subject to the preference allegation occurred in March 2006; Administrators were appointed in January 2007 and they submitted the form to move the company to dissolution in June 2010. Therefore, only if the company’s restoration was accompanied by a continuation of insolvency proceedings – either a liquidation following immediately on the cessation of the administration or an extension of the original administration – would the preference claim have any chance due to the timescales involved; it would be of no use to the petitioner if the commencement of the winding-up were the date of restoration.

Mr Registrar Jones had no difficulty deciding that it was just to restore the company to the register. However, he concluded that the resultant fiction that the dissolution had not occurred had no effect on the cessation of the administration: “when paragraph 84 of Schedule B1 to the Act prescribes that the appointment ceases upon registration of the notice, it means that there is no longer any administration in existence. The cessation is not dependent upon dissolution taking place” (paragraph 26). Therefore, there would still be a gap of over two years between the end of the administration and the start of any winding-up, which would not help the petitioner. The judge also felt that the solution did not lie in extending retrospectively the original administration, because the company had ceased to be in administration before its dissolution; all the current direction could do was to restore the company to the position it was in before dissolution.

In the absence of the recipient of the alleged preference, the judge was not prepared to consider suspending the limitation period between the end of the administration and the commencement of liquidation. Therefore, all he did was restore the company to the register and order its winding-up. He also declined to order that the IP waiting in the wings be appointed liquidator: “I only have power to make the appointment if a winding up order is made ‘immediately upon the appointment of an administrator ceasing to have effect’ (see section 140 of the Act). For the reasons set out above, that has not occurred” (paragraph 61).

Another Employment Appeal Tribunal: “affected employees” narrowed for TUPE consultation purposes

I Lab Facilities Limited v Metcalfe & Ors ([2013] UKEAT 0224/12) (25 April 2013)

http://www.bailii.org/uk/cases/UKEAT/2013/0224_12_2504.html

Summary: Staff employed in one part of the business were not “affected employees” under the consultation requirements of TUPE, because they had not been affected by the transfer of the other part of the business, but by the closure of their business. The fact that the original plan had been that their part of the business would also transfer was not relevant, but rather it was what was finally transferred that was relevant for TUPE consultation purposes.

The Detail: I Lab (UK) Limited (“ILUK”) operated a business providing rushes and post-production work to the film and television industry. On 11 June 2009, the post-production staff were given notice of redundancy, but also were told that the plan was that some of them would be hired on new contracts. However it seems that the plan changed; the company was placed into liquidation on 30 July 2009 and on 11 August 2009 assets relating to the rushes part of its business were sold to I Lab Facilities Limited and no new contracts were made with the former post-production staff.

The Employment Tribunal found that ILUK had failed to comply with regulation 13 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”), but the transferee appealed on the ground that the post-production staff were not “affected employees” for the purposes of TUPE, because that part of the business had not transferred, and thus they had not been entitled to consultation. The Appeal Tribunal agreed – the post-production staff had not been affected by the transfer, but by the closure of the business. However, Counsel for the employees argued that it had been the original plan – which would have affected the post-production staff also – that had generated the requirement to consult.

The Appeal Tribunal reasoned: “It is necessary to appreciate that the time at which an employer must comply with the obligations under regulation 13 (2) and (6) is not defined by reference to when he first ‘envisages’ that he will take the relevant ‘measures’. Rather, the obligation is to take the necessary steps ‘long enough before’ the transfer to allow consultation to take place. That being so, it can never be said definitively that the employer is in breach of that obligation until the transfer has occurred” (paragraph 20). Consequently, as the indirect impact of the actual transfer of the rushes business did not make the post-production staff “affected employees”, the appeal was allowed.

Court of Appeal re-opens the way for administrations of overseas companies

HSBC Bank Plc v Tambrook Jersey Limited ([2013] EWCA Civ 576) (22 May 2013)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/576.html

Summary: As reported in an earlier post (http://wp.me/p2FU2Z-38), the Court of Appeal overturned a rejection of an application for an Administration Order over a Jersey company.

The Detail: At first instance, Mann J said that an Administration Order could not be made under S426, as the English Court was not being asked to “assist” the Jersey Court in any endeavour as there were no proceedings afoot in Jersey.

In the appeal, Lord Justice Davis expressed the view that, with all respect to Mann J, “his interpretation and approach were unduly and unnecessarily restrictive” (paragraph 35). His first point was that “S426(4) is not by its actual wording applicable (notwithstanding the title to the section) to courts exercising jurisdiction in relating to insolvency law: it is by its wording applicable to courts having jurisdiction” (paragraph 36) and, in any event, Davis J felt that the Jersey court was engaged in an endeavour: “the endeavour was to further the interests of this insolvent company and its creditors and to facilitate the most efficient collection and administration of the Company’s assets” (paragraph 41) and thus the Royal Court of Jersey made the request that it did to the English Court.

March 26, 2013
by insolvencyoracle 1 Comment

A brief briefing

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

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

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

Valuing contingent claims

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

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

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

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

What documents are provisional liquidators entitled to recover?

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

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

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

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

COMI: Dublin v Belfast

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

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

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

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

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

Iceland v Scotland: Nice try, Landsbanki

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

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

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

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

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

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

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

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

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I’ve spotted some more recent cases since my return from Hawaii – and I see that the consultations on draft revised SIPs 3, 3A, and 16 have now been issued, excellent! – but they’ll all have to keep for future posts.

February 19, 2013
by insolvencyoracle Leave a comment

Proposals to Reform EC Insolvency Regulation: Better to be inside the tent?

If you, like me, were dissuaded from exploring the EC’s proposal on revising the European Regulation on Insolvency Proceedings, issued on 12 December 2012, by reason of its sheer length, you might find the Insolvency Service’s recent Call for Evidence useful in summarising its potential reach into the UK.

The Insolvency Service opened its Call for Evidence on 7 February 2013, with a closing date of 25 February. Whilst this may seem a tiny window in which to contemplate such a tome of proposals, I am certain that those for whom this holds most interest already will have spent quite some time over the last two months absorbing the proposals.

The fundamental question being asked by the Service is: should the Government opt in or out of the Regulation? Even with my zero personal experience and limited understanding of the work of cross-border insolvencies, it seems to me a no-brainer (well, the way the Service has argued it anyway). The Call for Evidence also asks questions on elements of the proposals likely to impact most on UK insolvency with a view to developing a negotiating mandate for the UK.

The Insolvency Service’s Call for Evidence can be found at: http://www.bis.gov.uk/insolvency/Consultations/EU-CallForEvidence and the EC’s full proposals at: http://ec.europa.eu/justice/newsroom/civil/news/121212_en.htm. I’ve set out below the proposals as they appear in the Service’s consultation.

In or Out?

By opting in, the UK can engage in negotiations in order to finalise the proposals, but it will not be able to opt out subsequently and so the UK will be bound by the final Regulation, whatever its form.

If the UK does not opt in, it can only observe the process; it may decide to opt in later, but it will need the Member States’ consent. If the UK does not opt in to the final Regulation at all, it may mean that the UK will remain bound by the existing Regulation. This could cause much confusion when dealing with an insolvency that crosses the border of an opted-in Member State and, as the Impact Assessment puts it, “the UK is generally considered to be a good environment for cross-border insolvency resolution, and this scenario would undermine that position” (paragraph 30).

An alternative scenario if the UK does not opt in is that the European Council may decide that the existing Regulation in its current form could no longer apply to the UK. The Service describes the consequences as: disenfranchisement of UK stakeholders from EU cross-border insolvencies; UK insolvencies failing to have EU-wide recognition; and, whilst the Model Law might help, it might involve multiple court proceedings in the different relevant jurisdictions and thus increased costs and time to get results.

From scanning commentaries on the EC proposals, it appears to me that not opting in is very unlikely. The only seriously negative vibe I’ve picked up – although even this is by no means universal – is a desire to keep Schemes of Arrangement out of the Regulation. As the EC proposes to retain the power of each Member State to decide whether a national insolvency procedure should be included, it seems to me that this is a weak reason for not opting in. And in any event, I would have thought there would be value in having Schemes of Arrangement acquire recognition across the EU. (UPDATE 16/10/2013: okay, I can see now the value of keeping Schemes out of the Regulation – see, for example, the following article by Dentons extolling the virtues of Schemes for essentially foreign companies: http://www.lexology.com/library/detail.aspx?g=3fd5d9b8-3356-4dd4-86bf-aea8980a9311&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2013-10-15&utm_term=)

Scope of the Insolvency Regulation

As alluded to above, the EC proposes to extend the scope of the Regulation wider than just “liquidation”, as presently (albeit that the Annex to the 2000 Regulation already includes Administration, VAs, Bankruptcy and Sequestration). It proposes to include proceedings “in which the assets and affairs of the debtor are subject to the control or supervision by a court. Such supervision would include proceedings where the court has no real involvement unless a creditor makes an application to review a decision” (paragraph 21) and “proceedings which include the adjustment of debt and the debtor remains in control of any assets” (paragraph 22). This is where the idea that Schemes of Arrangement will be wrapped up in the Regulation comes from.

Also as mentioned above, the Member State can decide whether to notify a particular national insolvency procedure to be included, but it is proposed there will be a new mechanism whereby the EC then will scrutinise the procedure to ensure that it fits the defined scope of the Regulation.

Jurisdiction for opening insolvency proceedings

The concept of COMI is proposed to be retained, consistent with the body of case law that has developed. The proposals seek to extend the concept to individuals.

The EC proposes to introduce a duty on the court or IP that opens the insolvency proceedings to examine the COMI of the debtor and specify the ground on which their jurisdiction is decided. Creditors from other Member States shall have the right to challenge the decision.

Secondary proceedings

It is proposed that the court receiving an application to open secondary proceedings must inform the office-holder of the main proceedings and allow him/her to be heard before the court makes its decision. The main proceedings’ office-holder will be entitled to ask for the application for secondary proceedings to be stayed, if they are not necessary to protect the interests of local creditors.

The proposal removes the restriction that secondary proceedings must be winding-up proceedings; it is proposed that they can be any proceedings available under the law of that Member State, including restructuring.

In addition, it is proposed that the courts in the main and secondary proceedings be obliged to communicate and cooperate with each other and that a similar obligation will be on the office-holder to communicate and cooperate with the court in the other Member State involved in the proceedings.

Publicity of proceedings and lodging of claims

“Each Member State will be required to maintain a public register(s) of insolvency decisions relating to companies and self-employed individuals, which must be internet based and free of charge. This requirement does not extend to insolvency proceedings concerning non-trading individuals or consumers” (paragraph 32). The register will contain basic information on the insolvency (albeit more than is currently on Companies House; for example, the information must include the court and reference number) plus a date for lodging claims. “Each register will be searchable via the European e-justice portal, with an interconnected search facility” (paragraph 33).

The EC proposes the provision of two standard forms for foreign creditors – a notice of insolvency and claim form – which will be made available (by whom? I think by the European e-justice portal) in all official EU languages. Foreign creditors must be given at least 45 days to lodge a claim, irrespective of any national laws specifying shorter timescales.

Groups of companies

The EC proposes to retain the Regulation’s entity-by-entity approach to the insolvencies of group companies, but seeks to improve coordination of efforts. Thus courts and office-holders involved in different proceedings on group companies will be obliged to communicate and cooperate.

It is proposed that the office-holder of an insolvent group company will be entitled to be heard in any opening proceedings on any other group company and will have the right to request a stay. An office-holder will also be able to participate in any insolvency proceedings on other group companies, for example in creditors’ meetings. As the EC puts it, “these procedural tools enable the liquidator [i.e. office-holder] which has the biggest interest in the successful restructuring of all companies concerned to officially submit his reorganisation plan in the proceedings concerning a group member, even if the liquidator in these proceedings is unwilling to cooperate or is opposed to the plan” (page 9 of the EC proposal).

The proposals are not intended to interfere with a strategy of pursuing a single set of insolvency proceedings over a highly integrated group of companies when it is determined that their COMI is in one jurisdiction.

Of course, this is all subject to negotiation and time… probably lots of time…

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UPDATE: On 15 April 2013, it was announced that the Government has decided to opt in to the proposal. This followed a unanimous response in favour of opting in by those who responded to the consultation. The written ministerial statement and the consultation responses can be accessed from: http://www.bis.gov.uk/insolvency/news/news-stories/2013/Apr/EUCallForEvidence

January 12, 2013
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Soapboxing on the Enterprise & Regulatory Reform Bill

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

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

What is in the Bill?

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

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

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

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

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

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

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

Is it controversial?

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

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

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

Will the individual always understand his/her options?

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

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

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

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

Will access to alternatives be cut off?

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

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

Will “bankruptcy tourism” be tackled?

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

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

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

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

Will paying by instalment work?

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

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

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

January 4, 2013
by insolvencyoracle 1 Comment

Three pre-Christmas judgments: (1) Bankrupt refused suspension of discharge to pursue IVA; (2) Another failed attempt to prove England COMI; and (3) Receiver refused payment of costs after restraining order set aside

Below, I catch up on some pre-Christmas judgments:

• Bramston v Haut – reverses earlier judgment and decides that the bankrupt’s attempt to suspend his automatic discharge in order to propose an IVA fails (and includes a warning about the statutory requirements for Nominees’ reports)
• The O’Donnells v The Bank of Ireland – decision on COMI sends away Irish couple from obtaining E&W Bankruptcy Orders
• CPS v The Eastenders Group – upholds decision that Court-appointed Receiver was not entitled to be paid from third party assets, but also decides that, at least under the Proceeds of Crime Act 2002, neither should the CPS pay. Note: this is subject to a Supreme Court appeal. (UPDATE 08/05/14: The Supreme Court has allowed the Receiver’s appeal that his fees be paid by the CPS (but has maintained that the third party assets are out of his reach). For a more detailed summary, see http://wp.me/p2FU2Z-6S.)

Appeal Court sees sense in Trustee objecting to bankrupt who sought suspension of discharge to pursue IVA

Bramston v Haut [2012] EWCA Civ 1637 (14 December 2012)
http://www.bailii.org/ew/cases/EWCA/Civ/2012/1637.html

Summary: The appeal was allowed; the judge’s view was that the earlier order suspending the debtor’s discharge from bankruptcy ought to have been set aside. Lord Justice Kitchin believed that the discharge was suspended, not because of the debtor’s failure to comply with his obligations or for any other purpose that might be within S279(3), but to give the debtor time to put forward an IVA proposal. The judge stated that, it seemed to him, this was “impermissible and outside the scope of the jurisdiction conferred by S279(3)” (paragraph 52).

The judgment includes a reminder on the necessary wording of Nominees’ reports, which, although it surprised me that an IP could have slipped up on this, may serve as a warning to IPs to double-check that their own reports meet the statutory criteria.

The Detail: A good summary of the pre-appeal position is given on page 18 of Lawrence Graham’s August 2012 edition of The Angle. In brief, the debtor had applied under S279(3) for the suspension of his discharge from bankruptcy so that he could put forward an IVA proposal, but the Trustee had opposed the suspension as he had concerns about various aspects of the proposal. The previous judge had dismissed the Trustee’s challenge on the basis that approval of the IVA proposal was a matter for the creditors and he viewed the Trustee as unreasonable for refusing to make the S279(3) application himself in order to block the IVA proposal.

The judge on appeal considered that the purpose of the power conferred by S279 is to extend the bankruptcy to ensure that the bankrupt continues to suffer the disabilities of an undischarged bankrupt until he complies with his obligations. At the time that this debtor had applied for the discharge suspension, his position was that he had complied with all of the Trustee’s demands, albeit that later the Trustee contended the opposite when he sought to have the order set aside.

Kitchin LJ suggested that the debtor could have applied for an interim order under S253, which could, via S255(4), include suspension of the automatic discharge. He pointed out that, to do so, the debtor would have to have given notice of the application both to the OR and the Trustee, which he did not do.

Such an application also would have required the submission of the Nominee’s report on the IVA proposal. In this case, although a Nominee’s report was submitted, it did not comply with S256A or S256(1) as it stated merely that the debtor, not the Nominee, was satisfied that the IVA had a reasonable prospect of being approved and implemented. As I mentioned above, perhaps we should all make doubly-sure that Nominees’ reports are compliant in this regard.

Consequently, the judge concluded that, even if the debtor had applied for an interim order under S253, “it would inevitably have foundered” and thus “the judge fell into error concluding that the court had jurisdiction” to make the order suspending the discharge (paragraphs 64 and 65).
In considering whether the Trustee had been unreasonable to refuse to make an application himself under S279, Kitchin LJ stated: “I do not understand it to be one of the duties of a trustee that he must respond affirmatively to a bankrupt’s request that he co-operate in the promotion of a proposal for an IVA. Furthermore, in the circumstances of this case, the Trustee believed that Mr Haut was in continuing default of his obligations and that the Second Proposal was defective, prejudicial to the interests of the creditors who had no personal connection to Mr Haut and appeared to be designed to thwart his efforts to carry out a proper investigation into Mr Haut’s affairs. Yet the order Mr Haut invited the Trustee to seek was intended to give Mr Haut an opportunity to put the Second Proposal before his creditors and thereafter secure the annulment of his bankruptcy with all the consequences the Trustee was anxious to avoid” (paragraph 73) and he thus concluded that this was far from a case where the Trustee had acted perversely.

Another case of a failed attempt to prove an England COMI

O’Donnell & Anor v The Bank of Ireland [2012] EWHC 3749 (Ch) (21 December 2012)
http://www.bailii.org/ew/cases/EWHC/Ch/2011/3749.html

Summary: An apparent permanent move to London prior to the presentation of bankruptcy petitions was insufficient to prove that the debtors’ COMI had moved to England, because it was not ascertainable to third parties.

The Detail: The Bank opposed petitions by Mr and Dr O’Donnell for English bankruptcy orders, presented in March 2012, alleging that the debtors’ COMI had always been Ireland, where its own petitions had been adjourned awaiting outcome of the EWHC case.

The O’Donnells maintained that they had left Ireland permanently in December 2011. Dr O’Donnell said that “she did not wish to live in a ‘bankocracy’”, “‘the onslaught and negative publicity, et cetera, that the Bank of Ireland have generated against us in the media has created such an atmosphere of hate and nastiness that I think we no longer wish to live in Ireland’” (paragraph 50).

Although the judge accepted that the O’Donnells intended to stay in London, he considered that the O’Donnells’ COMI was still in Ireland when the petitions were presented, largely because that is what it seemed an objective observer would have concluded by reason of information held on the Irish Companies Registration Office, the UK Companies House, and on the website of one of the O’Donnells’ companies. Consequently, the O’Donnells’ bankruptcy petitions were dismissed.

(10/10/13 Update: The O’Donnells’ application for a review of the above decision was dismissed on 06/03/13 – see http://www.bailii.org/ew/cases/EWHC/Ch/2013/489.html – and on 28/08/13 they were adjudicated bankrupt in the High Court in Ireland – see http://www.bailii.org/ie/cases/IEHC/2013/H395.html.)

Court-appointed Receiver left out of pocket after court decides third party assets no longer caught by order

Crown Prosecution Service v The Eastenders Group & Anor [2012] EWCA Crim 2436 (23 November 2012)
http://www.bailii.org/ew/cases/EWCA/Crim/2012/2436.html

Summary: Receivership and restraining orders enabled the Receiver to realise assets of a number of companies, but later the orders were set aside and, although the court was sympathetic to the Receiver, it concluded that to allow the Receiver to discharge his costs from the third party’s asset realisations would violate that third party’s rights under the European Convention on Human Rights. The judges also concluded that the court had no power to order the Crown Prosecution Service to settle the Receiver’s costs, although it left the door open to the Receiver to seek a common law remedy. (UPDATE 08/01/2014: this is subject to a Supreme Court appeal.)

The Detail: A good summary of this case was published in Accountancy Age on 13 December 2012 (“Receivers’ remuneration not in the bag following High Court battle”), but for the sake of completeness, I thought that I would add my own version here.

Orders were granted appointing a Receiver and restraining two individuals from dealing with their assets or the assets of a number of their companies, “Eastenders”. On appeal, the orders were set aside and the court held that Eastenders’ assets were not realisable property held by the individuals. The Receiver applied for an order that his costs be paid from Eastenders’ assets, but the judge declined to grant such an order on the basis that it would violate Eastenders’ rights under Article 1 Protocol 1 of the European Convention on Human Rights (“A1P1”). At a second hearing, the court concluded that it was unacceptable to deny the Receiver payment of his costs and thus it ordered that the CPS pay the Receiver’s costs – this was the subject of this appeal.

In order to review the CPS’ liability to pay the Receiver’s costs, the judge first re-considered the basis under which it had been decided that the Receiver was not entitled to payment from Eastenders’ assets. Lord Justice Laws considered that, although the previous appeal court had decided that Eastenders’ assets were not “realisable property”, the Receiver was entitled to rely on the original order up to the point that it was set aside and thus he felt that the Receiver could recover his costs from what had been considered receivership property.

Laws LJ did not view the result in this case as a violation of Eastenders’ rights under A1P1, but this is where his view differed from the other two appeal court judges. For assets to be subject to a receivership order, there must be “reasonable cause to believe that the alleged offender has benefitted from his criminal conduct” (S40(2)(b) of the Proceeds of Crime Act 2002 “POCA”) and, on the documents presented to court, there must be “a good arguable case… for treating particular assets as the realisable property of the defendant” (CPS v Compton, as quoted in paragraph 78 of this judgment), but in this case the appeal that resulted in the setting aside of the receivership and restraint orders concluded that neither of these two conditions were met and thus the appointment of the Receiver over Eastenders’ property had been unlawful. A1P1 states that “no one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law”; in this case, the Receiver’s claim to Eastenders’ property did not meet the exception, as the Receiver’s appointment had been unlawful.

But was the Receiver entitled to payment from the CPS? The court decided that it had no power under POCA so to order, although Laws LJ noted that the Receiver had not appealed the discharge of his lien and commented that in his opinion the lien was good. In conclusion, the other two appeal judges stated: “We acknowledge that the outcome of this appeal will be clearly unsatisfactory to a receiver who has undertaken work and incurred expenses in the expectation that he would be both rewarded and recompensed out of assets identified for him by the CPS. Our judgment does not exclude the possibility that he may have a common law remedy against those who sought his appointment. All that it does is to establish that he cannot be paid out of the companies’ assets in circumstances in which the legal basis for such provision is absent” (paragraph 72).

(UPDATE 08/01/2014: an appeal lodged by the Receiver is scheduled to appear before the Supreme Court on 24 February 2014. UPDATE 08/05/2014: the Supreme Court allowed the Receiver’s appeal that his fees be paid by the CPS. For a more detailed summary, see http://wp.me/p2FU2Z-6S.)

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