Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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BHS: lessons for IPs?

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Now that all the pantomiming is over, are there any lessons to glean from the Select Committees’ efforts? I think so. Allegations of “group think” and suggestions of advisers being too heavily incentivised to drive through a particular outcome could lead some to ponder “there but for the grace of God…” Whether or not mud is warranted, some stains may prove stubborn to remove.

The House of Commons Work and Pensions and BIS Committees’ report can be found at: goo.gl/Yi9eMI

 

“A remarkable level of ‘group think’”

Referring to the several advisers to Sir Philip Green and to Dominic Chappell, the Committee report states that “many of those closely involved claim to have drawn comfort from the presence of others”. Names such as Goldman Sachs and respected law firms and accountants appear to have lent credibility to the proceedings.

During the evidence sessions, some witnesses valiantly attempted to explain to the Committee members the scope of customer due diligence checks and the relatively narrow terms of their engagements. The Committees’ response may be discerned from the report (paragraph 64):

“The only constraint beyond the legally required checks is the risk that a company is willing to take that its reputation may be tarnished by association with a particular client or deal. In the case of BHS, it appears that advisory firms either did not consider the reputational risk or demonstrated a remarkable level of ‘group-think’ in relying solely on each other’s presence.”

IPs and related professionals work in a fairly small pond. Although we like to think we’re a robustly independent bunch, could we be at risk of some complacency when we encounter the same old faces?

 

“Advisers were rewarded handsomely”

It is perhaps less fair for the Committees to target the advisers on the levels of their fees. The firm that provided a financial due diligence report on BHS to the prospective purchaser, RAL, were set to be paid four times the fee if the transaction were successful than if it were aborted. The Committee also noted that “advisers were doubly dependent on a successful transaction because RAL did not have the resources to pay them otherwise” (the report does not refer to the existence of any guarantees, which was disclosed in the evidence sessions).

The firm tried to put their engagement into context by explaining the additional risks inherent in a successful purchase and by pointing out the ethical and professional standards that safeguard against such arrangements generating perverse strategies (http://goo.gl/ugfiIP).

The Committees were forced to admit that neither of the advisers “can be blamed for the decision by RAL to go ahead with the purchase”. That said, they did feel that the transaction advisers’ report “could have more clearly explained the level of risk associated with the acquisition” and, in the Committees’ typical emotive style, they stated that the advisers were (paragraph 73):

“…increasingly aware of RAL’s manifold weaknesses as purchasers of BHS. They were nonetheless content to take generous fees and lend both their names and their reputations to the deal.”

 

Countering the Self-Interest Argument

The Committees’ suggestion is that the advisers were too tied into a particular outcome, leading to doubts as to the veracity of their advice. Of course, almost everyone who gives advice – from pensions advisers to dentists – suffer this scepticism. When IPs act both as solutions advisers and implementers, accusations of acting in one’s self-interest are levelled as if they are statements of the blindingly obvious. Such perceptions of being unprofessionally influenced by self-interest are not only articulated by unregulated advisers looking to pigeon-hole IPs into creditors’ pockets, but also are reflected time and again in the Government’s/Insolvency Service’s proposals, for example on how to deal with the pre-pack “problem”, the perennial debates around IPs’ fees and the more recent moratorium proposals.

How do we counter this perception? Personally, I don’t believe the solution lies in setting thresholds on where advisers’ work should end – I was pleased that the early pre-pack suggestions of using a different administrator or a different subsequent liquidator were not taken up – as this risks the evolution of unwritten partnerships with the assumption that the self-interest and self-review arguments automatically fall away.

The perception can only really be tackled by doing a good job, by serving our clients’ interests best and being attentive to our (near-)insolvent clients’ obligations. We also need to remain alert to relationships and when we have stepped over the threshold. We must not see the Insolvency Code of Ethics only in terms of the “Specific Situations”, which I feel is very much an appendix to the real substance of the Code. The Code is by design largely non-prescriptive, but this means that we need to:

  • reflect on prior relationships, e.g. when we have acted as adviser (to the insolvent or to its creditors)
  • evaluate the relationship: is it “significant”, i.e. does it give rise to a threat to our objectivity (or any other fundamental principle)?
  • Can we reduce that threat to an acceptable level?
  • If not, we must have the strength of character to accept the conclusion that we should not take the appointment.
  • And of course, if we do think we can still take the appointment, we need to set out our reasonings and regularly review the position and effectiveness of any safeguards; ticking boxes on an ethics checklist is highly unlikely to be sufficient.

Calls continue to be made for directors to seek help early, when more doors to rescue remain open. IPs are being seen less often solely as insolvency office holders and they have augmented their insolvency skills accordingly.

R3 has just published two helpsheets for individuals and company directors with financial difficulties (at http://goo.gl/WOfCKI and http://goo.gl/eyHlia). These aim to dispel many of the misconceptions about IPs. As the falling insolvency statistics illustrate, IPs can and do help people and businesses get back on track without resorting always to formal insolvency tools.

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Ethics hits the headlines again: should we be worried?

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The big story of last week was the disciplinary sanction ordered to an EY IP for breaches of the Ethics Code.  But I think this is just one more straw on the camel’s back.  Every new criticism of apparent poor ethical standards that is added to the pile increases the risk of a regulatory reaction that would be counter-productive to the effective and ethical work of the majority.

 

Journalistic fog

Plenty has been said about the “noise” around pre-packs.  Therefore, I was not entirely surprised – but I was disappointed and frustrated – to read that the latest sanction had been twisted to fit one journalist’s evident attempt to keep shouting: “It was the classic cosy insolvency I wrote about last month: a company calls in insolvency advisers who conduct an ‘independent business review’, take the job of administrator and act on the sale as well.  On Wind Hellas, the creditors could not see how Ernst & Young could take both appointments without compromising their integrity. Six-and-a-half years later, the professional body has at last agreed with them.” (http://goo.gl/aIY9rU)

Actually, a look at the ICAEW notice (https://goo.gl/H7jUov) suggests that they did nothing of the sort.  The relationship that got the IP into hot water related to the fact that an associated company, Ernst & Young Societe Anonyme, had carried on audit related work during the three years before the IP took the appointment as Joint Administrator of the company.

It is unfortunate that a failure to join the ethical dots between a potential insolvency appointment and the firm’s audit-related connection with the company has been used to pick at the pre-pack wound that we might have hoped was on the way to being healed.

 

Speed of complaints-handling

Is the journalist’s reference to 6½ years another distortion of the facts?  I was surprised to read an article in the Telegraph from February 2011 (http://goo.gl/8902YO).  Apparently, the ICAEW’s investigation manager wrote to the IP way back then, saying that “the threat to Ms Mills’ objectivity ‘should have caused you to decline, or resign, from that appointment’”.  Given that that conclusion had been drawn back in 2011, it does seem odd that it took a further four years for the ICAEW to issue the reprimand (plus a fine of £250,000 to the firm and £15,000 to the IP).  Perhaps the recouping of £95,000 of costs is some indication of why it took four years to conclude.

I found it a little surprising to read in the Insolvency Service’s monitoring report in June 2015 (https://goo.gl/Lm5vdU) that the Service considers the that ICAEW operates a “strong control environment” for handling complaints, although it did refer to some “relatively isolated and historical incidents” as regards delays in complaint-processing (well, they would be historic, wouldn’t they?). In addition, in its 2014 annual review (https://goo.gl/MZHeHK), the Service reported that two of the other RPBs evidenced “significant delays” in the progression of three complaints referred to the Service.

Although I do understand the complexities and the need for due process, I do worry that the regulators risk looking impotent if they are not seen to deal swiftly with complaints.  I also know that not a few IPs are frustrated and saddened by the length of time it takes for complaints to be closed, whilst in the meantime they live under a Damocles Sword.

 

Ethics Code under review

In each of the Insolvency Service’s annual reviews for the last three years (maybe longer, I didn’t care to check), the Service has highlighted ethical issues – and conflicts of interest in particular – as one of its focal points for the future.  In its latest review, it mentions participating in “a JIC working group that has been formed to consider amendments to the Code”.

Ethical issues still feature heavily in the complaints statistics… although they have fallen from 35% of all complaints in 2013 to 21% in 2014 (SIP3 and communication breakdown/failure accounted for the largest proportions at 27% apiece).  Almost one third of the 2014 ethics-based complaints related to conflicts of interest.

The Service still continues to receive high profile complaints of this nature: its review refers to the Comet complaint, which appears to be as much about the “potential conflict of interest” in relation to the pre-administration advice to the company and connected parties and the subsequent appointment as it has to do with apparent insufficient redundancy consultation.

I suspect that the question of how much pre-appointment work is too much will be one of the debates for the JIC working group.  Personally, I think that the current Ethics Code raises sufficient questions probing the significance of prior relationships to help IPs work this out for themselves… but this does require IPs to step away and reflect dispassionately on the facts as well as try to put themselves in the shoes of “a reasonable and informed third party, having knowledge of all relevant information” to discern whether they would conclude the threat to objectivity to be acceptable.

It is evident that there exists a swell of opinion outside the profession that any pre-appointment work is too much.  Thus, at the very least, perhaps more can be done to help people understand the necessary work that an IP does prior to a formal appointment and how this work takes full account of the future office-holder’s responsibilities and concerns.  Are Administrators’ Proposals doing this part of the job justice?

 

Criticisms of Disciplinary Sanctions

Taking centre stage in the Insolvency Service’s 2014 review are the Service’s plans “to ensure that the sanctions applied where misconduct is identified are consistent and sufficient, not only to deal with that misconduct, but also to provide reassurance to the wider public”.

Regrettably, the body of the review does not elaborate on this subject except to explain the plan to “attempt to create a common panel [of reviewers for complaints] across all of the authorising bodies”.  I am sure the Service is pleased to be able to line up for next year’s review that, with the departure of the Law Society/SRA from IP-licensing, the Complaints Gateway will cover all but one appointment-taking IP across the whole of the UK.

But these are just cosmetic changes, aren’t they?  Has there been any real progress in improving consistency across the RPBs?  It is perhaps too early to judge: the Common Sanctions Guidance and all that went with it were rolled out only in June 2013.  Over 2014, there were only 19 sanctions (excluding warnings and cautions) and seven have been published on the .gov.uk website (https://goo.gl/F3PaHj) this year.

A closer look at 2014’s sanctions hints at what might be behind the Service’s comment: 15 of the 19 sanctions were delivered by the IPA; and 20 of the 24 warnings/cautions were from the IPA too.  To license 34% of all appointment-taking IPs but to be responsible for over 80% of all sanctions: something has got to be wrong somewhere, hasn’t it?

The ICAEW has aired its own opinion on the Common Sanctions Guidance: its response to the Insolvency Service’s recommendation from its monitoring visit that the ICAEW “should ensure that sanctions relating to insolvency matters are applied in line with the Common Sanctions Guidelines” was to state amongst other things that the Guidance should be subject to a further review (cheeky?!).

 

Other Rumbles of Discontent

All this “noise” reminded me of the House of Commons’ (then) BIS Select Committee inquiry into insolvency that received oral evidence in March 2015 (http://goo.gl/CCmfQp).  There were some telling questions regarding the risks of conflicts of interest arising from pre-appointment work, although most of them were directed at Julian Healy, NARA’s chief executive officer.  Interestingly, the Select Committee also appeared alarmed to learn that not all fixed charge receivers are Registered Property Receivers under the RICS/IPA scheme.  Although it seems contrary to the de-regulation agenda, I would not be surprised to see some future pressure for mandatory regulation of all fixed charge receivers.

The source of potential conflicts that concerned the Select Committee was the seconding of IPs and staff to banks.  I thought that the witnesses side-stepped the issue quite adeptly by saying in effect, of course the IP/receiver who takes the appointment would never be the same IP/receiver who was sitting in the bank’s offices; that would be clearly unacceptable!  It was a shame that the Committee seemed to accept this simple explanation.  But then perhaps, when it comes to secondments, the primary issue is more about the ethical risk of exchanging consideration for insolvency appointments, rather than the risk that a seconded IP/staff member would influence events on a particular case to their firm’s advantage.

Bob Pinder, ICAEW, told the Committee: “It used to be quite prevalent that there were secondments, but he [a Big Four partner] was saying that that is becoming less so these days because of the perception of conflict… There is a stepping away from secondments generally”, so I wonder whether there might not be so much resistance now if the JIC were to look more closely at the subject of secondments when reconsidering the Ethics Code.

The FCA’s review of RBS’ Global Restructuring Group, which was prompted by the Tomlinson report (and which clearly was behind much of the Committee’s excitement), is expected to be released this summer (http://goo.gl/l96vtl).  When it does, I can see us reeling from a new/revived set of criticisms – one more straw for the camel’s back.


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Tomlinson: IPs caught in the cross-fire

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Banks have become the 21st century pariahs. It seems that they can do nothing right and they cannot afford to do anything wrong. Lawrence Tomlinson may have banks, and RBS in particular, sighted in his cross-hairs, but is there much in his report that should concern the IP regulators or may herald changes for IPs?

Tomlinson’s published report can be found at: http://www.tomlinsonreport.com/docs/tomlinsonReport.pdf.

The IP’s role: pre-appointment

A large part of the report raises issues regarding companies’ routes into the RBS’ Global Restructuring Group and how, once there, companies find it almost impossible to escape it alive. IPs become wrapped into this argument via Tomlinson’s observations over the opaque nature of the Independent Business Review process: the bank selects the IP and usually only the bank sees the report. When you add to this the fact that the cost of the IBR is passed to the company, I can see how this may rankle, although I am not sure that this makes the whole process flawed.

Tomlinson raises the issue of conflict of interest: he states that “it is easy to see how these reports may be used to protect the bank’s interests at the expense of the business. Much of the high value work received by these firms comes from the banks so it is naturally in their interest to protect the bank’s financial position”. Inevitably, the work of the IBR IP is fraught – can they really act independently? But who really is expecting them to do so? The IP’s client is the bank, not the company, so, at a time when the bank’s and the company’s interests cease to be aligned, it would seem to me to be foolish to assume that the IP introduced by the bank is not advising first and foremost the bank on how to protect its interests. If the company wants its own advice, then it should instruct its own IP. Of course some do, although Tomlinson fails to mention the barriers to some companies and their instructed IPs working to find a solution acceptable to the bank.

The appointment of administrators

Tomlinson writes that there are many occasions when the IBR IP later is appointed administrator. This seems to be a general comment rather than RBS-targeted, which might have been difficult to make stack up, as I understand that it is RBS’ policy not to appoint the IBR IP as administrator, is it not?

It is also not clear whether the cases involving directors who feel mistreated by the banks are the same cases in which the IBR IP later became the administrator. I think this is important because, on its own, an IBR IP becoming administrator is not an heinous act. On the other hand, if we take one of Tomlinson’s worst case scenarios, where a business was only considered insolvent because of a property revaluation, the directors were frozen out of any opportunity to offer solutions, and they protested that the IBR leading to the bank’s decision to appoint an administrator was flawed, then one might expect the IP to decline the appointment.

The Insolvency Code of Ethics states: “Where such an investigation was conducted at the request of, or at the instigation of, a secured creditor who then requests an Insolvency Practitioner to accept an insolvency appointment as an administrator or administrative receiver, the Insolvency Practitioner should satisfy himself that the company, acting by its board of directors, does not object to him taking such an insolvency appointment. If the secured creditor does not give prior warning of the insolvency appointment to the company or if such warning is given and the company objects but the secured creditor still wishes to appoint the Insolvency Practitioner, he should consider whether the circumstances give rise to an unacceptable threat to compliance with the fundamental principles.” If an IP still decides to accept the appointment amidst protestations, clearly he should be prepared to encounter a complaint and perhaps worse.

Tomlinson makes the point that “once an administrator has been appointed, the directors lose their right to legal redress”. Whilst directors lose their management powers and the administrator acquires the power to bring any legal proceedings on behalf of the company – and I should point out that I’m not a solicitor – there is precedent for directors to take some actions, e.g. challenging the validity of the administrator’s appointment, as demonstrated in Closegate (http://wp.me/p2FU2Z-4I). Challenges may also be made to court by shareholders (or creditors) (Paragraph 74 of Schedule B1 of the Insolvency Act 1986) and courts can order the removal of administrators (Paragraph 88). Of course, these measures cost money and probably will not reverse any damage done.

The IP’s role: post-appointment

More to the point, I think, is the risk of conflict of interest for bank panel IPs generally. Tomlinson puts it this way: “The relationship between the bank, IPs, valuers and receivers should undergo careful analysis. The interdependency of these businesses on banks for generating custom establishes a natural loyalty and bend towards the interests of the banks. Often the bank recommends or instructs the IP directly, so their preferential treatment is critical to their clientele. Maintaining independence and a fair hand for all parties involved appears extremely difficult.”

We’ve seen this argument play out in the pre-pack arena: if directors are in control of appointing an IP as administrator, how can creditors be confident that the IP, on appointment, will be acting with due regard for their interests? Similarly, how can other stakeholders be confident that an IP will not be persuaded by this “natural loyalty” towards the bank controlling their appointment to act contrary to his duties as administrator? In a number of cases, I would suggest that it is academic: if the bank is the only party with any real interest – or it shares that with the unsecured creditors looking to a prescribed part – then any bias towards the bank will achieve the same result as if there were none… although this may overlook the first objective of an administration, which is to rescue the company as a going concern.

Tomlinson is right: maintaining the IP’s balance here is extremely difficult, although I would be inclined to take receivers out of the equation, as there is no real change of “hat” for IPs in those cases. Until now, we have depended on the professionalism of the parties and the legal and regulatory processes to wield a stick towards any who stray, but I guess that we live in an age when that is no longer seen as adequate.

Tomlinson highlights another risk of conflict of interest in relation to selling assets: “RBS is in a particularly precarious position given its West Registrar commercial portfolio under which it can make huge profits from the cheap purchase of assets from ‘distressed’ businesses… Others have stated that they believe their property was purposefully undervalued in order for the business to be distressed, enabling West Registrar to buy assets at a discount price.” This is a new one on me and I’m not aware of any other bank being in a similarly “precarious position”. Although I would have thought that there would be little criticism levelled against IPs selling to West Registrar where it represents the best deal – and Tomlinson does not appear to be suggesting transactions at an undervalue by administrators – as we all know, there is a risk of getting caught up in allegations of stitch-ups wherever there is a connected party sale, whether that involves a director’s purchase in a pre-pack or a party connected to an appointing creditor.

The Repercussions

The most IP-relevant solution suggested by Tomlinson is:

“It is also important that the wider potential conflicts of interest between the banks, IBRs, valuers, administrators, insolvency practitioners and receivers are given careful consideration. Where these conflicts occur, it does so at the expense of the business. If collusion did not happen between these parties and their relationships were more transparent, then better fairness between the parties could be ensured. This requires further investigation and consideration by the Government to ensure that the law is being upheld and these conflicts do not impact on the businesses ability to operate.”

As mentioned previously, the Insolvency Code of Ethics covers specifically the scenario of an IP carrying out an IBR then contemplating an insolvency appointment. Personally, I think it does this rather well – it addresses not only how to view an objection by the directors, but also how the IP has acted prior to the insolvency appointment, how he has interacted with the company, whether he made clear who his client was etc. However, there is no ultimate ban on the IP accepting the appointment; as with most ethical issues, it is left to the IP to consider whether the threats can be managed or they render his appointment inappropriate. I would not be surprised if, down the line, there were a call for there to be a ban that an IBR IP could not be appointed as administrator. If it were a legislative measure, we could have fun and games defining such items as what constitutes IBR work and for how long a subsequent appointment would be prohibited, but it could be done.

But would it have the desired effect? It would certainly increase the costs of some administrations, as the built-up knowledge and in many respects positive relationships of the IBR IP would be lost to the administrator. It might also have limited effect, as the “natural loyalty” could persist in any IP who has the prospect of more than one bank appointment, be it a case on which he carried out an IBR or a case on which he’d had no prior connection. I believe it is a natural tendency in all professions and trades to protect one’s clients and work sources and I do not believe it is something that can be avoided entirely.

As with pre-packs, I would prefer the solution to involve those who feel mistreated doing something about it, calling to account anyone who acted contrary to their duties, ethical or otherwise. As with pre-packs, however, the devil is in establishing a clear understanding of what is and what is not acceptable behaviour, rather than simply trusting a gut feeling. Tomlinson has aired a few relevant issues, but also some irrelevant ones, I think, which unfortunately cloud the picture.

But is anyone listening? The FT reported yesterday (http://www.ft.com/cms/s/0/550c5360-5c31-11e3-931e-00144feabdc0.html#ixzz2mVVnGjFz) that George Osborne has washed his hands of the report, although Mr Cable seems more convinced that there are genuine problems. However, whatever the conclusions of the FCA’s skilled person’s review, I am sure that insolvency regulators already are contemplating their next step. Some will see the Tomlinson report as an opportunity to renew calls for the end to bank panels of IPs. With a revision of the Insolvency Code of Ethics moving up the agenda of the Joint Insolvency Committee, I can see the ethics of the move from pre-appointment work to a subsequent appointment again being the subject of debate.

(01/02/14 UPDATE: BBC4’s File on Four programme, “Design by Default?”, can be accessed at http://www.bbc.co.uk/iplayer/episode/b03q8z4f/File_on_4_Default_by_Design/)


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Two Scottish Cases: (1) Heavy Criticism for a Liquidator who Bypassed the Court to Obtain Remuneration and (2) Proper Court Procedure Catches Out Administrator

Although these two cases are much more for readers north of the Border, it seems to me that principles arising from the first case – that officers of the court have greater concerns than simply getting paid and that IPs and solicitors should be always alert to conflicts of interest – are relevant to many more of us.

Heavy Criticism for a Liquidator who Bypassed the Court to Obtain Remuneration
Re Quantum Distribution (UK) Limited (In Liquidation) [2012] CSOH 191 (18 December 2012)
http://www.bailii.org/scot/cases/ScotCS/2012/2012CSOH191.html

Summary: The judge in the Court of Session hoped that the publication of his opinion “will discourage a repetition of the unacceptable events” (paragraph 1). Lord Hodge’s criticisms were leveled primarily at a liquidator who had bypassed the court to obtain his remuneration from a newly-formed liquidation committee despite a very critical report from the court reporter. He also criticised the petitioning creditor’s solicitors, who also acted for the IP on some matters, for failing to make clear to the liquidator his need to take separate legal advice when they were in a position of conflict of interest.

The Detail: The court only learned of the events when the Auditor of Court raised his concerns with Lord Hodge. The Auditor had produced “a most unusual report” that concluded that, in light of the concerns identified by the court reporter, he was unable to report what would be suitable remuneration of the liquidator.

The court reporter’s concerns included questions regarding a settlement for the insolvent company’s ultimate parent (“QC”) to pay £50,000 each to the liquidation and to the petitioning creditor (“IEL”), although it was unclear what direct claim IEL had against QC. The reporter criticised the liquidator for charging time for brokering the deal, which he suggested was not an appropriate agreement, to the general body of creditors; for failing to disclose the settlement to creditors; and for adjudicating IEL’s claim without taking into account mitigating factors. He also suggested that the petitioning creditor’s solicitors appeared to have a clear conflict of interest in also acting as the liquidator’s adviser and that the petitioning creditor “had been allowed to exert undue influence over the liquidation” (paragraph 23).

However, it appears that, despite receiving the Auditor’s report declining to report what would be suitable remuneration, the liquidator did not make enquiries into what the court reporter’s concerns were, but instead he convened a meeting of creditors to form a liquidation committee and obtained approval for his fees from the committee, which the judge considered was “not acceptable behaviour” (paragraph 36). Lord Hodge expressed concern that the liquidator and the solicitors showed “a striking disregard of their obligations to the court. It appears that nobody applied his mind to why the Auditor said what he did or showed any curiosity as to what the court reporter had said in his report. The concern, as the emails show, was simply how to get the liquidator his remuneration” (paragraph 37). The judge’s opinion was that, as officers of the court, the liquidator and the solicitors’ staff should have brought the concerns of the court reporter to the attention of the court.

The liquidator was also criticised for failing to disclose the full terms of the settlement to the liquidation committee. In addition, it seems that the liquidator had failed to recognise that the compromise needed the court’s approval.

In reviewing the solicitors’ position, Lord Hodge commented that “solicitors who act in an insolvency for both the petitioning creditor and the insolvency practitioner need to be much more alert to the dangers of conflict of interest… It may be acceptable for a firm of solicitors so to act when the petitioning creditor’s claim is straightforward and not open to dispute. But where the claim is complex and is open to question, the potential for conflict of interest should bar the solicitor from so acting. In my opinion claims for damages for breach of contract often are of that nature, particularly where, as here, they entail a claim for loss in future years” (paragraph 40).

Proper Court Procedure Catches Out Administrator
Re Prestonpans (Trading) Limited (In Administration) [2012] CSOH 184 (4 December 2012)
http://www.bailii.org/scot/cases/ScotCS/2012/2012CSOH184.html

Summary: Is it correct to seek remedy under S242 (gratuitous alienations) by means of a petition? The judge decided that it was not, but he left open the question of whether the consequence should be that the joint administrator should begin the process again, given that no prejudice, inconvenience or unfairness would flow from continuing with the petition process.

The Detail: The joint administrators petitioned that an assignation granted by the company amounted to a gratuitous alienation under S242. Counsel for the respondents sought dismissal of the petition with the argument that the remedy is available only by way of summons, not by petition.

The case turned on the interpretation of rule of court 74.15, which states that applications under any provision of the Insolvency Act 1986 during an administration shall be by petition or by note in the process of the petition lodged for the administration order. The judge compared the wording of the rule of court prior to the 2002 Act, which listed the applications that should be made by motion in the process of the petition (because, of course, pre-2002, all administrations were instigated by petitions). Lord Malcolm then concluded that rule 74.15 “covers an application which relates to the supervision of, and is incidental to the administration, such as those specifically mentioned in the pre-existing rule; and does not apply to proceedings brought by administrators under sections 242 and 243 of the 1986 Act” (paragraph 10).

However, Lord Malcolm questioned whether, in this case, it followed that the proceedings should be dismissed as incompetent. He acknowledged that, “in the present circumstance, when no prejudice, inconvenience or unfairness would flow from persisting with the current petition, it would be unfortunate if the petitioners were required to begin again before the same court, albeit in a different form of process, with all the consequential extra expense and delay” (paragraph 16), however the rule of court remains. He invited the parties to address him further on this issue and concluded that this case supported the call for the abolition of the distinction between ordinary and petition procedure in the Court of Session.