Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Welcome measures to help IPs in these times

In my last blog post, I published a wishlist of measures that would help IPs to do their jobs in these difficult times.  Since then, some extraordinary steps have been taken very quickly to address many of them.  Here, I summarise those actions.

Taking on New Appointments

  • Notices of intention to appoint, and of appointment of, administrators: the Temporary Insolvency Practice Direction (judiciary.uk/publications/temporary-insolvency-practice-direction-approved-and-signed-by-the-lord-chancellor/) came into force on 6 April. Although it states that a statutory declaration by video conference may constitute a formal defect or irregularity, it confirms that this by itself shall not be regarded as causing substantial injustice, provided that the declaration is carried out in the manner specified in the Practice Direction:

“9.2.1. The person making the statutory declaration does so by way of video conference with the person authorised to administer the oath;

9.2.2 The person authorised to administer the oath attests that the statutory declaration was made in the manner referred to in 9.2.1 above; and

9.2.3 The statutory declaration states that it was made in the manner referred to in paragraph 9.2.1 above.”

UPDATE 30/05/2020: Please note that the authority for statutory declarations to be administered virtually in Scotland derives from Schedule 4 para 9 of the Coronavirus (Scotland) (No. 2) Act 2020 (http://www.legislation.gov.uk/asp/2020/10/enacted), which came into force on 27 May 2020.  The provisions are temporary only and have an expiry date of 30 September 2020, although this can be extended by regulations.

  • There have been no regulatory measures to help directly with posting mailouts, but many IPs have been exploring outsourcing options. Although I’m sure there are many providers, I understand that Postworks is used successfully by several IPs.  Widespread use of delivery by email, I think, is still a work in progress: Turnkey and others are geared up to assist, but I think the issues are in compiling a list of email addresses that can be used.  Many IPs had moved to website delivery via a single R1.50 notice before the lockdown and I suspect that this process has become even more popular.
  • HMRC S100 documents: I have seen nothing to move forward from the Dear IP article (insolvencydirect.bis.gov.uk/insolvencyprofessionandlegislation/dearip/dearipmill/chapter8.htm#26) that stated that the HMRC email address is only to be used for “the initial pre-appointment notifications under the deemed consent or virtual meeting procedures”, so it seems to me that Statements of Affairs and adjournment notices etc. must still be posted.
  • Court activities: as far as I can tell and as set out in the Temporary Insolvency Practice Direction, the courts are doing a phenomenal job in keeping their virtual doors open. Bravo!
  • Physical meetings: the RPBs published guidance that: “where procedural meetings are required, virtual meetings will suffice in order to avoid breaching social distancing requirements.  A reasonable approach will be required to handling any creditor requests for physical meetings” (https://ion.icaew.com/insolvency/b/weblog/posts/joint-statement-by-icaew-and-the-ipa-regarding-measures-to-support-ips-during-the-covid-19-pandemic). Personally, I’m not sure how we’re supposed to take this.  Some may consider it reasonable to convene a physical meeting in a space large enough to accommodate social distancing.  Some others could consider it reasonable to dismiss creditors’ requests for a physical meeting altogether!  In my view, the reasonable approach would be to contact the requesting creditors to explore whether their concerns can be addressed in another way, e.g. an informal discussion or, if there are formal decisions to be made, insist that the “physical” meeting be held entirely remotely, thus requiring just a little departure from R15.6(6).
  • It seems that the Government’s intention to suspend the wrongful trading provisions has been met with some negativity by IPs (e.g. r3.org.uk/press-policy-and-research/news/more/29337/covid-19-corporate-insolvency-framework-changes-r3-response/), whereas the House of Commons’ briefing paper quotes other bodies, including the IoD and ILA, as welcoming the news (https://commonslibrary.parliament.uk/research-briefings/cbp-8877/). Although the change has not yet been made, the Government plans that it will be retrospective from 1 March 2020 and it will continue for 3 months thereafter.

 

Statutory Filings / Deliveries

  • The RPBs’ statement referred to above did not explain their expectations specifically in keeping up with progress reports, but it did acknowledge that the current difficulties could amount to a “reasonable excuse” defence for breaching statutory requirements. The statement highlighted the need to “have followed ethical principles and have justifiable, sound and well documented reasons for making those decisions”, i.e. where “reasonable steps to comply” are not enough to overcome the difficulties caused by the restrictions imposed on us in these extraordinary times.
  • The news on Tuesday that Companies House is now accepting filings by email was extremely welcome (https://content.govdelivery.com/accounts/UKIS/bulletins/28550aa). Understandably, it seems to be taking some time for Companies House to register documents at the moment and, if you physically mailed documents before they opened their doors to emails, you might consider sending them again by email.  I’m sure that Companies House won’t thank me for that though, so only seriously time-critical documents, e.g. ADM-CVL conversions, might merit such a second attempt.  The announcement included several warnings about how a failure to follow the instructions for emailing docs would result in them being rejected and, as Companies House filings by email are excluded from the deemed delivery provisions in R1.45, you would do well to ensure that staff follow the instructions to the letter.
  • I’m a little surprised that the InsS hasn’t sought to extend the deadline for D-reports, especially as they have clearly considered the logistics of collecting books and records. At first glance, Dear IP 95 appeared to concede that IPs didn’t need to take extreme measures to collect books and records, but when I looked closely, it did not such thing.  It replaced the previous instruction that IPs should locate and ensure that books and records are secured and listed as appropriate with a requirement that IPs “should continue to take all possible steps to locate and secure” them (https://content.govdelivery.com/accounts/UKIS/bulletins/284baba).  “All possible steps”?  Well, we weren’t going to be taking impossible ones!  It’s a shame that the InsS hasn’t confirmed that IPs can limit steps to reasonable ones in these times.

 

Case Administration

  • Although communications from the InsS, RPBs and HMRC regarding general case administration have been welcome, there has been little that has helped avoid cumbersome rules and other regulatory requirements. This is understandable, as the rules are the rules until a statutory instrument says otherwise.  However, at least the announcements have given us some comfort that the bodies appreciate some of our difficulties.
  • Included in these are, from the RPBs (https://ion.icaew.com/insolvency/b/weblog/posts/joint-statement-by-icaew-and-the-ipa-regarding-measures-to-support-ips-during-the-covid-19-pandemic):
    • “IPs may defer, on a short-term basis, non-priority work on existing cases (for instance investigatory work) and focus on new/urgent areas. IPs must take all reasonable steps to progress case administration in the longer term and ensure stakeholder financial interests are not prejudiced.” (Jo and I have been debating how, if on the other hand IPs have found that new engagements have taken a dip, now would be a good time to try to clear the decks for the future busy times.)
    • It may be acceptable to allow markets to recover before selling assets.
    • “Where a Notice of Intended Dividend has already been issued, we acknowledge that the payment of the dividend can be postponed and may be unable to be paid within two months”… but you will need to remember that, in these circumstances, the NoID process will need to begin again later (R14.33(3)).
    • “In order to provide flexibility for IPs to focus on new/urgent matters and to allow time for market recovery, we are relaxing the expectation in existing MVLs that creditors will be paid in full within 12 months provided that the IP continues to consider the company will be solvent in the medium term when markets have recovered.”
    • “When considering MVLs moving to a CVL (s.95), IPs may take longer than the deadline of seven days to notify creditors that the company is unable to pay debts in full within 12 months.”
    • “We acknowledge that it is not likely to be possible to comply with the SIP 3.1 requirement to respond to debtor enquiries ‘promptly’ and to close IVAs ‘promptly’ and accept that IPs will need to prioritise their work through the crisis period.”
    • The RPBs have also acknowledged that IPs will exercise their discretion in relation to CVAs and IVAs and they “accept that the discretion afforded to IPs in order to manage cases affected by the current crisis is necessarily wide”. I’m not sure how to take this: if a VA Proposal allows the Supervisor to exercise discretion, they hardly need the RPBs to tell them that they can do so, but if the Proposal does not allow any such discretion, then they cannot.  There seems to be a veiled message here, much like a lot of the revised Ethics Code, which seems to have been written with the practices of volume/consumer IVA providers in mind.
  • HMRC’s guidance (icaew.com/-/media/corporate/files/technical/insolvency/insolvency-news/coronavirus-insolvency-bulletin.ashx?la=en) includes:
    • A similar peculiar statement that they would expect IPs to exercise any VA discretion “to its maximum, with reference to creditors only if essential”. Well yes, that’s how a discretion should be exercised, isn’t it?  Let’s hope that HMRC is now realising how unhelpful it is to IPs to have modified out many of the discretions that originally had been proposed!
    • HMRC confirms that it will support a 3-month contribution break for coronavirus-impacted “customers”, but I think its in-bold confirmation that “there is no need to contact HMRC to request this deferment” risks misleading some, not least debtors who may expect an automatic payment break. If a VA’s terms do not allow the Supervisor to permit such a payment break, then this statement does not overcome this hurdle and creditors’ approval must be sought.
    • More helpfully, the guidance confirms that HMRC will not view post-VA VAT as due where the Government has already arranged for those VAT payments to be deferred. Unfortunately, the link HMRC has provided is already obsolete and the HMRC guidance does not refer also to the deferral of self-assessment income tax, but presumably the same principles apply?
  • The InsS continues to move into the electronic age, arranging for the following (to reduce the risks of fraudulent attempts, I’m not providing links):
    • ISA payment requests to be submitted with an electronic signature;
    • ISA payment requests and other CAU forms to be received by email; and
    • IVA registration fees to be paid by BACS.
  • HMRC has done likewise with its opening the way for all dividends to be paid via BACS. Unfortunately, if you have any dividends to pay to HMRC by cheque, HMRC has asked that you “hold on to them” (9 April release on insolvency-practitioners.org.uk/press-publications/recent-news UPDATE: additional guidance on paying dividends to HMRC by BACS is on this IPA page, dated 22/04/20).

 

And there’s more

Finally, some miscellaneous notifications include:

  • Must IPs complete file reviews in these times? Whilst not an official response, an RPB monitor emailed me swiftly after my last blog post.  She observed that, of course, the objective of a file review is to ensure that the case progresses as it ought to and that a firm’s reviewing policies should be designed to achieve this objective.  Thus, if an IP decides to relax their firm’s policy on file reviews in these extraordinary times, they should be considering how they can still try to achieve this objective and document why the firm’s adjusted policy will not compromise effective and compliant case administration wherever possible in the circumstances.  The monitor expressed the view that some kind of file review surely would still be possible in these times, even if access to the full case files is restricted.
  • Can office holders furlough employees? The ICAEW blogged references from .gov.uk guidance (https://ion.icaew.com/insolvency/b/weblog/posts/the-coronavirus-job-retention-scheme—clarity-for-administrators-and-directors), which describes the ability of Administrators to furlough staff as well as some of the finer points about directors’ positions.  Unfortunately, the .gov.uk guidance is not cut-and-dried and furloughing depends on the “reasonable likelihood of rehiring the workers”, so understandably IPs are exercising a great deal of caution before treading a path that could lead to an expensive challenge down the line.
  • Should IPs furlough their own staff? The ICAEW and the IPA have both issued warnings that they would not expect IPs to furlough to the extent that it compromises their ability to meet regulatory requirements (https://ion.icaew.com/insolvency/b/weblog/posts/business-continuity-for-insolvency-practitioners-during-covid-19).  The IPA has also required its members to keep it informed of the numbers and job titles of all furloughed staff as well as those unable to work through serious Covid-19 illness.
  • Are IPs key workers? R3 blogged (r3.org.uk/technical-library/england-wales/technical-guidance/covid-19-contingency-arrangements/more/29316/page/1/is-the-insolvency-profession-classed-as-a-key-sector-24-march-2020/) that likely they are, especially when administering cases that involve managing businesses that themselves are in the key sectors.  R3 also observed that the InsS considers that certain staff working in the RPS, Estate Accounts and ORs’ offices are delivering “essential public services”.  As much of an IP’s work is necessary to enable such InsS staff to deliver these public services, it would seem to follow that the IPs/staff would also be key workers.  Shortly after this post, however, the IPA emailed its members reminding them that it is a decision for each employer per the guidance at www.gov.uk/government/publications/coronavirus-covid-19-maintaining-educational-provision/guidance-for-schools-colleges-and-local-authorities-on-maintaining-educational-provision.
  • Showing us southerners that it can be done, the Scottish Government brought into force the Coronavirus (Scotland) Act 2020 in a matter of a couple of weeks. Amongst other things, it has extended the pre-insolvency moratorium period for individuals from 6 weeks to 6 months.  More details can be found at aib.gov.uk/news/releases/20202020/0404/coronavirus-scotland-act

 

Stay safe and keep well, everyone.


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Standing on the Shoulders: a summary of reported court decisions

0430 Brown & Viv

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

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

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

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

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

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

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

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

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

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

 

Court rejects Administrators’ attempts to sell third party assets

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

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

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

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

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

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

 

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

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

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

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

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

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

 

Holiday pay to include non-guaranteed compulsory overtime

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

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

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

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

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

 

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

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

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

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

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

 

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

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

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

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

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

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


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HMRC clarifies VAT deregistration of insolvent businesses… but how does it work in practice?

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In April 2014, HMRC released a Business Brief – 13/14 (http://www.hmrc.gov.uk/briefs/vat/brief1314.htm) – which R3 circulated to its members on 1 May 2014. The Brief seemed pretty self-explanatory as regards future cases, but I have seen no commentary about how IPs should be handling cases where VAT deregistration has already taken place. I summarise below HMRC’s responses to my queries.

Scenario 1: a company became VAT deregistered after it had gone into liquidation and the liquidator (prior to the Brief) sold its assets on a plus VAT basis. What happens now?

The issue arising from the recent legal advice is that the asset purchaser may encounter difficulties reclaiming input VAT on the sale. In that event, it is likely that the purchaser would be told by HMRC to go back and obtain a valid invoice to evidence the sale and that would mean reinstating the VAT registration if possible. But HMRC will address this issue on a case by case basis as and when the situation arises. HMRC does not propose to revisit historical cases on mass nor does it expect IPs to do so.

Scenario 2: as a consequence of this Brief, an IP reviewed his caseload and identified some cases with assets as yet unsold, but they fall below the VAT registration threshold (of £81,000), so he does not propose to look at re-registering the insolvent entities for VAT. However, if then he sells the assets exclusive of VAT, can he still recover (via a VAT426) any VAT input on the costs incurred in selling those assets?

The rules around the VAT 426 process are set out at Section 7 of the Insolvency VAT Public Notice 700/56 (http://goo.gl/WYkYxs) and the clarification provided in the Brief has no impact on this process.

The basic principle here is that an office holder is entitled to recover the VAT element of costs incurred in the winding up of a VAT registered business. Therefore, as before, if a business had deregistered for VAT before the IP’s appointment, the IP needs to consider the circumstances surrounding that deregistration. If the business had deregistered due to having ceased trading shortly before the IP’s appointment, then HMRC will still consider a VAT 426 claim as the IP is winding up a business that was VAT registered when it was trading. On the other hand, if for example the business had deregistered voluntarily due to reduced turnover some time before the IP’s appointment, then the IP would not be winding up a VAT registered business and, therefore, would have no entitlement to reclaim input tax on behalf of that business.

Where VAT deregistration occurred after the IP’s appointment, although VAT426 claims should be considered on a case by case basis, the fact that some asset sales did not attract VAT because deregistration had occurred should not affect the IP’s ability to submit a VAT426 claim to recover the VAT input on the costs incurred.

Okay then, what about cases that have been deregistered for VAT where the unsold assets are over the VAT registration threshold? How does an IP go about re-registering the business for VAT?

Contact the National Insolvency Unit Helpdesk. The contact details for the Helpdesk are included at Section 1.4 of the Insolvency VAT Public Notice 700/56 (http://goo.gl/WYkYxs).

In the past, HMRC has issued VAT168 notices to IPs warning them that, unless they object, deregistration will take place automatically after 7 days. Given the difficulties that can be caused through a business deregistering prematurely, will HMRC change its approach to progressing automatic deregistration?

It appears that the VAT167 and VAT168 deregistration enquiries will still be issued. Under VAT legislation, HMRC is entitled to cancel a VAT registration without the registered person’s express consent, but only where HMRC is “satisfied” that the criteria for registration no longer applies (Paragraph 13(2) of Schedule 1 of the VAT Act 1994). That judgment will be based on evidence in HMRC’s records concerning assets on hand etc. On receiving a deregistration questionnaire, if the IP still anticipates supplies being made in terms of continued trading or (more likely) asset realisation, then HMRC would expect the IP to inform them at that point. The VAT registration will then be kept open.

The Brief suggests that legal advice has merely clarified the position that has existed for some time, so this could mean that there are a host of historic cases of assets sold post-deregistration on a plus VAT basis. Does HMRC expect IPs to revisit these cases and take action to amend the position to that set out in the Brief?

Only if that proves necessary in order for a VAT registered purchaser of assets from an insolvent business to recover input tax. As explained in the answer to question 1 above, HMRC is neither proposing nor requesting a mass resurrection of historical cases. But reinstatement of a VAT registration may prove necessary on a case by case basis where a purchaser of assets encounters difficulty reclaiming input tax. Hopefully the number of such cases will be relatively small. The intention of Brief 13/14 is to try to reduce the number of such cases to zero going forward.

My huge thanks to Steve Taccagni, Insolvency Policy Adviser at HMRC, for answering my questions so comprehensively.