Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Lean pickings from recent High Court decisions

My lack of blog postings has been bugging me over the past couple of weeks, but I regret that, despite my best efforts, I have failed to spot any earth-shattering news (for which we should be grateful, I guess).

Over the past weeks, I have made my personal submission to the Government’s Red Tape Challenge on insolvency (but I did not think that readers would be interested in that) and I have been exploring the thorny issues of PPI claims in IVAs, but every time I look at the issues, more questions pop up.  Nevertheless, I hope to post something on this subject shortly.

I have also been reviewing the High Court decisions as they have been released, but in my view there have been few of any particular interest to insolvency practitioners.  For the more curious amongst you, here are my lean pickings:

  • Both Odyssey and Ross River consider directors’ pre-liquidation duties.
  • Clyde & Co considers whether LLP members can be employees.
  • Tinseltime considers solicitors’ liabilities to non-party costs orders in some CFA situations.

Odyssey Entertainment Limited v Kamp & Ors (09/08/12)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2316.html

The court found that a director (“D1”) had broken his duty of good faith under S172 of the CA 2006 towards the company (now in liquidation) (“C”): “In a nutshell, I find that (1) by 4.1.09, D1 had decided that C would not provide him with the route to a capital profit which he had hoped for and that he would have better prospects in that respect working on his own account; (2) thereafter, D1 influenced the board’s stage by stage decision making process which led to the winding down of C’s business, the termination or surrender of its contracted rights, and the liquidation of C; (3) over the period 4.1.09 to 31.8.09, D1 misled C’s board as to his own true intentions and kept secret the work he undertook on his own account as a film sales agent, whilst still a director and an employee of C, as part of his plan to bring those intentions to fruition. In so doing, D1 continued to mislead C’s board (and therefore C) as to C’s true viability and prospects; (4) had C’s board not been misled by D1, C’s board would probably not have made the decisions that it did leading to its winding up on 9.9.09; and, (5) in consequence, D1 and/or D2 and/or D3 as a result of D1’s efforts secured sales agent’s rights in films that (a) would otherwise probably not have reverted to the rights owner in the case of film rights already under contract to C and (b) would otherwise probably have been acquired by C in the case of other films on which D1 had been working while a director of C” (paragraph 204).

The only point of interest I gleaned was the comment of HHJ Simon Barker QC on the position of the co-directors: “What emerged from both the written evidence and the cross-examination of [the co-directors] is that they all deferred to D1’s long experience and expertise as a film sales agent (the expert witnesses were agreed that D1 is a leading individual UK film sales agent) for guidance as to C’s sales prospects and, more generally, the market for independent sales agencies. In so doing, they were not simply accepting whatever D1 might say in disregard of their own powers of thought nor were they in dereliction of their duties as directors. Rather, they were giving due weight to the one of their number who could speak with particular authority on the general market for sales agents and the specific position of C” (paragraph 94).

Ross River Limited & Anor v Waveley Commercial Limited & Ors (06/09/12)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2487.html

The main issue before the court was the possible liability of a director (Mr Barnett) to pay a sum to RossRiver by way of equitable compensation for alleged breaches of fiduciary duties that he owed to RossRiver.  Amongst the considerations was whether the director should have wound up the company (“WCL”) earlier and before WCL had used its assets (including revenues from a joint venture with Ross River) to defend an action brought by Ross River for payment of monies due under the joint venture agreement.

Morgan J concluded that RossRiver had failed to prove entitlement to equitable compensation from the director.  In so doing, he seems to have put some weight behind the director’s consultation at an early stage with accountants, who reflected on the option of liquidation: “Mr Barnett did take advice on whether WCL should be wound up or, possibly, whether it was in Mr Barnett’s separate interests for WCL to be wound up. There is no evidence as to the advice which Mr Barnett received. In these circumstances, I consider that I ought not to decide that it was a breach by WCL or by Mr Barnett of a fiduciary duty owed to Ross River to omit to take steps to wind up WCL in early 2009” (paragraph 74), although the fact that the allegation was not pleaded nor put to the director when cross-examined may have had something to do with the judge’s decision.

Morgan J also commented: “On the face of it, WCL was entitled to defend itself and to use its own assets to do so, even though the use of those assets might produce the result that it used up all of its available funds and ended up being unable to pay any sum found to be due to RossRiver… In my judgment, both WCL and Mr Barnett were real and substantial defendants. Both were entitled to defend the claims brought against them without there being a breach of fiduciary duty owed to RossRiver. The fiduciary duties which, in my earlier judgment, I found to exist do not go so far as to restrict either WCL or Mr Barnett from putting forward their chosen stance in litigation brought by RossRiver against them. It would be a very onerous fiduciary duty which prevented a party to adversarial litigation from defending itself” (paragraphs 67 and 69).

[UPDATE 08/09/2013: For the sake of completeness, I thought I ought to report that Ross River’s appeal was allowed (http://www.bailii.org/ew/cases/EWCA/Civ/2013/910.html), although the appeal didn’t really touch on the insolvency-relevant bits of the earlier judgment.

Briefly, the difficulty that Lord Justice Lloyd had with the previous judge’s reasoning was that the funds that Waveley Commercial Limited (“WCL”) had used to defend the action were subject to a Joint Venture Agreement, which prohibited WCL from paying itself, or using for its own benefit, any part of the proceeds of the development other than in payment of proper expenses of the development or as agreed with Ross River. Lloyd LJ felt that it was sufficient that Ross River had cast doubt on the legitimacy of some of the payments and that it was for WCL and Mr Barnett to prove that payments were proper, not for Ross River to prove the contrary.]

Clyde & Co LLP & Anor v Bates Van Winkelhof (26/09/12)

http://www.bailii.org/ew/cases/EWCA/Civ/2012/1207.html

The main question before the court was: can a member of an LLP be a worker within the meaning of S230 of the Employment Rights Act 1996?

Whilst “workers” have limited rights under the ERA and do not extend to the rights to insolvency qualifying liabilities (as far as I can see) as is the case for “employees”, Elias LJ did include consideration of an LLP member’s rights as an employee also.  He commented: “I would be minded to hold [and he did so conclude in paragraph 74] that the member of an LLP would not by virtue of that status alone constitute either an employee or a worker. Whether the member could enter into some separate employment relationship with the partnership, rather in the manner that a company director can do, would be a different question. There would be no employment status arising out of the simple status of member of the firm” (paragraph 73).

(UPDATE 26/05/14: the Supreme Court issued judgment on an appeal on this case on 21 May 2014: http://www.bailii.org/uk/cases/UKSC/2014/32.html. The Supreme Court decided unanimously that the LLP member was a “worker” under the ERA96. They were not required to consider, and they declined to express an opinion on the question “of some complexity and difficulty”, whether she was also an “employee” and indeed whether members of an LLP (or a traditional partnership) could enter into an employment contract effectively with themselves, which would have made the decision more relevant to insolvency situations.)

Tinseltime Limited v Roberts & Ors (28/09/12)

http://www.bailii.org/ew/cases/EWHC/TCC/2012/2628.html

This is one more for insolvency solicitors than practitioners: does a solicitor who takes on a case for an impecunious claimant under a conditional fee agreement (CFA) where there is no after the event (ATE) insurance policy in place, and who also agrees to fund the disbursements necessary to allow the case to proceed, thereby constitute himself a non-party funder and render himself liable to a non-party costs order in the same way as if he was a commercial non-party litigation funder?

Solicitors who are alert to this issue will have been watching the progress of an appeal on another case, Flatman v Germany & Ors ([2011] EWHC 2945 (QB)), in relation to which the Law Society asked to intervene.  The judge, HHJ Stephen Davies, and the parties in this case did not find compelling reasons to wait for the outcome of that appeal (expected in December 2012).  Although it seems possible that the appeal may proceed on grounds different to those already advanced, it is interesting that HHJ Davies, after acknowledging that there may be particular aspects of the other case that led Eady J to allow the appeal, stated that “if however Eady J was holding that it would be sufficient to make a non-party costs order that the solicitor was acting under a CFA without there being an ATE policy in place under which he agreed to fund the disbursements because the client was unable to do so and in order to ensure that the client could bring his claim, then I respectfully disagree with him. I consider that something more is required to justify the making of such an order, in circumstances where it is perfectly proper for the solicitor to agree to fund the disbursements under a CFA, even if he may be taken to know that unless he agrees to do so the claim cannot proceed” (paragraph 60).

On the facts of this case, HHJ Davies concluded: that there was nothing in the evidence indicating that the solicitor (Mr Edmonson) viewed the case as a business proposition under which he could receive a substantial fee; rather, that the solicitor had failed to understand how complex and costly the case might be; that in no way can it be considered that the solicitor controlled the litigation; and that “finally, but extremely significantly in my judgment, when I come to consider the overall justice of the matter, this is a case where there is contemporaneous evidence that Mr Edmondson was not motivated solely by financial self-interest in taking on this case, but with the laudable aim of providing access to justice to Tinseltime… Mr Edmondson was prepared to provide that assistance, where other solicitors were not. He may well have been naive as matters turned out, and Mr Ridgway may well not have been deserving of the assistance which Mr Edmondson provided. But that does not detract from the fact that Mr Edmondson cannot in my judgment be criticised, let alone made personally liable for costs, for taking on a case on a basis permitted by the law in order to ensure that Tinseltime was able to present what Mr Ridgway clearly believed was a genuine claim to the court” (paragraph 67).

Earlier in the judgement, HHJ Davies had stated: “So far as I am aware there are no reported cases in which a solicitor acting under a CFA has had a non-party costs order made against him on the basis of control, but I can see how there might be circumstances where the court was able to conclude that the solicitor’s desire to achieve a successful outcome had caused him to in effect take over the running of the litigation for his own ends, and that this would justify the making of a non-party costs order against him. One example might be where the damages claimed were, or had become, modest in comparison to the costs already incurred, so that the client had for all practical purposes lost any real interest in the pursuit of the proceedings but the solicitor was wedded to pursuing them to recover his costs” (paragraph 58).


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The AiB/Scottish Government’s Report on Responses to the Bankruptcy Law Reform Consultation

Summary

The AiB/SG’s consultation, which closed on 18 May 2012, raised questions on every aspect of Scottish personal insolvency – DAS, PTDs, SEQs, LILAs, and even suggested introducing a whole host of other “products” – as well as exploring the AiB’s current and prospective roles in administering and supervising insolvencies.  The report on the consultation responses was published on 28 August 2012 and can be accessed at: http://www.aib.gov.uk/news/releases/2012/08/bankruptcy-law-reform-consultation-summary-responses

The summary of the opening Summary alone lists 65 conclusions (pages 5 to 7), but I have attempted to list the most significant below (my comments added in parenthesis).  I should mention that I have only ever come across Scottish insolvency in my role at the IPA, so, although I have been closely involved with Scottish IPs in drafting consultation responses (although not for this one) and I have reviewed Scottish cases as part of the monitoring function, I have no front-line experience of administering them.

  • Money advice to be made compulsory prior to accessing any form of statutory debt relief, although not to be provided by the AiB
  • Support to have one Common Financial Tool, preferably a Scottish-specific one, against which all debtors will be measured, irrespective of the insolvency process being contemplated
  • Allow assessed contributions to be deducted directly from an individual’s wages
  • “Support to introduce a moratorium period of 6 weeks in statutory debt relief products, these to be displayed in a public register” (this seems to be directed at bankruptcy, so that the debtor can intimate an intention to apply, as is currently available in DAS)
  • “DAS should not be the default option where an individual can pay their debts in 8 years, although there was support for a shorter period” (it seems the majority who responded to the question, “how long should it be?”, answered 6 years.  However, the table suggests that “majority” is only 12 out of a total of 129; 89 answered “N/A”, so presumably many of those would not wish to see any defined timescale where DAS is the default option – seemingly this was not picked up by the AiB.)
  • “Composition in DAS should be available, after the programme has run for 12 years and 70% of the debt has been paid” (although not in the summary, the report indicates that a strong majority would like creditors to have to consent      to the composition, with some suggestion being that this is sought after DAS has run successfully for a number of years)
  • Support for a minimum debt level of £10,000 for entry into a PTD
  • Support for a minimum dividend in PTDs (see my comments below)
  • There should not be a fixed term for completion of a PTD
  • The current process of deemed consent and current thresholds in PTDs should continue
  • “Support for the removal of Apparent Insolvency as criteria in debtor applications” (the report adds: “if mandatory advice is adopted as a precursor to bankruptcy”)
  • The minimum debt level for debtor’s bankruptcy should increase to £3,000
  • Support for a “No Income” product for individuals on state benefits who have up to £10,000 of debt and up to £2,000 of assets
  • Other products, e.g. “Low Income Product”, “High Value Product”, not required
  • Support for a new Business DAS for sole traders and partnerships
  • Support for discharge to be linked to a bankrupt individual’s co-operation with their trustee
  • Where an individual cannot be located their discharge should be deferred indefinitely
  • AiB should have the power to defer discharge rather than refer the case to a sheriff
  • Support for debts that were incurred within 12 weeks of a debtor application or the granting of a trust deed should be excluded from discharge
  • Child maintenance arrears and credit union debts should continue to be discharged in bankruptcy and PTDs
  • Creditors should have to submit a claim within 120 days (the report adds “… of notification of an individual’s bankruptcy”, although the consultation question suggested this statutory timescale for all processes and this had strong support from respondents)
  • Support for the recall of bankruptcy process to be clarified and that the final interlocutor should be withheld until all funds have been distributed
  • The current prescribed rate of interest should be retained and all post-procedure interest and charges be frozen
  • Support for the debtor’s discharge to be linked to the date of award
  • Payment holidays of up to 6 months should be available in all statutory debt relief products and the period of time added onto the length of the product before discharge is granted
  • AiB should have the power to make orders for some bankruptcy processes and a separate independent panel should be used to review complex or disputed decisions
  • AiB should not have a more proactive role in supervising debt relief products
  • An AiB panel should not determine an appropriate course of action where a trustee has not followed an AiB direction (see my comments below)
  • Support for a Memorandum of Understanding between the UK Insolvency Service and RPBs to be redrafted to allow information on regulatory activity related to Scottish cases to be issued to AiB
  • “There should be an office of the Official Receiver in Scotland and this role should be carried out by AiB” (i.e. to act as liquidator of last resort)

The timescales for changes are, understandably, vague, given the vast range of proposals that will affect primary and secondary legislation as well as AiB Guidance Notes and the development of other projects, such as the proposed Scottish common financial tool.  Whilst the report states that, after a series of stakeholder workshops, it is hoped that the SG will be in a more informed position to issue an official response, the AiB’s website states that the SG’s response is expected to be published in October 2012.

My thoughts on the report – the methodology

What struck me was the AiB’s methodology in considering, not only the numbers of responses by individuals, but also those by organisations only.  The cynic in me senses that the AiB may have been somewhat selective in this consideration.

For example, Q15.1b asks: “If the AiB should continue to act as trustee, should she act only as trustee of last resort?” (page 87).  49 individuals answered “yes” and 44 answered “no”, but when responses only from organisations are considered, this becomes 29 “yes” against 39 “no”.  The summary to this section states: “Whilst the majority of respondents believed that AiB should continue to act as trustee of last resort, when the figure for organisations only was examined, this showed that AiB should continue to act as trustee in all cases where appointed” and this conclusion seems to have drifted into the opening summary.  However, on other occasions, an “organisations only” majority does not seem to have influenced the outcome.  For example, Q15.4 asks: “Where the AiB makes a direction which is not adhered to by the trustee, should an AiB panel decide on an appropriate course of action?” (page 89).  Although more “organisations only” answered “yes” than “no”, fewer individuals answered “yes” than “no” and the individuals’ voices seem to have taken precedence in the conclusions (albeit that the comment from Nolans Solicitors suggests that some “no” respondents may feel that someone other than an AiB panel, e.g. the IP’s regulator, should decide – something again not picked up by the AiB).

Perhaps I should not be too selective myself however, as sometimes this selective process seems to lead to positive outcomes.  For example, Q15.3 asks: “Should AiB have a more proactive role in the supervision of all debt relief products?” (page 89).  Although more “organisations only” answered “yes” than “no”, fewer individuals answered “yes” than “no” and the individuals’ voices seem to have taken precedence in the conclusions.

Given that IPs are perhaps more accustomed to writing as individuals than the other categories of respondents, it is not surprising that this selective approach, putting greater emphasis on “organisations only” responses, sometimes swings the outcome away from what I suspect are the IPs’ preferences.  20 of the 37 IP responses were from individuals, whereas all the creditor responses were from organisations and only 7 of the 27 advice sector responses were from individuals (and 13 in the “other” category).  There may be some merit in giving less weight to some individual responses (which some may be inclined to put in the “green ink brigade” category), but given that the vast majority of IPs operate in an “organisation” and many manage that organisation, this broad-brush distinction seems grossly unfair to me.

My thoughts on the report – the detail

Although there are many quoted responses that are extremely sensible suggestions, of which I hope the AiB will take notice and incorporate in future plans, some response quotes raised my hackles.  For example, there seems to be a perception that, if a PTD only produces a 50% dividend, this means that a large proportion (would some incorrectly assume 50%?) of the funds ingathered fall into the hands of the IP (see, for example, Grampian Credit Union’s comment on page 32).  Putting aside all the non-IP costs that need to be discharged, the percentage dividend of course bears no resemblance to the amount of the funds paid as a dividend.  For example, if £10,000 is distributed to creditors with claims of £200,000, this is only a 5% dividend, but if the same sum is distributed to creditors with claims of £20,000, it is a 50% dividend (perhaps a comparison of extremes, but I’m sure you get the point).  Thus it is nonsensical to assume that a PTD paying out a low dividend is automatically disadvantageous to creditors; surely the crux of the matter is: would the outcome be any better (not forgetting the impacts on the debtor) via any other process?  It seems to me that the only real way of exploring whether PTDs can become more beneficial to creditors is to consider carefully whether the costs in the process can be reduced, although the outcome of the AiB/SG’s earlier consultation on “Protected Trust Deed – Improving the Process” suggests to me that the process will become more costly with more reporting and other burdens laid at the IP’s door.

It is therefore extremely frustrating that the outcome of the consultation, that “the majority of respondents either suggested 10p in the pound or that no minimum amount should be specified” (page 33), has been interpreted by the AiB as “support for a minimum dividend on PTDs” (summary on page 5).

I was surprised at the majority (albeit not a large one) supporting the idea that a debtor’s discharge from bankruptcy be deferred indefinitely where he/she cannot be located.  I would concur with ICAS’ comment (page 63) that “just because an individual cannot be located does not indicate that he would not co-operate. Consideration has to be given to whether the Trustee has been able to deal with the estate effectively for the benefit of the creditors. Each case has to be considered on its own merits”.  Hopefully, reasonableness will prevail if/when this provision makes it to statute.

I also find the idea that debts incurred prior to bankruptcy (the apparent preferred period being 12 weeks) should be excluded from discharge a novel one, particularly in comparison with E&W bankruptcy legislation (putting aside transactions such as preferences).  I will be interested to see how this is described in draft legislation, as the report suggests there is support for the exclusion of only some debts, such as those relating to non-essential items or where the debtor had knowledge that they would probably not be paid – this may generate some work for the lawyers and courts, I would suggest.

Speaking from my perspective of having worked at an RPB, I struggle with the arguments the AiB puts forward for engaging in an information gateway with the RPBs and the UK Insolvency Service.  The AiB seems to want to know what disciplinary actions the RPB may be in the process of taking against IPs.  No information gateway will assist the AiB to learn of actions-in-process (and even if she knew, what would this indicate about the IP’s conduct until the issue had been decided?), but only of settled sanctions, which in most cases are in the public domain (and if any are not, it is very likely that the Insolvency Service’s/JIC’s work in ensuring consistency of the publicity of disciplinary outcomes will bring these into line).  It is certainly the case that currently the AiB’s and the RPBs’ activities in supervising/regulating IPs occur in isolation from each other – and I believe that it is unhelpful when the AiB receives and investigates complaints (with no reference to the RPB) that are more suited to investigation by the IP’s licensing/authorising body – but in my mind that is an inevitable outcome of the seeming overlap of responsibilities of the different bodies.

There are far too many details in the report to cover here and it is perhaps not sensible to spend too much energy in contemplating the proposed changes at this moment.  I am sure that many of you, like me, will be interested in seeing how the results of this consultation are reflected in future stages.