Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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The draft revised SIP13: has it sold out to SIP16?

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The consultation release explained that the SIP13 revision involved using “(wherever possible) language which is consistent with SIP16”. The resulting draft gives me the impression that the working group started with a blank sheet of paper and asked themselves: how can we adapt SIP16 for on-liquidation sales?

I agree that much of the current SIP13 is redundant, as it simply reproduces principles from the Code of Ethics (albeit that the Code rarely makes such direct applications), it does seem to me that the diversity of scenarios for connected party sales in and around insolvency processes has been lost in this redraft. This SIP’s primary focus clearly has become post-appointment connected party sales that are contemplated prior to appointment.

Why chop out so many connected party sales that are caught by the current SIP13? Will this improve perceptions?  Will we lose valuable transparency if we assume that the only connected party transactions worthy of disclosure are quasi pre-packs?

Requirements on office holders

The only requirements that the draft revised SIP13 puts on IPs in office are:

  1. “If an office holder subsequently relies on a valuation or advice other than by an appropriate independent valuer and/or advisor with adequate professional indemnity insurance this should be disclosed along with the rationale for doing so and the reasons why the office holder was satisfied with any valuation obtained, explained.”
  2. “When considering the manner of disposal of the business or assets the office holder should be able to demonstrate that their duties under the legislation have been met.”
  3. “The office holder should demonstrate that they have acted with due regard to creditors’ interests by providing creditors with a proportionate and sufficiently detailed justification of why a sale to a connected party was undertaken, including the alternatives considered. Such disclosure should be made in the next report to creditors after the transaction has been concluded, which should be issued at the earliest opportunity.”

Item 2 is pointless: a SIP should not have to state that IPs need to be able to demonstrate that they have complied with legislation.

The other two items are generally reasonable, but I think the application of these requirements is confused by the preceding section headed “Preparatory Work”. In fact, item 1 above appears in the “Preparatory Work” section, which adds to the perception that the entire SIP relates only to quasi pre-packs.

“Preparatory Work” – a confusing context

This section states:

“An insolvency practitioner should keep a detailed record of the reasoning behind both the decision to make a sale to a connected party and all alternatives considered.”

“An insolvency practitioner should exercise professional judgement in advising the client whether a formal valuation of any or all of the assets is necessary.”

The SIP’s “principles” explain that “insolvency practitioner” is to be read as relating to acting in advisory engagements prior to commencement of the insolvency process.

The “preparatory work” heading and the reference to the pre-appointment “decision to make a sale” lead me to wonder whether the sections that follow – “after appointment” and “disclosure” – apply only to sales where pre-appointment preparatory work has been undertaken.  Another issue with the heading – and the fact that the first sentence above is a copy of para 10 of SIP16 (with the omission of “pre-pack”) – is that it suggests that SIP13 does not capture sales completed pre-appointment.

But does it make sense to reduce SIP13 to a SIP16 baby brother?

Does the SIP work for liquidation sales?

Often business and/or asset sales to connected parties are conducted in or around a CVL process. Sometimes the sale happens pre-liquidation: sometimes without the advising IP’s involvement, but sometimes with their knowledge and assistance.  In other cases, the IP takes no steps to sell the assets until his/her formal appointment as liquidator; indeed, in some cases the IP will not even have met or spoken with the directors before the S98 meeting as they replace the members’ choice of IP as liquidator.

What are the disclosure requirements for pre-liquidation sales? This draft revised SIP13 omits all such disclosure.  True, at present SIP8 requires some disclosure, but:

  • SIP8 only requires disclosure of transactions in the year before the directors resolved to wind up the company, so there remains a crucial reporting gap;
  • SIP8 only requires disclosure to the S98 meeting, so technically it need not be in the post-S98 report that is circulated to creditors; and
  • SIP8 will be changed enormously by the 2016 Rules and rumour has it that SIP8 might even disappear completely.

How many companies go into CVL having sold/lost all their chattel assets already? I reviewed the filing of 10 one year old CVLs chosen at random:

  • 6 had no chattel assets at the point of liquidation, although the previous accounts of 3 of these attributed some value to chattel assets (and one of the others had no filed accounts);
  • 3 involved post-CVL connected party sales; and
  • 1 involved a post-CVL unconnected party sale.

Of course, there can be all kinds of reasons why a company goes into CVL with no chattel assets, but if the revised SIP13 is issued, how many connected party transactions will go entirely unreported in future? Might it even influence more directors to dispose of assets before an insolvency office holder is appointed so that the sale falls under the radar?

Perceptions

Of course, the insolvency office holder will make appropriate investigations into a pre-liquidation (or any other insolvency process) sale. Therefore, is there really any harm done if the details of the sale are not provided to creditors?

I guess not, but doesn’t the omission de-value the efforts to ensure that office holders disclose post-appointment sales? What are the chances that the distinction between a pre and post sale will be lost on some creditors?  If they see solely a cash at bank lump sum received by the liquidator of a once asset-rich company and few details, what might their sceptical minds conclude?

Not quite SIP16

As I mentioned at the start, this draft revised SIP13 seems to have been produced from a blank sheet of paper and a copy of SIP16. However, fortunately, this SIP seems to have avoided the prescriptive shackles of its fellow.

The consultation release referred to SIP13 having been drafted “in a proportionate way and without being onerous, recognising that it may apply to low value transactions”. Notwithstanding that some liquidation business/asset sales may be as hefty as some pre-packs, I think this is good news: the draft SIP13 does not contain a SIP16-style shopping list of disclosure items (bravo!) and sticks to the principle of providing “a proportionate and sufficiently detailed justification of why a sale to a connected party was undertaken, including the alternatives considered”.

Therefore, whilst I suspect that disclosure of material business sales may be expected to contain a number of SIP16 elements, at least selling an old computer to the director for £50 will not require a chapter-and-verse account. However, it will take diligence on the part of those drafting and reviewing creditors’ reports to ensure that an adequate explanation, depending on the specific circumstances, is given. As with the new SIP9, formulaic approaches to report-writing will not work.

Wider scope?

Assuming that the pre-appointment “preparatory work” context is not meant to rule out disclosure of cold post-appointment sales, the draft revised SIP13 would have a wider reach than the current SIP13 in some respects:

  • Sales with connected parties (or at least as they are defined by statute), not just with directors, are caught; and
  • Personal insolvency processes are caught, so for example it would include a bankrupt’s family member buying out the Trustee’s interest.

Consultation deadline

I agree that a revision of SIP13 is long overdue: for one thing, its reference to a Rule 2.2 report lost all relevance in 2003!

The consultation – available at http://goo.gl/D91QMo – ends on 11 May 2016. I’ll be submitting a response, so if you want to counter my opinions, you’d better getting writing.

 

By the way, if you’ve been wondering how the picture relates to the story: there’s no connection, it’s just that I’ve recently returned from a spectacular trip to Bolivia and Chile.

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Just Scottish Coal Company: Scottish Liquidators’ Powers to Disclaim – back to square one

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Re The Scottish Coal Company Limited (In Liquidation) (12 December 2013) ([2013] CSIH 108)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSIH108.html

In an earlier blog post – http://wp.me/p2FU2Z-3I – I covered the judgment in the Outer House of the Court of Session, which decided that the joint liquidators were entitled to disclaim onerous land and abandon water use licences.

The Scottish Environment Protection Agency and others appealed to the Inner House with the outcome that the previous decision was recalled and the court directed that the liquidators do not have the power to abandon or disclaim the sites or the statutory licences. The consequences seem to go further than that, however, as this decision indicates that the post-appointment liabilities arising under these statutory regimes will fall as liquidation expenses.

To summarise the issue facing the liquidators: the Scottish Coal Company Limited (“SCC”) carried out open cast coal operations on some of its sites under licences granted under the Water Environment (Controlled Activities) Regulations 2005 and 2011 (“the CARs”) and permits issued under the Pollution Prevention and Control (Scotland) Regulations 2000 and 2012. The costs of continuing to meet the terms of these licences and permits were running at c.£500,000 per month. If the liquidators’ only option in escaping these were to comply with the terms of surrender, the cost would be several million pounds.

The judgment runs to 162 paragraphs and is challenging in many respects. To do it justice, I thought I’d give this its own post. I think the key bases for the court’s decision can be summarised as follows.

If a trustee can abandon property, why can’t a Scottish liquidator?

The original decision arose in part from consideration of S169(2) of the Insolvency Act 1986, which states that “in a winding up by the court in Scotland, the liquidator has (subject to the rules) the same powers as a trustee on a bankruptcy estate”: as a Scottish trustee has power to abandon heritable property (S32(9A) of the Bankruptcy (Scotland) Act 1985), so too, it was thought, should a Scottish liquidator. On appeal, the Inner House examined whether this trustee power does not translate into a liquidator’s power to rid himself of onerous property. Strictly speaking, a trustee does not abandon the property, but only “any claim to the debtor’s share and interest … in the property. No transfer of ownership is envisaged. Rather, the trustee gives up what… is a personal right to acquire ownership of (that is, a real right in) the property” (paragraph 117). When the trustee abandons this right, the property remains in the ownership of the bankrupt.

Now try applying that power to a liquidator: “Unlike the situation of a trustee, who obtains a personal right to acquire ownership of the bankrupt’s heritage upon vesting of the sequestrated estate, a liquidator acquires no such right. The company’s property, whether moveable or heritable, does not vest in him at all” (paragraph 121), thus the liquidator cannot “abandon” property in the same way as a trustee can, as he does not hold the “personal right to acquire ownership” of the property. The company remains the owner throughout. “From a practical point of view, the liquidator may elect, in certain circumstances and with appropriate sanctions, not to realise certain property, whether moveable or heritable; or he may be unable to realise it. If that remains the position as at dissolution, then so be it… The property, however, does not become separated in any legal sense from the company’s general assets in advance of that dissolution” (paragraph 123).

So, if a liquidator cannot abandon the sites, what about the licences?

The judges looked at the provisions contained in the CARs as an example of a statutory regime governing some of the many licences that the liquidators were seeking to abandon. Under the CARs, “simply by assuming the role of, for example, liquidator, the insolvency practitioner concerned becomes ‘the person who is responsible for securing compliance with the terms of [any CARs] licence’ granted to the company” (paragraph 129). “By virtue of it having applied for and been granted a CARs licence, SCC incurred onerous obligations to avoid the risk of adverse impact on the water environment and to leave it in such a state that it complies with the relevant environmental legislation. These obligations subsist notwithstanding the cessation of any or all activity on the part of SCC and, in particular, any controlled activity. Moreover, by virtue of the very clear terms of regulation 2(1) of the CARs, which as already noted include a liquidator within the definition of ‘responsible person’, those obligations are incumbent upon the liquidators” (paragraph 133).

As a Scottish liquidator has no express power to disclaim onerous property, “whether a Scottish liquidator has power specifically to abandon a CARs licence, and thereby bring an end to its onerous conditions, must depend on the terms of the CARs and the relevant licences” (paragraph 136). The CARs contain no such provision for abandonment, but instead they provide specific mechanisms for releasing a licensee, including surrender. Therefore, either the liquidator pursues a surrender – accepting the expensive conditions attached to it by SEPA – or the licences continue until the liquidators vacate office and the company is dissolved.

Ok, if the liquidators cannot disclaim the licences, can they at least avoid the obligations arising from them falling as liquidation expenses?

The judges considered the intended purpose of the CARs: “Where, as here, the relevant legislation was enacted to implement an EU Directive, it is taken to be the legislative intention to achieve the purpose of the Directive… As already noted, the CARs were made under section 20 of the 2003 Act, which was enacted in order to transpose the Water Framework Directive into domestic law. The Water Framework Directive is extensive in its scope and ambitious in its objectives. Its purposes include, for example, the establishment of ‘a framework for the protection of inland surface waters, transitional waters, coastal waters and groundwater which: …ensures the progressive reduction of pollution of groundwater and prevents its further pollution’ (art 1(a)). Where an insolvent company will in due course be dissolved, enforcing a statutory licence against a liquidator affords at best only temporary and imperfect environmental protection. Nevertheless it would seem to be beyond argument that the broad interpretation of the CARs will better achieve the desired result. As a consequence, SCC’s environmental obligations will be treated as liquidation expenses, thereby giving them priority over other obligations” (paragraphs 142 and 143).

They also pointed to other “persuasive factors in favour of giving pre-eminence to the policy of maximising environmental protection over the policy of the expeditious and equal distribution of available assets among the unsecured creditors of an insolvent company”, such as the decision in Re Mineral Resources, which included that “the interest in the protection of the environment should prevail over the interest in fair and orderly winding up of companies” (paragraph 144).

But, bearing in mind that an English liquidator may seek to disclaim a Scottish site or licence, doesn’t this overstep the mark of matters reserved to Westminster?

The judges thought not. “The purpose of the CARs as a whole, and the provisions relating to a liquidator in particular, is an environmental one. Neither the CARs as a whole, nor the provisions relating to liquidators, have as their purpose an insolvency objective. The effect on liquidators of companies possessing a CARs licence is no more than a loose or consequential connection. In all the circumstances, those provisions of the CARs which are said to restrict the power of a liquidator cannot be said to relate to reserved matters. They are, accordingly, not outwith the competence of the Scottish Parliament by reason of section 29(2)(b) of the [Scotland] 1998 Act” (paragraph 156). True, “the CARs have an effect on the practicalities of insolvency. However, more than that is required in order to place them beyond the devolved competence of the Scottish Parliament. If, contrary to the views expressed above, the CARs have modified the law on reserved matters (and in particular any of those aspects of the law of corporate insolvency which are listed under head C2 of schedule 5 to the 1998 Act), it remains the case that any such modifications are incidental to, and consequential on, provisions in the CARs relating to environmental matters, which are not reserved, and only to an extent that is necessary to give effect to the environmental purpose of the CARs” (paragraph 160).

So can an English liquidator disclaim a Scottish site or licence?

“An English liquidation may involve disclaimer of property held anywhere in the world and the liquidation process, and any final dividend upon dissolution, may proceed accordingly. However, the manner in which heritable property is actually disposed of is a matter to be determined by the lex situs (the law where the property is situated). Whatever the powers of a liquidator may be in terms of the law under which the liquidation is processed, the property will not transmit from the company unless that is achieved in accordance with the law applying where the land is located” (paragraph 126).

The Outcome

Therefore, the Inner House reversed the earlier decision and directed that the liquidators do not have the power to abandon (otherwise disclaim) the sites or the statutory licences.

Some commentators have hinted at the prospect of a Supreme Court appeal.

Personally, this outcome leaves me with the following questions:

• If the costs of meeting the ongoing obligations under such statutory licences rank as a liquidation expense, could companies involved in potentially environmentally-damaging, licensed, activities in Scotland find that their access to credit dries up?

• Although English liquidators have specific power to disclaim onerous property – and I don’t know how the English equivalent of the CARs are worded – how does this stack up against legislation implementing an EU Directive, which presumably is felt by all of the UK, with the overriding objective of environmental protection?


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Red Tape? Hang out the bunting!

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

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

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

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

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

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

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

2. Abolishing almost all meetings

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

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

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

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

3. Communication by website

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

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

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

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

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

4. Extend extensions by consent

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

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

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

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

5. Scrap small dividends

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

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

6. “Minor” changes

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

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

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

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

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

7. Changes to D-report/return forms

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

English court leaves US to decide bankrupt’s COMI

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Peering into the Insolvency Statistics

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Whilst clearing out my e-file, I took a few minutes to review the Insolvency Service’s insolvency statistics up to the end of 2012, released on 1 February 2013: http://www.insolvencydirect.bis.gov.uk/otherinformation/statistics/201302/index.htm. I thought I’d dig a bit deeper into the stats*.

Corporate Insolvencies (England & Wales)

It has always bugged me that the Service produces a Liquidations graph but none for the other corporate procedures, so I thought I’d produce one myself. Unfortunately, whilst I’ve had no trouble embedding photos into my posts, I have failed to do the same with graphs, so I’m afraid you’ll have to click here to see the graphs: Graphs 03-04-13 (I’m probably teaching grandmother to suck eggs, but if you Ctrl-click onto “Graphs 03-04-13”, it will open up a new tab, which will mean that you can easily switch from text to graphs.)

A few notes on the figures of graph (i) (drawn from the Insolvency Service’s published data, linked via the Insolvency Service release referred to above):

• They have not been seasonally adjusted, which I presume explains some of the spikiness of the graph and particularly, I suspect, the more pronounced Q4 troughs and Q1 peaks.
• I have counted three sets of group company insolvencies (844 Adms in Q4 06; 729 Adms in Q4 08; and 129 CVAs in Q2 12) as only one insolvency in each case.
• Recs includes LPA Receiverships and the Insolvency Service noted a difference in their handling of the data during 2007 and thus the figures for 2007 (the most pronounced effect being on the Receivership figures) are not directly comparable.

I wonder if these complications are some of the reasons why the Service has never produced graphs for these insolvency procedures!

A few personal observations and conjectures:

• With the Enterprise Act 2002 introducing a fundamentally-revised Administration process in September 2003, it seems that it took some time for the momentum to build – Administration numbers did not seem to start levelling out until late 2005.
• Alternatively, perhaps it has something to do with the timing of post-Sept 03 debentures and that probably some of these began leading to Administration as the years rolled on (probably not coincidental that Receivership appointments were also falling in this 2003-2005 period).
• I thought the sequence of peaks in the various types of insolvency was interesting: Administrations peaked in Q4 08/Q1 09; Liquidations in Q1/Q2 09 (not included on the above graph); Receiverships in Q3 09; and CVAs in Q2 10. No doubt, commentators of recession and insolvency processes will have their own explanations for this sequence. I have my own ideas also, but as I am coming at it from such a position of ignorance, I wouldn’t dream to putting them in print!

I also looked at the figures for Administrations that moved to CVLs and compared them with the number of Administration appointments for the previous year on the assumption that, generally, if a CVL were the appropriate exit route, the Administration would move to CVL a year after appointment – the spikiness of the resultant graph probably indicates that this is a rubbish assumption! See graph (ii) of Graphs 03-04-13

I am not a statistician – it shows, doesn’t it?! – so all I think this suggests, if anything, is that the percentage of Administrations moving to CVL has held pretty steady throughout the past six years. Is that some positive news, that, despite the apparent diminished value of assets in the recession, it seems that just as many Administrations (by percentage) move to CVL, i.e. have the prospect of returning something to the unsecured creditors?

Personal Insolvencies (England & Wales)

The Insolvency Service releases tend to be very thorough when it comes to personal insolvencies, so there’s not much to add, but their data does include figures for Income Payment Orders (“IPOs”) and Income Payment Agreements (“IPAs”), at which I thought I’d take a look. As bankruptcies are recorded at the date of the order, but IPOs/IPAs occur later, I thought it only fair to look at this on a yearly basis – see graph (iii) of Graphs 03-04-13.

IPOs/IPAs look fairly proportionate to bankruptcies, don’t they? Let’s look at this in a different way – see graph (iv) of Graphs 03-04-13.

I’m not sure what – if anything – this illustrates: does it suggest that a larger proportion of bankrupts can pay something from their income? Or does it demonstrate the success of IPAs, which were introduced in April 2004? Or does it suggest that Official Receivers have become more proactive in pursuing IPO/IPAs?

Another Insolvency Service note I found interesting was: “Prior to December 2010 a proportion of surplus disposable income was allowed to be retained by the bankrupt, post December 2010 all surplus disposable income was claimed by the Official Receiver as trustee. Another change in policy was implemented at the same time in that the minimum payment sought under an IPO/IPA reduced from £50 per month to £20 per month”. Perhaps that explains the 2011 peak, but then what about the 2012 dip? I’ll be interested to see how this graph develops over the next couple of years.

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* All Q4 2012 figures are provisional.

By the way, if you’re wondering about the introduction of images… A friend suggested that I should liven up the posts (I absolutely agree they could do with it!) with photos that have a link – even if extremely tenuous – with the words. I hope it helps the readability!


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A brief briefing

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

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

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

Valuing contingent claims

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

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

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

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

What documents are provisional liquidators entitled to recover?

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

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

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

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

COMI: Dublin v Belfast

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

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

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

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

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

Iceland v Scotland: Nice try, Landsbanki

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

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

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

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

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

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

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

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

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


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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.


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Four High Court Decisions: (1) how (not) to avoid personal liability; (2) LPA Receivership changes “client” for TUPE purposes; (3) out-bid Newco avoids allegations of hiving out business; and (4) discharged bankrupt refused release from family proceedings debt

I don’t think any of these judgments introduces anything new, but they might still hold a little interest:

  • Wright Hassall LLP v Morris – lessons in avoiding personal liability in post-administration agreements
  • McCarrick v Hunter – LPA Receivership results in change of client, thus no TUPE transfer of service provision
  • City of London Group Plc & Anor v Lothbury Financial Services Limited & Ors – out-bid Newco avoids claims from purchaser finding the “cupboard bare”
  • McRoberts v McRoberts – when will a court release a bankrupt from a family proceedings debt under S281(5)?

Lessons in avoiding personal liability in post-administration agreements

 Wright Hassall LLP v Morris [2012] EWCA Civ 1472 (15 November 2012)

 http://www.bailii.org/ew/cases/EWCA/Civ/2012/1472.html

 Summary: This has been the subject of some discussion on the LinkedIn Contentious Insolvency group.  The main lessons I drew from this case are that, not only should IPs take care to avoid personal liability when signing contracts/agreements as agent (SoBO?), but also to understand who – himself or the insolvent entity – is made party to legal proceedings.  In this case, it seems that the IP did not think through the consequences of an action brought against him; he seemed to assume (or at least he attempted to rely on the assumption) that the successful litigant would rank pari passu with other administration expense creditors.  As the IP had not appealed the order, all that was left to the judge – who was asked by the litigant for directions that it be paid in priority to the other expense creditors – was the question: was the order against the IP personally or the companies in Administration?  As the companies had not been made party to the proceedings, the court on appeal concluded that it could not be the companies and thus the IP was held personally liable.

The Detail: Mr Morris, Administrator of two companies, entered into two CFAs with Wright Hassall LLP.  The judgment of Lord Justice Treacy notes: “Although the heading to the agreements made plain that the two companies were in administration, and the Appellant must have understood that Mr Morris was the Administrator, when he signed the agreements he did so without any qualification as to his personal position or reservation as to his personal liability. In due course Judge Brown QC was to find that Mr Morris signed the documents without reading them” (paragraph 5).  Here endeth the first lesson.

Later, the solicitors sought payment under the CFAs.  The court found in favour of Wright Hassall LLP, but, as described above, when the solicitors pursued payment, Morris sought to treat them as an administration expense creditor who would need to wait along with all other expense creditors.  The solicitors sought directions that they be paid in priority to the other expense creditors, but, although the issue of personal liability had not been raised before, Judge Cooke recognised that this issue was key.  He decided that Morris was not personally liable, putting some weight behind the naming of the defendant as “Morris as Administrator of… Limited” and suggested that this acknowledged that Morris was acting as agent, rather than in a personal capacity.  Wright Hassall LLP appealed this decision.

The problem identified by one of the appeals judges, Treacy LJ, was that the only defendant was Morris; at no stage had the companies been joined as parties to the litigation.  Treacy LJ noted that there was no authority for asserting that, by describing the defendant as “Morris as Administrator of… Limited”, this recognises that he is being sued as agent.  He also noted that the only way the companies could have been made party to the action was with the consent of the Administrator or by order of court, but neither of these steps had been taken.  Finally, he noted that, had the companies truly been the defendants, they would have been described as “XYZ Limited (In Administration)”.  As Judge Brown QC could only make an order against a party to the action before him, it followed that the order was against Mr Morris personally.

LPA Receivership results in change of client, thus no TUPE transfer of service provision

McCarrick v Hunter [2012] EWCA Civ 1399 (30 October 2012)

http://www.bailii.org/ew/cases/EWCA/Civ/2012/1399.html

Summary: I have seen some commentary on the Hunter v McCarrick Employment Appeal Tribunal ([2011] UKEAT 0167/10/DA) and, as this recent appeal was dismissed, there has been no change, but I thought it was worth a quick mention.

We are all used to the principle that, if a business switches its service provider, the people employed by the original service provider are protected under TUPE.  In this case, the appointment of LPA Receivers led to employees switching employer although they provided the same services to the same properties.  However, the switch of employers was not considered to be a transfer of service provision, because the “client” had changed from the borrower to the mortgagee/receivership.

The Detail: McCarrick was employed by WCP Management Limited (“WCP”), which provided management services on a group of properties.  The mortgagee appointed LPA Receivers, who instructed a new property management company, King Sturge, and thus WCP stopped providing the service.  McCarrick then became employed personally by Hunter, who had an interest in seeing the swift end of the receivership and who made McCarrick available to assist King Sturge in the property management at no cost to the receivership.  McCarrick apparently provided the same property management services as he had before, but he was now paid by Hunter.

Subsequently, McCarrick was dismissed and he sought to claim that the dismissal was unfair.  In order to do so, he needed to prove continuity of employment between WCP and Hunter.  The Employment Appeal Tribunal decided – and this appeals court confirmed – that there was no transfer of service provision between WCP and Hunter.  It was stated that Regulation 3(1)(b) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 envisages that the client will remain the same throughout the transfer of service provision and “it would be quite illegitimate to rewrite the statutory provisions in the very broad way suggested by the appellant” (paragraph 37), i.e. to enable the Regulations to achieve the purpose of protecting employees in this situation when there is a transfer of service provision.  Therefore, as the client switched from the borrower to the mortgagee “and/or the receivership” (paragraph 27), Regulation 3(1)(b) regarding the transfer of service provision does not apply.

Out-bid Newco avoids claims from purchaser who found the cupboard bare

City of London Group Plc & Anor v Lothbury Financial Services Limited & Ors [2012] EWHC 3148 (Ch) (8 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3148.html

Summary: The post-Administration purchasers of a business alleged that they found “the cupboard was bare”, but claims against “Newco” and others for migrating the business prior to insolvency failed.

What I found particularly interesting in this case was the apparent acknowledgement of the judge that the director could take certain steps in anticipation of a pre-pack sale to Newco.

The Detail: A subsidiary of the first claimant bought the business, name and assets of Lothbury Financial Limited (“LF”) from its Administrators four days after the company was placed into Administration on application of the claimants.  The claimants alleged that a former director, consultants, and employee of LF conspired to transfer the business to Lothbury Financial Services Limited (“LFS”) and thus committed serious acts of misfeasance.

Mrs Justice Proudman concluded that the claims failed.  She was satisfied that the evidence demonstrated that: LFS operated as a bona fide separate business prior to the Administration of LF; LF’s clients were not misled, but chose to follow the consultants, who had no restrictive covenants, to LFS of their own accord (the business was PR); and LFS was entitled to continue to use the name after the goodwill of LF was sold to the claimant.

As far back as summer 2009 (LF was placed into Administration on 29 March 2010), the director was taking advice from an IP regarding a pre-pack Administration, although he was also attempting to re-negotiate payment terms with the claimant in order to rescue LF.  The claimants alleged that LFS was set up and structured as part of the director’s exit strategy, that LFS was to be the destination for LF’s business.  “The claimants argue that the allegation of a pre-pack administration is self-serving as depriving LF of its business served to ensure that the price to be paid would be minimised and rival bidders would be discouraged. However, preparing to succeed to an original business in such circumstances is in my judgment different from preparing to compete with it. It is the essence of a pre-pack management buy-out that information has to be derived from the failing company in order to structure such a buy-out” (paragraph 38).

So how much activity in preparation of a pre-pack is acceptable and over what kind of period?  It is noteworthy that in this case, although there was evidence of some confusion of company names on a client’s contract and an employee was described as having “overreached herself” (paragraph 28) in explaining to the London Stock Exchange’s Regulated News Section that LF had simply changed its name to LFS and moved offices, the judge found no case against the director for breach of fiduciary duty and noted that LF suffered no loss by the actions.

When will a court release a bankrupt from a family proceedings debt under S281(5)?

McRoberts v McRoberts [2012] EWHC 2966 (Ch) (1 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2966.html

Summary: A discharged bankrupt was refused release from a bankruptcy debt arising from a family proceedings order.

Although this is not a particularly surprising outcome, the judgment provides a useful summary of the factors the court considers when deciding whether to override the default position of S281(5) of the Insolvency Act 1986.

The Detail: Mr McRoberts’ bankruptcy started in September 2006.  Mrs McRoberts submitted a proof of debt for c.£245,000 being the amount owed under an order in their family proceedings in 2003 in resolution of their financial claims ancillary to their divorce.  Mr McRoberts was discharged from bankruptcy in September 2007 and the bankruptcy was concluded with no distribution to creditors.

S281(5) provides that discharge from bankruptcy does not release the debtor from such a debt, but the court has jurisdiction to release it and the court in Hayes v Hayes held that the court’s discretion in this matter is unfettered and the debt can be released after the debtor’s discharge.  The Hon. Mr Justice Hildyard considered the factors described in Hayes and continued: “As it seems to me, the ultimate balance to be struck is between (a) the prejudice to the respondent/obligee in releasing the obligation if otherwise there would or might be some prospect of any part of the obligation being met and (b) the potential prejudice to the applicant’s realistic chance of building a viable financial future for himself and those dependent upon him if the obligation remains in place. In striking that balance I consider that the burden is on the applicant; unless satisfied that the balance of prejudice favours its release the obligation should remain in place” (paragraphs 24 and 25).  He also considered that a review of the merits or overall fairness of the underlying obligation did not come into it, but that, if any modification of the order were sought, this was a matter for the matrimonial courts.

In this case, the judge’s view was that the balance remained in favour of keeping the obligation in place – the debtor had not provided evidence that any future enterprise or activity would be blighted by the continued obligation – and thus he declined to grant release.


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Solicitors’ fees for unsuccessfully opposing a winding-up petition allowed in priority to Liquidators’ fees, but not in priority to Administrators’ fees

Neumans LLP (a firm) v Andronikou & Ors [2012] EWHC 3088 (Ch) (2 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3088.html

Although there is case precedent – Re a Company (No 004055 of 1991) [1991] 1 WLR 1004 – for allowing the company’s costs for seeking to strike out a winding-up petition to be a Liquidation expense, personally this seemed a new thought to me: that the category of Liquidation expenses at R4.218(3)(h), “the costs of the petitioner, and of any person appearing on the petition whose costs are allowed by the court”, could include the insolvent company’s costs for seeking to avoid the winding-up order.

Of course, these pre-Liquidation costs do not automatically rank in priority to the Liquidator’s fees – they have to be “allowed by the court” – but it seems to me that this case highlights yet more pre-appointment liabilities of which Liquidators need to be aware.

In contrast, the judge decided that the solicitors’ fees should not be allowed as an Administration expense.

It is perhaps important to note that the Liquidators did not object to the result (because there was no Administration surplus from which to discharge the costs).  However, the judgment provides some valuable comment on the application of the Lundy Granite principle in Administrations and what kind of costs the court will allow as Liquidation expenses.

Background: In December 2009, Portsmouth City Football Club Limited (“the company”) instructed solicitors to act for it in connection with a winding-up petition presented by HMRC.  The solicitors continued to act on the matter until c.12 February 2010 when the company’s instructions were withdrawn.  At that time, the petition had reached an appeal stage.  Administrators were appointed on 26 February 2010 and thus the winding-up petition was suspended automatically.  On considering the Administrators’ (revised) proposals, the creditors approved that the company should exit Administration via Compulsory Liquidation. The original HMRC winding-up petition was restored to a hearing on 24 February 2011 when the winding-up of the company was ordered and this resulted in the ending of the Administration.

The company’s former solicitors had received part-payment from a person connected with the company, but there remained c.£267,000 owing in fees and disbursements.  The solicitors sought a determination that the costs should be an expense of the Administration; alternatively, that they should be an expense of the Liquidation; and further alternatively, that they should be an expense of the CVA (which existed whilst the company was also in Administration).

Are the solicitors’ fees an Administration expense?

The solicitors’ first argument was that the court could order that the costs be paid as an Administration expense under S51 of the Senior Courts Act 1981.  In part, that section states that: “the court shall have full power to determine by whom and to what extent the costs [of proceedings] are to be paid”.  Morgan J decided that this did not help the solicitors: “An order for costs under section 51 is for the benefit of the company. At most, it would involve a payment by the company to the company. It would not involve the administrators making a payment to the solicitors…  Section 51 does not authorise the court to order the administrators to make a payment to the solicitors. As I have explained, they did not incur costs and no order for costs is to be made in their favour” (paragraph 68).

Another argument was that the court could order that the costs be “treated” as an Administration expense.  In considering this, Morgan J reviewed the list of Administration expenses at R2.67 and reflected on the impact of the Lundy Granite principle, i.e. a liability under a contract entered into before Liquidation could be treated as if it were an expense of the Liquidation, where the Liquidator had retained the benefit of the contract for the purposes of the winding-up.  He stated: “If the company is under a liability to pay a sum under the Lundy Granite principle, then it seems to me that, as a matter of fact, payment of such a sum will be a necessary disbursement within rule 4.218(3)(m)” (paragraph 91) and thus it followed that “a liability which is payable in full under the Lundy Granite principle can be a necessary disbursement within rule 2.67(1)(f). Further, such a liability can be a liability incurred by the administrator under rule 2.67(1)(a)” (paragraph 93).

So were the solicitors’ costs in this case a liability under the Lundy Granite principle?  Morgan J decided that they were not, as the company’s contract of retainer of the solicitors ended before the Administration began and the Administrators “did not do anything to elect to retain the benefit of the contract of retainer for the purposes of the administration. Further, if they had so elected, they would only have been liable for charges in relation to the period from the time of such election” (paragraph 95).

Morgan J concluded that the solicitors’ fees came under no category of Administration expenses per R2.67 and they were not to be “treated” as if they came within that rule.

Are the solicitors’ fees a Liquidation expense?

One of the significant differences between R2.67 for Administration expenses and R4.218 for Liquidation expenses is that the latter includes (at (3)(h)): “the costs of any person appearing on the petition whose costs are allowed by the court”.  Morgan J stated: “The company comes within the reference to ‘any person’ in rule 4.218(3)(h). The company incurred costs in that it contracted, before the presentation of the winding up petition, to pay fees to the solicitors. Thus, the decision for the court is whether to ‘allow’ the costs of the company as costs within rule 4.218(3)(h)” (paragraph 115).

“On the evidence and the submissions in this case, and having regard to the fact that there was no real opposition to this course, I consider that I am able to hold: (1) the solicitors were duly instructed on behalf of the company; (2) those directing the affairs of the company at the relevant time considered that it was in the best interests of the company for the company to oppose the winding up petition in the way, and on the grounds, on which it did; (3) those directing the company were not acting in their own interests in a way which was in conflict with the best interests of the company; (4) the work done by the solicitors on behalf of the company was in fact in the best interests of the company; (5) there is no factor which would justify the court in refusing to allow the company’s costs to be an expense of the liquidation” (paragraph 128).

Which elements of the solicitors’ fees are Liquidation expenses?

In addition to the solicitors’ fees and disbursements directly related to the opposing of the winding-up petition, Morgan J considered whether the solicitors’ other fees and disbursements also should be allowed:

  • Costs incurred prior to the presentation of the petition: allowed to the extent that the “work ultimately proved of use and service in the application which the company later made to strike out the petition” (paragraph 133).
  • Costs in dealing with another creditor’s petition: allowed from the date that this petition and HMRC’s petition were ordered to be considered together; work prior to this event related to a separate matter.
  • Costs in advising on a possible application for a S127 validation order: Morgan J felt that these costs were “very closely bound up” with the costs of dealing with the HMRC petition and thus they were allowed.
  • Costs in dealing with a First-tier Tribunal regarding the company’s VAT position: the company had been pursuing a credit, which it alleged would result in a substantial cross-claim supporting its application to strike out HMRC’s petition.  Morgan J felt that the arguments as to whether to allow these costs as a Liquidation expense were “very evenly balanced”, but he chose not to allow them, viewing them as “sufficiently different from the direct costs of responding to the HMRC winding up petition so that it would be wrong to give them the priority which would follow from allowing them as an expense of the liquidation” (paragraph 136).

UPDATE: Neumans’ appeal was heard on 24 July 2013 (http://www.bailii.org/ew/cases/EWCA/Civ/2013/916.html). Lord Justice Mummery dismissed the appeal, stating that the order made by Morgan J was “dead on” (paragraph 33).


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MF Global: Are Special Administrators analogous to Liquidators?

Heis & Ors (Administrators of MF Global UK Limited) v MF Global Inc [2012] EWHC 3068 (Ch) (1 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3068.html

Decision: In considering the default provisions of a repurchase agreement between the two parties, David Richards J concluded that Special Administrators appointed under the Investment Bank Special Administration Regulations 2011 are not officers analogous to a Liquidator and an application under the Regulations for a Special Administration Order is not analogous to a petition for a winding-up.

The primary consequence of this decision in this case is that, although the appointment of the Special Administrators over MF Global UK Limited (“UK”) occurred before a Trustee was appointed over MF Global Inc (“Inc”), UK has control over establishing the sums due under the agreement.  This makes quite a difference: the Special Administrators provisionally suggested Inc’s claim to be in the region of £37m, whereas with Inc as the non-defaulting party, its claim had been estimated at £287m.

Background: The Special Administrators sought directions regarding the default provisions of a Global Master Repurchase Agreement (“GMRA”) between UK and Inc in order to establish which was the defaulting party, which was necessary in order to establish the sums due under the GMRA.

Special Administrators were appointed over UK approximately three hours before a Trustee was appointed over Inc under the US’ Securities Investor Protection Act 1970.  The GMRA defined default events as including “an Act of Insolvency” where the non-defaulting party serves a default notice.  However, where the Act of Insolvency was “the presentation of a petition for winding-up or any analogous proceeding or the appointment of a liquidator or analogous officer”, no default notice was required.  As no default notice was served when UK was placed into Special Administration, it was crucial to determine whether the Special Administration was analogous to the appointment of a Liquidator.  The parties were agreed that the appointment of a Trustee over Inc was analogous to the appointment of a Liquidator, so if Special Administrators were not analogous to Liquidators, then Inc would be the defaulting party.

David Richards J stated that if the basic characteristics of liquidation – of bringing the business of the company to an end, realising its assets and distributing the proceeds amongst creditors – are not present, “it would in my judgment be impossible to say that the procedure was ‘analogous to’ liquidation as contemplated by the GMRA” (paragraph 33).  He then compared and contrasted the powers and objectives of Special Administrators and Schedule B1 Administrators with those of Liquidators and, not surprisingly, pointed out that “an administration and other insolvency proceedings may result in the realisation of a company’s assets and a distribution of the proceeds among creditors, but the alternative of a rescue of the company as a going concern is at least one of the purposes or objectives of those proceedings. In those cases it is understandable that the non-Defaulting Party under the GMRA would wish to have an opportunity to wait and see how the proceedings develop before deciding whether to exercise its right to serve a notice declaring an event of default and thereby close out all outstanding transactions under the GMRA” (paragraph 52).  David Richards J was not persuaded that Special Administrations were analogous to Liquidation even though, as Inc’s Counsel suggested, it would be very rare, if ever, that an investment bank that had been placed into Special Administration would be rescued – one of the alternatives of Objective 3 of the Special Administration process is to rescue the investment bank as a going concern and thus it is a process which is not analogous to Liquidation.