Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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“Ransom” Payments – seeing things from the other side

4609 Sydney

 

I’m sure that your hackles were raised when you last heard IPs described as seeing a distressed debtor only as an opportunity to make money.  Many of the suppliers’ responses to last year’s consultation on proposed Essential Supplies legislation struck a similar chord.

In this post, I take a look at some of the more persuasive consultation responses as well as the emerging Insolvency (Protection of Essential Supplies) Order 2015, set to come into force on 1 October 2015.

The consultation responses and the draft Order can be found at: http://goo.gl/N4Tg3c

The government press release is at: http://goo.gl/Ta0KOw

 

Energy Suppliers

The key issue for most suppliers is that supplying to an unpredictable business, such as one administered by an office holder in an insolvency situation, could end up as seriously loss-making for them.  Not knowing for how long or how much energy an insolvent business is going to need carries huge consequences for suppliers, as they have to purchase (or sell excess) power on short term markets that trade at very different prices.  If the supplier cannot pass at least some of this cost to the customer, they will be trading at a significant loss.

Some suppliers referred to the “deemed contract rates”, which apply to supplies where a contract is not in existence and thus applies in some cases where an IP does not agree to a post-appointment contract.  These rates inevitably are higher than contract rates as the consumer can switch to another supplier at any moment, and thus some suppliers took exception to the suggestion that these, as well as other post-insolvency changes to manage risks, such as requiring more frequent payments or upfront deposits, in effect are “ransom” payments.

Many respondents predicted that, if they were prohibited from taking action on formal insolvency, suppliers might take precipitative action when a business shows signs of financial distress.  Others felt that the increased risks would be shared by customers with poor credit ratings and new start-ups, with some suggesting that it might even be difficult for these businesses to procure a contract.

Personal guarantees

The topic of personal guarantees threw up a variety of comments.  Some suppliers seemed to confuse these with undertakings that the supply would be paid for as an expense.  Several asked the Insolvency Service to provide a standard form of words for PGs, as they can take a lot of time and effort to agree.  Some suggested that it would save time if the IP simply gave the PG – or undertaking – within a specified timescale, rather than build into the process the need for the supplier to ask for one.

Some suppliers were sceptical that an IP could support a call on the PG, leading to requests that IPs provide proof of their assets or credit insurance and, if the supplier is not satisfied, then the supply could be terminated.  Some also asked that PGs be supported by the IPs’ firms, which led one to suggest that IPs from smaller firms may have difficulty persuading suppliers that the PG was adequate.  Some were nervous about the without-notice withdrawal of a PG or undertaking with one respondent stating that the PGs should have effect for the whole duration of the administration.

Timescales to termination

Many said that the proposed timescales to terminate the supply were too long: respondents are well aware of IPs’ reluctance to agree PGs and therefore felt that the 14-28 day period for suppliers to learn of the appointment and to give the office holder time to sign a PG could end up being effectively a free supply to the insolvent business, with several suggesting that the IP could design things this way whilst having no intention to seek to secure a longer supply.  Many also said that they would need to get a warrant to be able to terminate the supply, which would require leave of court (in administrations), thus lengthening the process considerably.

The suppliers argued that they might not learn of the appointment until at least 14 days after commencement, which under the old draft Order would have left them already out of time to request a PG.  I was surprised that several suppliers seemed to believe that office holders were under no clear obligation to tell them about the appointment, which no doubt is behind Jo Swinson’s reference to the need for guidance (see below).  Some suppliers did accept that office holders might have difficulty identifying energy suppliers, especially when dealing with a large number of properties.  Personally, I have also seen IPs encounter difficulties getting past the front door of some suppliers, with day one correspondence getting thrown back because an account cannot be located.

Some noted that the Impact Assessment pointed the finger more at key trade suppliers and IT suppliers (so, suggested one, why not simply wrap these suppliers into the existing statutory provisions?) and thus they questioned whether affecting how energy providers deal with insolvent businesses will deliver the projected fewer liquidations.  “The proposal to change the right of only certain, specified companies to freely contract with one another, appears to be both disproportionate and an unjustified distortion of contractual law” (RWE npower).

 

Merchant Services

The merchant service providers came out in force, their principal argument being that their “charges”, which is the focus of the Order, fade into insignificance when compared with their exposure to the risk of chargebacks, especially when payments have been made by customers for goods/services (to be) provided by an insolvent business.  Thus, the requirement that the merchant services continue to be provided on the existing terms for the 14-28 day window prior to obtaining a PG – and even after obtaining a PG, if that were even possible – was simply unbearable.

Worldpay’s response sets out the way that, at present, they believe the system works well.  They seek an indemnity to be paid as an administration expense for any chargebacks, including any arising from pre-administration transactions, and they also look to agree “an administration fee with the insolvency practitioner to reflect the significant time incurred in managing the administration”… but Worldpay “does not demand ransom payments”.

Carve-out

The responses indicated that the Insolvency Service was to meet with the merchant service providers shortly after the consultation had ended and clearly they succeeded in convincing the Service of their concerns, as the scope of the Order has now been changed so that it does not extend to “any service enabling the making of payments”.

 

The Insolvency Profession

IPs and others involved in insolvency made – and repeated – some valuable observations about the draft Order, which regrettably have not been taken up.  In some cases, this is because the issues are really with the long-passed Enterprise & Regulatory Reform Act 2013, but it also gives the impression that, once legislation has been drafted, it is extremely tough to get it amended.

R3 and KPMG asked that the scope of the new legislation be widened to encompass other supplies, such as software licences and information systems, and they struggled to see why only administrations and VAs are within the scope: omitting receiverships and liquidations unhelpfully restricts the ability of these insolvency tools to achieve better outcomes for all.

The City of London Law Society Insolvency Law Committee (“the Committee”) noted that the draft Order deviated unhelpfully from provisions covering the same territory in the Investment Bank Special Administration Regulations 2011 and the Financial Services (Banking Reform) Act 2013 (“the SIs”).  Why the difference in rules?

Personal guarantees again

The Committee cast doubts over the “practical and logistical issues” surrounding the PG provisions, highlighting that IPs could encounter demands for PGs from a number of suppliers in the crucial initial days of an appointment.  It “strongly encourages” the government “to reconsider the approach and, if at all possible, to amend Section 93(3), so that the ability to request a personal guarantee is restricted to the utilities currently covered by Section 233 IA”.

The Committee’s quid pro quo suggestion was that the legislation should mirror the SIs mentioned above and provide explicitly for all post-administration supplies to rank as administration expenses, suggestions also made by R3.  Interestingly, the government press release stated that “suppliers will be guaranteed payment ahead of others owed money for services supplied during the rescue period”.  This doesn’t seem to relate to the effect of PGs, as this is covered separately in the press release, but I don’t see where this super-priority for suppliers appears in the statute.

As a last resort, the Committee suggested the production of a pro forma guarantee to save precious time, especially considering that a number of suppliers of varying degrees of sophistication may be seeking PGs.

Unsurprisingly, R3 had strong words for the PG regime: “The provisions allowing a supplier to require a personal guarantee by the office holder are also inappropriate.  This was and is an unwelcome feature of the existing 233 legislation, as it is disproportionate.  In principle, there is no reason why a supplier should enjoy a greater level of comfort from an insolvency officer holder than it would from the directors of a solvent trading company…  No supervisor is likely to give one.”

PwC referred to PGs as “an anathema to most IPs” and its preference seems to be that all possible options remain open for negotiation by the parties.  In its response, PwC stated that “circumstances will remain where the payment of a deposit and/or a higher ‘on price’ are commercially more appropriate, and the IP should retain the discretion to negotiate case by case, supplier by supplier”.

Other flaws

There seem to be several concerns about the detail of the draft Order, concerns that I think have survived even the post-consultation revision:

  • The Order prevents suppliers from terminating contracts simply because of administration/VA, but it does not prevent them from altering contract terms, such as increasing prices (and perhaps then terminating the contract if the revised terms are not complied with).
  • The PG may reach to termination charges incurring post-administration/VA.
  • Because the Order focuses on terms that are triggered by administration or a VA, it does not deal with terminations/changes resulting from the triggers of pre-administration/VA events, such as the Notice of Intention to Appoint Administrators or putting forward a VA Proposal (see also below).

 

The Order

The Order is scheduled to come into force on 1 October 2015.  The current draft differs from the earlier consultation draft in the following respects:

  • The 14-day timescale for suppliers to ask for a PG has been dropped. Therefore, suppliers will be able to ask for a PG at any time and then they acquire the power to terminate the supply if the PG is not given by the office holder within 14 days of the request.
  • The court may grant the supplier permission to terminate the contract, if satisfied that it would cause the supplier “hardship” – as opposed to the draft’s “undue hardship”.
  • The Order no longer applies to “any service enabling the making of payments”.
  • The Order turns a draft clause (the previous S233A(6), which is now S233A(2)) on its head. I think this is to deal with some suppliers’ issues that the previous draft Order would have prevented terminations “because of an event that occurred before” the administration/VA, even though the event was not connected to the formal insolvency. Now the Order states that an insolvency-related term does not cease to have effect if it entitles a supplier to terminate the contract or supply because of an event that occurs, or may occur after the administration/VA. The problem with this is that I think it eliminates the whole purpose of the previous S233A(6), which was to avoid actions resulting from pre-administration/VA events, such as the issuing of a Notice of Intention to Appoint Administrators or the proposing of a VA!
  • The government release points to an additional non-statutory measure: “guidance will be issued to insolvency practitioners that they should make contact with essential energy suppliers at the earliest possible time following their appointment to discuss what supply they expect to use”.

I know that Giles Frampton, R3 President, has said: “These proposals will make it easier for the insolvency profession to save businesses, save jobs, and get creditors as much of their money back as possible”.  I’m not sure that I can be as positive, but a surprising outcome of the consultation for me was a greater understanding of some of the hurdles faced by suppliers.  IPs are not the only ones who want to see businesses (/customers) survive.


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(1) Court-appointed receiver entitled to payment as officer of the court after discharge; (2) Mothballing business not an ETO reason for dismissals; (3) Wife’s statutory demand set aside as potentially viable defence that she was not properly advised; and (4) A VAT decision survives appeal

0618 Fazenda
Still catching up post-holiday, some court decisions…

Glatt & Ors v Sinclair: Court-appointed receiver continued as officer of the court after discharge and thus was entitled to be paid from receivership assets
Kavanagh & Ors v Crystal Palace FC (2000) Ltd & Ors: Tribunal decision reversed: redundancies made to mothball a business with a view to a going concern sale (whether sooner or much later) did not constitute an ETO reason [UPDATE 26/11/2013: see the more recent post – http://wp.me/p2FU2Z-4I – for a summary of the Court of Appeal’s decision reversing this judgment]
Welsh v Bank of Ireland (UK) Plc: a Northern Ireland case acting as a reminder to lenders seeking PGs from spouses
HMRC & Ford Motor Co Ltd v Brunel Motor Co Ltd: an appeal against a VAT Tribunal decision is dismissed

Court-appointed receiver entitled to payment as officer of the court after discharge

Glatt & Ors v Sinclair [2013] EWCA Civ 241 (26 March 2013)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/241.html

Summary: Although a receiver appointed by the court under the Criminal Justice Act 1988 was discharged in 2006, he was entitled to be paid from the receivership assets his remuneration and expenses (subject to the court’s approval of the quantum) incurred after discharge on the basis that “he continues to be an officer of the court (and subject to the supervision of the court) to the extent that he still has functions to perform with a view to a final conclusion of the administration of the receivership.”

The Detail: In 2006, Mr Glatt successfully appealed against a confiscation order, which was set aside; this was swiftly followed by the discharge of a 2001 receivership order made under the Criminal Justice Act 1988. There followed a number of disputes between Mr Glatt and the former receiver, in particular regarding the Receiver’s entitlement to exercise a lien over the assets covered by the receivership order to meet his remuneration and costs. In December 2010, an order found in favour of the receiver for his costs plus interest and, after further consideration by a costs judge, another order was granted in June 2012 confirming that the 2010 order did extend to the receiver’s post-discharge remuneration, expenses and disbursements, and that the receiver was entitled to payment out of the receivership assets.

In this appeal, the appellants sought to argue that the court had no power to order payment of post-discharge remuneration and expenses.

Firstly, Lord Justice Davis did not believe it would be just to allow the appellants to argue this point. He felt that the appellants could have been in no doubt that the receiver had proceeded on the basis that he was entitled to claim post-discharge remuneration and expenses; they had had an earlier opportunity to debate the point, but had not. Nevertheless, Davis LJ proceeded to consider the question of the receiver’s entitlement.

The judge noted that there may be a number of tasks required of a receiver post-discharge, for example the preparation and filing of closing accounts, and it was his view that: “Where a receivership order made under the Criminal Justice Act 1988 is discharged, the receiver continues to be an officer of the court (and subject to the supervision of the court) to the extent that he still has functions to perform with a view to a final conclusion of the administration of the receivership. It would be a wholly unsatisfactory and arbitrary state of affairs were it to be otherwise” (paragraph 41). In this case, the significant post-discharge work of the receiver had been substantially in dealing with the appellants’ challenges on issues such as ownership of assets and the extent of the lien. “In my view, therefore, the general principle being that the receiver looks to payment from assets under the control of the court (not from the parties), the receiver here continued, after discharge, to act as an officer of the court and to be subject to its supervision in and about the enforcement of his lien” (paragraph 44), although the asset-owner was not left entirely without remedy, as the receiver’s remuneration and expenses were still subject to the court’s approval.

“Mothballing” for future going concern sale not an ETO reason for dismissals

Kavanagh & Ors v Crystal Palace FC (2000) Limited & Ors [2012] UKEAT 0354 (20 November 2012)

http://www.bailii.org/uk/cases/UKEAT/2012/0354_12_2011.html

Summary: The appeal judge decided that the Tribunal had erred in law in misapplying the facts it had found to the statutory regime. Following Spaceright v Baillavoine, an economic, technical or organisational (“ETO”) reason must be an intention to change the workforce and to continue to conduct the business, as distinct from the purpose of selling it. In this case, an intention to mothball the club with a view to selling it as a going concern – whether to purchasers already on the scene or others later – should have led the Tribunal to a conclusion that there was no ETO reason and thus the liabilities should have passed from the transferor to the transferee.

The Detail: Although an apparently old decision, it has only recently appeared on BAILII. The company’s administration began in January 2010 and over the next few months the administrator attempted to sell the club, but it proved difficult mainly because the sale was dependent upon the purchasers also acquiring the stadium, the sale of which was not in the administrator’s control.

When the sale had not been completed at the end of the football season, the administrator decided to “mothball” the club. He prepared to make the majority of the staff redundant and the potential purchasers were warned of the plan and invited to avoid this eventuality by providing ongoing funding and finalising a purchase of the stadium. In response, the potential purchasers suggested that it might be best for them to withdraw their bid in the hope that someone else might come forward in the short time left. The Honourable Mr Justice Wilkie at this appeal said: “It is clear that what was going on, to some extent, was by way of brinkmanship” (paragraph 8). The administrator explained to the press that due to lack of funds there was no alternative but to make staff redundant and that the players would have to be next, which likely would result in the potential purchasers withdrawing. The first Tribunal commented that the growing media and public pressure had the “desired effect and an agreement for sale of the stadium was made within a few days” (paragraph 11), with the club’s sale and the CVA approval following thereafter.

The first Tribunal had concluded that the administrator’s primary reason for the redundancies was to mothball the club in the hope that it could be sold some time in the future and that it was not in the administrator’s contemplation that publicity of the redundancies might lead to the swift sale of the stadium and consequently the club. Wilkie J commented that this “is a wholly surprising conclusion” that “flies in the face of the evidence” (paragraphs 29 and 30). However, he continued that this divergence in opinions between himself and the Tribunal judge made no real difference, because, either way, the administrator still intended to sell the club as a going concern, whether to the existing potential purchasers or to others some time in the future. “It is very clear from all the findings of fact that the Tribunal made that the only possible conclusion that they could draw was that the dismissal of the Claimants was for the purpose of selling the business, albeit it was not at that stage certain that there would be a sale, nor necessarily to whom the sale would be, but, in our judgment, by reason of the authorities to which we have been referred, that is not relevant for the purposes of the application of Regulations 4 and 7” (paragraph 31).

The key authority to which Wilkie J referred was the case of Spaceright Europe Ltd v Baillavoine and Anor, which concluded that “for an ETO reason to be available, there must be an intention to change the workforce and to continue to conduct the business, as distinct from the purpose of selling it”. However, in this case the administrator had no intention to continue to conduct the business as such “but to preserve it so that it could, in new hands, if that came about, resume the conduct of business” (paragraph 30). Thus the judge concluded that the Tribunal had erred in law in misapplying the facts to the statutory regime; it should have concluded that the dismissals were not for an ETO reason but with a view to sale or liquidation; and therefore the liability for the various claims should have passed from the transferor to the transferee.

[UPDATE 26/11/2013: The Court of Appeal reversed this decision on 13/11/2013 (http://www.bailii.org/ew/cases/EWCA/Civ/2013/1410.html), which is the subject of a more recent post: http://wp.me/p2FU2Z-4I. The appeal judges distinguished between the facts of Spaceright and this case, in relation to which they were satisfied that the dismissals were for an ETO reason; the dismissals had been necessary to reduce the wage bill in order to continue running the business.]

A knowledge of case law helps when giving advice!

Welsh v Bank of Ireland (UK) Plc [2013] NIMaster 6 (11 March 2013)

http://www.bailii.org/nie/cases/NIHC/Master/2013/6.html

Summary: In this Northern Ireland case, Ms Welsh succeeded in her application to have set aside a statutory demand in pursuit of monies owed under a personal guarantee of a loan to her husband. As the Bank had not evidenced that all of the core minimum requirements described in Etridge with regard to obtaining proper legal advice had been met, the judge felt that Ms Welsh had a potentially viable defence, which was sufficient cause to order the setting aside of the statutory demand.

The Detail: Ms Welsh applied to have the Bank’s statutory demand against her set aside on the ground that the Bank had constructive notice of alleged undue influence and/or misrepresentation by her husband and that she did not receive proper legal advice prior to signing the personal guarantee, which was the subject of the statutory demand.

Master Kelly noted that “an applicant debtor need only demonstrate a genuine arguable case, or a potentially viable defence to the dispute requiring investigation, to succeed in preventing legal proceedings issuing by way of insolvency proceedings. It follows therefore, that in the case of an application to set aside a statutory demand, the hearing is not for the purposes of a trial of the dispute; rather it is for the court to determine whether the applicant’s grounds for disputing the debt constitute a potentially viable defence” (paragraph 16). The judge looked to the case of The Royal Bank of Scotland v Etridge (No 2) for the core minimum requirements of a lender when a wife offers to guarantee her husband’s debts. In this case, the Bank had not evidenced any direct communication with Ms Welsh and the solicitor’s confirmation of advice in a letter after the guarantee had been signed was not sufficient evidence to prove that all the core minimum requirements had been met (it also cannot have helped that the solicitor admitted that he was not familiar with the Etridge case). Consequently, the judge felt that Ms Welsh had an arguable case that would require a full trial. As she had demonstrated a potentially viable defence, the judge ordered that the statutory demand be set aside.

And finally… briefly… a VAT case

HMRC & Ford Motor Company Limited v Brunel Motor Company Limited (in administrative receivership) [2013] UKUT 006 (TCC) (19 March 2013)

http://www.bailii.org/uk/cases/UKUT/TCC/2013/6.html

Summary: The Upper Tribunal dismissed an appeal to a First Tier Tribunal decision of September 2011 that Ford’s actions to re-possess vehicles subject to a supply agreement (which had terminated automatically due to the receivership) and issue credit notes were unilateral acts and thus there had been no agreed rescission of the agreement with the consequence that the credit notes had no effect for VAT purposes.