Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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A Collection of Two Halves – Part 1: New Cases

0531 Caiman

It’s been a while since I blogged on case law, so I’ve divided my pile into two posts. In this one, I summarise some decisions that I’ve not seen covered widely elsewhere:

Re Coniston Hotel – an Administration challenge, which may have stoked Tomlinson’s embers, fails to ignite.
Holgate v Reid – more Administrators’ actions are challenged: dispute over a Para 52(1)(b) statement.
Shaw v Webb – post-petition dispositions persuade the court to choose winding-up over Administration.
Thomas v Edmondson – can an IPO be granted after a short IPA is completed?
Barnes v The Eastenders Group – Supreme Court decides CPS must pay Receiver after failed restraint order.

West Registrar case hits a wall

Re Coniston Hotel (Kent) LLP (In Liquidation) (8 April 2014) ([2014] EWHC 1100 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/1100.html
The long-running claims of the members of the LLP that the Administrators, RBS, and property agents, had conspired to defraud came to a head in this application brought by the former Administrators in which they sought the striking-out of the members’ proceedings.

The judge’s summary of the members’ claims leaves the reader in little doubt as to what the punchline might be: “The Members’ criticisms are not about professional negligence by the Administrators or by the valuers whom they instructed or by the agents whom they instructed to sell the Hotel, nor are there criticisms about the mode of sale, nor the handling and outcome of the negotiations for the sale. Instead the Members have pleaded a very different kind of challenge to the sale… [They] say that the marketing process was a sham. They do not identify the respects in which it was a sham, but they say it was a sham. They say it was a pretence and they say that it was pursuant to a conspiracy to defraud… All the conspirators knew, so it is alleged, that the Hotel was worth £7 million. It is quite clear that the Bank’s duty and the Administrators’ duty would have been to get the open market value for the Hotel and to achieve the market value. However, so it is alleged, the Bank was not prepared to see the Hotel sold for its full value and the debt owed to the Bank paid. What the Bank wanted instead was that the Hotel should be sold at around 50 per cent of its true value and not sold in the open market to a fortunate purchaser, but sold to an associated company of the Bank, West Register Limited. In order to carry this fraud to fruition, it was necessary to have Knight Frank place a value on the Hotel, which was about 50 per cent of what Knight Frank fully appreciated was the true value, about 50 per cent of £7 million. Armed with that fraudulent valuation from Knight Frank, the conspirators would then pretend to market the hotel, there would be a sham marketing process and the Hotel would be sold to the predetermined purchaser, West Register. I suppose one can see what was in it for West Register. They would acquire something at half its true value. It is less obvious what was in it for the Bank, because their debt, which exceeded the sale price that came about, would not be paid in full, but, perhaps, the Bank would be content that its associate had profited in that way. It is difficult to see what Knight Frank’s motive for this very serious act of dishonesty and wrongdoing would have been. It is submitted to me that they had motive enough: they wanted to please the Bank. It is also difficult to see what the Administrators’ motive would have been for participation in this fraud. This fraud is of the gravest and most serious character. However, it is submitted to me that I should see the force of the point, that the Administrators simply wanted to please the Bank” (paragraph 28).

Nevertheless Morgan J acknowledged that “it is a strong thing for a judge to strike out a case or give summary judgment, particularly in a case where there is an allegation of serious wrongdoing” (paragraph 33) and he also noted “a most disturbing report” (paragraph 25) written by Lawrence Tomlinson, by which he was “sufficiently disturbed… to give the Members a chance to take legal advice as to whether they had a properly pleadable case at an undervalue” (paragraph 50).

In relation to the allegation that the marketing was a sham, the judge stated that it was “utterly fanciful. It is an allegation put forward by someone (the Members) who simply refuse to face up to the reality of what has happened here” (paragraph 43). In dealing with the allegations that the prospective Administrators’ communications with the Bank were improper, the judge noted that the letter of instruction was “really very clear indeed” as regards the relationships between the parties and there was a “complete lack of material to indicate that [the IPs] were guilty of this very serious fraud”. In view of this, Morgan J also had strong words for counsel for the members: “his professional duty was to decline to plead the allegation which he did plead, alternatively, to withdraw from the case” (paragraph 49).

Consequently, the judge dismissed the conspiracy to defraud or, alternatively, the undervalue claim, along with the members’ Para 75 claim, which was quickly dismissed on the basis that the members did not have a pecuniary interest in the relief sought.

(UPDATE: the judgment on the appeals was given on 13/10/2015 ([2015] EWCA Civ 1001).  The involvement of West Registrar made Lady Justice Arden “scrutinise what happened with scepticism, but at the end of the day it is impossible for the appellants to get round the evidence as to the way the respondents marketed the hotel”.  The appeals were dismissed.)

Another challenge of Administrators’ actions

Holgate & Holgate v Reid & Dawson (20 February 2013) ([2013] EWHC 4630 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/4630.html
This is a fairly old judgment, but it has only recently been published on BAILII.

The Holgates are creditors and members of a company over which Joint Administrators were appointed by the QFCH. The Administrators included a Para 52(1)(b) statement in their Proposals. Mr Holgate requisitioned a creditors’ meeting, but then withdrew his request, having received the Administrators’ request for an indemnity to cover the costs of convening a meeting, estimated at £21,900. Shortly thereafter, the Administrators issued notice that the Proposals were deemed to have been approved.

Some time later, the Holgates applied to court under Para 74 to order the Administrators not to sell the company’s business and assets as they planned; to revoke the deemed approval of the Proposals and the basis of the Administrators’ fees as fixed under R2.106(5A); and to require a Para 51 creditors’ meeting to be held. The Holgates submitted that the company could, and should, be rescued as a going concern by means of a CVA and thus the Administrators should not have made a Para 52(1)(b) statement. They also submitted that there had been a fundamental change of circumstances since the Administrators’ Proposals, because since then the FSA had announced that the major banks had agreed to provide redress on mis-sold interest rate hedging products and that such redress may well negate the bank’s claim against the company. The Administrators countered that the business had been trading at a loss both before and after Administration and that, whilst they had instructed solicitors to investigate the mis-selling claim, they were not in funds to pursue it. They were also keen to conclude the business sale for fear that it would otherwise fall away.

The Holgates failed to persuade Hodge HHJ that the Administrators’ evidence that the company could not be traded profitably was wrong. Thus the judge concluded that, on the evidence, it could not be said that the Administrators did not genuinely hold the opinion that the company had insufficient property to enable a distribution to be made to unsecured creditors other than out of the prescribed part and therefore they acted properly in dispensing with a creditors’ meeting by reason of the Para 52(1)(b) statement in their Proposals.

The judge found that the costs within the estimate of £21,900 in relation to a requisitioned meeting “may well have proved exaggerated; but I am not satisfied that they were deliberately exaggerated by the administrators with a view to deterring Mr Holgate from pursuing his requisition of a meeting. In my judgment, the administrators were acting cautiously in looking at a worst case scenario for the costs” (paragraph 38) and, in any event, the creditors’ meeting could have resolved that these costs be paid from the estate.

Hodge HHJ also considered the Holgates’ application in relation to Para 74(6)(c), i.e. that no order may be made if it would impede or prevent the implementation of proposals approved more than 28 days earlier. The judge felt that this applied as much to deemed approved proposals and that, as the Holgates were asking the court to resist the business sale, which was “the whole tenor of the proposals” (paragraph 44), he should dismiss the application. As an alternative, he was also not inclined to exercise the court’s discretion, as he felt that Mr Holgate had acted unreasonably in not pursuing the requisition for an initial creditors’ meeting and he pointed out that Mr Holgate had the right even then, under Para 56, to requisition a meeting given the apparent level of his claim as creditor.

As regards the suggestion that the FSA announcement supported a change in circumstances that might persuade the court to make a direction under Para 68, Hodge HHJ did not agree: “the existence of the FSA review merely relates to the means by which the mis-selling claim may be pursued. It is not clear whether it applies in the present case, or will secure sufficient satisfaction for the company even if it does. In any event, because I am not satisfied that the rescue of the company as a going concern is a viable proposition, it does not seem to me that there is any proper basis for the court to give any directions under paragraph 68 with regard to the holding by the administrators of a meeting of creditors” (paragraph 51).

Despite a consenting winding-up petitioner, the court declines to make an administration order and instead appoints a provisional liquidator

Shaw v Webb & Ors (10 April 2014) ([2014] EWHC 1132 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/1132.html
HHJ Simon Barker QC acknowledged that, “on paper the criteria or preconditions for making an administration order, which are set out at paragraph 11 of Schedule B1, are made out: (a) there is no question but that [the company] is unable to pay its debts, and (b) the evidence of Mr Webb points to it being reasonably likely that the purpose of administration (in this case a better result for the creditors than would be likely on liquidation) will be achieved if an administration order is made” (paragraph 18). In addition, neither the petitioning creditor nor the QFCH opposed the making of an administration order. Therefore, why did the judge decline to make the administration order, but instead appointed Mr Webb as provisional liquidator, allowing the winding-up petition to proceed?

The judge felt that the payment of £115,000 that occurred post-petition “cries out for satisfactory explanation and justification” (paragraph 23); he felt similarly concerning the purchase of the company’s sole share post-petition; and he wondered whether there were other dispositions that may be unjustifiable, expressing surprise that the bank statements for the post-petition period were not in evidence (another item to add to the administration order application shopping list?)

Consequently, in view of the fact that the making of an administration order would neutralise the effect of S127 in relation to post-winding up petition dispositions, Simon Barker HHJ felt that it was appropriate to call the winding-up petition on for hearing. A winding-up order has since been granted.

Can an Income Payments Order be made after a short Income Payments Agreement is completed?

Thomas & O’Reilly v Edmondson (12 May 2014) ([2014] EWHC 1494 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2014/1494.html

A bankrupt had entered into an Income Payments Agreement (“IPA”) with the Official Receiver, which effectively gave the OR the benefit of the bankrupt’s NT tax code up to the end of the tax year in which the debtor had been made bankrupt.

Later, Joint Trustees were appointed and, after failing to agree a further IPA with the debtor, they applied for an IPO in the amount of £10,000 per month for three years from the date of the IPO. The District Judge concluded that the Trustees were not entitled to an IPO on the basis that there had already been an IPA. The Trustees appealed.

Mrs Justice Aplin considered at length the effect of the introduction of S310A by means of the Enterprise Act 2002: were the intentions to limit the period of income payments to a maximum of three years and to provide that either an IPA is agreed or an IPO is sought?

The judge’s conclusion was that the court remains entitled to grant an IPO notwithstanding the previous IPA. She said: “It seems to me that the plain and ordinary meaning of section 310 is clear and that there is no reason to go beyond it. Furthermore, had the legislature intended that jurisdiction be limited in the way which is suggested, it seems to me that it would have said so at the time of the express amendments made by sections 259 and 260 of the Enterprise Act 2002” (paragraph 25).

As regards the issue of whether the combined maximum of income payments is three years, the judge said: “It seems to me that even if the Respondent is correct and it was Parliament’s intention that a bankrupt should not be required to pay part of his income to his trustee in bankruptcy for more than 3 years, the potential for an anomaly if there is jurisdiction to make an Income Payments Order despite an Income Payments Agreement having already been entered into is met by the existence of the discretion of the judge when exercising the jurisdiction whether to make the subsequent order and if so, the length of the order in question” (paragraph 28)… so I guess it remains to be seen whether the Trustees will be granted a full 3-year IPO on top of the 5-month IPA.

The Supreme Court upholds a Receiver’s right to be paid notwithstanding a quashed restraint order

Barnes v The Eastenders Group & Anor (8 May 2014) ([2014] UKSC 26)

http://www.bailii.org/uk/cases/UKSC/2014/26.html
I summarised the lead up to this Supreme Court appeal in an earlier post (http://wp.me/p2FU2Z-1H). Briefly, a Receiver was appointed over third party assets along with the CPS’ application for a POCA restraint order, which subsequently was set aside. The outcome of earlier court decisions was that the Receiver was not permitted to draw his fees and costs from the third party assets on the basis that the party’s right to peaceful enjoyment of its possessions under Article 1 of Protocol 1 of the European Convention of Human Rights (“A1P1”) took precedence, but also there was no basis under the POCA or the Human Rights Act 1998 for the CPS to be required to pay the Receiver’s fees and costs. The Receiver appealed to the Supreme Court.

In a unanimous judgment, the Supreme Court supported the previous decision that, as in this case there was no reasonable cause to regard the third party’s assets as the defendant’s at the time of the order, it would be a disproportionate interference with the third party’s A1P1 rights for the Receiver’s fees to be drawn from that party’s assets.

However, the judges felt that to leave the Receiver without a remedy would be to substitute one injustice for another and violate the Receiver’s A1P1 rights: “a receiver who accepts appointment by a court is entitled to know that the terms of his appointment will not be changed retrospectively. Moreover it is an ordinary part of receivership law that a receiver has a lien for his proper remuneration and expenses over the receivership property. To take away that right without compensating him would violate the receiver’s rights under A1P1” (paragraph 96). However, Lord Toulson agreed that there was no power in the POCA to order the CPS to pay the Receiver’s fees and costs.

The judge considered that the solution lay in the concept of unjust enrichment. The IP had agreed to act as Receiver on the basis that his agreement with the CPS provided for him to be paid from the defendant’s assets over which he would be entitled to a lien. The enrichment arose from the CPS’ perception that there would be a benefit to the public in the party’s assets being removed from its control and placed in the hands of the Receiver whilst its investigations were proceeding, but it was unjust enrichment as there was a total failure of consideration in relation to the Receiver’s rights over the assets, which was fundamental to the basis on which he was to act. Thus, the Receiver was entitled to look to the CPS for payment of his fees and costs.

Lord Toulson had some “lessons for the future” for the CPS. He noted that in the Court of Appeal judgment, the judge had “deplored the fact that the original application was made at short notice to a judge who was in the middle of conducting a heavy trial with only a limited time available for considering it” (paragraph 118) and stressed that, in view of the fact that such serious applications are made ex parte, the CPS had a special burden of candour and, because of the potential to cause serious harm, a material failure to observe the duty of candour could be regarded as serious misconduct.


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Case summaries: Two Admin appointments; two OR cases; valuing a bank’s claim; LB Pension Scheme; and disqual

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The Courts have been busy. Here’s a summary of half the recent judgments in my inbox:

Re Care People Limited: Administrator’s appointment valid despite defective QFCH demand
Re Integeral Limited: Proposed Administrators’ “supine approach” falls very far short of Court’s expectations
Re Clive McNally: how to value unsecured element of bank’s claim for IVA voting purposes
Howard v OR: OR is not Equality Act duty when deciding to revoke IVA
LB Re Financing No. 1 Limited v Trustees of Lehman Brothers Pension Scheme: Trustees entitled to add target companies to FSD
• From Scotland: SoS for BIS v Reza: director in name only disqualified
• From Northern Ireland: OR v Gallagher: OR fails to have post-petition matrimonial order set aside as disposition

Re Care People Limited (In Administration) ([2013] EWHC 1734 (Ch)) (18 March 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1734.html

In Brief: Appointment of administrators six minutes after QFCH demand, which gave conflicting deadlines for repayment, was premature at worst. Court decided defect did not render appointment a nullity and waived, declaring appointment valid.

Ultimate Invoice Finance Limited, a QFCH, issued a written demand dated 25 February 2013 to the company and an Administrator was appointed by filing a notice of appointment at court at 12 noon on 26 February. The difficulty was that the demand gave two different timescales for repayment: in one place, two days, and, elsewhere in the same demand, by return. Under the terms of the charge, the written demand was to be considered as served 48 hours from the time of posting. The QFCH repeated the demand by emailing it at 11.54am on 26 February, i.e. just six minutes before the appointment. Consequently, the question for Judge Purle was whether the Administrator had been validly appointed.

Purle J concluded that “at least enough time, which is more than six minutes, had to elapse for the unchallenged part of the demand to be met, assuming the company could meet it. The probability, therefore, is that the appointment was not properly made at the time, but was irregular” (paragraph 13). However, the company was in no position to make the repayment in two days or at all, so “what occurred at worst therefore was a premature appointment” (paragraph 14). He felt that the defect was simply a procedural matter and did not consider it “of such fundamental importance as to render the appointment a nullity” (paragraph 15). He also believed that the prejudice to the company was limited and that there was no substantial injustice resulting from the premature appointment and thus he declared the appointment valid notwithstanding the defect.

Re Integeral Limited ([2013] EWHC 164 (Ch)) (5 February 2013)

http://www.11sb.com/pdf/re-integeral-ltd.pdf

In Brief: Proposed Administrators criticised for taking “supine approach” to flawed administration application. Court took into account creditors’ lack of confidence in any administrator proposed by director and granted winding up order.

This judgment has not yet appeared on BAILII, but the article in R3’s Summer 2013 Recovery magazine by Prav Reddy and Christopher Boardman was quite striking, so I thought I’d track it down.

Readers of Recovery magazine may recall the article, which emphasised the obligations of nominee administrators indicated by this case in which an application for an administration order was dismissed in favour of a winding-up order. The judge, Richard Snowden QC, stated that “it is of fundamental importance that any insolvency practitioner who is nominated as a potential administrator – an officer of the court – and who ventures his opinion to the court as to the prospects of an administration order, should do so carefully, with an independent mind, and on the basis of a critical assessment of the position of the company and the proposals going forward” (paragraph 69). In this case, the court granted leave for the petitioner to apply for a costs order against the nominee administrators personally on the basis that their evidence “fell very far short of these basic requirements” (paragraph 70).

Having read the judgment, I thought I’d add to the R3 article. The facts of this case were quite unusual, leading the judge to state that, in his judgment, “the administration application has been a tactical ploy by Mr Joshi to avoid or at the very least postpone the liquidation of the Company and the independent investigation of his conduct of its affairs” (paragraph 78). It sticks in the throat a bit to hear a judge refer to an “independent liquidator” and to give weight to the views of creditors who “would have no confidence in any administrator suggested by Mr Joshi”. It makes for uncomfortable reading when a judge appears to hint at a risk, or at least acknowledges the perception of some creditors, that such an IP will not do his/her job when appointed officer of the court. In Snowden’s judgment “the supine approach of both practitioners and their failure even to acknowledge the fundamental problems… is so serious as to call into question their competence and independence from Mr Joshi” (paragraph 72). It makes me question: how is a nominated administrator to function? He is not an officer of the court until appointed administrator and until then he receives his instructions from the company in assisting in putting the company into administration – I am not suggesting that this supports a “supine approach”, but it does make me wonder how an IP can manage such risks of conflict of interest, which exist in every case, at least theoretically, where he is introduced to an appointment – whether Administration, Liquidation, or CVA – by the company.

Re Clive Vincent McNally ([2013] EWHC 1685 (Ch)) (17 June 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1685.html

In brief: Bank was correct to deduct future costs of LPA receivers in valuing unsecured element of claim for purposes of voting on IVA.

McNally appealed his bankruptcy, which had followed a rejected IVA Proposal, and the rejection of his application to set aside, amongst other things, the chairman’s decision on the amount of a bank’s debt for voting purposes.

The key differences in the chairman’s/bank’s view of the value of the claim for and the view of Mr McNally were (i) the value of the property – the bank relying on a valuation of £650,000 to £750,000 and Mr McNally relying on a letter proposing to market the property at £850,000 – and (ii) the costs of realisation – the bank estimating them at £100,000 and Mr McNally at £27,000.

The judge had little difficulty in rejecting McNally’s view of the property value in favour of the bank’s on the basis of the valuation evidence. Deciding on the costs of realisation was a little less straightforward, as they comprised costs incurred prior to the IVA meeting and future costs anticipated to be incurred by LPA receivers. Judge Purle QC stated: “I would accept that the court should not proceed on the basis that exceptional or unusual costs will be incurred, but where, as here, receivers are in place, the ongoing costs associated with their appointment are inevitable and cannot be ignored… Costs which must inevitably be incurred before or in the realisation of the security must, it seems to me, be taken into account in ascertaining the unsecured balance, as the value of the security (from which the costs will be paid) is necessarily reduced by the amount of those future costs” (paragraph 33).

On this basis, the value of the bank’s unsecured claim was considered sufficient to defeat the proposed IVA and the appeal was dismissed.

R (on the application of Amanda Howard) v The Official Receiver ([2013] EWHC 1839 (Admin)) (28 June 2013)

http://www.bailii.org/ew/cases/EWHC/Admin/2013/1839.html

In Brief: OR exercised a judicial function when deciding to revoke a DRO, so not subject to public sector equality duty.

Ms Howard sought a judicial review of the OR’s decision to revoke her Debt Relief Order on the ground that the OR had failed to comply with the public sector equality duty set out in section 149 of the Equality Act 2010.

The DRO was revoked on the basis that the debtor’s disposable income during the moratorium period materially exceeded the £50 per month threshold allowed, albeit that this was a consequence of the debtor receiving three months’ underpayment of working tax credits from HMRC, but the debtor claimed that the OR had failed to take into account that she had a protected characteristic under the Equality Act 2010 – the OR had accepted that the debtor was disabled within the meaning of the Act – and that the decision to revoke amounted to direct discrimination.

The key issue was whether the OR was exercising a judicial function (within the meaning contemplated by paragraph 3 of Schedule 18 to the Act) in deciding to revoke the DRO – if so, she would not have the section 149 public sector equality duty.

Mr Justice Swaden’s judgment is one of the longest I have read, but the upshot was that the OR was exercising a judicial function – in my view, one persuasive argument was that the power to revoke a DRO is conferred on both the OR and the court and, as it was common ground that the court would be exercising a judicial function in revoking a DRO, it is difficult to see how the OR would not be also; if instead the OR were subject to the public sector equality duty, it could mean that the OR and the court would come to different conclusions on identical facts.

Consequently, the OR was not subject to the public sector equality duty in deciding to revoke the DRO and the application for judicial review was dismissed.

LB Re Financing No 1 Limited & Ors v The Trustees of the Lehman Brothers Pension Scheme & Ors ([2013] EWCA Civ 751) (214 June 2013)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/751.html

In Brief: Trustees entitled to seek addition of further target companies to FSD, despite two-year timescale from look-back date having elapsed.

Although this is a Lehman Brothers pension case, and thus I have struggled to keep up with the issues and arguments, it seems to me to be a significant outcome.

On 13 September 2010, the Determinations Panel of the Pensions Regulator issued a Financial Support Direction to six Lehman group companies. The Trustees referred the determination to the Upper Tribunal in order to increase the number of targets of the FSD by adding a further 38 Lehman group companies. The additional targets appealed on the basis that the Trustees were not “directly affected” by the determination and thus were not entitled to exercise the right to request their addition and that the 2-year period had elapsed (based on the Pensions Regulator’s Warning Notice, which identified 14 September 2008 as the look back date for any FSD determination against a target identified in the warning notice) and thus the Regulator could not issue an FSD to the other companies based on the same issue date. Both grounds of the appeal were dismissed.

Lady Justice Arden did not believe that the court should adopt a narrow interpretation of “directly affected” and thus conclude in this case that, because the Trustees’ rights were affected two or three steps after the determination, this rules them out as being “directly affected”. “They are, therefore, interested in a very real sense in the initial stage involving the determination to issue an FSD” (paragraph 22).

On the 2-year time limit issue, it was acknowledged that “there will never be another case in which the time limit imposed by section 43(9) [of the Pensions Act 2004] in its original form will fall to be applied” (paragraph 38), as it has since been amended by the Pensions Act 2011. However, Arden LJ described the “plainly undesirable consequences” that would result from the imposition of a 2-year timescale in the way argued, which “would turn the reference and appeal proceedings into a filibusterer’s paradise” (paragraph 48) and “would be to treat the time limit as an inappropriate master rather than as a good servant” (paragraph 59). She believed that the Upper Tribunal’s directions given under section 103(5) and (6) of the Pensions Act 2004 were not subject to the time limit provided in section 43(9).

Secretary of State for Business, Innovation & Skills v Ferdousi Reza ([2013] ScotCS CSOH 86) (31 May 2013)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH86.html

In Brief: Director’s abdication of all responsibility to husband resulted in two-year disqualification order. Also lesson for directors: if contemplating an undertaking, perhaps offer it before the hearing!

A disqualification order was made against Mrs Reza for two years.

Mr and Mrs Reza had both been directors. Mr Reza had already given an undertaking not to be a director for three years. The company had gone into administration after continuing to trade without paying tax, but Mrs Reza’s defence was that she had no knowledge of that, as she had no active involvement with the company but left all its affairs to her husband.

The judge commented that “over the whole of her 18 years in office as a director, the respondent failed to carry out even the most basic of her duties” (paragraph 15) and acknowledged that she had been made a director only because of the perceived tax advantages and in case her husband had been unavailable to sign documents. However, “if someone accepts a directorship and then abdicates all responsibility for the affairs of the company, on any common sense view they have demonstrated unfitness for the office to a high degree… and the case law is clear that incompetence can include inactivity” (paragraphs 17 and 19). The short disqualification period of two years was considered appropriate, given that Mrs Reza did not know of the company’s tax defaults.

Despite Mrs Reza informing the court at the end of the hearing that she would be prepared to give an undertaking, the petitioner pursued a disqualification order “not least as an example and a deterrent to others” (paragraph 21).

Official Receiver for Northern Ireland v Catherine Gallagher ([2013] NIMaster 12) (8 May 2013)

http://www.bailii.org/nie/cases/NIHC/Master/2013/12.html

In Brief: OR failed to have matrimonial order set aside as a post-petition disposition, although managed to claw back funds intended for petitioner.

Although this is a Northern Ireland case, the arguments centre around Article 257 of the Insolvency (Northern Ireland) Order 1989, which pretty-much mirrors S284 of the Insolvency Act 1986, so I thought it was worth covering.

A bankruptcy petition was presented on 31 January 2011, but an order was only made on 13 January 2012. In the interim, the bankruptcy petition was removed from the bankruptcy court to the matrimonial court and a matrimonial agreement incorporating the transfer of the debtor’s interest in a property was made an order of court on 18 November 2011. The OR sought to have the order set aside, arguing that the petition should not have been moved to the matrimonial court and it should have been dealt with more expeditiously; had it been so, the OR argued that the bankruptcy order would have been made in all likelihood before the property adjustment orders were made.

The judge decided that, as the ancillary relief proceedings were High Court proceedings, the matrimonial court’s order fulfilled the Article 257 criteria in that the property adjustment orders had been made with the consent of the High Court and were therefore not void, save for the following.

One element of the matrimonial agreement was that £21,500 should be paid to the petitioning creditor. The judge noted that this was intended to enable the petition to be dismissed. Therefore, as it was not paid and the petitioning creditor had sought and obtained the bankruptcy order, the judge concluded that the sum should be paid to the OR as it formed part of the bankruptcy estate.