Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Tag Archives: preferential creditors


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Hobson’s Choice

A recent court decision has left us with a Hobson’s choice: should we follow what appears to be a flawed decision or ignore it?

Why do I say that the decision appears flawed?  Can the apparent inconsistencies in the Act/Rules be explained away?  What should we do now?

The decision in question, Hobson & Coleman v OAS Realisations (2022) Limited ([2024] EWHC 1491 (Ch)), is available at https://www.bailii.org/ew/cases/EWHC/Ch/2024/1491.html.

The Decision

Firstly, it is worth pointing out that, although there were technically two sides to this application, both were represented by the Joint Administrators’ counsel and evidently they were hoping that the court would ratify their past actions.  Therefore, the judge heard no opposing arguments.

On the basis of legal advice, the Joint Administrators had moved a company in ADM to CVL under Para 83 of Schedule B1.  They had envisaged that there would be sufficient property only to pay a distribution to HMRC as a secondary preferential creditor and they believed that this met the Para 83(1)(b) criterion: “where the administrator of a company thinks… that a distribution will be made to unsecured creditors of the company (if there are any) which is not a distribution by virtue of section 176A(2)(a)”.

The judge agreed, because in his view: (i) preferential creditors are unsecured creditors per S248; (ii) the context of Para 83(1)(b) did not require “unsecured creditors” to mean non-preferential unsecured creditors; and (iii) in any event the Administrators thought they would pay a dividend to unsecureds, which is the Para 83 test (i.e. it does not require administrators to reasonably think such a thing).

So we didn’t think this before?

No, we didn’t.  While of course prefs are unsecured – because they are not secured – since the start of Schedule B1, it was understood that the IS/RPBs took the view that “unsecured creditors” in Para 83(1)(b) did mean non-preferential unsecureds.

The RPBs’ past view

This led to many (even in my limited experience) occasions where IPs were challenged by the RPB for moving an ADM to CVL when it did not appear reasonable to have thought at the time of the move that there would be a non-preferential non-prescribed part dividend.  Those challenges led many of those IPs to seek legal advice, which sometimes assisted the IP to continue the CVL notwithstanding the alleged breach of Para 83 but sometimes resulted in IPs having to put their hands in their own pockets to ensure that there were sufficient funds for a non-pref non-prescribed part dividend.

Am I bitter at the pivot?

No, of course not (and I hasten to add that I was not the compliance reviewer referred to in the decision, although I probably would have made much the same observations).  I have had to roll with more material pivots than this, such as Brumark/Spectrum Plus and Paramount Airways.

I am strongly in favour of anything that eases seemingly unreasonable ADM restrictions.  I have never understood why a CVL should not be a possible exit route in any ADM where there are not compelling reasons for the ADM to continue.

But the problem is that the decision is problematic.

Why did we think that a CVL move was restricted to non-pref non-prescribed part dividends?

Probably because in other areas of the Act/Rules “unsecured creditors” surely does mean non-pref unsecureds.

The 2010 Rules

Changes to the 1986 Rules introduced in 2010 reinforced the perception that, where the Rules referred to unsecured creditors, they obviously meant non-pref unsecureds. 

For example, old R4.126(1E)(xii) required final CVL reports to state (my emphasis):

“the aggregate numbers of preferential and unsecured creditors set out separately” 

The phrase “preferential and unsecured creditors” appeared repeatedly in these 2010 amendments.

Of course, we no longer have those Rules, but others are still with us.

The Para 52(1)(b) nonsense

For example, Para 52(1)(b) says that an administrator need not seek a decision on their Proposals where the Proposals include a statement:

“that the administrator thinks… that the company has insufficient property to enable a distribution to be made to unsecured creditors other than by virtue of section 176A(2)(a)”

If “unsecured creditors” here were to include prefs, then it would mean that you would not make a Para 52(1)(b) statement where you thought there would be a pref distribution.  But R18.18(4)(b) says that, where a Para 52(1)(b) statement has been made, fee approval (absent a committee) is sought as follows:

“if the administrator has made or intends to make a distribution to preferential creditors… (ii) a decision of the preferential creditors in a decision procedure”

So if Para 52(1)(b) were viewed through Hobson, then R18.18(4)(b) would never apply, would it?  Except, I suppose, if you didn’t think you’d make a pref distribution when you produced your Proposals but then you did when you came to ask for fee approval.  But that’s nonsense, isn’t it?

The same goes for R3.52(3), Para 78(2) and Para 98(3) regarding seeking approval for pre-ADM costs, an extension and discharge.  You would practically never seek approval from prefs under these provisions, because you would never have made a Para 52(1)(b) statement where you thought you’d be paying a pref distribution.

Is it possible for “unsecured creditors” to mean different things in different places?

Well, yes.  HHJ Matthews said as much when he considered the wording of S248: “So, unless the context otherwise requires, an ‘unsecured creditor’ is a creditor who does not hold “in respect of his debt a security over property of the company””.

This means we needs to consider the context, which could affect the meaning of unsecured creditors.

That’s pretty unsatisfactory, isn’t it?  You’d think that the person/group drafting both Para 52 and Para 83 could have settled on consistent language, wouldn’t you?  Alternatively, I’d have thought that Para 52 could be said to be part of the context of Para 83, which could lead to a view contrary to HHJ Matthews’.

Also, look again at the wording of Para 52(1)(b) and Para 83(1)(b).  They both use almost exactly the same phrase:

  • Para 52(1)(b): “to enable a distribution to be made to unsecured creditors other than by virtue of section 176A(2)(a)”
  • Para 83(1)(b): “a distribution will be made to unsecured creditors of the company (if there are any) which is not a distribution by virtue of section 176A(2)(a)”

Are we seriously living in a world where the distributions in these two paragraphs are measured in completely different ways?

An alternative view – that “unsecured creditors” in Para 52(1)(b) means the same as the Hobson view of Para 83(1)(b), so casting doubt on many many Proposals and their consequent fee approvals etc. – doesn’t bear thinking about!

There is another strong reason to question the robustness of the Hobson view.

The killer blow?

The Explanatory Notes to the Enterprise Act 2002, which introduced Schedule B1, include (paragraph 700, my emphasis):

“Paragraph 83 allows the administrator to end the administration and convert the proceedings into a voluntary winding-up. This will occur if the preferential and secured creditors have been paid all they are likely to receive (or such has been set aside for them), and there is money available for the unsecured creditors.”

That appears pretty cut-and-dried to me and shows that the drafter of the Explanatory Notes intended “unsecured creditors” in Para 83 to mean non-pref unsecureds. 

Had HHJ Matthews been aware of this Explanatory Note, I would be surprised if his decision would have been what it was.

Other reasons for concern

I think the above are more than enough reasons to distrust the decision.  However, I have other reasons, including: the policy objective behind the amendment to Para 83(1)(b) that coincided with a tenuously corresponding change to Para 65; and which creditors move into the frame of fee-approval following a move to CVL that appears unaligned with a policy that this should fall to the creditors with interest.

What are the RPBs’ views now?

I have heard from an RPB staff member that they (and some others) would not have significant concerns if an ADM were moved to CVL in similar circumstances to the Hobson case.  Their primary concerns are that IPs: (i) weigh up the costs of the options available to them, e.g. having regard to the cost of a court-ordered extension, and (ii) ensure that their reasons for moving to CVL (or not, where this may be an option) are fully documented for the file.

I think this is, not only a very sensible approach, but also in reality the only reasonable one for the RPBs to take in view of the decision.  Of course, this is only the view of individual RPB staff members.  It would be risky to take it as read that this would be shared by all RPB staff and regulatory committees.

Given the RPBs’ past activities in challenging ADM moves to CVL, I feel it would be extremely valuable if the RPBs – and/or perhaps the InsS in a Dear IP – were to publish something on these lines to give this approach some authority.  Such an approach need not have significant regard for any reasons for doubting the robustness of the Hobson decision – it is what it is.  But rather, such a statement would simply give IPs comfort that they could proceed in principle without fear that their RPB might challenge them on this point sometime in the future.

Where does this leave us?

Of the people that I’ve spoken to, many of the compliance managers are very nervous about the decision, whereas many of the IPs are more than happy to follow it.  They consider it is unlikely to be challenged – with which I agree, given that at least some of the RPB staff seem content for IPs to follow it – and they seem to share my view that blocking a move to CVL never did make practical sense.

Of course, there remains the risk that a judge on another day will take a contrary view.  However, given that the application of Para 83 depends on what the Administrator “thinks”, it seems unlikely to me that any future decision of this kind will render such Administrators’ thinking perverse.  Thus. I think it likely that any future decision would only have prospective effect.

So yes, on balance, I think it’s safe to follow this decision provided that the Administrator’s thinking is written down contemporaneously.  But of course, I am not a solicitor and we all get things wrong some of the time.

My thanks go to some of the R3 GTC members (whose views are not necessarily reflected here) and to the RPB staff member, who all have helped me explore these issues more deeply and finally to commit pen to paper.


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A tale of two views: is a paid creditor still a creditor?

The Insolvency Service’s report on the 2016 Rules review contains some interesting gems.  It’s a detailed report, which demonstrates they have scrutinised the consultation responses.  The result is a list of proposed fixes to the Rules – most are welcomed, a few are alarming.

In this blog, I describe what I found was the most surprising and alarming statement in the report.  It relates to the age-old question: is a paid creditor still a creditor?  The report’s statement is surprising, as it is the polar opposite of a comment published by the Insolvency Service 5 years’ ago.  And it is alarming because the report states merely that the Rules need to be made “clearer”, which suggests that we have all been misinterpreting the Rules over the past 5 years.  But hey ho, we’re only talking about fee-approval and Admin extensions!

The Insolvency Service’s report is available at: https://www.gov.uk/government/publications/first-review-of-the-insolvency-england-and-wales-rules-2016/first-review-of-the-insolvency-england-and-wales-rules-2016

Is a paid creditor still a creditor?

If a creditor’s claim is discharged (and not subrogated to the payer) after the start of an insolvency proceeding, should that creditor still be treated as a creditor for decision procedures and report deliveries?

Before I left the IPA in 2012, the question began to be discussed at the JIC.  It turned out to be a hotly debated topic and I never did learn the conclusion.  I’d always hoped that there would be a Dear IP on the subject to settle the matter once and for all (subject to the court deciding otherwise, of course).  It was such a live topic at that time that surely the 2016 Rules were drafted clearly, weren’t they?

The general principle?

I had heard a rumour long ago that the Insolvency Service’s view was once-a-creditor-always-a-creditor.  I understood that the basis for this view was that creditors are generally defined as entities who have a claim as at the relevant date, so the fact that the creditor’s claim may have been discharged later does not change their status as a creditor.

Of course, this doesn’t work if, after the insolvency commences, the creditor sells their debt (or it is otherwise discharged by a third party): the purchaser/settlor tends to acquire the creditor’s rights, so the original creditor would no longer be entitled to a dividend or to engage in decision procedures – there are Rules and precedents to address these scenarios.

I can see where this view might come in handy, e.g. where an office holder had already paid creditors in full and only afterward realises that creditors have not yet approved their fees.

However, this view always seemed illogical to me: why should a paid creditor be entitled to decide matters that no longer affect them, e.g. the office holder’s fees or the extension of an Administration?  Indeed, some paid lenders refuse to engage where their debt has already been discharged, even though an Administrator may need all secured creditors’ consents to move forward.

Setting aside this issue, it could be argued that in some respects the 2016 Rules support a once-a-creditor-always-a-creditor view.  For example, R15.31(1)(c) states that in CVLs, WUCs and BKYs, a creditor’s vote is calculated on the basis of their claim “as set out in the creditor’s proof to the extent that it has been admitted”, which could indicate that post-commencement payments are ignored for voting purposes. 

But then what about R14.4(1)(d), which states that a proof must:

“state the total amount of the creditor’s claim… as at the relevant date, less any payments made after that date in relation to the claim… and any adjustment by way of set-off in accordance with rules 14.24 and 14.25”? 

Is the “claim” the original sum or the adjusted sum?  If, for the purposes of identifying the “claim” for voting purposes, conveners are supposed to ignore post-commencement payments made, then doesn’t R14.4(1)(d) (and R15.31(1) – see below) mean that they should also ignore any set-off adjustment?  That doesn’t make sense, does it?

Administrations are always “special”, aren’t they?!

R15.31(1)(a) provides that creditors’ claims for voting purposes are calculated differently for ADM decision procedures.  It states that in ADMs creditors’ votes are calculated:

“as at the date on which the company entered administration, less (i) any payments that have been made to the creditor after that date in respect of the claim, and (ii) any adjustment by way of set-off…”.

This seems pretty unequivocal, doesn’t it?  A paid creditor would have no voting power in an ADM decision procedure.

It is not surprising therefore that R15.11(1) provides that notices of ADM decision procedures must be delivered to:

“the creditors who had claims against the company at the date when the company entered administration (except for those who have subsequently been paid in full)”.

So the natural meaning of these Rules seems to be that paid creditors have no voting power and therefore do not need to be included in notices of decision procedures.  This seems logical, doesn’t it?

What about prefs-only decision procedures?

These Rules led me to ask the Insolvency Service via their 2016 Rules blog: what is the position where an Administrator is seeking a decision only from the prefs, especially where those creditors also have non-pref unsecured claims?  Do the Rules mean that, where a pref creditor’s claim has been paid in full, the pref creditor is ignored for the prefs-only decision procedure? 

Or does the fact that the creditor hasn’t actually been “paid in full” because they have a non-pref element mean they should still be included in the prefs-only process?  And does that mean that, per R15.31(1)(a), they would be able to vote in relation to their non-pref claim? 

Yes, I know this would seem a perverse interpretation, but it seemed to me the natural meaning of rules that were not designed to apply to a prefs-only process.

The Insolvency Service’s view in 2017

The Insolvency Service’s response on 21 April 2017 (available at https://theinsolvencyrules2016.wordpress.com/2016/11/30/any-questions/comment-page-1/#comments – a forum on which the Service aimed to “provide clarity on the policy behind the rules”) was:

“Our interpretation is that 15.3(1)(a) (sic) would lead an administrator to consider the value of outstanding preferential claims at the date that the vote takes place. This would only include the preferential element of claims, and if these had been paid in full then the administrator would not be expected to seek a decision from those creditors.”

Now: the Government’s “long-standing view”

However, the Insolvency Service’s Rules Review report (5 April 2022) states:

“Several respondents asked for clarification on the position of secured and preferential creditors that had received payment in full. It has been the Government’s position for some time that the classification of a creditor is set at the point of entry to the procedure and that this remains, even if payment in full is subsequently made. We believe that to legislate away from this position could cause more problems than it would seek to solve. Accordingly, the Government has no plan to change its long-standing view on this matter. We will amend rule 15.11(1) to be clearer that where the Insolvency Act 1986 or the Rules require a decision from creditors who have been paid in full, notices of decision procedures must still be delivered to those creditors.”

Wow!  If only the Insolvency Service had published the Government’s long-standing view 5 years’ ago, before all those fees had been considered approved by only unpaid prefs or secureds!

Is it only a R15.11(1) issue?

The Service’s report makes no mention of the voting rights of paid prefs.  So does this mean that paid prefs should receive notice of decision procedures, but, in line with the Service’s statement in 2017, they have no voting rights?  Or do they think that R15.31(1)(a) also needs to be changed?

And what about paid secured creditors?  They’re not involved in decision procedures at all, so R15.11 is irrelevant where an Administrator is seeking a secured creditor’s approval or consent. 

What is a “secured creditor”?

A secured creditor is defined in S248 of the Act as a creditor “who holds in respect of his debt a security over property of the company”.  “Holds” = present tense.  If a secured creditor no longer holds security over the company’s property at the time when an Administrator seeks approval/consent, are they in fact a secured creditor?

It seems to me that, if the Service wishes to amend the Rules to make them clearer as regards the Government’s position, they may need to look at amending the Act too.

The consequence of a clarification of the Rules

If the report had stated that the Service intended to change the Rules to give effect to the Government’s view, I would not have been so alarmed – that would be a problem for the future.  But they have said that they want to make the Rules “clearer”.  This suggests that they believe the existing Rules could be interpreted to give effect to the Government’s view.  In that case, are we expected to apply the existing Rules in the way that this report describes?

And what about all the earlier cases in which paid secured or pref creditors’ approvals were not sought?  What effect does this have on previously-deemed approved fees, extended Administrations and discharged Administrators?

And what does this approach achieve?  Are IPs really expected to seek approvals/consents from paid creditors, most of whom have no theoretic, or even real, interest in the process?  Why should paid prefs get to decide, even if they have non-pref unsecured claims, when no other unsecured creditors have this opportunity?

Are the ADM Para 52(1)(b) Rules fit for purpose?

I have often blogged that I think the Rules around the consequences for Para 52(1)(b) ADMs are confused and illogical.  The Insolvency Service acknowledged some issues in the Rules Review report:

“Some respondents raised issues related to administration cases where statements had been made pursuant to paragraph 52(1)(b) of Schedule B1 to the Insolvency Act 1986, highlighting the difficulties that can sometimes occur when only secured and/or preferential creditors need to be consulted on certain matters under the Rules. It is clear that in some cases engagement with this smaller group of creditors can be difficult. However, we consider that the overall efficiencies provided for by the Insolvency Act and Rules across all such cases outweigh the difficulties that can occur in a minority of them.”

“The overall efficiencies”?  Is the Insolvency Service saying that, because it is useful in many cases not to have to bother with non-pref unsecureds, this outweighs the issues arising in a minority of cases?  If that’s true, then why not roll out this alleged more efficient process across all insolvency case types..?

The advantage of HMRC pref status?

Ok, a silent secured creditor can be a real headache and a silent paid secured creditor is going to be particularly reluctant to lift a finger.  But now that HMRC is a secondary pref creditor in most cases, at least this eases the problem of getting a decision from the prefs, doesn’t it?

I understand that HMRC is still acting stony in the face of many decision procedures.  Oh come on, guys!  If you want IPs to waste estate funds applying to court, you’re going the right way about it.

Other issues with the Rules Review report

This is only one of a number of issues I have with statements in the report.  In the next article, I will cover some others as well as highlight some items of good news for a change.

And apologies for my silence over the past months: an extremely busy working season and an unexpected health issue sapped me of my time and energy.  Last August, I had planned on covering other effects of the IVA Protocol – this will emerge one day.