Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Tag Archives: provisional liquidator


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Standing on the Shoulders: a summary of reported court decisions

0430 Brown & Viv

I think it’s great that summaries of court decisions are more freely-available now than ever before.  I’ve wondered whether I should just drift back into the shadows and leave it to the pros… but then I remember that, even if no one reads them, authoring my own summaries helps get them fixed in my own mind.  Therefore, I shall continue:

  • Sands v Layne – should the court consider all creditors’ interests when considering whether to dismiss a petition because the debtor has reached an agreement with the petitioner alone?
  • Re Business Environment Fleet Street – as statute allows an administrator to take control of property to which he thinks the company is entitled, can he sell it?
  • Parkwell Investments v HMRC – should provisional liquidators be appointed if there is a tax assessment appeal outstanding?
  • Bear Scotland v Fulton – should non-guaranteed overtime be included in holiday pay?
  • Connaught Income Fund v Capita Financial Managers – does a liquidator have a statutory power to get in post-appointment assets?
  • Day v Tiuta International – if the charge under which receivers are appointed is invalid, can they remain in office by reason of the appointor’s subrogated rights under another charge?

Trustee fails to overturn a debtor’s deal with the petitioner

Sands v Layne & Anor (12 November 2014) ([2014] EWHC 3665 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/3665.html

Mr Layne originally sought to avoid bankruptcy by offering security over his home and payment by instalments to the petitioning creditor.  However, given the time that the debtor would have needed to pay off the debt, the judge rejected his defence that the creditor had unreasonably refused the offer and made a bankruptcy order in July 2011.  In June 2012, the parties came to an agreement as regards payment and security and, by means of a consent order, the bankruptcy order was set aside.  In June 2013, the Trustee in Bankruptcy applied for the consent order to be rescinded pursuant to S375 of the IA86, the thrust of his submission being that the debtor and creditor had sought to deal with the matter between themselves without taking into account any obligations to him or to other unsecured creditors.

The deputy judge expressed a wavering view over the conclusion leading from the decision in Appleyard v Wewelwala that S375 reviews and rescissions by first instance courts can deal with only decisions made by those courts, not also decisions emanating from appellate courts, and thus the Trustee’s application failed.  However, given the deputy judge’s “diffidence”, he considered further questions arising from the application.

How should the interests of other unsecured creditors impact on the court’s consideration of whether a petition should be dismissed under S271(3)(a), i.e. where “the debtor has made an offer to secure or compound for” the petition debt?  The deputy judge concluded that, as the first ground for dismissal under S271 involves the court being satisfied that the debtor is able to pay all his debts, “the second ground – involving an offer to secure or compound – must therefore be intended to apply even where the debtor is not so able” (paragraph 20).

The deputy judge listed the other unsecured creditors’ potential remedies, including seeking to be substituted as petitioner and challenging the security as a preference (albeit that they would need to establish a desire to prefer the original petitioner).  “In short, in so far as other unsecured creditors may be affected by the provision of the security to the petitioner, the statute provides a targeted remedy in what it considers suitable cases, and it is neither necessary nor appropriate for their interests to be addressed in the context of the bilateral dispute between the petitioning creditor and the debtor and in particular the issue whether, where security is offered and rejected, a bankruptcy order should be made or refused” (paragraph 22).

The deputy judge also observed that the Trustee’s argument “suffered from a serious dose of circularity” (paragraph 24) in that the Trustee could not have been joined as a respondent to the original appeal, which “was to decide whether the bankruptcy order should stand. If the order fell and there was no bankruptcy, all consequences dependent on it – the trusteeship and the vesting – disappeared with it” and thus he had no standing to bring the application in the first place.

Moon Beever published an article examining the role of the Trustee as illustrated by this decision: http://goo.gl/Fu62LU.

 

Court rejects Administrators’ attempts to sell third party assets

Re Business Environment Fleet Street Limited; Edwards & Anor v Business Environment Limited & Ors (28 October 2014) ([2014] EWHC 3540 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/3540.html

Administrators applied under Para 72 of Schedule B1 for leave to dispose of assets, including properties subject to subleases and equipment located at the properties, which one of the respondents claimed to own.  Under Para 72, the court can authorise administrators to dispose of “goods which are in the possession of the company under a hire-purchase agreement”, which under Para 111 extends to chattel leasing agreements.

The deputy judge examined the agreement between the Company and the respondent and concluded that the Company had not been granted possession of the assets, which remained either with the respondent or had transferred to the subtenants.  Thus, the agreement did not comprise a chattel leasing agreement, as it did not involve the bailment of goods.

The Administrators pursued an alternative ground, arguing that Paras 67 and 68 combined entitled them to manage – which would include disposal of – property to which they think the Company is entitled.  The deputy judge rejected the argument that “property” in the two paragraphs has the same meaning: it may be appropriate for an administrator to take control of assets in a hurry on his appointment, but disposal would be a step too far.  “It would confer an exorbitant jurisdiction on the administrator to convert property belonging to third parties, simply because this happened to be desirable on the balance of convenience” (paragraph 19.3).  The deputy judge also saw no support in S234, which relieves an administrator from liability for converting third party assets where he acted reasonably.

But what if the sale sought by the Administrators appeared to make sense commercially?  The Administrators’ case here was that there was considerable “marriage” value in disposing of the assets together with the properties, enhancing the purchase price by some £7m.  In this particular case, the deputy judge saw the marriage value in the proposed sale, but did not see that a delay in a sale would be detrimental and thus was not satisfied that the balance of convenience lay in ordering an immediate sale (even if he had been satisfied that the court had jurisdiction to order it).

For an alternative – and far more authoritative – analysis, you might like to read the article by Stephen Atherton QC (via Lexis Nexis) at http://goo.gl/VYFblM.

 

Attempts to “see-saw” between courts does not avoid the appointment of provisional liquidators

Parkwell Investments Limited v Wilson & HMRC (16 October 2014) ([2014] EWHC 3381 (Ch))http://www.bailii.org/ew/cases/EWHC/Ch/2014/3381.html

This case has received some attention due to the judge’s statement that he was unable to accept the reasoning of the deputy judge in Enta Technologies Limited v HMRC (http://wp.me/p2FU2Z-6W), which if it were correct would lead to a “very undesirable consequence… namely the inability of the court to appoint anyone a provisional liquidator to a company where the company has an outstanding appeal against the assessment” (paragraph 21).

In this case, the Company had applied for the termination of the provisional liquidation and the dismissal of HMRC’s winding-up petition on the basis that the First Tax Tribunal was the place to determine its VAT position and that, as there were appeals against assessments still outstanding, it was inappropriate that the Companies Court should pre-empt the process by appointing a provisional liquidator.  Sir William Blackburne stated: “There is to my mind something highly artificial in the notion that this court has jurisdiction to entertain a winding-up petition brought by HMRC against a company founded on the non-payment of a VAT assessment… for so long as the company has taken no steps to appeal the assessment to the FTT… only to find that that jurisdiction is lost the moment the company files its notice of appeal to the tribunal or, if not lost, is no longer exercisable, irrespective of the merits of the appeal…   I cannot think that this approach is right. Jurisdiction in this court cannot arise and disappear (or be exercisable and then suddenly cease to be) in this see-saw fashion” (paragraphs 19 and 20).

The judge believed that the true question was whether the appeal to the FTT has any merit. If it has none, then the assessment continues to constitute a basis for a winding-up petition.  However, “if the court, on a review of the evidence before it, considers that the company has a good arguable appeal which will lead either to the cancellation of the assessment or to its reduction to below the winding-up debt threshold, it will dismiss the petition” (paragraph 20).  In this case, the judge concluded that the Company had failed to produce sufficient evidence to demonstrate a good arguable case and thus the provisional liquidator was allowed to continue in office.

For a more practical look at the implications of this decision, you might like to look at an article by Mike Pavitt, Paris Smith LLP, at http://goo.gl/0lZyrO.

 

Holiday pay to include non-guaranteed compulsory overtime

Bear Scotland Limited & Ors v Fulton & Ors (4 November 2014) (UKEATS/0047/13) (heard with Hertel (UK) Limited v Woods & Ors and Amec Group Limited v Law & Ors (UKEAT/0161/14)http://www.bailii.org/uk/cases/UKEAT/2014/0047_13_0411.html

None of these cases involved insolvencies, but I can see how their impact on holiday pay calculations could have consequences for IPs.  However, permission to appeal has been granted and the government has set up a taskforce to assess the possible impact of this decision (see http://goo.gl/8jmV53).

The conclusions of the Companies’ appeals against several elements of previous tribunal decisions were as follows:

  1. Normal remuneration – in relation to which holiday pay is calculated –included overtime that employees were required to work, even though the employer was not obliged to offer it as a minimum.
  2. An employer’s failure to pay holiday pay on this basis could be claimed as unlawful deductions from pay under the ERA1996, but not where a period of more than three months had elapsed between each such unlawful deduction (i.e., I think, if, say, holiday was paid short in March, August, and October of this year, only August and October could be claimed; March would not be able to be claimed, as it occurred more than three months before the August short payment).
  3. Pay in lieu of notice is not required to be calculated under the same basis, i.e. it does not include the overtime described in (1) above. This differs from the position as regards holiday pay, because it was felt that the parties’ view of what hours were “normal” at the time the contract was entered into would not have been informed by the experience of working under that contract, which described overtime as not guaranteed and not forming part of normal working hours.
  4. In two of the cases concerned, time spent travelling to work (which was paid during working times as a Radius Allowance and Travelling Time Payment) also fell within “normal remuneration” for the purpose of calculating holiday pay.

There has been some comment (e.g. Moon Beever’s article at http://goo.gl/Etay9A) that overtime other than compulsory overtime is also likely to be comprised in “normal remuneration”.  Whilst this was not dealt with by the Appeal Tribunal, the judge did highlight the principle that “‘normal pay’ is that which is normally received” (paragraph 44) and thus I can see why that conclusion might be drawn.

 

A liquidator’s power to get in post-appointment assets

The Connaught Income Fund, Series 1 v Capita Financial Managers Limited (5 November 2014) ([2014] EWHC 3619 (Comm))http://www.bailii.org/ew/cases/EWHC/Comm/2014/3619.html

The key points – and quotes – that I’d extracted from the judgment were the same as those highlighted by Pinsent Masons (http://goo.gl/QU8o9i).

The liquidators of the Fund (which was an unregulated collective investment scheme set up as a limited partnership) took an assignment of the investors’ claims, but these were resisted under a number of arguments including a challenge that the liquidators acted outside their statutory powers in taking the assignments.

The judge decided that the assignments were allowed under the liquidators’ Schedule 4 power “to do all such things as may be necessary for winding up the company’s affairs and distributing its assets”, including those that had not been assets of the partnership when it traded.

 

Receivers’ appointment sound notwithstanding that their appointor’s charge could be invalid

Day v Tiuta International Limited & Ors (30 September 2014) ([2014] EWCA Civ 1246)http://www.bailii.org/ew/cases/EWCA/Civ/2014/1246.html

This is a complicated case, which I think has been successfully summarised by Taylor Wessing LLP (http://goo.gl/YhN2ga).

Tiuta International Limited (“TIL”) agreed to lend money to Day to enable him to repay a loan provided by Standard Chartered (“SC”) and to discharge the charge to SC.  Later, due to Day’s non-payment, TIL appointed receivers under the powers of its new charge, but Day claimed damages against TIL that, if set off against the loan, would release TIL’s charge and invalidate the receivers’ appointment.  TIL argued that, even if Day were successful in escaping from its charge, TIL was still entitled to appoint receivers because it was subrogated to the SC charge by reason of its payment settling SC’s loan and charge.  Day contended that, even if this were so, TIL would need to appoint receivers again but this time in express reliance on the SC charge.

Lady Justice Gloster stated: “it is important to bear in mind that the correct analysis of the right of subrogation is that a party who discharges a creditor’s security interest and who is regarded as having acquired that interest by subrogation, does not actually acquire the creditor’s interest, but rather obtains a new and independent equitable security interest which prima facie replicates the creditor’s old interest. Subrogation does not effect an actual assignment of the discharged creditor’s rights to the subrogated creditor. What subrogation means in this context is that the subrogated creditor’s legal relations with a defendant, who would otherwise be unjustly enriched, are regulated as if the benefit of the charge had been assigned to him” (paragraph 43).

“Thus whilst TIL did not purport to rely on the SC Charge when appointing the Receivers… and purported to rely only on the TIL Charge to make the appointment, that in my judgment was immaterial…  Subrogation is a means by which the court regulates the legal relationships between parties in order to avoid unjust enrichment and the precise manner in which it operates may vary according to the circumstances of the case. In the present case, on the hypothesis that the TIL Charge was voidable, the doctrine of subrogation, in conferring a new equitable proprietary right on TIL, would have operated to entitle TIL to the notional benefit of the SC Charge for the purposes of securing repayment of the TIL Loan made under the terms of the TIL Loan Facility” (paragraph 44).  She continued that TIL was not required to follow the payment demand process as required by the SC charge, which would be “nonsensical” since SC’s liabilities had been discharged, but it was entitled to follow the process set down in the TIL loan facility and charge leading to the appointment of receivers.


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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)…

IMGP7906 lowres

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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More on the ERR Bill and two cases: (1) Scottish Court shows more than the usual interest in provisional liquidator’s fees; and (2) Court avoids “unpardonable waste of scarce resources” by striking out evidence

I present a bit of a mixed bag here:
• The Enterprise & Regulatory Reform Bill – developments since my blog post of 12 January
• Nimmo – the Scottish Court of Session takes more than a passing interest in a provisional liquidator’s fees
• Secretary of State v Potiwal – despite the seeming absence of a technical argument, the court saves the taxpayers’ money in proving a case a second time

Update on the Enterprise & Regulatory Reform Bill

New Bankruptcy Application Process

On 12 January, I posted to this blog my thoughts on the insolvency parts of the ERR Bill. Last week, some interesting tweaks to the Bill had been proposed: that the adjudicator be allowed to apply to the court for directions (which might have helped if the adjudicator had been presented with a bankruptcy application with tricky COMI dimensions); and that, if the adjudicator felt that an alternative remedy were more suitable, the individual be given ten days to seek advice and potentially withdraw the bankruptcy application. Unfortunately, both these proposals were withdrawn following the House of Lords’ debate.

In relation to the subject of applying to court for directions, Viscount Younger of Leckie said: “Persons appointed as adjudicators will have the skills they need to do the job without the need for recourse to the court. It is acknowledged that the court still has a role to play. Where the adjudicator refuses to make a bankruptcy order because the criteria are not met, the debtor will have the right to appeal to the court. That provides a route to court in those cases where it is needed” (Lords Hansard on House of Lords Grand Committee 16 January 2013, http://www.publications.parliament.uk/pa/ld201213/ldhansrd/text/130116-gc0002.htm).

With regard to allowing the individual time to explore alternative solutions, Viscount Younger said: “I reassure noble Lords that before making their bankruptcy application, applicants will be strongly encouraged to take independent debt advice to ensure that bankruptcy is really the right option for them. My officials will work with the Money Advice Service and providers within the debt advice sector to ensure that applicants have the information they need to make an informed decision. Furthermore, within the electronic application process itself, we propose to include a series of warnings to ensure that applicants are made fully aware of the serious implications of bankruptcy before they make their application. We will also ensure that the process flags up any alternative debt remedies that may better suit their circumstances. The Government consider that these safeguards are sufficient to ensure that debtors are empowered to make an informed decision as to whether or not bankruptcy is the right option for them before they take the serious step of making a bankruptcy application. The Government believe that these amendments would unnecessarily complicate the process by requiring the adjudicator to exercise discretion on a case-by-case basis. That would increase administration costs with an impact on the application fee. It would also delay access to debt relief for the debtor, who would have elected for bankruptcy in full knowledge of their other options.”

Whilst I understand the government’s intention to formulate a simple administrative process to replace the current court-led debtor’s bankruptcy petition process (although those IA86 provisions are not being repealed via the Bill, presumably so that individuals who cannot/do not wish to apply online can still instigate their own bankruptcy), it seems inevitable to me that such a process will be ill equipped to deal with out-of-the-norm cases.

Continuation of contracted supplies in corporate insolvencies

It seems that R3’s “Holding Rescue to Ransom” campaign is paying off! Added to the list of proposed amendments to the Bill are the following proposed changes to S233 of IA86:

• To include “a supply of computer hardware or software or infrastructure permitting electronic communications” as another utility that must continue to be supplied (subject to the current S233 conditions) on request by the office holder.
• Utility supplies to be caught by the provisions irrespective of the identity of the supplier.
• To include that “any provision in a contract between a company and a supplier of goods or services that purports to terminate the agreement, or alter the terms of the contract, on the happening of any of the events specified in subsection (1) [i.e. administration, administrative receivership, S1A moratorium, CVA, liquidation, or appointment of a provisional liquidator] is void” – this does not seem to be limited only to utility supplies.

It remains to be seen, however, if these proposed changes survive the debate in the House of Lords (next sitting is scheduled for 28 January 2013).

Scottish Court of Session not content to take as read the court auditor’s and reporter’s recommendations of approval of provisional liquidator’s fees

Nimmo, as liquidator of St Margaret’s School, Edinburgh, Limited [2013] ScotCS CSOH 4 (11 January 2013)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH4.html

Summary: Despite both the reporter and the court auditor recommending that the provisional liquidator’s remuneration of c.£120,000 be allowed, the court sought further information in justification of the fee. Whilst IPs can take some comfort in the result that the judge allowed the fees in full, his comments suggest some lingering concern and hinted at a desire for a review of the court procedures.

The Detail: Over 20 days, a provisional liquidator managed “a high profile and extremely sensitive appointment” (paragraph 9) over a school and incurred time costs of c.£120,000. Later, the IP was appointed liquidator of the same company with his fees for the liquidation being approved by the liquidation committee. Interestingly, Lord Malcolm disapproved of the use of the word “cost” when referring to as yet unauthorised remuneration: “For the future I would advise that in reports to committees the proposed fee should not be described as ‘a cost’ already incurred by the liquidator. It should be made clear that the committee is being asked to exercise a judgment as to whether the proposed remuneration is reasonable and appropriate (or words to that effect). A proposed fee is in a different category from outlays. The scope for disagreement or questioning should be obvious to the readers of the report” (paragraph 31). The IP’s fees as provisional liquidator remained to be approved by the court.

Both the reporter and the court auditor considered that the provisional liquidator’s fees were reasonable, but the judge requested further information. Despite learning of the complexities handled by the IP, Lord Malcolm stated: “nonetheless I retain a sense of surprise and concern at a proposed fee of over £120,000 (exclusive of vat) for 20 days work, and I suspect that many will find it remarkable that the winding up of a middling size private school can generate fees of over £620,000 (again exclusive of vat)” (paragraph 31). However, the judge allowed the fee, noting that “the court cannot simply reject the clear advice of the reporter and the auditor of court without cogent and objectively justifiable reasons for doing so” (paragraph 35).

Lord Malcolm’s closing comments suggest a desire for more widespread consideration of the issue of insolvency office-holders’ remuneration: “Perhaps it is no bad thing that, now and again, an opinion is issued which shows how these matters are presented to, and addressed by the court. Generally they are resolved without any public hearing or publicity. There is at least a risk that the fee levels and general practices and procedures seen as normal in the corporate insolvency world become, when the court is asked to adjudicate, in a sense self-fulfilling. This highlights the important role of the auditor of court in the current system, given that he is not directly involved in such work. It may also be that, from time to time, and in the light of experience, the judges should review current practice to check whether there is room for improvements in the court’s procedures which might help it to exercise its jurisdiction under the insolvency rules” (paragraph 38).

Court avoids “unpardonable waste of scarce resources” by striking out director’s evidence in disqualification proceedings

Secretary of State for Business, Innovation & Skills v Potiwal (Rev 4) [2012] EWHC 3723 (Ch) (21 December 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3723.html

Summary: In relation to disqualification proceedings, the Secretary of State (“SoS”) sought to rely on the fact that a VAT Tribunal had already proven a director’s knowledge of his company’s fraud. The court found that, although the SoS’ argument that the director was estopped from denying knowledge failed because the SoS and HMRC were not privies, it agreed that it would be manifestly unfair and it would bring the administration of justice into disrepute to require the SoS to prove the director’s knowledge a second time.

The Detail: An earlier VAT Tribunal had concluded that the director knew of the company’s VAT fraud, but in evidence to defend disqualification proceedings the director denied having such knowledge. The SoS sought to have that part of the director’s evidence struck out on the grounds that he was estopped from denying that he had this knowledge; or that his denial was an abuse of process, as it would be manifestly unfair for the SoS to be put to the substantial cost and delay of proving the allegation; and/or that to permit the issue to be re-litigated would bring the administration of justice into disrepute.

For the argument of estoppel to win out, the parties to the disqualification proceedings – the SoS and the director – had to be in privity with the parties to the earlier VAT Tribunal – HMRC and the insolvent company. Given the director’s role in the company and in the VAT Tribunal proceedings, the judge had no difficulty in concluding that the director and his company were privies. However, he decided that the SoS and HMRC were not privies: “I consider that it would therefore go against the grain of the development of the law about abuse of process to identify for the first time a new class of privity of interest between two very different arms of government pursuing different aspects of the public interest, and being motivated in particular cases by different policy and funding considerations when doing so” (paragraph 21). Consequently, in relation to the first ground, Mr Justice Briggs concluded that, because there was no privity of interest between the SoS and HMRC, the proven position in the VAT Tribunal could not be carried forward into the disqualification proceedings.

However, Briggs J then considered whether “hundreds of thousands of pounds” of tax-payers’ money should be used to prove the allegation a second time. Having considered the circumstances of the VAT Tribunal, which was funded by the taxpayer throughout, the judge concluded that it would be manifestly unfair to impose the cost of re-litigating the issue on the SoS. With regard to the argument that re-litigation would also bring the administration of justice into disrepute, Briggs J stated: “Where, as here, the issue as to a director’s knowledge of a complex MTIC fraud has been fully and fairly investigated by an experienced tribunal and the director found to have had the requisite knowledge, it seems to me that right-thinking members of the public would regard it as an unpardonable waste of scarce resources to have that issue re-litigated merely because, by a simple denial and without deducing any fresh evidence, Mr Potiwal seeks to require the complex case against him to be proved all over again” (paragraph 29). Thus, he ordered that parts of the director’s evidence be struck out as an abuse of process.


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The case of an OR’s resources under pressure and another gap in the Rules

Oh dear, the Official Receiver cannot seem to get it right.  In the first case, his swift handover of an appointment left the Trustee with outstanding costs and no bankruptcy, but in the second case, his delay in getting to grips with a new case that clearly warranted an IP’s appointment jeopardised the continuance of an action commenced by the Provisional Liquidators.  Is this “a reflection of the enormous pressure on resources, both financial and human, under which the OR is working” (TAG Capital Ventures v Potter, paragraph 31)?

The circumstances of the Appleyard case were unique (as demonstrated by the fact that it revealed a previously unreported lacuna in the 1986 Rules) and therefore I do not think that they serve as an argument for an OR to delay passing a case to an IP.  However, I would suggest that the TAG Capital Ventures case demonstrates a more obvious downside of such a delay.  To ensure the most beneficial outcome for creditors, I would have thought that a swift review of each case as soon as it comes into the OR’s hands – to identify the cases that are more appropriate for IPs and to get those shifted asap – surely is the best way to work, particularly with limited resources, isn’t it?  Of course, it’s easy to see what needs to be done, but not so easy to do it when one is fire-fighting and this may be a one-off, but such ‘endemic, notorious, delays’ surely warrant attention.

Appleyard v Wewelwala [2012] EWHC 3302 (Ch) (23 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3302.html

Summary: An unfortunate train of events left the Trustee in Bankruptcy with outstanding costs after the debtor’s bankruptcy was overturned on appeal.  The judge’s view was that the Trustee had been “unjustly left out in the cold”; he decided that the debtor’s property should stand charged with payment of the Trustee’s costs incurred up to the point when he learned that the bankruptcy order had been set aside; and he recommended amendment to the Insolvency Rules to deal with this lacuna.

The Detail: The debtor appealed the bankruptcy order on the grounds that the petitioning creditor had unreasonably refused to accept her offer to make payments by instalments.  On 14 December 2011, the court provided that the bankruptcy order be set aside and that the hearing of the petition be adjourned for twelve months on the debtor’s undertaking to pay instalments to the petitioner.  The order made no provision for the Trustee’s release from office or for payment of his expenses.  In fact, it may have been the case that the judge did not even know that a Trustee had been appointed.

Appleyard had been appointed Trustee by the Secretary of State – the Official Receiver believing, correctly at the time, that the debtor had been refused permission to appeal.  Appleyard had not been notified of the hearing – there is no provision in statute or the CPR requiring him to be notified – and he only learned of the setting aside of the bankruptcy order when the debtor telephoned him in January 2012.  The Trustee had progressed the case in the usual manner, incurring costs of some £6,500.

Mr Justice Briggs felt that, as the Trustee was simply doing his job, there was no reason in principle why the Trustee’s expenses – up to the point when he learned of the successful appeal – should not be paid.  In considering from whom those expenses ought to be paid, Briggs J drew on the judgment in Butterworth v Soutter, an annulment case: if the ground for annulment was where the order ought not to have been made (S282(1)(a)), then “there must be strong argument for saying that the petitioning creditor should pay the trustee’s costs” (paragraph 25), but if it were on the ground of payment/securing of the bankruptcy debts, then there is strong argument that the bankrupt should pay.  This, and the decision in Thornhill v Atherton, led Briggs J to conclude that “Mr Appleyard’s right as trustee to recover his expenses, having acted entirely properly and innocently at least until January 2012, must prevail over Mrs Wewelwala’s right to enjoy to the full her estate upon its re-vesting in her as a result of the setting aside of the bankruptcy order. This is so even if, as between her and Davenham [the petitioner], it may be Davenham which was largely to blame for the circumstances leading to those expenses being innocently incurred…  I do not think that it would be right to make an order against her personally, since this is more than Mr Appleyard would have been entitled to, had he remained her trustee. Nonetheless I should direct that her property… stand charged with payment of Mr Appleyard’s reasonable expenses down to January 2012, leaving him to obtain execution in that respect in such manner as he should think fit, in the absence of agreement with Mrs Wewelwala” (paragraphs 32 and 33).  The judge left it open to the debtor whether she might challenge the reasonableness of the Trustee’s fees and/or to pursue a claim for compensation against the petitioner.

However, in relation to the Trustee’s costs incurred after he had learned of the setting aside, Briggs J “reached the opposite conclusion”.  It seemed to him “that he [the Trustee] should have incurred no further expense without first applying to the court for directions” (paragraph 34).

Briggs J concluded: “it is most unfortunate that it was not appreciated by either of the parties to Mrs Wewelwala’s appeal last December that Mr Appleyard’s expenses need to be addressed. A trustee in bankruptcy’s expenses are as important a matter to be dealt with on an appeal against a bankruptcy order heard after his appointment, as they are in any application for rescission or for annulment. To the extent that the Insolvency Rules fail to make this clear, consideration should be given to their amendment, or to the issue of an appropriate practice direction. In any event, it is to be hoped that the reporting of this judgment may draw this aspect of bankruptcy practice and procedure to the attention of litigants and their professional advisors” (paragraph 37).

TAG Capital Ventures Limited v Potter [2012] EWHC 3323 (Ch) (23 November 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/3323.html

Summary: The fact that the Official Receiver had not been in a position to continue an action commenced by Provisional Liquidators and a four month delay were insufficient to conclude that continuance of the action would amount to an abuse of process of the court or to discharge a freezing order made at the outset of the action.

The Detail: Immediately following their appointment, the Provisional Liquidators applied for a freezing order against director, Potter, and commenced an action against him.  A trial timetable was agreed, although neither party complied with disclosure.

Hot on the heels of the OR’s appointment as Liquidator on 25 June 2012, Potter’s solicitors asked the OR about his intentions with regard to the action.  They asked again on 3 October and received the response: “Based on the information we have, and the fact that the provisional liquidators have not provided the records to date, the Official Receiver is not in a position to continue this action”.

Around the same time, the OR sent a report to creditors confirming that he did not intend calling a meeting of creditors.  Shortly on receipt of this report, on 5 October, the petitioners’ solicitors contacted the OR’s office and put in train the process to have one of the former Provisional Liquidators appointed as Liquidator by the Secretary of State.

On 8 October, the date for filing the pre-trial questionnaire, Potter’s solicitors notified the OR’s office that failure to discontinue the proceedings would result in their client’s own application to have the proceedings struck out.  No response was received and thus the application was made.

The IP was appointed Liquidator on 23 October and was now keen on continuing the action.

Mr Justice Warren commented that, without the OR’s statement on 4 October that he was “not in a position to continue this action”, Potter’s application would be “hopeless” (paragraph 37) and that the evidence (emails between the OR and the IP) suggested that up until the end of September “the OR had made no decision at all, a fact consistent with the suggestion made by Mr Wolman [for the claimant] that there are endemic, and he would say notorious, delays within the OR’s office” (paragraph 39).  The judge suggested that, even if the conclusion were that on 4 October the Company did not intend to intend to pursue the action (a conclusion on which the judge cast significant doubt), it would be “an entirely disproportionate response” to strike out the action (paragraph 45).

In considering whether any delay in progressing the action supported the discharge of the freezing order, Warren J took no account of any delay prior to the appointment of the OR, as the Company was not in a position to act prior to this point.  He also stated that “the OR must, on any footing, have been given a reasonable time after his appointment in which to consider his position in relation to the proceedings.  I do not say that in all cases involving an insolvent company as claimant that a defendant simply has to accept the delays caused by the insolvency process.  But in the present case, Mr Potter was the controlling mind and owner of the Company and ultimately responsible in practical terms for its demise…  It would be wrong, I think, for Mr Potter to be able to rely on delay resulting from the orderly implementation of an insolvency process in order to obtain the discharge of the freezing order” (paragraph 48).

However, Warren J did observe that there seemed to be a delay over and above the “proper time for those matters” of some two months and that it may have been reasonable to expect the OR to have decided in July that, in view of the existing litigation, it would have been appropriate to hand the case to an IP, but nevertheless this small delay did not warrant the discharge of the freezing order.

The judgment includes details of exchanges between the OR’s office and the Provisional Liquidators, which demonstrate that there was no constructive dialogue between these parties throughout the OR’s term of office (which was not entirely due to delays by the OR) and leaves me wondering why the OR did not conclude swiftly on his appointment that an IP should be appointed (particularly given this case’s profile) or, failing this, why it took over three months for him to issue a Notice of No Meeting to creditors.


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Two High Court decisions: (1) retrospective leave to commence proceedings; and (2) questions of admissible S235 evidence and conflicted solicitors where a petition debt is disputed but Provisional Liquidators are in office

I have covered two newly-released judgments below:

  • Colliers International – can the court grant retrospective permission for a creditor to commence legal proceedings after a court-based insolvency (i.e. Bankruptcy, Compulsory Winding-up, or Administration) has begun?
  • TAG Capital Venture – should a Provisional Liquidator’s S235 interview be excluded from evidence in relation to an opposed petition on a disputed debt?  Also, in the case of a disputed petition debt, can the same solicitors act for both the petitioners and the Provisional Liquidators?

Bank of Ireland (UK) Plc v Colliers International UK Plc [2012] EWHC 2942 (Ch) (24 October 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/2942.html

Decision: Richards J makes it clear that this judgment is intended to resolve uncertainties suggested by the history of previous judgments and to establish the principle that retrospective permission may be given for the commencement of proceedings under S130(2) or S285(3) of the Insolvency Act 1986 or under Paragraph 43(6) of Schedule B1 (paragraphs 35 and 36).

Background: The uncertainties are explained in Sealy & Milman’s note to S285(3) (page 340 in 15th edition).  S285(3) provides that, after the making of a bankruptcy order, creditors with provable debts may not commence any action except with leave of court (and the Act provides generally similar provisions for compulsory winding-ups and Administrations).  Sealy & Milman’s note describes the case precedent: in Saunders (1997), the court granted retrospective leave, but in Taylor (2007), it was refused; then in Bank of Scotland Plc v Breytenbach (2012), the court followed the earlier decision in Saunders.

In this current case, the applicants notified the Administrators of potential claims two months after Colliers was placed into Administration.  The claims relate to allegations of negligence in providing valuations on Southern Cross group care homes provided in 2006 in view of valuations obtained in 2011 indicating much reduced values.  The applicants issued claim forms in September 2012.  Assuming the court had jurisdiction to grant retrospective permission, Richards J stated that it was a clear case for permission to be granted (paragraph 8).

After considering the case precedent, Richards J reflected on the purpose of the statutory provisions requiring leave of court to be obtained to commence actions.  He noted that there was no corresponding provision for CVLs and thus, to quote “Black LJ in Boyd v Lee Guinness Limited, ‘this section is one of a series of provisions designed to ensure that when a winding-up order has been made by the court the whole of the task of supervising the collection and distribution of the company’s assets should be committed to the winding-up court and, accordingly, that all proceedings having any bearing upon the winding-up of the company should remain under the supervision and control of that court.’  Given that purpose, it is hard to see why the court should not be permitted to grant retrospective permission if in the circumstances it is appropriate to do so” (paragraph 32).

Re TAG Capital Venture [2012] EWHC 1631 (Ch) (8 February 2012)

http://www.bailii.org/ew/cases/EWHC/Ch/2012/1631.html

This judgment appears to have been released last week, but it relates to a February 2012 case.

Decision: Richards J addressed two issues: (1) he rejected the director’s request that a transcript of his interview with Provisional Liquidators under S235 should be excluded from evidence on a winding-up petition; and (2) he agreed with the director that, in the circumstances of this case, the solicitors for the petitioners should not also be acting for the Provisional Liquidators.

Background: The sole director opposes the petition and disputes the petition debt, but Provisional Liquidators have been appointed.  The director argued that the purpose of a S235 interview conducted by a Provisional Liquidator is to enable him to undertake his duties, which are essentially to establish underlying facts about the nature, business, liabilities and assets of the company and to ensure the preservation of its assets.  The judge agreed that these were amongst the Provisional Liquidator’s duties, but an investigation into the petition debt and any contracts between the parties would be wrapped up in this purpose.  Richards J stated: “If in the course of his investigations a provisional liquidator discovers or obtains evidence which is relevant to the issues to be determined in the petition, it would in my judgment be perverse if he could not place that evidence before the court whether it assisted the petitioner or those opposing the petition” (paragraph 7).

On the conflict issue, Richards J stated: “in circumstances where the petition debt is the subject of actual dispute leading to a one day hearing to determine whether the petition is well founded, there is a conflict between the positions of the provisional liquidators and the petitioners” (paragraph 12), but he continued: “in saying this, I am not suggesting that it is never appropriate for the same firm of solicitors to act both for the petitioning creditor and for provisional liquidators, or for the same firm to act for creditors and for a liquidator appointed after a company has gone into winding up. It will all depend upon the circumstances. If there is no dispute about the debt owed to the petitioning creditor then in the absence of other circumstances, there is no conflict between the petitioner’s position and the position of the provisional liquidators” (paragraph 16).

The judge also observed that, as the director knew that the same solicitors were acting for both the petitioners and the Provisional Liquidators at the time of the S235 interview, he can have no complaint that information from that interview has already passed between the parties.  He also rejected the director’s argument that the solicitors should cease to act for the petitioners, but saw that the more appropriate course of action was for the Provisional Liquidators to instruct new solicitors.