receiver’s fees | Insolvency Oracle

May 18, 2014
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A Collection of Two Halves – Part 1: New Cases

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.

April 16, 2013
by insolvencyoracle Leave a comment

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

Still catching up post-holiday, some court decisions…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A knowledge of case law helps when giving advice!

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

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

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

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

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

And finally… briefly… a VAT case

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

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

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