Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Two cases of marshalling; support for ETO dismissals; a flawed Chairman’s report fails to help a debtor escape her IVA; and a Company’s challenge of its Administrators’ appointment

Motorshow 086

Although I have promised myself an article on the Scottish Bankruptcy Bill and I see that the Deregulation Bill has not gone smoothly through the House of Commons Committee, I should catch up with some recent decisions:

Crystal Palace v Kavanagh: dismissals for an ETO reason are possible after all.
Smith-Evans v Smailes: is an IVA a nullity, if a Chairman’s report on the requisite majority achieved is challenged long after the S262 period?
Highbury v Zirfin: marshalling and the difference between equity of exoneration and the right of subrogation…
Szepietowski v the NCA: … but sometimes marshalling is restricted by the terms of the deal.
Closegate v McLean: the Company/directors were entitled to challenge the Administrators’ appointment.

Back to the future: dismissals can be for an ETO reason even where the objective remains a going concern sale

Crystal Palace FC Limited & Anor v Mrs L Kavanagh & Ors (13 November 2013) ([2013] EWCA Civ 1410)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/1410.html

This successful appeal has been the subject of some helpful articles already, such as that written by Dr James Bickford Smith for R3’s Recovery News. My summary of the history up to this Appeal Court decision can be found at: http://wp.me/p2FU2Z-2R.

The Court of Appeal stressed the case-sensitive natures of both this case and Spaceright Europe Limited v Baillavoine, which had formed the basis for the previous EAT’s decision to the contrary. Lord Justice Briggs highlighted the need, per Regulation 7 of the Transfer of Undertakings (Protection of Employment) Regulations 2006, to analyse the “sole or principal reason” for dismissals “so that the Employment Tribunal needs to be astute to detect cases where office holders of insolvent companies have attempted to dress up a dismissal as being for an ETO reason, where in truth it has not been” (paragraph 26).

This Court agreed with the original ET’s analysis in this case that, whilst the Administrator’s ultimate objective remained the sale of the Club (as, Briggs LJ pointed out, would be the case in almost all Para 3(1)(b) Administrations), he made the dismissals because he needed to reduce the wage bill in order to continue running the business, i.e. they were for an ETO reason. This was contrasted with the facts of the Spaceright case, which had decided that the sole or principal reason behind the dismissal of the CEO was to make the business more attractive to a purchaser, illustrating how dismissals could fall outside of an ETO reason.

(UPDATE 15/06/14: On 14 May 2014, the Supreme Court refused permission to appeal this decision.)

If a Chairman’s report states that the IVA was approved and no S262 challenge is raised, does the IVA exist if the requisite majority had not been achieved?

Smith-Evans v Smailes (29 July 2013) ([2013] EWHC 3199 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3199.html

I make no apologies for the length of this summary or the numerous quotes: I believe that this is a somewhat surprising and material outcome so that I felt it was wise to draw heavily from the judgment.

In a nutshell, the debtor appealed against her bankruptcy order, which was made as a consequence of a breached IVA. The debtor claimed that the IVA was a nullity, as the requisite majority had not voted in favour at the S257 meeting.

Two creditors, RBS and HSBC (who had voted via TiX), had voted to restrict the IVA’s duration to 2 years, but, although immediately after the meeting the Chairman had written to TiX “pointing out the divergences from the instructions received” (paragraph 15), in the absence of a reply the Chairman reported that the IVA was approved and its duration was 3 years. HH Judge Purle QC stated that “whilst the chairman of the meeting did not initially, in May 2008, have authority to cast the RBS and HSBC votes in the way subsequently indicated, RBS and HSBC have unequivocally ratified his actions by voting (albeit in the minority) for a determination upon the footing that the IVA was in place” (paragraph 17), referring to the creditors’ voting years’ later on the subject of how the Supervisor should react to the debtor’s breach of the IVA terms.

Purle HHJ commented on the application of the decision in Re Plummer, in which Registrar Baister described his view of the differences between a material irregularity and something that invalidates an IVA approval. Registrar Baister had provided as an example a case where the chairman had wrongly calculated the votes and reported approval when the requisite majority had not been achieved. He had said that this goes further than a material irregularity; in reality, there never was approval. “It cannot be that in those circumstances section 262(8) could be said to overcome the problem by making real that which simply never was. The reason it cannot is because of its wording, which presupposes approval: it is ‘an approval given at a creditors’ meeting’ which ‘is not invalidated’. Non-approval cannot, however, be transformed into approval” (paragraph 28).

However, Purle HHJ held a different view. He reflected on another example in which a requisite majority is obtained on a vote marked objected to: “But let us suppose that no creditor in fact challenges the result. We are left with an IVA which has been approved on a disputed debt, which turns out later never to have been owed. Then, just as much in that case as in the example given by Registrar Baister, it can be said that there never was, as a matter of fact and law, the requisite majority. It would follow that the debtor could, when in breach of the IVA, let us say two years later, turn round and say: ‘There was no IVA and I cannot be made bankrupt for being in breach of its terms’, thus making the time-limited right of challenge or appeal redundant. It seems to me that that is such a startling result that it cannot possibly have been intended by Parliament and the draftsman of the Rules. For my part, I would not and do not construe this part of the 1986 Act or the rules as giving rise to those consequences. I would on the contrary construe section 262(8) and rule 5.22(6) as precluding that result” (paragraph 29).

Consequently, in relation to decisions made at, or in relation to, a S257 meeting, Purle HHJ concluded that “If those decisions are not challenged, in my judgment, they should stand once the relevant report has been made. The time limits, which are tight, set out in both the Act and the Rules, should be applied and not subverted by a collateral attack months or even years down the line” (paragraph 32). In this case, he therefore decided that “as there was no challenge under section 262, the matter cannot be taken now by the debtor. Likewise, there was no challenge (assuming there could have been one) under paragraph 5.22, under which the court’s power is expressly exercisable only if the circumstances giving rise to the appeal are such as to give rise to unfair prejudice or material irregularity. There is no unfair prejudice in holding the debtor to an IVA which he promoted nor was the irregularity material in light of the affected creditors’ knowledge and subsequent ratification” (paragraph 36).

Marshalling and the difference between equity of exoneration and the right of subrogation

Highbury Pension Fund Management Company & Anor v Zirfin Investments Management Limited & Ors (3 October 2013) ([2013] EWCA Civ 1283)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/1283.html

I summarised the first instance decision at http://wp.me/p2FU2Z-23. The key conclusion of that decision – that Highbury had a right to marshal securities, even though there was no common debtor (the claims attached to properties of the debtor and the guarantors) – was not the subject of the appeal. Highbury sought to appeal Norris J’s conclusion that its rights over the properties charged to Barclays could not be exercised until Barclays had been paid in full, because Highbury’s rights were restricted so by the wording of the guarantee.

The Appeal judges agreed that the guarantee did not restrict the application of the principle of marshalling. Lord Justice Lewison explained the difference between (i) Zirfin’s right to become subrogated to Barclays’ rights by reason of the guarantee but only after Barclays had been paid in full and (ii) the right of equity of exoneration existing between Zirfin and the Affiliates (the primary debtor): “Where two persons are liable to a creditor for the same debt, but as between themselves one of them is primarily liable and the other is only secondarily liable, the debtor with the secondary liability is entitled to be exonerated from liability by the primary debtor. This equity, unlike the remedy of subrogation, is not dependent on actual payment by the secondary debtor. As soon as the liability is crystallised he is entitled to go to a court” (paragraph 19).

Consequently, it was decided that, on the application of the principle of marshalling, Highbury was entitled to realise the securities notwithstanding that Barclays had not been paid in full, Barclays still retaining priority to repayment over Highbury.

Marshalling again: it can come down to the wording

Szepietowski v The National Crime Agency (formerly SOCA) (23 October 2013) ([2013] UKSC 65)

http://www.bailii.org/uk/cases/UKSC/2013/65.html

In 2005, the Assets Recovery Agency (which later became SOCA and, later still, the NCA) pursued assets acquired by Mr Szepietowski and this resulted in a settlement involving the granting of a second charge in favour of SOCA over a property, which was charged also to RBS, entitling SOCA to recover up to £1.24m from the proceeds of sale of the property. In 2009, the property was sold but, after RBS’ debt was paid off, SOCA received only £1,324. Consequently, SOCA sought to invoke the right to marshal against another property charged to RBS (“Ashford House”). The lower courts had held that SOCA’s marshalling claim was well-founded and Mrs Szepietowski appealed to the Supreme Court.

Although the Supreme Court unanimously allowed the appeal, the justices’ reasons for doing so fell roughly into two camps.

Three justices held that marshalling failed partly because the charge did not create, or acknowledge the existence of, any debt from Mrs Szepietowski to SOCA; it simply provided that she was bound to pay SOCA an amount up to £1.24m from the sale proceeds. Lord Neuberger concluded that “where the second mortgage does not secure a debt owing from the mortgagor to the second mortgagee, the right to marshal should not normally exist once the common property is sold by the first mortgagee and the proceeds of sale distributed, because there would be no surviving debt owing from the mortgagor to the second mortgagee. In such a case, equity should proceed on the basis that the second mortgagee normally takes the risk that the first mortgagee will realise his debt through the sale of the common property rather than the sale of the other property” (paragraph 56). He could not conceive of a case, but did not rule out its existence in exceptional circumstances, in which marshalling effectively could create a secured debt, where in the absence of marshalling no debt existed at all.

However, the two other justices did not consider that the existence or non-existence of a personal liability was the key to deciding whether marshalling was possible. Lord Carnwath agreed that the appeal should be allowed because the terms of the settlement entitled SOCA to recover a sum from property with the specific exclusion of Ashford House and the wording impliedly excluded recourse to any source for payment other than those identified. “If SOCA had wished to include Ashford House as potentially recoverable property, they should have done so specifically, rather than hope to bring it in later by an equitable backdoor” (paragraph 91).

Company/directors were entitled to challenge Administrators’ appointment (but failed in any event)

Closegate Hotel Development (Durham) Limited & Anor v McLean & Ors (25 October 2013) ([2013] EWHC 3237 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3237.html

The companies challenged the validity of the Administrators’ appointments by a QFCH on the basis that the floating charge was not enforceable.

Firstly, the companies had to overcome the hurdle as to whether they had authority to make the application, given that Paragraph 64 of Schedule B1 states that, without the Administrators’ consent, a company may not exercise management power – defined as a power that interferes with the exercise of the Administrators’ powers. Richard Snowden QC did not see this as a difficulty for the companies: “I do not think that paragraph 64 is intended to catch a power on the part of the directors to cause the company to make an application challenging the logically prior question of whether the administrators have any powers to exercise at all” (paragraph 6).

The facts of this case involved lengthy exchanges between the companies and the bank in relation to the companies’ complaints against the bank subject to litigation and proposals to settle the debt due to the bank, which ended with the bank’s appointment of Administrators. It was the companies’ case that “the Companies reasonably understood the communications from the Bank and the course of conduct between them to be a representation that neither side should take any action whilst negotiations between them were continuing” (paragraph 44) and thus the bank had been estopped from taking the action of appointing Administrators. Mr Snowden QC decided on the evidence presented that the companies stood no real prospect of establishing that the bank’s statements or conduct amounted to a clear and unequivocal representation that the bank would not exercise its rights to take enforcement action and therefore the bank was not estopped from appointing Administrators.


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Three cases: (1) What is the relevant date for IVAs suspended on a S262 challenge? (2) When is an alleged transaction at an undervalue not a “transaction”? (3) Vesting of causes of action in Trustee foils attempts to pursue misfeasance claim

• Davis & Davis v Price & Price – what is the relevant date for IVAs suspended on a S262 challenge?
• Hunt v Hosking & Ors – when is an alleged transaction at an undervalue not a “transaction”?
• Fabb & Ors v Peters & Ors – vesting of causes of action in Trustee foils attempts to pursue misfeasance claim

What exactly is a “suspended” IVA?

Davis & Davis v Price & Price ([2013] EWHC 323 (Ch)) (21 February 2013)
http://www.bailii.org/ew/cases/EWHC/Ch/2013/323.html

Summary: As a consequence of a successful S262 challenge, two debtors’ IVAs were suspended and further creditors’ meetings were convened to consider their revised Proposals. After these were approved, the S262 challengers issued statutory demands in pursuit of their costs for bringing the challenge. The appeals judge agreed that the statutory demands should be set aside on the basis that the costs were caught in the IVAs, for which the relevant date was the second meetings’ date. Contrary to the wording of the S262 order, the judge felt that the effect of suspending the original IVAs was not to continue to bind the original creditors.

The Detail: The Prices challenged the Davises’ IVAs under S262 in relation to the values of £1 attributed to their claims for the purposes of voting at creditors’ meetings held in June 2010. The challenge was successful and the District Judge ordered the suspension of the Davises’ IVAs – which would not have been approved had the Prices’ claims been admitted for voting in the sum of £35,389, the value placed on the claims for voting purposes by DJ Gamba – and required the Davises to decide whether to re-present the original Proposals or to present varied Proposals for consideration at further creditors’ meetings to be convened by the Nominee. The Davises were also ordered to pay the Prices’ costs of £7,011.

At creditors’ meetings held on 13 January 2011, the Prices again voted to reject the Proposals, which had been revised by the Davises, but the Prices only proved in the sum of £35,389. However, the requisite majorities were achieved and the revised Proposals were approved. The Prices then pursued payment of their costs of £7,011 on the argument that they were not claims in the IVAs, because they did not exist at the time of the original interim orders in April 2010.

The question at the heart of this matter was: what was the effect of the suspension of the Davises’ IVAs? In this appeal, counsel for the Prices sought to distinguish between an order revoking an IVA and one suspending it, both options available to the court under S262(4). Mr Justice David Richards noted that there was only one rule relating to entitlements to vote at a creditors’ meeting convened to consider an IVA Proposal – R5.21; the rules make no distinction as to whether this is the first time such a meeting is convened or whether it is convened on the back of a revoked IVA or a suspended IVA under S262(4). The judge considered that in this circumstance the reference in R5.21(2)(b) to the “amount of the debt owed to him at the date of the meeting” was the amount owed at the date of the January 2011 meeting convened to consider the revised Proposals and therefore the Prices had been entitled to prove also in respect of their costs in bringing the S262 challenge.

So what is the status of a suspended IVA? The wording of DJ Gamba’s order resulting from the S262 challenge had stated that, if the proposed variation was put to the vote and rejected, the approval of the IVAs on 8 June 2010 would be revoked with immediate effect “and the IVA Creditors shall ceased to be bound by the IVAs”; it further provided that, if the IVAs were reconsidered and approved, the suspension of the approval of the IVAs would be lifted with immediate effect and “the IVA Creditors shall continue to be bound by the IVAs in accordance with section 260”. However, David Richards J stated: “I do not think it is right that if the approval of an IVA is suspended, it nonetheless continues to bind creditors. Once approval is suspended, it does not seem to me possible to say that there is an ‘approved arrangement’ within the meaning of section 260(2)” (paragraph 29). He acknowledged that S262(7) grants the court power to give supplemental directions, but he did not believe that this enabled the court to substitute a different rule for R5.21 in relation to creditors’ voting rights.

12/02/2014 UPDATE: Although the appeal heard on 21/01/2014 was dismissed (http://www.bailii.org/ew/cases/EWCA/Civ/2014/26.html), it did highlight a(nother!) problem with the Act: S260, which binds creditors into an approved IVA, expressly has effect “where the meeting summoned under S257 approves the proposed” IVA. However, in this case, the meetings that led to approved IVAs were consequent to a S262 challenge and, as Lady Justice Arden put it, “if the IVAs were varied and the creditors approved those varied IVAs, those were the IVAs to come into force, not the original IVAs. In reality what happened in that event is that the varied IVAs replaced the original IVAs. The original IVAs ceased to have any legal existence after that” (paragraph 33).

Thus, were the creditors bound by S260? “The court must of course give effect to the intention of Parliament… However, where the effect of a literal interpretation of a statute is to create significant anomalies which the court is satisfied Parliament could not have intended, the court should seek to find an interpretation which avoids those anomalies” (paragraphs 38 and 39). In order to achieve this end, Lady Justice Arden interpreted the reference to a “further meeting” in S262(4)(b) to be a reference to a “further meeting under S257” so that S260 has effect.

The Company must be party to the transaction for it to be challenged at an undervalue

Hunt v Hosking & Ors ([2013] EWHC311 (Ch)) (22 February 2013)
http://www.bailii.org/ew/cases/EWHC/Ch/2013/311.html

Summary: A liquidator sought to challenge as transactions at an undervalue payments made to Mr Hosking from the Company’s client monies held by its accountants – the monies were paid to Mr Hosking in settlement of his private loan to the accountant, who appeared to be entitled to the monies by reason of two fee agreements with the Company. However, the liquidator’s S238 application failed on the basis that the payments to Mr Hosking were not “transactions” to which the Company was party. The judge pointed out that either the accountants were not authorised to pass the monies over, in which case it would be an issue of misappropriation of assets, or the challenge should be levelled at the fee agreements between the accountants and the Company.

The Detail: A firm of accountants, of which Mr Temple was the sole proprietor, held monies on behalf of its client, Ovenden Colbert Printers Limited (“the Company”), from which the accountants appeared to be entitled to draw fees pursuant to two fee agreements. A number of payments were made from the accountants’ client account to Mr Hosking, which he claims related to repayments of his private loan to Mr Temple (who later became bankrupt).

Mr Hunt, the Company’s liquidator, applied under S238 claiming that the payments made from the client account to Mr Hosking were transactions at an undervalue. The liquidator made other allegations regarding the strength of the fee agreements with a suggestion that they may have been induced under misrepresentation. However, the fee agreements were not the subject of the S238 application.

Mr Justice Peter Smith identified a fundamental difficulty with Mr Hunt’s argument that the payments to Mr Hosking were transactions at an undervalue: the Company was not a party to the payments. He illustrated it this way: “If Mr Temple held a bag of sovereigns for the Company and they were held to the Company’s order, and if he gave them away to Mr Hosking, I suggested that that would not be a transaction. It would simply be a case of misappropriation of assets. Of course, the Company through the liquidator would have any number of remedies to recover those sovereigns. Such a claim could be made not only against Mr Temple but also against Mr Hosking if he receives the sovereigns. That is not the present claim… The fundamental difficulty facing Mr Hunt is that however much he investigates; however much mud he wishes to throw at Mr Hosking; none of it is relevant to his application under section 238. This is because on the undisputed facts set out above, the Company has not entered into a transaction which the liquidator can review. The only transactions it entered into in my opinion were the two fee agreements and those are not under challenge and indeed one of them cannot be under challenge due to the passage of time. If the payments were authorised they cannot be challenged unless the two fee agreements are challenged and they are not in these proceedings. If the payments were unauthorised, there is no transaction by the Company” (paragraphs 50 and 55).

[UPDATE 26/11/2013: Hunt’s appeal against the summary judgment/strike out application was dismissed on 15/11/2013 (http://www.bailii.org/ew/cases/EWCA/Civ/2013/1408.html). It seems to me that the fundamental difficulty remained: there was no indication that the Company had been party to any relevant transaction. Thus, the Court of Appeal decided that the judge had been right to strike out the application, as the claims under S238 and S241 had no prospect of success.]

Vesting of causes of action in Trustee foils attempts to pursue misfeasance claim

Fabb & Ors v Peters & Ors ([2013] EWHC 296 (Ch)) (18 January 2013)
http://www.bailii.org/ew/cases/EWHC/Ch/2013/296.html

Summary: A claim against administrators under Paragraph 75 of Schedule B1 was struck out as an abuse of process on the basis that the claimant knew his causes of action had vested in his Trustee in Bankruptcy at the time. In addition, the fact that 96% of the administrators’ claims against Fabb had been abandoned was not sufficient to support a misfeasance claim, as judgment had been achieved in relation to the remainder.

The Detail: Fabb was made bankrupt after administrators of “Holdings” obtained judgment against him of c.£88,000 in relation to a loan account and on a conversion claim, although over 96% of the administrators’ original claim was, effectively abandoned.

Fabb asserted two causes of action against the administrators: misfeasance and, in effect, malicious prosecution of the earlier proceedings as regards the 96% of the claims that were abandoned. After the proceedings commenced, the court ordered Fabb’s Trustee to assign to Fabb the various claims, conditionally on payment of £10,000; the assignment had not yet been completed.

His Honour Judge Purle QC noted a fundamental objection to the misfeasance proceedings: “Proceedings under paragraph 75 can only (so far as presently relevant) be brought by a shareholder or creditor. Mr Fabb is neither of those things, and nor will he be either of those things even if the assignment takes place. Any interest he may have had in the shares of Holdings is now vested in his trustee. Likewise, any indebtedness formerly due to him is now vested in his trustee… There is a still further objection. These proceedings were brought at a time when Mr Fabb knew that the causes of action he wishes to assert were vested in his trustee in bankruptcy, and that he needed an assignment” (paragraphs 13 and 16). On this basis, the judge felt bound to strike out Fabb’s claim as an abuse of process.

In any event, the judge identified difficulties in relation to the merits of Fabb’s claims that the 96% claim was brought abusively, for an improper motive or an improper purpose: “What to my mind makes the claim impossible is that the proceedings in which the 96 percent claim was included were pursued to judgment. True it is that the 96 percent claim was abandoned, but the rest of the claim was pursued over an eight day hearing, I think it was, and the claim succeeded in substantial amounts, despite a fully argued defence. It is difficult to see in those circumstances how the proceedings can be characterised as malicious or an abuse, as they had to be, and were successfully, pursued to judgment, albeit in a much smaller sum than originally claimed” (paragraph 23).