Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Two Scottish Cases: (1) Heavy Criticism for a Liquidator who Bypassed the Court to Obtain Remuneration and (2) Proper Court Procedure Catches Out Administrator

Although these two cases are much more for readers north of the Border, it seems to me that principles arising from the first case – that officers of the court have greater concerns than simply getting paid and that IPs and solicitors should be always alert to conflicts of interest – are relevant to many more of us.

Heavy Criticism for a Liquidator who Bypassed the Court to Obtain Remuneration
Re Quantum Distribution (UK) Limited (In Liquidation) [2012] CSOH 191 (18 December 2012)
http://www.bailii.org/scot/cases/ScotCS/2012/2012CSOH191.html

Summary: The judge in the Court of Session hoped that the publication of his opinion “will discourage a repetition of the unacceptable events” (paragraph 1). Lord Hodge’s criticisms were leveled primarily at a liquidator who had bypassed the court to obtain his remuneration from a newly-formed liquidation committee despite a very critical report from the court reporter. He also criticised the petitioning creditor’s solicitors, who also acted for the IP on some matters, for failing to make clear to the liquidator his need to take separate legal advice when they were in a position of conflict of interest.

The Detail: The court only learned of the events when the Auditor of Court raised his concerns with Lord Hodge. The Auditor had produced “a most unusual report” that concluded that, in light of the concerns identified by the court reporter, he was unable to report what would be suitable remuneration of the liquidator.

The court reporter’s concerns included questions regarding a settlement for the insolvent company’s ultimate parent (“QC”) to pay £50,000 each to the liquidation and to the petitioning creditor (“IEL”), although it was unclear what direct claim IEL had against QC. The reporter criticised the liquidator for charging time for brokering the deal, which he suggested was not an appropriate agreement, to the general body of creditors; for failing to disclose the settlement to creditors; and for adjudicating IEL’s claim without taking into account mitigating factors. He also suggested that the petitioning creditor’s solicitors appeared to have a clear conflict of interest in also acting as the liquidator’s adviser and that the petitioning creditor “had been allowed to exert undue influence over the liquidation” (paragraph 23).

However, it appears that, despite receiving the Auditor’s report declining to report what would be suitable remuneration, the liquidator did not make enquiries into what the court reporter’s concerns were, but instead he convened a meeting of creditors to form a liquidation committee and obtained approval for his fees from the committee, which the judge considered was “not acceptable behaviour” (paragraph 36). Lord Hodge expressed concern that the liquidator and the solicitors showed “a striking disregard of their obligations to the court. It appears that nobody applied his mind to why the Auditor said what he did or showed any curiosity as to what the court reporter had said in his report. The concern, as the emails show, was simply how to get the liquidator his remuneration” (paragraph 37). The judge’s opinion was that, as officers of the court, the liquidator and the solicitors’ staff should have brought the concerns of the court reporter to the attention of the court.

The liquidator was also criticised for failing to disclose the full terms of the settlement to the liquidation committee. In addition, it seems that the liquidator had failed to recognise that the compromise needed the court’s approval.

In reviewing the solicitors’ position, Lord Hodge commented that “solicitors who act in an insolvency for both the petitioning creditor and the insolvency practitioner need to be much more alert to the dangers of conflict of interest… It may be acceptable for a firm of solicitors so to act when the petitioning creditor’s claim is straightforward and not open to dispute. But where the claim is complex and is open to question, the potential for conflict of interest should bar the solicitor from so acting. In my opinion claims for damages for breach of contract often are of that nature, particularly where, as here, they entail a claim for loss in future years” (paragraph 40).

Proper Court Procedure Catches Out Administrator
Re Prestonpans (Trading) Limited (In Administration) [2012] CSOH 184 (4 December 2012)
http://www.bailii.org/scot/cases/ScotCS/2012/2012CSOH184.html

Summary: Is it correct to seek remedy under S242 (gratuitous alienations) by means of a petition? The judge decided that it was not, but he left open the question of whether the consequence should be that the joint administrator should begin the process again, given that no prejudice, inconvenience or unfairness would flow from continuing with the petition process.

The Detail: The joint administrators petitioned that an assignation granted by the company amounted to a gratuitous alienation under S242. Counsel for the respondents sought dismissal of the petition with the argument that the remedy is available only by way of summons, not by petition.

The case turned on the interpretation of rule of court 74.15, which states that applications under any provision of the Insolvency Act 1986 during an administration shall be by petition or by note in the process of the petition lodged for the administration order. The judge compared the wording of the rule of court prior to the 2002 Act, which listed the applications that should be made by motion in the process of the petition (because, of course, pre-2002, all administrations were instigated by petitions). Lord Malcolm then concluded that rule 74.15 “covers an application which relates to the supervision of, and is incidental to the administration, such as those specifically mentioned in the pre-existing rule; and does not apply to proceedings brought by administrators under sections 242 and 243 of the 1986 Act” (paragraph 10).

However, Lord Malcolm questioned whether, in this case, it followed that the proceedings should be dismissed as incompetent. He acknowledged that, “in the present circumstance, when no prejudice, inconvenience or unfairness would flow from persisting with the current petition, it would be unfortunate if the petitioners were required to begin again before the same court, albeit in a different form of process, with all the consequential extra expense and delay” (paragraph 16), however the rule of court remains. He invited the parties to address him further on this issue and concluded that this case supported the call for the abolition of the distinction between ordinary and petition procedure in the Court of Session.


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The AiB/Scottish Government’s Report on Responses to the Bankruptcy Law Reform Consultation

Summary

The AiB/SG’s consultation, which closed on 18 May 2012, raised questions on every aspect of Scottish personal insolvency – DAS, PTDs, SEQs, LILAs, and even suggested introducing a whole host of other “products” – as well as exploring the AiB’s current and prospective roles in administering and supervising insolvencies.  The report on the consultation responses was published on 28 August 2012 and can be accessed at: http://www.aib.gov.uk/news/releases/2012/08/bankruptcy-law-reform-consultation-summary-responses

The summary of the opening Summary alone lists 65 conclusions (pages 5 to 7), but I have attempted to list the most significant below (my comments added in parenthesis).  I should mention that I have only ever come across Scottish insolvency in my role at the IPA, so, although I have been closely involved with Scottish IPs in drafting consultation responses (although not for this one) and I have reviewed Scottish cases as part of the monitoring function, I have no front-line experience of administering them.

  • Money advice to be made compulsory prior to accessing any form of statutory debt relief, although not to be provided by the AiB
  • Support to have one Common Financial Tool, preferably a Scottish-specific one, against which all debtors will be measured, irrespective of the insolvency process being contemplated
  • Allow assessed contributions to be deducted directly from an individual’s wages
  • “Support to introduce a moratorium period of 6 weeks in statutory debt relief products, these to be displayed in a public register” (this seems to be directed at bankruptcy, so that the debtor can intimate an intention to apply, as is currently available in DAS)
  • “DAS should not be the default option where an individual can pay their debts in 8 years, although there was support for a shorter period” (it seems the majority who responded to the question, “how long should it be?”, answered 6 years.  However, the table suggests that “majority” is only 12 out of a total of 129; 89 answered “N/A”, so presumably many of those would not wish to see any defined timescale where DAS is the default option – seemingly this was not picked up by the AiB.)
  • “Composition in DAS should be available, after the programme has run for 12 years and 70% of the debt has been paid” (although not in the summary, the report indicates that a strong majority would like creditors to have to consent      to the composition, with some suggestion being that this is sought after DAS has run successfully for a number of years)
  • Support for a minimum debt level of £10,000 for entry into a PTD
  • Support for a minimum dividend in PTDs (see my comments below)
  • There should not be a fixed term for completion of a PTD
  • The current process of deemed consent and current thresholds in PTDs should continue
  • “Support for the removal of Apparent Insolvency as criteria in debtor applications” (the report adds: “if mandatory advice is adopted as a precursor to bankruptcy”)
  • The minimum debt level for debtor’s bankruptcy should increase to £3,000
  • Support for a “No Income” product for individuals on state benefits who have up to £10,000 of debt and up to £2,000 of assets
  • Other products, e.g. “Low Income Product”, “High Value Product”, not required
  • Support for a new Business DAS for sole traders and partnerships
  • Support for discharge to be linked to a bankrupt individual’s co-operation with their trustee
  • Where an individual cannot be located their discharge should be deferred indefinitely
  • AiB should have the power to defer discharge rather than refer the case to a sheriff
  • Support for debts that were incurred within 12 weeks of a debtor application or the granting of a trust deed should be excluded from discharge
  • Child maintenance arrears and credit union debts should continue to be discharged in bankruptcy and PTDs
  • Creditors should have to submit a claim within 120 days (the report adds “… of notification of an individual’s bankruptcy”, although the consultation question suggested this statutory timescale for all processes and this had strong support from respondents)
  • Support for the recall of bankruptcy process to be clarified and that the final interlocutor should be withheld until all funds have been distributed
  • The current prescribed rate of interest should be retained and all post-procedure interest and charges be frozen
  • Support for the debtor’s discharge to be linked to the date of award
  • Payment holidays of up to 6 months should be available in all statutory debt relief products and the period of time added onto the length of the product before discharge is granted
  • AiB should have the power to make orders for some bankruptcy processes and a separate independent panel should be used to review complex or disputed decisions
  • AiB should not have a more proactive role in supervising debt relief products
  • An AiB panel should not determine an appropriate course of action where a trustee has not followed an AiB direction (see my comments below)
  • Support for a Memorandum of Understanding between the UK Insolvency Service and RPBs to be redrafted to allow information on regulatory activity related to Scottish cases to be issued to AiB
  • “There should be an office of the Official Receiver in Scotland and this role should be carried out by AiB” (i.e. to act as liquidator of last resort)

The timescales for changes are, understandably, vague, given the vast range of proposals that will affect primary and secondary legislation as well as AiB Guidance Notes and the development of other projects, such as the proposed Scottish common financial tool.  Whilst the report states that, after a series of stakeholder workshops, it is hoped that the SG will be in a more informed position to issue an official response, the AiB’s website states that the SG’s response is expected to be published in October 2012.

My thoughts on the report – the methodology

What struck me was the AiB’s methodology in considering, not only the numbers of responses by individuals, but also those by organisations only.  The cynic in me senses that the AiB may have been somewhat selective in this consideration.

For example, Q15.1b asks: “If the AiB should continue to act as trustee, should she act only as trustee of last resort?” (page 87).  49 individuals answered “yes” and 44 answered “no”, but when responses only from organisations are considered, this becomes 29 “yes” against 39 “no”.  The summary to this section states: “Whilst the majority of respondents believed that AiB should continue to act as trustee of last resort, when the figure for organisations only was examined, this showed that AiB should continue to act as trustee in all cases where appointed” and this conclusion seems to have drifted into the opening summary.  However, on other occasions, an “organisations only” majority does not seem to have influenced the outcome.  For example, Q15.4 asks: “Where the AiB makes a direction which is not adhered to by the trustee, should an AiB panel decide on an appropriate course of action?” (page 89).  Although more “organisations only” answered “yes” than “no”, fewer individuals answered “yes” than “no” and the individuals’ voices seem to have taken precedence in the conclusions (albeit that the comment from Nolans Solicitors suggests that some “no” respondents may feel that someone other than an AiB panel, e.g. the IP’s regulator, should decide – something again not picked up by the AiB).

Perhaps I should not be too selective myself however, as sometimes this selective process seems to lead to positive outcomes.  For example, Q15.3 asks: “Should AiB have a more proactive role in the supervision of all debt relief products?” (page 89).  Although more “organisations only” answered “yes” than “no”, fewer individuals answered “yes” than “no” and the individuals’ voices seem to have taken precedence in the conclusions.

Given that IPs are perhaps more accustomed to writing as individuals than the other categories of respondents, it is not surprising that this selective approach, putting greater emphasis on “organisations only” responses, sometimes swings the outcome away from what I suspect are the IPs’ preferences.  20 of the 37 IP responses were from individuals, whereas all the creditor responses were from organisations and only 7 of the 27 advice sector responses were from individuals (and 13 in the “other” category).  There may be some merit in giving less weight to some individual responses (which some may be inclined to put in the “green ink brigade” category), but given that the vast majority of IPs operate in an “organisation” and many manage that organisation, this broad-brush distinction seems grossly unfair to me.

My thoughts on the report – the detail

Although there are many quoted responses that are extremely sensible suggestions, of which I hope the AiB will take notice and incorporate in future plans, some response quotes raised my hackles.  For example, there seems to be a perception that, if a PTD only produces a 50% dividend, this means that a large proportion (would some incorrectly assume 50%?) of the funds ingathered fall into the hands of the IP (see, for example, Grampian Credit Union’s comment on page 32).  Putting aside all the non-IP costs that need to be discharged, the percentage dividend of course bears no resemblance to the amount of the funds paid as a dividend.  For example, if £10,000 is distributed to creditors with claims of £200,000, this is only a 5% dividend, but if the same sum is distributed to creditors with claims of £20,000, it is a 50% dividend (perhaps a comparison of extremes, but I’m sure you get the point).  Thus it is nonsensical to assume that a PTD paying out a low dividend is automatically disadvantageous to creditors; surely the crux of the matter is: would the outcome be any better (not forgetting the impacts on the debtor) via any other process?  It seems to me that the only real way of exploring whether PTDs can become more beneficial to creditors is to consider carefully whether the costs in the process can be reduced, although the outcome of the AiB/SG’s earlier consultation on “Protected Trust Deed – Improving the Process” suggests to me that the process will become more costly with more reporting and other burdens laid at the IP’s door.

It is therefore extremely frustrating that the outcome of the consultation, that “the majority of respondents either suggested 10p in the pound or that no minimum amount should be specified” (page 33), has been interpreted by the AiB as “support for a minimum dividend on PTDs” (summary on page 5).

I was surprised at the majority (albeit not a large one) supporting the idea that a debtor’s discharge from bankruptcy be deferred indefinitely where he/she cannot be located.  I would concur with ICAS’ comment (page 63) that “just because an individual cannot be located does not indicate that he would not co-operate. Consideration has to be given to whether the Trustee has been able to deal with the estate effectively for the benefit of the creditors. Each case has to be considered on its own merits”.  Hopefully, reasonableness will prevail if/when this provision makes it to statute.

I also find the idea that debts incurred prior to bankruptcy (the apparent preferred period being 12 weeks) should be excluded from discharge a novel one, particularly in comparison with E&W bankruptcy legislation (putting aside transactions such as preferences).  I will be interested to see how this is described in draft legislation, as the report suggests there is support for the exclusion of only some debts, such as those relating to non-essential items or where the debtor had knowledge that they would probably not be paid – this may generate some work for the lawyers and courts, I would suggest.

Speaking from my perspective of having worked at an RPB, I struggle with the arguments the AiB puts forward for engaging in an information gateway with the RPBs and the UK Insolvency Service.  The AiB seems to want to know what disciplinary actions the RPB may be in the process of taking against IPs.  No information gateway will assist the AiB to learn of actions-in-process (and even if she knew, what would this indicate about the IP’s conduct until the issue had been decided?), but only of settled sanctions, which in most cases are in the public domain (and if any are not, it is very likely that the Insolvency Service’s/JIC’s work in ensuring consistency of the publicity of disciplinary outcomes will bring these into line).  It is certainly the case that currently the AiB’s and the RPBs’ activities in supervising/regulating IPs occur in isolation from each other – and I believe that it is unhelpful when the AiB receives and investigates complaints (with no reference to the RPB) that are more suited to investigation by the IP’s licensing/authorising body – but in my mind that is an inevitable outcome of the seeming overlap of responsibilities of the different bodies.

There are far too many details in the report to cover here and it is perhaps not sensible to spend too much energy in contemplating the proposed changes at this moment.  I am sure that many of you, like me, will be interested in seeing how the results of this consultation are reflected in future stages.