Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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It’s all happening in Scotland!

2314 Eungella

Over the past few months, I have accumulated a pile of papers annotated as if they belonged in a 1970s stellar observatory, although most of my Wow!s have arisen from a feeling of horrific incredulity.

I apologise in advance if I have got any details wrong; this post is nothing more than an English-person’s reaction to the Scottish Government’s proposed changes to the personal insolvency landscape across the border. I’m sure that Scottish IPs are well-acquainted with the changes, but some Englanders might like to scan this; it might make you feel more grateful for the current state of affairs down here!

Here are the key new pieces of legislation affecting the Scottish personal insolvency regimes:

• The Debt Arrangement Scheme (Scotland) Amendment Regulations 2013, which came into force on 2 July 2013.
• The Protected Trust Deed (Scotland) Regulations 2013, which are due to come into force on 28 November 2013. The draft Regulations can be found at: http://www.legislation.gov.uk/sdsi/2013/9780111021361/contents.
• The Bankruptcy and Debt Advice (Scotland) Bill, which is working its way through Scottish Parliament, Stage 1 oral evidence sessions having concluded on 6 November 2013.

In this post, I deal with the first two items. In a later post, I hope to cover the Bill.

Debt Arrangement Scheme (“DAS”)

The Chief Executive of the Accountant in Bankruptcy (“AiB”), Rosemary Winter-Scott, is quoted to have said: “DAS is the only Scottish Government-backed scheme that offers a way for people who are in debt to regain control of their finances again” (http://www.scottishfinancialnews.com/index.asp?cat=NEWS&Type=&newsID=7331#7331).

That article also publicises the amount of money that has been paid via DAS: £13m in six months. Whilst that is pretty impressive, I am not entirely convinced that this is evidence enough that DAS is the success that the Scottish Government (“SG”) and AiB would have us believe. How many debtors have exited DAS debt-free? May we have some figures on that, AiB, please? If DAS is simply a statutory debt management plan (“DMP”) with no end date, is it really the solution for all the thousands of debtors that are being encouraged down that route?

The AiB’s 2012 DAS review stated that the average duration of all Debt Payment Plans (“DPPs”) is 7 years 2 months (http://www.aib.gov.uk/sites/default/files/publications/DAS%20Review%202012%20-%20published%203%20December%202012.pdf), although I noted that this is the original scheduled duration and the review shows a few DPPs scheduled to last over 20 years, even the odd one or two over 30 years! Given that this statutory process does not have the flexibility of a non-statutory DMP that might be used as a temporary stop gap, I do wonder how this can be considered the “fair and reasonable” solution.

In my mind, the DAS Regulations 2013 at least have provided a light at the end of the tunnel for some debtors. Before the Regulations, the debts had to be paid in full (less up to 10% in fees). The Regulations introduced an element of composition (actually, “re-introduced”, as it had been an original provision back in 2004): where a debtor has been making payments for 12 years (excluding any payment breaks) and has repaid at least 70% of the total debt outstanding when the DPP was approved, the debtor would be eligible to make an offer of composition to creditors. Of course, creditors don’t have to accept – and the offer takes effect only with the acceptance or silence of every creditor – but if a debtor has been paying for 12 years, one would hope that they’d show some mercy..?

Much has been said also of the Regulations’ bringing-forward of the point when interest and charges on debts is frozen: to the date at which the DPP is applied for by the debtor, “potentially saving people in debt up to six weeks interest” (http://www.aib.gov.uk/news/releases/2013/07/new-regulations-place-debt-arrangement-scheme-das). Some commentators had hoped that the Regulations could have been amended so that it occurred earlier than that, but I was interested to read what might have been the real motivation behind the change: the DAS newsletter 3 points out that the change should avoid the “high volume of applications for variations to correct the level of debt included in a DPP where interest and charges have accumulated over the application process” (http://www.dasscotland.gov.uk/news/debt-arrangement-scheme-newsletter-edition-3), so maybe it hasn’t been all about debtors…

Still, I shouldn’t be surly. However, it’s not all good news for debtors: the DAS newsletter 4 reported that some banks have reacted to this change by restricting or suspending debtors’ access to bank accounts on receipt of a DPP proposal (http://www.dasscotland.gov.uk/debt-arrangement-scheme-newsletter-edition-4). Now who’s being surly..?!

Alan McIntosh brought attention to the numbers of DPPs that have been revoked (http://www.firmmagazine.com/scotlands-bankrupt-debt-strategy/) and the numbers just keep going up: the number of approved applications to revoke in Q1 2013/14 was up 31.5% on the previous quarter and up 93.8% on the quarter of the previous year. I guess it’s not surprising that the figures are increasing, given the current squeeze on consumers and that the numbers agreeing DPPs are generally also on the rise. I just think it’s a bit rich that the Enterprise Minister, Fergus Ewing, continually hails DAS as a success in view of the fact that more and more people are accessing it, but there seems to be no attention given to the people that are (or are not) leaving it.

Protected Trust Deeds (“PTDs”)

Proposed changes to the PTD process have been rumbling on for a number of years with the SG’s express motivation being to “drive up the performance of PTDs”. Although it has sought to do this by tackling “the trend of rising costs associated with delivering PTDs alongside disappointing dividend returns” (http://www.aib.gov.uk/protected-trust-deed-update), it seems intent on achieving this by dealing with what it seems to see as rip-off costs, but it does nothing tangible to help address the real costs. What I mean is: the SG seems to think that, by relegating pre-TD costs to the status of unsecured claims, outlawing fees on a time costs basis, and layering yet more requirements on the Trustee, the “trend of rising costs” will be reversed. Aren’t we all facing a trend of rising costs in every aspect of our lives? The AiB experiences rising costs – of course, the statutory costs on PTDs continue to increase – but somehow IPs are supposed to have a magic cure for this problem..?

Having said that, I’m not completely blind to the effects of the market in debtors, the anecdotal stories of which suggest a crazy world of surely unviable sums being sought. I do wonder if the situation isn’t so grim in England because creditors have exerted more pressure on fees in IVAs. However, personally I don’t see a statutory bar on pre-TD costs as a panacea. After all, that only controls the monies in the insolvency estate.

Fergus Ewing does not see PTDs “as a sustainable debt relief solution for either creditors or debtors if more than half of all the receipts are spent on costs”. Unfortunately, the Chinese whispers have led to this message becoming even more extreme in front of the Scottish Parliament’s Economy, Energy and Tourism Committee: “A key issue with PTDs in recent years has been that, in some cases, they offer insufficient returns to creditors because most of the value in the debtor’s estate is used to pay the trustee’s fees” (http://www.scottish.parliament.uk/parliamentarybusiness/CurrentCommittees/68799.aspx). Please, will someone start talking some sense?! Firstly, the AiB’s statistics focus on total costs, not just Trustees’ fees. And we’re not talking mainly about DAS candidates here, are we? How many bankruptcies return more than half the pot to creditors? Does the lack of such a dividend make them unfair?

I also find some of the fantastically biased AiB releases staggering. They repeatedly quote ABCUL, which refers to Trustees having “so often pocketed” the vast bulk of realisations and welcomes the “new measures to clamp down on abuses of protected trust deeds” (http://www.aib.gov.uk/news/releases/2013/09/changes-protected-trust-deeds). They absurdly misrepresent statistics, such as quoting Fergus Ewing in the same release: “the costs of protected trust deeds… are increasing by more than 25 per cent. The latest figures show this is happening in up to 84 per cent of cases”, when the figures show that this is happening in only 25% of cases! (The 84% comes from one firm’s figures alone. You could say it is “up to 100% of cases”, if you’d picked the right cases!) Thank goodness that IPs are strong professionals that will not let this kind of criticism demoralise them into stopping doing a decent job. Sometimes cases that appear straightforward on day one just get complex or assets appear – such as PPI refunds – that weren’t originally envisaged and the effort just needs to be expended, by IPs, agents and solicitors… to improve returns! Or would Mr Ewing prefer Trustees to walk away from tricky or new assets for fear that their costs might increase?

Right, I must start getting objective about this. Otherwise, I’ll never get to the end of this article!

Some of the PTD Regulation changes detailed in the AiB releases are:

• A trust deed will be ineligible to be protected if the debtor’s total debts can be repaid in full within a 48 month period (i.e. from the full amount of the debtor’s surplus income, as calculated by means of the Common Financial Statement).
• “Pre-trust deed fees, such as fact-finding fees,” will be excluded “so that these can no longer be charged separately and will be treated the same as other debts”. The AiB release refers to “fees”, but I think this should be “outlays”, shouldn’t it; I don’t think that even the AiB is expecting an IP to prepare a Trust Deed free of charge, is she?!
• Trustees’ fees will be charged on the basis of a single fixed upfront fee and a percentage of funds ingathered. The fixed fee may be increased either with a majority in value of creditors (that is, an absolute majority, not a majority of those voting) or by the AiB.

But other changes have not been given top-billing by the AiB:

• The acquirenda period for Trust Deeds will be 4 years. Considering that, at least for a couple of years until the Bill becomes Act, bankrupts will only have to pay for 3 years (, are discharged after 1 year and are only exposed to a 1 year acquirenda period), some are predicting that PTD candidates will choose Sequestration. Personally, I doubt this, as it did not happen in England when 5-year IVAs became commonplace, but then IVAs are seen as some debtors’ best efforts to do the right thing by their creditors; I’m not sure that PTDs have the same image.
• Debtors’ contributions will be determined using the Money Advice Trust’s Common Financial Statement.
• Irrespective of creditors’ wishes regarding the Trust Deed achieving protected status, the AiB will have the power to refuse to register the Trust Deed, if she is not satisfied that the debtor’s expenditures and contributions are at appropriate levels.
• The Regulations fix the equity of heritable property as at the date that the Trust Deed is granted, but they raise all kinds of questions about how equity realisation or contributions in lieu of equity are to work.
• The AiB will have power to give directions, whether on the request of the Trustee, debtor, or creditors, or on the AiB’s own initiative. The Scottish Parliament Committee report mentioned above notes ICAS’ concerns that “the AiB is not best placed to take decisions in place of and over-ruling highly experienced and qualified IPs”, but all that it records the Minister saying in response is that “the AiB was undergoing significant restructuring to ensure that certain staff who would be involved in such decisions and appeals would be ring-fenced from those taking the original decisions” – that doesn’t deal with the concerns!

The (brief) Regulatory Impact Assessment suggests that, whilst the AiB will incur costs of £1.3m over the first 5 years, which will be recovered through a statutory fee, the Regulations are not expected to impact on IPs’ costs, as the Regulations are not expected to restrict the level of IPs’ fees, just revisit the basis on which they are calculated. Does the SG truly believe that the Regulations will result in no additional expense on IPs?!

For more details on the issues with the Regulations, I’d recommend ICAS’ written evidence, accessible at: http://icas.org.uk/Current_Insolvency_Issues.aspx (thank you, ICAS, for making available such an enlightening summary).

Phew! Right – those are the imminent changes. The Bill proposes some more incredible changes and I know that ICAS and others are expending a lot of effort in an attempt to refine its contents. You have my sympathy!

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Setting the Scene for Game and other decisions

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I have a nagging suspicion that I’ve been keeping up with reading court judgments in an effort to postpone the job of looking at the draft Rules. I know that I’ll have to look at them sometime, but for now here’s my usual round-up:

• Setting the scene (1): the landlords’ appeal in Game that threatens the Goldacre and Luminar decisions
• Setting the scene (2): the SoS’ appeal of the redundancy consultation requirements in Woolworths and Ethel Austin
• Subtle variation in definitions between Scottish and English statute makes all the difference for a bankrupt living alone
• Limitation period not a barrier to breach of fiduciary duty claim
• Shareholder “acting unreasonably” by not pursuing alternative remedy to deadlock

One to look out for: the landlords’ appeal in the Game Group of Companies

Jervis v Pillar Denton Limited (Game Station) & Ors ([2013] EWHC 2171 (Ch)) (1 July 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2171.html

Most of you will already be keeping an eye open, but I thought I’d cover it here, as BAILII now has published the first instance decision that, in light of the outcomes of Goldacre and Luminar, was pretty-much a foregone conclusion and to which all parties seemed to accept there would be an appeal.

To set the scene: Administrators were appointed on Game Stores Group Limited on 26 March 2012, the day after quarterly rents became due for payment in advance. A licence to occupy a number of properties was granted to Game Retail Limited when the business was sold to it on 1 April 2012. One further property was never occupied by Game Retail Limited, but was effectively abandoned by the Administrators when they removed goods from the property over the first five days of the Administration.

Of course, under Goldacre and Luminar, the rent that fell due prior to Administration is not payable as an expense of the Administration, notwithstanding any use of the property by the Administrators after appointment. In addition, any rents that fall due during the Administration are payable in full as expenses of the Administration even if the Administrators stop using the properties before the end of the relevant quarter. Nicholas Lavender QC made an order to this effect.

The landlords have been granted permission to appeal (and Game Retail Limited to cross-appeal), the key proposed ground being that the Lundy Granite principle and the decision in Re Toshoku Finance UK Plc should result in just and equitable treatment of the rent relating to the period when the property is being used beneficially for the purposes of the Administration as ranking as an expense of the Administration.

The case tracker suggests that the appeal will be heard in February 2014.

(UPDATE: The Game appeal judgment was released on 24 February 2014 (http://www.bailii.org/ew/cases/EWCA/Civ/2014/180.html), the general conclusion being that post-appointment rent (accruing on a daily basis) constitutes an Administration or Liquidation expense, if the property is occupied for the benefit of the Administration or Liquidation. Whilst some of the press coverage suggested that this was a victory for landlords over nasty office-holders, I think that the general mood amongst IPs is that this is a return to a just and sensible approach with which most are comfortable (although a Supreme Court appeal remains a possibility). For a summary of the appeal and its consequences, I would recommend: http://lexisweb.co.uk/blog/randi/landlords-can-rejoice-following-the-game-administration-decision/.)

Another one to look out for: the Secretary of State’s appeal in the Woolworths/Ethel Austin Employment Tribunals

USDAW & Anor v Unite the Union, WW Realisations 1 Limited and the Secretary of State for Business, Innovation & Skills ([2013] UKEAT 0548/12) (10 September 2013)

http://www.bailii.org/uk/cases/UKEAT/2013/0548_12_1009.html

This one is a lot less critical for IPs, but has the potential to reverse a fairly ground-breaking decision nevertheless.

In an earlier post (http://wp.me/p2FU2Z-3I), I reported on the original Tribunal of 30 May 2013, which decided that S188 of TULRCA (relating to the consultation requirements where redundancies are expected to affect “20 or more employees at one establishment”) was more restrictive than the EC Directive and that the consultation requirements should apply if 20 or more redundancies in total were planned, irrespective of the employees’ locations. These conclusions meant that some 4,400 former employees of Woolworths and Ethel Austin Limited (in two originally unconnected Tribunal cases) became entitled to 60 or 90 days’ pay… which, of course, fell at BIS’ door.

BAILII has now published the outcome of the Secretary of State’s application for permission to appeal, which was unique inasmuch as the SoS had declined expressly the court’s invitation to attend the previous hearing. However, HH Judge McMullen QC recognised that the previous judgment “made a substantial change in the outlook to this legislation, and it is in the interests of all that this issue be clarified as soon as possible” (paragraph 13). He also had no problem with the technicality that in fact the SoS was not a party at first instance to the Ethel Austin appeal, but only to the Woolworths one. He also imposed a stay on the order that arose out of the earlier appeal pending the SoS’ appeal.

A key issue for the appeal will be the outcome of the CJEU’s considerations of the case of Lyttle v Bluebird UK Bidco 2 Limited (C-182/13 NIIT, http://www.bailii.org/nie/cases/NIIT/2013/555_12IT.html), a February 2013 Northern Ireland Tribunal case, which covers the same ground.

(UPDATE (09/03/14): On 22 January 2014 (http://www.bailii.org/ew/cases/EWCA/Civ/2014/142.html), the Court of Appeal agreed to make a reference so as to give the CJEU an opportunity to join these cases to the Lyttle case with a view to producing a single judgment. Lord Justice Maurice Kay felt that this was appropriate, as there are no employee representations in the Lyttle case and it could be that a judgment on Lyttle alone might not resolve the issues arising in these cases in any event.)

(UPDATE 08/03/15: the European Advocate General’s opinion suggests that ‘at one establishment’ does have a purpose and is compatible with EU law.  Although it is likely, it remains to be seen whether the ECJ will follow the Advocate General’s opinion.  For a summary of the position as it stands at present, take a look at http://goo.gl/HhjHPN or http://goo.gl/MsfGFZ.)

Different Scottish and English treatments of bankrupt’s home do not lead to unfairness

McKinnon v Graham ([2013] EWHC 2870 (Ch)) (20 September 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/2870.html

This case nicely demonstrates a subtle difference between the English and Scottish laws relating to a bankrupt’s home: both provide that the property revests in the debtor after three years, but the provisions apply in different circumstances.

S40(4)(a) of the Bankruptcy (Scotland) Act 1985 defines “family home” as: “any property in which at the relevant date the debtor had (whether alone or in common with any other person) a right or interest being property which was occupied at that date as a residence by the debtor and his spouse or civil partner or the debtor’s spouse or former spouse or civil partner (in any case with or without a child of the family) or by the debtor with the child of the family”, but the corresponding S283A of the Insolvency Act 1986 applies “where property comprised in the bankrupt’s estate consists of an interest in a dwelling-house which at the date of the bankruptcy was the sole or principal residence of the bankrupt, the bankrupt’s spouse or civil partner or a former spouse or civil partner of the bankrupt”. Consider the position of a property occupied only by the debtor: under English law the property would revest after three years, but under Scottish law it would not.

This case centred around such a property to which the Trustee of Mr Graham’s sequestration had been granted an order for possession. Mr Graham appealed, arguing that the judge had been wrong to apply Scottish law, which must give rise to situations that are manifestly unfair and thus offends public policy. HHJ Behrens endorsed the original decision, satisfied that the judge had correctly concluded that this was not an exceptional case requiring departure from the principle of modified universalism; he had been correct to apply Scottish law. “The fact that Scottish law chose to do this by reference to ‘the family home’ rather than the English law reference to ‘the sole or principal residence of the bankrupt, the bankrupt’s spouse or civil partner or a former spouse or civil partner of the bankrupt’ does not seem to me to come within a measurable distance of offending public policy or a fundamental principle of English insolvency law. As I have indicated the only difference between the 2 sections are the rights afforded to the bankrupt where he alone occupies the family home. Both jurisdictions provide protection where there is occupation by a spouse, civil partner or children. To my mind this difference is not fundamental to English insolvency law, nor does it offend public policy or create manifest unfairness” (paragraph 26).

Limitation period not applicable in case of director dishonesty

Vivendi SA & Anor v Richards & Bloch ([2013] EWHC 3006 (Ch)) (9 October 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3006.html

Claims for breach of fiduciary duty succeeded against a director and shadow director in a fairly complex, but not extraordinary, case. However, personally what I learned from it was that the usual six-year limitation period did not apply as Mr Justice Newey had concluded that the director and shadow director had engaged in dishonest conduct. The payments in question were made between March 2004 and February 2005 and the company went into liquidation in the middle of 2005, but proceedings were not issued until May 2011.

Winding up order not the only solution for “deadlock” company

Maresca v Brookfield Development and Construction Limited & Anor ([2013] EWHC 3151 (Ch)) (16 October 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/3151.html

Mrs Maresca sought the winding up of Brookfield Development and Construction Limited (“BDC”) on the ground that its affairs had been conducted in a way that was unfairly prejudicial to her or alternatively on the just and equitable ground.

The personal relationship between Mrs Maresca and the other shareholder/director had broken down and Mr Justice Norris did consider “that on Mrs Maresca’s contributories’ petition she is entitled to relief by the winding up of the company and (in the absence of any other remedy) it would be just and equitable that the company should be wound up. However I consider that there is another remedy available to her and that she would be acting unreasonably in seeking to have BDC wound up instead of pursuing that other remedy: section 125(2) Insolvency Act 1986” (paragraph 40). With aplomb, Norris J then proceeded to quantify Mrs Maresca’s claim as a creditor based on the facts before him, leading to an order that, if BDC paid her £10,000 by 1 December 2013, then she is bound to transfer her share in BDC to the other shareholder and BDC is not to be wound up.

Norris J ended his judgment with a lesson: “I would readily acknowledge that there is a degree of approximation in this. But I have seen my task as providing a just outcome according to law by the application of resources appropriate to the dispute. Further refinement would come at a cost that would be ruinous to the parties (who have probably devoted to this case more than it is worth). Those who present petitions of this sort for companies like BDC must understand that that is likely to be the approach adopted: and would be wise to adopt the same approach in settlement negotiations” (paragraph 51).


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Not the Nortel/Lehman Decision

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I am not going to comment on the Supreme Court’s decision in Nortel and Lehman, because, as with Eurosail, it has had plenty of coverage already. Instead, I’ll cover a few lesser-known cases, with a couple of Scotland ones taking the top-billing:

• Scotland: Re The Scottish Coal Company Ltd – Liquidator entitled to disclaim land and onerous licences (UPDATE: this was overturned on 12 December 2013 ([2013]CSIH 108). A summary of that reclaiming motion is at http://wp.me/p2FU2Z-5v.)
• Scotland: Re Station Properties Ltd – judge not convinced case made out for para 80 exit from administration and administrators directed to issue revised proposals to cover change of administration objective
Re GP Aviation Group International Ltd – appeals against tax assessments are not property capable of assignment by a liquidator
USDAW v WW Realisations 1 Ltd – reversal of Woolworths/Ethel Austin decisions on redundancy consultation legislation: number of redundancies at each location not as relevant as total number
Evans & Evans v Finance-U-Limited – creditor who proved in full in bankruptcy did not renounce security
• Scotland: Re William Rose – Trustee’s late application to extend 3-year period could not reverse property re-vesting
• Northern Ireland: Tipping v BDG Group Ltd – late application for protective award allowed, as ignorance of the law considered reasonable

However, if you do want to read a summary of Nortel/Lehman, I think that 11 Stone Buildings’ briefing note covers the subject well: http://www.11sb.com/news/24-july-2013—nortel—lehman-supreme-court-decision–guidance-on-insolvency-expenses-and-provable-claims.asp. I’m sure most IPs are breathing a sigh of relief and waiting, a little more comfortably now, for the Game appeal…

Finally, a Scottish precedent for a liquidator’s power to disclaim (UPDATE: … not so fast!)

Scotland: Re. The Scottish Coal Company Limited (11 July 2013) ([2013] CSOH 124)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH124.html

Liquidators sought directions on whether they could abandon or disclaim land and/or onerous water use licences, in order to avoid the substantial costs involved in maintaining and restoring the sites, which the Scottish Environment Protection Agency (“SEPA”) would require before it would accept a surrender of its licences. SEPA and other bodies made representations, conscious that, if the liquidators succeeded, significant costs might fall to the taxpayer.

Scottish readers will be aware that there is no express statutory provision available to liquidators of Scottish companies to disclaim onerous property, in contrast to the position of liquidators of English and Welsh companies who may disclaim under S178 of the Insolvency Act 1986. Counsel in this case were also unable to find any case law or textbook showing a liquidator of a Scottish company exercising such a power.

Lord Hodge drew a comparison with the position of a Trustee in a sequestration, which has power to abandon land, and contemplated its effect in relation to S169(2) of the Act, which provides that “in a winding up by the court in Scotland, the liquidator has (subject to the rules) the same powers as a trustee on a bankruptcy estate”. The judge felt that it was not an exact comparison, as the effect of a trustee’s abandonment was to reverse the vesting so that the bankrupt owns the property. However, there is no vesting of property in a liquidator, so if he were somehow to bring to an end the company’s ownership of the property, it would become ownerless. Although the judge saw the potential for abuse as a means of avoiding obligations, he saw no reason in principle why land could not be made ownerless, given that the Crown has a right to waive ownership of bona vacantia, which would render such property ownerless.

The judge then considered whether the liquidators could avoid the obligations imposed under the Water Environment (Controlled Activities) (Scotland) Regulations 2005 (“CAR”) in seeking to surrender the licences. The judge described powerful considerations that might have persuaded him to hold that the liquidators could not disclaim the licences, one reason being that he thought “that there is a strong public interest in the maintenance of a healthy environment, the remediation of pollution and the protection of biodiversity. There is a conflict between the results sought by the directive and the insolvency regime. I do not think that the insolvency regime has any primacy which means that CAR can exclude a liquidator’s power to disclaim only if, like section 36 of the Coal Industry Act 1994, it says so expressly” (paragraph 51). However, the judge recognised that “if the relevant provisions of CAR have the effect of (a) removing a liquidator’s right to disclaim the property of a company and refuse to perform an obligation in relation to that property and (b) creating a new liquidation expense which would have to be met before the claims of preferential creditors, it seems to me that it would modify the law on reserved matters… It would also be altering the order of priority on liquidation expenses in rule 4.67 of the Insolvency (Scotland) Rules 1986 if… the remuneration of the liquidator were to rank equally with the obligation to spend money to comply with CAR” (paragraph 64).

Consequently, the judge concluded that the liquidators could disclaim the sites and abandon the water use licences along with the obligations under CAR. He also endorsed the liquidators’ proposed mechanism for effecting the abandonment, which involved giving notice to all interested parties, advertising the fact so that locals were made aware of the abandoned sites, and sending a notice to the Keeper of the Registers in Scotland.

(UPDATE 09/01/14: this decision was overturned in a reclaiming motion ([2013] CSIH 108) on 12/12/13 – see http://wp.me/p2FU2Z-5v.)

Scotland: More work required of administrators to exit via Para 80 and administrators directed to submit revised proposals to address change in objective

Re. Station Properties Limited (In Administration) (12 July 2013) ([2013] CSOH 120)

http://www.bailii.org/scot/cases/ScotCS/2013/2013CSOH120.html

The administrators’ proposals, which included that they thought that the objective set out in Paragraph 3(1)(c) of Schedule B1 would be achieved, were approved at a creditors’ meeting. Subsequently, it appeared to the administrators that all creditors should receive full repayment of their debts, as the directors had secured funding, and therefore they planned to exit the administration and hand control of the company back to the directors. The quantum of the claim of one creditor, Dunedin Building Company Limited (“DB”), was subject to a legal action. DB objected to the administrators’ plan arguing that they should adjudicate on its claim before ending the administration.

The administrators sought directions as to whether in the circumstances they could end the administration under Paragraph 80 of Schedule B1 on the basis that the purpose had been sufficiently achieved notwithstanding DB’s objection.

Lord Hodge felt that an administrator could not come to this conclusion “without obtaining a clear understanding of the directors’ business plan and cash flow forecasts and forming an independent view, in the light of the best evidence reasonably available, whether that plan and those forecasts are realistic” (paragraph 20). He also felt that “It would be consistent with current accountancy practice to require the directors to produce a business plan and forecasts for at least 12 months and to attempt to look into the future beyond that time to identify whether there was anything which was likely to undermine the company’s viability” (paragraph 22). The ultimate value of DB’s claim was a factor in assessing the company’s future cash flow solvency, so the judge felt either that the administrators should await the outcome of the legal action or they “should take steps to enable themselves to reach an informed and up to date view on the likely value of that claim” (paragraph 23) before they could decide whether the company had been rescued as a going concern.

Lord Hodge also felt that the administrators had to deal with the change in administration objective – from Para 3(1)(c), as set out in their proposals, to Para 3(1)(a) – by issuing revised proposals under Para 54. “I am not persuaded that the obligation on an administrator under para 4 of Schedule B1 to ‘perform his functions as quickly and efficiently as is reasonably practicable’ provides any justification for bypassing para 54 even if an administrator were of the view that a dissenting creditor would be outvoted at the creditors’ meeting” (paragraph 30).

Although personally, I see this as a significant conclusion, particularly as I don’t think I’ve seen any administrator issue revised proposals, it should be remembered that the judge felt that, in the circumstances of this case, the change in administration objective was a substantial change, particularly because DB had been in dispute with the directors regarding its claim and the change in objective could see the company reverting to the directors’ control before the claim was determined.

Right to appeal a tax assessment is not property capable of being assigned

Re. GP Aviation Group International Limited (In Liquidation): Williams v Glover & Pearson (4 June 2013) ([2013] EWHC 1447 (Ch))

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1447.html

Former directors asked the liquidator to appeal against HMRC’s corporation tax assessments, but the liquidator did not have the finance to fund the appeals, so the former directors asked the liquidator to assign the appeals to them. The liquidator sought directions on whether he had the power to assign the appeals.

HH Judge Pelling QC concluded that the right of appeal was not property within the meaning of the Insolvency Act and so was no capable of being assigned. He noted that the liability, to which the right of appeal related, could not be assigned and the right of appeal could not be assigned separately. He stated that, even if it had been capable of assignment, he would not have sanctioned it, as: “the assignment of the right to appeal without being able to assign or novate the liability would place the office holder in a potentially invidious position – an unreasonable and intransigent position might be adopted in relation to the appeal that might expose the Company to penalties, interest and costs that could otherwise have been avoided. This risk is not one that the court should sanction given the potential implications for creditors as a whole” (paragraph 32). The judge made it clear that his judgment applied strictly to the bare right to appeal in this case. “Different considerations may apply where the liability can be novated or where the appeal right is one that is incidental to a property right that can be assigned (for example a right to appeal a planning decision in relation to land that is sold by an office holder)” (paragraph 33).

Less than 20 redundancies at any one site did not avoid consultation requirements where more than 20 were made redundant over all sites

USDAW & Anor v WW Realisation 1 Limited & Ors (30 May 2013) ([2013] UKEAT 0547 and 0548/12)

http://www.bailii.org/uk/cases/UKEAT/2013/0547_12_3005.html

I appreciate I’m behind the times on this one, which has been widely publicised in the past couple of months.

Earlier Tribunals had decided that there was no duty to consult under TULRCA with staff who worked at different sites where less than 20 redundancies were planned at those sites even though the total number of dismissals across the company was over 20. The Tribunals dealt with two separate cases involving such redundancies of staff who had worked in Ethel Austin and Woolworths stores. The consequence had been that 4,400 workers had been excluded from awards for the companies’ failures to consult, which had been granted to c.24,000 of their former colleagues who had worked at larger stores and head offices.

These decisions were overturned on appeals, although the judge expressed some disappointment that the respondents did not attend or comment, feeling that it put the Tribunal at a disadvantage. In particular, the judge noted that, as a consequence of the appeals, the Secretary of State for BIS would be faced with the prospect of paying out 60 or 90 days’ pay for 4,400 people.

The key issue was discerning the purpose behind S188(1) of TULRCA, which refers to “20 or more employees at one establishment”, which the Appeal Tribunal decided was more restrictive than the EC Directive, which was intended to be implemented into domestic legislation by means of S188. The judge concluded that “the clear Parliamentary intention was to implement the Directive correctly” (paragraph 50). Therefore, “the only way to deliver the core objective of protection of the dismissed workers in the two cases on appeal is to construe ‘establishment’ as meaning the retail business of each employer. This is a fact-sensitive approach which may not be the same in every case but it is consistent with the core objective as applied to the facts in these two cases” (paragraph 52). However, the Tribunal preferred a solution that made “the point more clearly and simply so that it can be applied without detailed consideration of the added fact sensitive dimension. We hold that the words ‘at one establishment’ should be deleted from section 188 as a matter of construction pursuant to our obligations to apply the Directive’s purpose” (paragraph 53), although they acknowledged that this might be a step too far.

(UPDATE 08/03/15: the European Advocate General’s opinion suggests that ‘at one establishment’ does have a purpose and is compatible with EU law.  Although it is likely, it remains to be seen whether the ECJ will follow the Advocate General’s opinion.  For a summary of the position as it stands at present, take a look at http://goo.gl/HhjHPN or http://goo.gl/MsfGFZ.)

Creditor who proved in full in a bankruptcy did not renounce its security

Evans & Evans v Finance-U-Limited (18 July 2013) ([2013] EWCA Civ 869)

http://www.bailii.org/ew/cases/EWCA/Civ/2013/869.html

In 2007, Mr and Mrs Evans purchased a car financed by a loan from Finance-U-Limited (“FUL”) and a bill of sale granting FUL security over the car. Mr Evans went bankrupt later in 2007 and Mrs Evans went bankrupt in 2008. FUL proved in Mr Evans’ bankruptcy for the full sum due under the loan agreement; the existence of security was disclosed on the proof, but no value was put on it. The claim was admitted in full and FUL later received a small dividend. After Mrs Evans’ discharge from bankruptcy, she continued to pay monthly instalments to FUL until mid-2010. In 2012, the Evans were successful in seeking a declaration that the car was their property free from any claim by FUL on the basis that, because FUL had proved in full in Mr Evans’ bankruptcy, it no longer had a right to enforce its security over the car. FUL appealed the declaration.

Lord Justice Patten referred to the case of Whitehead v Household Mortgage Corporation Plc in which it was decided that the acceptance of a dividend from an IVA “did not amount to an agreement or election by the creditor to treat as unsecured that part of the debt in respect of which the dividend had been paid” (paragraph 20). He felt that “FUL was not therefore required to renounce its security as the price of being able to prove for the balance of the debt nor was that the effect of it proving for the entire amount due. It therefore retained its right to enforce the security following Mr Evans’ bankruptcy but did not exercise that right whilst Mrs Evans continued to meet the instalments” (paragraph 21). He therefore reversed the decision at first instance and, as the term of the loan had expired, he decided that FUL was entitled to possess the car free from any statutory requirement to give notice.

Scotland: impossible to undo the reinvesting of a family home in the debtor

Re. Sequestrated Estate of William Rose (4 June 2013) ([2013] ScotSC 42)

http://www.bailii.org/scot/cases/ScotSC/2013/42.html

The Trustee sought a warrant to serve an application under S39A(7) of the Bankruptcy (Scotland) Act 1985 on the debtor and his spouse. The debtor was sequestrated on 20 May 2008, so the Trustee sought to extend the 3-year time period after which the family home is reinvested in the debtor, albeit that the 3 years had expired before the Trustee made his application. The Trustee explained that he had failed to act sooner as a consequence of an “administrative error” (paragraph 4.3).

Sheriff Philip Mann was “unmoved” by the submissions on behalf of the Trustee: “The plain fact of the matter is that, on the Trustee’s averments, the property has already reverted to the ownership of the debtor and it is now too late to prevent that from happening. The Trustee is not trying to prevent that from happening. He is, in effect, trying to reverse that which has already happened in consequence of section 39A(2). Section 39A(7) says nothing about reversing the effect of section 39A(2)” (paragraph 5.4). The Sheriff therefore concluded that the Trustee’s application was incompetent and he refused to grant the warrant.

Northern Ireland: ignorance of remedy for company’s failure to consult was “reasonable”, thus five months’ late claim allowed

Tipping v BDG Group Limited (In Liquidation) ([2013] NIIT 2351/12) (19 April 2013)

http://www.bailii.org/nie/cases/NIIT/2013/2351_12IT.html

Whilst it is a Northern Ireland case, so of limited application, I thought it was worth mentioning briefly that the former employee succeeded in claiming compensation for the company’s failure to consult, despite his claim being lodged five months after the “primary limitation period” for lodging a complaint with the Tribunal.

The reason for the delay was that the claimant had not been aware of the protective award. “Courts and tribunals have consistently held that ignorance as to one’s entitlement to make a complaint of unfair dismissal is not reasonable ignorance. (This is on the basis that the general public now are well aware of entitlements to make unfair dismissal complaints). However, the situation is different in respect of protective award complaints. The availability of remedies in respect of collective redundancy consultation failures, the threshold (of 20 redundancies), and the circumstances in which an individual, as distinct from a trade union or employee forum representative, can seek such remedies, are all matters which are not generally well known” (paragraphs 16 and 17) and therefore the Tribunal held that it could allow the complaint, albeit that, in the judge’s view, the further period of five months was “close to the boundaries of what I consider to be ‘reasonable’” (paragraph 21).


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Legislative changes on the horizon: PTDs, TUPE, and gift vouchers

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Something else that I’ve been meaning to do post-holiday was sweep up all the announcements of consultations and proposals for changes to insolvency and related legislation that have been published by various government departments and agencies. Here are the ones I’ve discovered:

• AiB’s proposed changes to PTDs and DAS
• BIS TUPE consultation
• New proposal on gift voucher creditors

AiB’s proposed changes to PTDs and DAS

28/02/2013: The AiB published some welcome (by me, anyway) fine-tuning to her developing “vision of a Financial Health Service” (http://www.aib.gov.uk/news/releases/2013/02/bankruptcy-law-reform-update).

She has withdrawn the proposals to introduce a minimum dividend for PTDs and to deal in-house with creditors’ petitions for bankruptcy, two items that I covered in an earlier blog post: http://wp.me/p2FU2Z-V (and I know of many others who have been more vocal on the issues). The third item I covered in that post – restructuring PTD Trustees’ fees so that they can only be drawn as an upfront fixed sum plus a percentage of funds ingathered – seems to have strengthened in tone: no longer is reference made to “guidance”, so it seems possible to me that there will be a legislative change to enforce this. My personal view on this is that, although of course there are vast differences between PTDs and IVAs, straightforward IVAs have been worked on this basis for many years now and I think that, although the inevitable tension between creditors and IPs regarding the quantum of the fixed and percentage fees persists, on the whole it seems to have developed into a settled state generally acceptable to all parties. However, I see far more difficulty in moving away from charging fees on an hourly basis for complex cases – I sense that the fees in many complex IVAs and PVAs are still based on hourly rates – and I do wonder what will result from the AiB’s approach to fees for individuals with complex circumstances and unusual/uncertain assets.

The AiB has also dropped the idea that debts incurred 12 weeks prior to bankruptcy should be excluded (which also seemed to me difficult to legislate: http://wp.me/p2FU2Z-w).

So what now does she propose to introduce? Some new significant items for PTDs:

• A minimum debt level of £5,000 (previously £10,000 had been the suggestion)
• A new joint PTD solution (with a £10,000 debt minimum)
• A new requirement on the Trustee to demonstrate that a Trust Deed is the most appropriate solution for the individual. If the AiB is not satisfied with the case presented, there will be a new power to prevent it becoming Protected. As now, the Trustee could apply to the Sheriff, if they disagree with the AiB’s assessment. (Personally, I hope that the AiB will exercise this power only to deal with obvious cases of abuse. For example, looking solely from a financial perspective some individuals might be better served going bankrupt, but often they wish to avoid bankruptcy and improve their creditors’ returns, which is a commendable attitude that should not be stifled. Ultimately, is it not the debtor’s choice?)
• Pre Trust Deed fees and outlays will be excluded. Any such fees and outlays will rank with other debts. (I have some sympathy with the AiB’s apparent frustration at insolvency “hangers-on” seeming to reap excessive rewards from the process of introducing debtors to the PTD process, however I am not convinced that this is the solution. As an upfront fixed fee is going to be introduced, will it not simply send such costs underground?)
• On issuing the Annual Form 4 (to the AiB and to creditors), if the expected dividend has reduced by 20% or more, Trustees will be required to provide details of the options available and to make a recommendation on the way forward. (“Make a recommendation”? Who gets to decide what happens? Isn’t the Trustee obliged/empowered to take appropriate action?)
• Acquirenda will be standardised at 1 year for both bankruptcy and PTDs. (It makes sense to me to ensure that PTDs are not seen to be more punitive than bankruptcies, but this is quite a change, isn’t it?)
• No contributions will be acceptable from Social Security Benefits.
• Equity will be frozen in a dwelling-house at the date the Trust Deed is granted.

The AiB also has proposed some new changes to DAS, the one that caught my eye being that interest and charges will be frozen on the date the application is submitted to creditors, rather than at the later stage of the date the Debt Payment Programme is approved, as is the case currently. The AiB’s proposal also remains that a DPP might be concluded as a composition once it has paid back 70% over 12 years.

BIS TUPE Consultation

17/01/2013: The BIS consultation on proposed changes to the Transfer of Undertaking (Protection of Employment) Regulations 2006 was issued and closes on 11 April 2013 (https://www.gov.uk/government/consultations/transfer-of-undertakings-protection-of-employment-regulations-tupe-2006-consultation-on-proposed-changes – a 72-page document that takes some reading!).

Despite the calls for legislative clarity on the application of TUPE in insolvencies, most notably in administrations, the consultation states: “the Government’s view is that the Court of Appeal’s decision in Key2law (Surrey) Ltd v De’Antiquis has provided sufficient clarity and that it is not necessary to amend TUPE to give certainty” (paragraph 6.30). I don’t know about you, but every time I ask myself what is the current position on TUPE in administrations, I have to check the date! Key2Law may well appear to have settled the issue now, but I have to remind myself every time what its conclusion was exactly.

The proposals do include some elements that may be more useful:

• BIS invites views on whether there should be a provision enabling a transferor to rely on a transferee’s ETO reason, seemingly recognising the risks that purchasers of an insolvent business run in absence of this provision (paragraph 7.72 et seq).
• It is proposed that the regulations be changed so that a transferee consulting with employees/reps, i.e. prior to the transfer, counts for the purposes of collective redundancy consultation (paragraph 7.84 et seq).
• It is proposed that, where there is no existing employee representative, small employers (suggested to be with 10 or fewer employees) will be able to consult directly with employees regarding transfer-related matters (paragraph 7.94 et seq).

Whilst on the subject, it seems timely to remind readers that it is expected that the consultation requirement where 100 or more employees at one establishment are proposed to be made redundant will be amended from 90 days to 45 days. This change appears in the draft Trade Union and Labour Relations (Consolidation) Act 1992 (Amendment) Order 2013, anticipated to come into force on 6 April 2013.

Gift Voucher Creditors

15/03/2013: R3 issued a press release entitled “Voucher holders’ proposal to become ‘preferred creditors’” (http://www.r3.org.uk/index.cfm?page=1114&element=17990&refpage=1008), but the motivation for this release, other than awareness of some stories surrounding high profile retail administrations, might not be known to you.

MP Michael McCann’s ten minute rule bill seeking consideration for gift voucher creditors to be made preferential seemed to go down well at the House of Commons on 12 February 2013 (http://www.youtube.com/watch?v=53_fN8c1f8Q&feature=youtu.be). Then on 14 March 2013, a House of Commons’ notice of amendments to the Financial Services (Banking Reform) Bill was issued, which included the following:

“(1) The Chief Executive of the Financial Services Compensation Scheme shall, within six months of Royal Assent of this Act, publish a review of the protections understanding that such payments are deposits in a saving scheme.

(2) The review in subsection (1) shall include consideration of any consequential reform to creditor preference arrangements so that any payments made in advance as part of a contract for the receipt of goods or services (such as gift vouchers, certificates or other forms of pre-payment) in expectation that those sums would be redeemable in a future exchange for such goods or services might be considered as preferential debts in the event of insolvency.”

As can be seen, a change to gift voucher creditors’ status seems a long way from becoming statute, but the wheels are now in motion for something to be done.

To me, R3’s suggested alternative of an insurance bond makes more sense. The costs of seeking, adjudicating on, and distributing on a huge number of relatively small gift voucher claims likely would appear disproportionate to the outcome… and it is not as if IPs need any more spotlight on their time costs! I appreciate that such costs will arise where claims need to be dealt with even as they are now, as non-preferential unsecured claims, but I suggest it would be unfair to other ordinary unsecured creditors if they were forced to sit in line and watch whilst realisations were whittled away in dealing with this large new class of preferential creditor. The USA Borders case demonstrates some of the difficulties in dealing with gift voucher claims (see, for example, http://www.lexology.com/library/detail.aspx?g=8298e876-f998-4777-bacf-ce781f312242 – the clue is in the name…)

There are other alternatives, of course, such as the use of trust accounts, although a paper (which now seems ahead of its time) by Lexa Hilliard QC and Marcia Shekerdemian of 11 Stone Buildings discusses the difficulties arising from these also (http://www.11sb.com/pdf/insider-gift-vouchers-jan-2013.pdf).

(UPDATE 22/05/2016: Gift vouchers became topical again with the Administration of BHS.  R3 summarised the difficulties in dealing with gift vouchers in an insolvency at https://goo.gl/eN20mN.  This “R3 Thinks” also brought to my attention a paper written by R3 on the subject in June 2013, accessible at https://goo.gl/GJDbNO.)

 

Right, that brings me up to date… almost. Just the consultation on the FCA’s regime for consumer credit remaining…