Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Not the Eurosail Supreme Court judgment

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In the middle of drafting today’s post, I noted the release of the Supreme Court’s decision in Eurosail. I think I need time to absorb that judgment, but you can find it here: http://www.supremecourt.gov.uk/news/latest-judgments.html.

Instead, I’ll plough on here with a few other judgments:

SoS v McDonagh & Ors: post-CVA wages/HP claims arising on liquidation not payable from NI Fund
HSBC v Tambrook: Jersey court asks English court to make an administration order via S426 IA86
Tanner v Millar: does a friend’s blank cheque mean you’re not insolvent?
Firstplus v Pervez: a lesson for mortgagees in getting the pre-action process right

Post-CVA arrears of wages and holiday pay not payable from the NI Fund when company moves into liquidation

Secretary of State for Business Innovation & Skills v Mr M V McDonagh & Ors [2013] UKEAT 0287/12 (14 February 2013)

http://www.bailii.org/uk/cases/UKEAT/2013/0287_12_1402.html

Summary: This Appeal Tribunal overturned the decisions of two separate Employment Tribunals that former employees of a company that had been in CVA were entitled to claim arrears of pay and holiday pay from the NI Fund when the company subsequently went into liquidation. The appeals judge decided that the relevant date for claims was the date that the company’s CVA had been approved, not when later it had been placed into liquidation.

The Detail: Two separate Employment Tribunals had decided that former employees of companies that had been in CVA were entitled to claim arrears of pay and holiday pay from the NI Fund when the companies subsequently went into liquidation. In each case, all the twelve claimant employees had been unaware that the company had been placed into CVA – they had continued to be paid for some time until their employment ended when, or shortly before, the companies went into compulsory liquidation, leaving them with claims for arrears of wages and holiday pay. The NI Fund rejected their claims on the basis that the relevant date of these claims was after the commencement of the company’s insolvency, which it claimed was the date the CVA was approved, not the date of the liquidation commencement.

The Honourable Mr Justice Langstaff noted that the original judge, who had decided in favour of the employees, had interpreted the Employment Rights Act 1996 in light of what he had assumed was Parliament’s intention, suggesting that, because the company in CVA could – and did – continue to pay wages, at that time it had not become insolvent for the purposes of the ERA96, but that this point had occurred only when the company had been placed into liquidation. “That is to apply a definition of insolvency which is not to be found in the Act” (paragraph 22). “It is incoherent to suggest that a company which is insolvent by statute becomes insolvent again or in addition or in any additional way when wound up. The underlying state of insolvency has not changed” (paragraph 35).

The judge also found no contradiction in the EC Directive, which invites Member States to fix a relevant date for wages claims alternative to the commencement of insolvency proceedings, which, contrary to the original judge’s opinion, include CVAs, but that the UK had not taken up that invitation.

Langstaff J recognised the apparent unfairness of his conclusions in this case, particularly where the employees had no knowledge of the CVA, but he pointed out that this decision only affected debts that were payable before the start of the insolvency proceeding. “Other debts would be payable afterwards. A period of notice pay, for instance, to which each of these Claimants was entitled was not excluded from guarantee” (paragraph 56).

According to counsel on this case this was the first time that this question has been raised before any court, which personally I find most surprising: there must have been many cases where employees have been left with the full range of claims after a company in CVA has moved into liquidation. Perhaps this is the first time, however, that an employee has sought to dispute the RPO’s rejection.

English court’s rejection of Jersey court’s request for assistance in making administration order swiftly reversed

HSBC Bank v Tambrook Jersey Limited [2013] EWHC 866 (Ch) (12 April 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/866.html

Summary: A secured creditor applied for an English administration order over a Jersey company. The application was supported by a letter from the Royal Court of Jersey asking that the English Court assist, pursuant to S426 of the IA86, by making the administration order. At first instance, the application was rejected on the basis that, as there was no insolvency proceeding either ongoing or intended in Jersey, the English Court could not “assist” the Jersey Court by making an English administration order. On appeal on 1 May, this decision was overturned, although the decision has yet to be published.

The Detail: Tambrook is a Jersey-registered and generally accepted to be Jersey-COMI company, although its main business activity is in England. None of the insolvency options available under Jersey statute were considered attractive by either the company director or the company’s secured creditor, but they saw significant advantages in an English administration.

As the company’s COMI is not England, the secured creditor sought to apply for an English administration via S426 of the IA86. S426(4) states that the English court “shall assist the courts having the corresponding jurisdiction in any other part of the United Kingdom or any relevant country or territory”. The Royal Court of Jersey had written a letter to the English High Court requesting that it assist, pursuant to S426, by making an administration order.

In the first instance decision, Mr Justice Mann declined to make an administration order on the basis that the court was being asked to provide far more than simply assistance to the Jersey Royal Court: “this court cannot ‘assist’ another court which is not actually doing anything, or apparently intending to do anything, in its insolvency jurisdiction” (paragraph 18). Mann J came to this decision despite the applicant’s counsel referring to five Jersey cases in which he claimed administration orders had been granted in similar circumstances; the judge felt that they did not assist him in any way, as no reasoned decisions were available on those cases.

Although the full judgment has yet to be published, several sources report (e.g. http://www.mourantozannes.com/news/news/breaking-news-tambrook-overturned-on-appeal.aspx) that this decision was overturned on the hearing of an appeal on 1 May 2013.

Does a blank cheque from a friend disprove insolvency?

Tanner v Millar [2013] EWHC 750 (Ch) (23 January 2013)

http://www.bailii.org/ew/cases/EWHC/Ch/2013/750.html

Summary: Although this was a fairly insignificant – and unsuccessful – application for permission to appeal against a transaction at an undervalue judgment, I thought it contained an unusual twist: the beneficiary of the transaction (Tanner) sought to prove that the bankrupt had not been insolvent at the time of the transaction because Tanner had been capable and willing to pay any sum to get the bankrupt out of a hole. The judge decided that this evidence probably would not have influenced the result of the case: the district judge had found that the debtor had been insolvent at the time based on the position of his own assets and liabilities.

The Detail: In an earlier judgment, the judge had found that the bankrupt had paid away substantial sums to Tanner by way of a transaction at an undervalue and thus ordered Tanner to repay the sums to the Trustee in Bankruptcy. Tanner sought permission to appeal the decision on a number of grounds. One of the grounds was that, at the time of the transaction, Tanner had had access to substantial funds and was willing to step in to provide to the bankrupt whatever funds were necessary to meet a contingent damages claim, which had been the key to the bankrupt’s insolvency.

Mr Justice Sales refused permission to appeal, deciding that this ground – and the others – did not meet the standard tests to allow fresh evidence to be admitted. In relation to this ground, Sales J decided that, even if admitted, it probably would not have an important influence on the result of the case: “It is quite clear, as the district judge found, that the bankrupt did not have sufficient assets of his own to meet his liability to pay damages. He was therefore insolvent. The fact that he had a generous friend in the form of Mr Tanner on hand who might have been prepared to help him (but had no legal obligation to do so) does not meet the point, as determined by the district judge, that the bankrupt was himself insolvent at the relevant time” (paragraph 15).

Mortgagee’s pre-action information must not be issued too early in the process

Firstplus Financial Group Plc v Mr Khalid Pervez [2013] ScotSC 27 (22 March 2013)

http://www.bailii.org/scot/cases/ScotSC/2013/27.html

Summary: In this Scottish case, the Sheriff decided that the mortgagee had not complied with the pre-action requirements for enforcing its security because it had provided the debtor with the pre-action information at the same time as the “formal requisition” letter and before the expiry of the calling-up notice. Although different Acts resulted in different interpretations of the timing of the debtor “entering into default”, each interpretation led to a conclusion that the pre-action information had been provided too early in the process. Although the Scottish Government’s guidance suggests compliance at an earlier stage, it could not take precedence over primary legislation.

The Detail: The mortgagee, Firstplus, sought orders for the possession and sale of Pervez’s residential house. The case turned on whether Firstplus had complied with the pre-action requirements of the Applications by Creditors (Pre-Action Requirements) (Scotland) Order 2010 (“PAR Order 2010”).

Firstplus had communicated the debtor a number of times, culminating in the issuing of a “formal requisition” letter on 26 May 2011. This letter had included the required pre-action information. Later still, Firstplus served a calling-up notice on 19 July 2011. In view of the fact that the PAR Order 2010 states that the pre-action information “must be provided as soon as is reasonably practicable upon the debtor entering into default”, the key question was: when had the debtor defaulted? The question is complicated by the fact that “default” has different meanings under the different Acts to which the PAR Order 2010 refers: the Conveyancing and Feudal Reform (Scotland) Act 1970 and the Heritable Securities (Scotland) Act 1894.

The 1970 Act defines default, in part, as: “(a) where a calling-up notice in respect of the security has been served and has not been compiled with (Standard Condition 9(1)(a)); (b) where there has been a failure to comply with any other requirement arising out of the security (the court’s emphasis) (Standard Condition 9(1)(b));”. In this case, the Sheriff concluded that the calling-up notice had to be served and thus the earlier default notice was invalid and ineffective. On this basis, as the expiration of the calling-up notice had occurred after the pre-action information had been sent, the Sheriff decided that the PAR Order 2010 had not been complied with.

The Sheriff also reviewed the 1894 Act. He concluded that, although the 1894 Act does not expressly define “default”, “it is plain from the express terms of section 5 of the 1894 Act that the ‘default’ envisaged by that section can only occur ‘after formal requisition’ of the principal (my emphasis). Logically, therefore, the ‘default’ and the demand for payment cannot be simultaneous” (paragraph 59). It was Sheriff S Reid’s view that there must be a short time lapse between the issuing of the demand and the conclusion that the debtor had “made default” in terms of the 1894 Act and, although in this case the Sheriff need not have decided how long that time period should be, he expressed the view that “that time is likely to be very short – probably no more than one hour in commercial cases (Bank of Baroda v Panessar [1987] Ch. 335; Sheppard & Cooper Ltd v TSB Bank plc [1996] All ER 654), perhaps no more than a few clear banking days in non-commercial cases – being, in any event, no more than is necessary, in ordinary course, for the mechanics of a monetary transfer to be instructed and effected through recognised modern banking techniques” (paragraph 67). Therefore, because in this case the pre-action information had accompanied the “formal requisition”, the Sheriff decided that the PAR Order 2010 had not been complied with.

Firstplus had argued that it had been obliged to comply with the Scottish Government’s “Guidance on Pre-Action Requirements for Creditors”, which states that the pre-action information had to be provided as soon as the debtor enters into default “for example, by falling into arrears”, which would appear to suggest a far earlier point than that indicated by the 1970 and 1894 Acts. The Sheriff’s response was that “In my judgment, while creditors must ‘have regard to’ any Guidance issued by the Scottish Ministers in this respect, they are not obliged to follow it, still less is the Guidance a binding or definitive statement of the law. If that Guidance was seeking to define ‘default’ for the purposes of the 1970 Act as comprising merely a debtor ‘falling into arrears’, it would have been, in my judgment, an incorrect statement of the law. The Guidance cannot take precedence over, or contradict the proper meaning of, primary legislation” (paragraph 84).

This judgment has left me with a question: given the different timings of default under the two Acts, what would have happened had the pre-action information been sent after the “formal requisition” but before the calling-up notice?


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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).