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Business Recovery And Insolvency Bulletin

December 2010

Welcome to the latest edition of Taylors’ Business Recovery and Insolvency Bulletin.

With all the best wishes of the season we bring you the festive edition of our Business Recovery and Insolvency Bulletin. We hope you’ll enjoy our regular round up of the most recent and relevant cases concerning insolvency.

Should you require any further information or guidance on any of the articles contained in this edition of our quarterly bulletin please contact Andrew or Chris:

Full Details for AndrewAndrew Livesey, Partner
Office: 0844 8000 263
Mobile: 07884 231375

» Full contact details and profile
» Insolvency and Business/Support Restructuring


In This Edition:

» An Expensive Business
» Goldacre - Update
» Stop The Rot
» Bulbinder Singh Sandhu v Jet Star Retail Limited
» Section 176a - Clarification Or Confusion?

Insolvency Bulletin

The Business Recovery and Insolvency Bulletin is Taylors regular newsletter providing the latest information and updates for all business recovery, restructure and insolvency issues and case law. - Sign up now!

An Expensive Business

On 10 December 2010, the High Court delivered judgment on a claim brought by the UK Pension Regulator in the estates of Lehman Brothers and Nortel Networks. The judgment was handed down by Mr Justice Briggs and whilst the fine detail is not yet available, the outcome of the decision is clear and far reaching.

The UK Pension Regulator issued financial support directions (“FSD”) of £2.1 billion in respect of the Nortel Networks UK Pension Plan and £130 million in the Lehman Brothers Pension Scheme. The Regulator may issue an FSD to any legal person connected or associated with an employer which is either a service company or is insufficiently resourced and which participates in an underfunded final salary pension scheme. An FSD requires the recipient to put in place financial support for the employer's obligations. In this case, the target companies were all in administration and the issue for determination was whether the FSD’s issued by the Regulator were payable as expenses of the administrations of both estates.

Mr Justice Briggs stated that he was bound by precedent and found in the Regulator’s favour. Accordingly, the FSDs issued by the Regulator are payable as administration or liquidation expenses.

This decision has conferred super priority on the UK Pension Regulator and pension trustees given that FSDs are now payable before not only all unsecured creditor claims, but also potentially before the fees and expenses of the administration. Many insolvency commentators consider this decision will bar out companies with significant pension deficits from being able to utilise the rescue procedure. It also has implications for the ability of such companies to obtain credit in a market where lending criteria is already restricted.

It is clear that the Judge delivered his judgment with a heavy heart describing the current position as a, ‘legislative mess’ and commenting that his decision could be, ‘an impediment to the achievement of the objectives of the rescue culture.’ The Judge invited legislative change which would be welcome sooner rather than later.

Goldacre - Update

The Courts in England and Wales have been relatively quiet on what many would label as the most significant decision of the last 12 months. Likewise there do not appear to be any noises coming out of the Insolvency Service as to whether there is likely to be clarification on the issue when the new Insolvency Rules come into effect in April of next year.

A recent decision in the Scottish Courts may serve as an indicator as to whether the Goldacre principle is here to stay.

A Scottish company was tenant of premises in Worcester. The company went into administration. The administrators sold the company’s business and in doing so granted the buyer a licence to occupy the Worcester premises. The purpose of the licence was to allow the tenant the opportunity to take an assignment of the lease once the landlord’s consent had been obtained. The assignment never took place and the landlord sought a declaration from the Scottish Court as to whether the administrators were bound to pay the unpaid rent as an expense of the administration.

The Court decided that the rent payable should be treated as an expense of the administration given that the administrators had allowed the premises to be used.

The outcome of this decision mirrors the Goldacre result but it is not clear whether the same reasoning was employed. The reasoning in Goldacre hinges on the application of the salvage principle which is said to be applicable to liquidations and administrations. It is also not clear whether the liability to pay rent as an expense is linked to the contractual liability or with reference to the administrators’ usage of the premises.

The decision is useful given that Goldacre concerned a scenario where the administrators were in actual physical occupation of the premises. This case indicates that the granting of a licence to occupy is likely to be considered as ‘use or retention’ under the salvage principle such as to give rise to the payment of rent as an expense.

Stop The Rot

The following two recent cases act as a refresher of relevant issues to consider when reviewing a creditor’s claim for reservation of title.

GHSP v AB Electronic Limited [2010] EWHC1828 (Comm)

GHSP was an American company that supplied electro-mechanical control systems for motor vehicles to AB, which was an English company manufacturing automotive and industrial position sensors.

Negotiations ensued between the parties to seek to agree the terms of trade. However those negotiations never concluded in universal agreement. In this case AB was facing a claim brought by GHSP for the supply to it of a faulty batch of sensors. One of the issues for determination was whether the parties had concluded a contract in relation to either of the parties’ relevant terms.

The Court determined that looking at this case on the facts, neither party had successfully registered its terms and conditions. The case provides a useful review of the ‘Battle of the Forms’ and the ‘last shot doctrine.’ Where contracting parties each deliver to the other their standard terms and conditions, the party that was the last to send those terms without reply from the other will generally have its terms and conditions incorporated into the contract.

In this case it was decided that both parties had buried their heads in the sand and consequently neither party had successfully incorporated its terms and conditions. This left the contract to be interpreted with reference to the provisions of the Sale of Goods Act 1979 (“SOGA79”).

The ramifications of this decision for creditors claiming ROT are stark. SOGA79 provides that title to goods passes on delivery, which means that unless an ROT provision has been incorporated into the contract of supply ROT cannot be claimed. When considering ROT claims, care should be taken to investigate the contractual relationship and negotiations which took place between the parties in order to establish whether a creditor’s terms and conditions apply to the contract of supply. The lesson to be learnt here is to always ensure that in addition to assessing whether a creditor can refer to a ROT clause and identify its stock, the contractual history between the parties is equally as important to establish whether a creditor can rely on its ROT clause.

Bulbinder Singh Sandhu (trading as Isher Fashions UK) v Jet Star Retail Limited

(trading as Mark One) (in Administration) and Others [2010] EWHCB 17 (Mercantile)

This case concerned goods supplied by the Claimant to the Defendant. Upon the Defendant entering into administration, certain of the Claimant’s stock was sold by the company between appointment and the sale of the business with the remainder of the company’s stock (whilst excluded from the sale) was delivered to the buyer of the business upon completion. The Claimant’s terms and conditions contained an ROT provision together with an insolvency termination clause that entitled the Claimant to terminate the contract if, among other things, an administrator was appointed. The Claimant claimed against the company and the administrators for damages for conversion.

The Judge decided in favour of the Defendant company and the administrators and, accordingly, the Claimant’s claim for conversion failed. The contract between the Claimant and the company provided the right for the Defendant to sell and pass title in the stock to its customers. Given that the contract provided for the post insolvency position and gave the Claimant the option to terminate the contract, the administration did nothing to interfere with the contract and accordingly, notwithstanding the ROT provision once the stock had been sold, title had passed and therefore the claim of conversion must fail.

This case stands as a useful reminder that in the context of normal supply chain contracts, the existence of an ROT provision does not necessarily give rise to solid grounds for a claim in the event that the stock is sold or passed to a third party.

Section 176a - Clarification Or Confusion?

In the case of The Liquidators of PAL SC Realisations 2007 Limited v (1) Inflexion Fund 2 Limited Partnership and (2) Autocruise Co Investment Limited Partnership, PAL was one of the trading companies in the Autocruise group which went into administration on 5 October 2007.

In 2006, Inflexion Fund 2 Limited Partnership (“Inflexion”) and Autocruise Co Investment Limited Partnership (“Autocruise”) provided finance for a management buyout of the group. National Westminster Bank Plc (“NatWest2) was the main funder and had priority pursuant to a priority Agreement between the lenders.

Following the administration, only NatWest received any distribution in respect of its security. The group was to enter into CVL where it was anticipated that a large prescribed part would be available to unsecured creditors. Accordingly, Inflexion and Autocruise decided to formally release their security in order to share in the prescribed part. Given that Inflexion and Autocruise’s share of the liability was sizable, their inclusion would have had an impact on the dividend available to other unsecured creditors. Accordingly, the liquidators sought clarification from the Court.

The Decision
The Court decided that because the debts of Inflexion and Autocruise were unsecured at the time they submitted their claim against the prescribed part they were entitled to participate.

Established authority on this point suggests that a secured creditor cannot participate in the prescribed part in respect of any shortfall owed to it after the realisation of its security. It must be assumed, therefore, that the decision in this case relied upon the fact that there had been a total waiver of security. This decision widens the options for secured creditors to elect how to recover their debts. The decision doesn’t clarify, however, whether the ability to take part in the prescribed part would be open to a secured creditor who had already received a dividend floating charge realisation and subsequently released its security. Looking at the reasoning in this case it is arguable that a secured creditor could participate in such circumstances, however, looking at prior authority and the intent behind section 176A this would be an odd outcome. It is possible that further clarification will be needed on this point either by a decision in a higher Court or by virtue of further changes to the Insolvency Rules.

Copyright 2006 - 2010 Taylors Solicitors

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