Andrew Livesey
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Business Recovery And Insolvency
Bulletin
June 2011
Welcome to the June
edition of Resolve.
Welcome to the current (and first
anniversary edition!) of our
insolvency bulletin which just
happens to coincide with Taylors’
20th birthday!
What is there to be said about the
UK economy? Low numbers of
insolvencies but no growth. It feels
like we are still in recession. Will
there be a double dip? Certainly it
will be a slow road to recovery but
it seems equally certain that there
is a pent up “flood” of business
failures yet to come. Why the time
lap? It seems the buzz word with
lenders is “impairment mitigation”.
In English, bust business will not
be flushed through the system in
volume until lenders feel that the
markets have improved to make
converting the assets to cash
worthwhile. Watch this space! In the
meantime, Happy Birthday to us.
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On 31 March 2011 the Parliamentary
Under-Secretary of State for Business
Innovation and Skills, announced to
Parliament new measures in response to the
report and consultation process on the
merits of pre-packaged administration
business sales.
Mr Davey reported on the outcome of the
review on practitioners’ utilisation of the
procedure set out in SIP16 and heralded
(albeit quietly) its overall success.
Quoting the latest statistics, Mr Davey
confirmed that overall levels of compliance
had increased and that, in the majority of
cases, necessary statements had been given
to creditors.
The new measures announced by Mr Davey
include a new requirement to notify
creditors in advance where administrators or
proposed administrators intend to dispose of
a significant proportion of the business and
assets of a company where the sale is to a
connected party and in circumstances where
there has been no open marketing of the
business and assets. The intention behind
this measure is to improve transparency for
creditors. Mr Davey argued that whereas
pre-packs can offer a flexible and speedy
means of rescue they must be undertaken in a
fair and reasonable manner. The intention
behind the measures is to ensure that
creditors have a fair chance to have their
voice heard and, if possible, make a
competing bid for the assets of the
business.
Comment
No detail has yet been provided in
relation to what or who will be considered a
connected party for the purpose of the
notice. It is also not clear how much notice
an administrator or a proposed administrator
will need to give to creditors prior to
completing a pre-packaged sale and the
sanction which will be imposed if the sale
completes despite resistance from creditors.
There are obvious difficulties with the
proposed measures given that it is unlikely
that many directors will be comfortable with
the idea of an imminent insolvency process
being notified to suppliers. If notice is
given before appointment it will likely lead
to suppliers taking protective measures.
Such action is likely to have a negative
effect on trade and on the value of the
business potentially rendering the pre-pack
process a nullity. A further update will be
provided once more detail is issued by BIS.
In the case of Minmar (99) Limited v
Khalatschi [2011] EWHC 115 (CH) the High
Court has restated a number of basic
principles to directors and officeholders in
relation to the appointment of
administrators by the directors of a
company.
Facts
The case concerned an application
brought by a director of the company who did
not agree with the directors’ appointment of
administrators. The dissenting director
applied for an order setting aside the
appointment.
The Decision
The case was heard by the Chancellor who
decided that any decision of the directors
to appoint an administrator must be made
strictly in accordance with the procedures
laid down in the company’s articles. In this
case the company’s articles required
decisions to be made either unanimously or
at properly convened and conducted board
meeting. Although the decision to appoint
had reportedly been made at a directors
meeting it had not been properly convened or
held in accordance with the articles. The
Respondents argued that paragraph 105 of
Schedule B1 to the Insolvency Act 1986
provided that anything done by the directors
of the company includes a reference to the
same thing done by the majority of the
directors. Reference was also made to the
commentary provided in Sealy and Milman
which states that strictly speaking a
meeting is not required under the present
provisions. The Chancellor did not accept
this argument stating that the provisions of
paragraph 105 did not dispense with the
usual rules of internal management and for
this reason the appointment was deemed
invalid.
The Court also held the appointment to be
invalid because notice had not been served
on the company. Under paragraph 26(1) of
Schedule B1 where the company or the
directors intend to appoint an administrator
notice of intention must be given to any
person who may be entitled to appoint an
administrative receiver or administration
under paragraph 14. Paragraph 26(2) adds
that notice must also be given to such other
persons as may be prescribed under rule 2.20
which says that in addition to the persons
mentioned in paragraph 26 notice must also
be given to the company. The Chancellor
rejected an argument raised by the
Respondents that notice need only be given
to the additional persons mentioned in rule
2.20 where notice has to be given to the
holder of a qualifying floating charge under
paragraph 26(1).
Comment
The decision in this case makes it clear
that unless the company’s articles are
followed to the letter the appointment of
administrators by the directors of a company
is at risk from being deemed invalid.
Practitioners are advised to take heed of
the company’s procedures as set out in the
company’s articles of association.
In the case of Panter v Rowellian
Football Social Club and others [2011] EWHC
1301 (Ch) the High Court was asked to
consider whether a social club could enter
administration.
Facts
Mr Panter made an application for an
administration order to be made in respect
of Rowellian Football Social Club and for
the appointment of joint administrators. The
Court was asked to consider paragraph
111(1A) of Schedule B1 to the Insolvency Act
1986 which provides:
‘In this Schedule, ’company’ means—… (c)
a company not incorporated in an [European
Economic Area] state but having its centre
of main interests in a member state other
than Denmark.’
Decision
Sitting in Leeds District Registry,
Judge Behrens concluded that the Court did
not have jurisdiction to make an
administration order in relation to the
club. The Court determined that there was no
direct authority on the interpretation of
section 111(1A). Accordingly the Court
looked to the interpretation of section 220
of the Insolvency Act 1986 which provides:
‘For the purposes of this Part
’unregistered company’ includes any
association and any company, with the
exception of a company registered under the
Companies Act 2006 in any part of the United
Kingdom.’
Judge Behrens decided that if the club
were not "any association" within the
meaning of section 220(1) it was difficult
to see how it could be a company within
section 111(1A)(c). It had none of the
normal attributes of a company given that
the membership rules, the provision for
subscriptions and expulsion were those of a
club and not a company. If the club were not
susceptible to compulsory winding up it was
difficult to see why Parliament should have
intended it to be subject to the
administration regime.
Comment
This case demonstrates another example
of how Schedule B1 does not always dovetail
with the provisions of the 1986 Act and
provides welcome guidance on the issue.
In the case of Peoples Phone Limited v
Theophilos Nicolaou [2011] EWHC 1129 (Ch)
Judge Behrens was on hand again to clarify
insolvency procedure, specifically in
relation to an IVA creditor which appeared
to have waived its entitlement to claim in
the IVA.
Facts
Mr Nicolaou proposed an IVA to his creditors
which was approved on 16 October 2008. At
the date of the acceptance of the IVA, the
debtor’s landlord had a claim pursuant to
the lease in the sum of just over £60,000.
The landlord and the debtor agreed a
surrender of the lease in November 2009. In
February 2010 the landlord submitted a proof
of debt. The Supervisor rejected the
landlord’s proof in August 2010 on the
grounds that the landlord’s claim had been
compromised by virtue of the deed of
surrender. The landlord argued that the deed
of surrender contained a mistake given that,
whilst it had intended to accept a surrender
of the lease from the debtor, the landlord
had not intended to waive its entitlement to
submit a claim in the debtor’s IVA. The
landlord issued an application for
rectification of the deed of surrender by
virtue of mistake and issued a separate
application to reverse the Supervisor’s
decision. The landlord sought an adjournment
of the hearing of the application to reverse
the Supervisor’s decision until after the
determination of the application to rectify
the surrender. The Court refused to adjourn
and dismissed the application to reverse the
Supervisor’s decision. The landlord
appealed.
Decision
Judge Behrens found that the District
Judge should have adjourned the application
to reverse the Supervisor’s decision pending
the outcome of the rectification
proceedings. The Judge accepted that whilst
the Supervisor may wish to conclude the IVA,
that did not mean he was entitled to
disregard genuine claims by creditors or
potential creditors. The Judge found that
the Supervisor should have awaited the
outcome of the rectification proceedings
before rejecting the landlord’s claim and
suggested that the Supervisor could have
made a final dividend to other IVA creditors
whilst reserving that part of the IVA fund
which would be payable in the event that the
landlord succeeded in rectifying the deed of
surrender.
Comment
As at the date of the rejection of the
landlord’s proof, no rectification
proceedings had been issued. Judge Behrens
did not find that the 3 month delay between
the Supervisor’s rejection of the proof and
the instigation of rectification proceedings
by the landlord was unduly excessive. In
cases where an IVA creditor disputes the
rejection of its claim, the Supervisor is
recommended to invite the creditor to take
appropriate action to resolve the issue as
appropriate. The Supervisor can ensure that
other IVA creditors are not prejudiced by
declaring a final dividend whilst reserving
payment of further monies pending the
outcome of the ancillary proceedings..
Readers of this bulletin would be well
advised to consider the full judgment in the
case of Re Ruiz (a bankrupt) [2011] EWHC 913
(Fam) not least because it contains a
heartfelt and passionate judgement
concerning the difficulties which arise due
to the overlap between matrimonial and
insolvency proceedings. We have highlighted
a couple of the points relevant to
bankruptcy law.
The Facts
The facts of this long running legal
battle are complex. In summary, this case
concerned a wife who had commenced divorce
proceedings which were not disposed of prior
to the bankruptcy of the husband. The
husband had petitioned for his bankruptcy
but was not found to have done so
tactically. At the outset of the trustee’s
appointment it was anticipated that there
would be around a £150,000 surplus, which
due to an order made in the matrimonial
proceedings would have been payable to the
wife. The wife applied for the bankruptcy to
be annulled some 18 months after the
bankruptcy order during which time the
trustee had applied for possession. The
matter finally came before the High Court in
March of this year.
The Decision
The Court dismissed the wife’s
application. During the course of its
decision the Court was asked to consider a
number of points not all of which were
necessarily fundamental points of law. There
are, however, 2 issues which are worthy of
comment.
On behalf of the wife, an argument was
raised that her home rights under s.33 of
the Family Law Act 1996 put the family home
permanently beyond the reach of the trustee
in bankruptcy and of the creditors. This
bold proposition was based on s336(2)(a) of
the Insolvency Act 1986 which provides:
336(2) Where a spouse's or civil
partner's home rights under the Act of
1996 are a charge on the estate or
interest of the other spouse or civil
partner, or of trustees for the other
spouse or civil partner, and the other
spouse or civil partner is adjudged
bankrupt—
(a) the charge continues to subsist
notwithstanding the bankruptcy and,
subject to the provisions of that Act,
binds the trustee of the bankrupt's
estate and persons deriving title under
the trustee …
The Court was intrigued by the reasoning
behind this argument but ultimately decided
that that the intention behind section
336(2) was to ensure that, where a wife's
home rights are concerned, a trustee in
bankruptcy is in no better short-term
position than a husband had been. The Court
determined that the rights endure until they
are brought to an end by an order of the
Court and that the section did not give a
person in the position of the wife the right
to remain in the property in perpetuity
regardless of anyone else's interests. The
Court went on to comment that such an
interpretation would bring about absurd
results.
The second interesting aspect of this
decision concerned the trustee’s request
that an annulment be made conditional on
payment of the trustee’s fees and expenses.
Following a review of the authorities, the
Court was satisfied that had it been
appropriate to annul the bankruptcy, the
order would necessarily have been
conditional upon the payment of the
trustee's fees and expenses. The Court also
determined that it did not deem it necessary
to subject the trustee’s fees and expenses
to scrutiny. The Court expressed dismay at
how the costs in these proceedings had
spiralled out of control. From an initial
debt of £66,000 in December 2007, the
overall amount required to clear the
bankruptcy had risen to £260,000 by the time
of the hearing. This part of the decision is
particularly interesting as the Court’s
judgment contains an addendum referring to
the Practice Statement for the Fixing and
Approval of the Remuneration of Appointees
(2004) [BCC] 912 which had not been referred
to the Court by any of the parties. The
Court simply comments that the wife may have
been able to rely on the Practice Statement
but for the fact that it was not brought to
the Court’s attention.
Comment
The judgment of Mr Justice Peter Jackson
is unusual in the blatant and unguarded
manner in which he demonstrates his
frustration at the problems which arise
where insolvency and matrimonial law clash.
It would have been interesting to see how
the Court would have dealt with the
trustee’s fees had it been properly directed
to the existence of the Practice Statement
on Remuneration. Suggestions are also put
forward by the Judge that in circumstances
where a debtor’s petition refers to
matrimonial proceedings such a petition
should be adjourned with notice being given
to the debtor’s spouse or at the very least
notice of the bankruptcy order being served
on the spouse. It will be interesting to
note whether this suggested practice will be
observed by the Court in due course.
Copyright 2006 - 2011 Taylors Solicitors
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