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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.


In This Special Edition:

» Pre-pack Reform
» Invalid Administration Appointments
» Join the Club
» IVA Creditors Deserve Second Chance
» Bankruptcy and Divorce: A Cautionary Tale

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!

Pre-pack Reform

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.

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.

Invalid Administration Appointments

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.

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).

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.

Join the Club

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.

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.’

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.

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.

IVA Creditors Deserve Second Chance

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.

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.

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.

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..

Bankruptcy and Divorce: A Cautionary Tale

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.

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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