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Business Recovery And Insolvency Bulletin

March 2011

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

The insolvency statistics published by the Insolvency Service for the last quarter of 2010 show a reduction from the corresponding quarter in 2009 in the number of liquidations at 11.3% and administrations at 24.4%.

The same is true of personal insolvency with the statistics showing a drop in the number of bankruptcy orders between corresponding quarters of 29.2%.

Notwithstanding these trends the Courts have been busy on insolvency related topics and those cases that have been reported are significant. There is also a lot to digest on the proposed plans to reform the insolvency profession and procedures.


In This Edition:

» OFT Consultation - Update
» Is the Employment Appeal Tribunal’s (“EAT”) Barke worse than its bite?
» Back to the Future
» An IVA is no longer child’s play
» Section 176a - Clarification Or Confusion?
Corporate Hospitality – A Thing of the Past?

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!

Office of Fair Trading (“OFT”) Consultation - Update

In our September edition, we commented on the proposals put forward by the OFT in their report “The Market for Insolvency Practitioners in Corporate Insolvencies”. On 10 February 2011 the Insolvency Service launched its consultation, inviting all interested parties across the profession to comment on the proposals contained in the report.

The report concentrated on corporate insolvency with, broadly, the following recommendations:-

  • The establishment of an Independent Complaints Body to deal with a wide range of issues including fees;
  • Reform of the regulatory framework; and
  • Amendment to legislation relating to administration and liquidation.

Whilst the obvious focus of the report was on corporate insolvency, the Insolvency Service is inviting views on both the personal and corporate insolvency market. The Government appears to be supportive of the majority of the recommendations and it appears that the report is being seized upon as an opportunity for a wider reform of insolvency procedure.

The consultation runs until 6 May 2011, and is likely to be followed by new proposals for potentially far-reaching reform. This could explain why the new Insolvency Rules, which were scheduled to come into effect on 6 April 2011, have been shelved until October 2012. The Insolvency Service Policy Unit has stated that the delay in implementing the new Rules has been as a result of contributions and feedback received from a wide range of insolvency stakeholders and from the Insolvency Rules Committee. The suspension of the implementation of the new Rules may be in anticipation of further substantive amendments which could bring into effect possible reforms in response to the consultation. We will endeavour to keep you updated on the position through this bulletin.

Is the Employment Appeal Tribunal’s (“EAT”) Barke worse than its bite?

Subscribers to this bulletin will recall our brief report on the decision of the EAT in OTG Limited v Barke and Others (“Barke”). Following a full review of the decision delivered on 16 February, we can now provide a detailed review of the EAT judgment.

The case concerned 5 separate employment tribunal appeals on the same issue concerning the application of regulation 8(7) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) on transfers conducted in administration proceedings. This regulation provides that regulations 4 and 7 of TUPE do not apply to “bankruptcy or analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor”.

The judgment was delivered by Mr Justice Underhill, the President of the EAT. In a detailed and lengthy judgment the EAT outlines the differing opinions on the application of TUPE to certain types of administration proceedings and in particular pre-packaged administrations. The EAT split the two main differing opinions into the “absolute approach” where regulation 8(7) never applies to any form of administration proceedings and the “fact-based approach” where regulation 8(7) applies if the administration has been instituted with a view to the liquidation of the assets.

In coming to a decision on the preferred approach, the EAT considered the intention of the legislation by reviewing the legislative source of TUPE which is the Council Directive 2001/23/EC (“the Directive”). The EAT also undertook a detailed review of the case of Abels v Bedrijfsvereniging voor de Metallindustrie en de Electrotechnishche Industrie [1985] ECR 469 (“Abels”). The EAT found that the stated purpose of the Directive was “to provide for the protection of employees.” In the case of Abels, the European Court determined that whilst the Directive did not apply to liquidation it did apply to the Dutch Law equivalent of UK administration proceedings. The European Court decided that such proceedings were distinguishable from liquidation and should be classed as “other insolvency proceedings” to which the Directive applied. The reasons given for this decision where that “other insolvency proceedings” often involved less supervision of the Court and were instituted with the intention of preserving the assets and undertaking of the company.

The EAT applied the analysis in Abels to UK administration proceedings with particular reference to paragraph 3 of Schedule B1 to the Insolvency Act 1986 (“Schedule B1”). It was decided that the statutory purposes of administration (rescuing the company as a going concern, a better realisation for creditors than in a winding up and a distribution to one or more secured or preferential creditors) where hierarchical in nature. The EAT determined that this meant that the primary purpose of any administration, pre-pack or otherwise, was always to rescue the company as a going concern.

Following this analysis, the EAT preferred the “absolute approach” and based its reasoning on the following grounds:

  • the distinction between liquidation and other insolvency proceedings in the Directive and TUPE must be determined by reference to the legal characteristics of the procedures and regard should not be had to the intention of the insolvency practitioner;
  • it cannot ever be said that administration proceedings are commenced with a view to the liquidation of the assets because paragraph 3 of Schedule B1 dictates that all administrations are commenced with a view to rescuing the company as a going concern even if it is known that this purpose cannot be achieved prior to the appointment;
  • the administrator is not required to report to creditors on the stated objective of the administration until his proposals are sent to creditors which leaves the employees in an uncertain position;
  • for the reason stated in ground 3 the “fact-based approach” will lead to disputes which generate cost, delay and uncertainty; and
  • the purpose of the Directive is to safeguard the rights of individual employees and this must prevail in the case of any doubt as to the applicability of TUPE even if there is a greater detrimental effect on the employees by virtue of the undertaking not continuing.

Whilst the decision in Barke is not unexpected, the reasoning adopted by the EAT is open to criticism which might extend the prevailing uncertainty on the applicability of TUPE to pre-pack administrations. The main problems with this decision are highlighted as follows:

  1. the argument for the “absolute approach” hinges on a narrow interpretation of paragraph 3 of Schedule B1 which does not sit well with recent authority on the statutory purpose. Recent cases such as Re Kayley Vending Limited [2009] BCC 578 (“Kayley”) provide judicial approval for pre-pack administrations and conclude that it is possible for an administrator to be appointed in reliance on the second or third objectives;
  2. following on from this point, the EAT refers specifically to a passage in Sealy and Millman (located after paragraph 2 of Schedule B1) which refers to Kayley and cases decided on similar grounds. It is apparent from this transcript that the EAT was not referred to the most up to date copy of Sealy and Millman as no reference is made in the passage to the case of Re Hellas Telecommunications (Luxembourg) II SCA [2009} EWHC 3199 (Ch) which further cements the legitimacy of pre-packs and endorses the selection of the appropriate statutory purpose prior to appointment. The EAT acknowledges that the barrister arguing for the “fact-based approach” referred to a number of cases on the statutory purpose, however, the EAT chose not to refer to any of these cases in its judgment. It is disappointing that the EAT decided not to conduct any review of these cases particularly given that they demonstrate a wider approach to the application of the statutory purpose than that adopted by the EAT;
  3. in the 5 grounds relied upon by the EAT as justification for the “absolute approach”, a great deal of reliance is placed on the absence of any requirement for an administrator to state, at the beginning of an administration, which of the objectives under paragraph 3 of Schedule B1 the administrator has adopted. It is said that this would cause disputes and cause uncertainty for employees leading to increases in delay and cost. This reasoning completely ignores SIP 16 and the requirement for administrators to ensure that a statement complying with SIP 16 is sent to all creditors and to the Insolvency Service as soon as practicable following appointment. The EAT makes no reference to SIP 16 in its judgment despite the fact that the paragraph which immediately follows from the Sealy and Millman transcript referred to in Barke provides a useful summary of SIP 16 and its use in pre-pack administrations. This reasoning also does not take into account that the administrator may be required to confirm the appropriate statutory purpose in evidence supporting a Court application. It also ignores the fact that an administrator will usually engage with employees immediately following appointment; and
  4. there is evidence in the judgment that the EAT had difficulties reconciling the pros and cons of the conflicting approaches to the applicability of TUPE. Reference is made to the fact that there is little difference in practice to liquidation and a pre-pack administration which shows that the decision is likely to have been more motivated by political factors. There is also recognition that the application of TUPE to pre-pack administrations might be prejudicial to employees if it deters a buyer and prevents the undertaking from continuing. This factor is dismissed with reference to the Directive and the Abels decision. It is highlighted, however, that an administrator and potential buyer can still make use of regulation 9 of TUPE by negotiating a transfer with employees although this is unlikely to be a practical option in many pre-pack administrations.

The above flaws in the reasoning in Barke may not provide the desired certainty on this issue. Barke stands alongside Oakland v Wellswood Yorkshire Limited (“Oakland”) which means that the door is not closed on an argument that TUPE does not apply to pre-pack administrations particularly given that the reasoning in Barke is open to attack. Although it would be a brave Chairman who opted to detract from Barke, true certainty on this issue will not arrive until the Court of Appeal has had the opportunity to consider the issue or TUPE is amended. Given that the Court of Appeal has stated that it does not agree with the decision in Oakland, it is likely that TUPE will ultimately apply to all administrations. It is a shame, however, that the EAT has missed an opportunity to provide the absolute certainty it patently set out to achieve.

Back to the Future

In the case of HMRC v. Maxwell and Klempka [2010] EWCA Civ1379, the Court of Appeal was asked to consider an application by HMRC to reverse the decision of a Chairman sitting at a meeting of creditors for the approval of a CVA.

Mercury Tax Group Limited (“the Company”) was placed into administration with the administrators’ proposals anticipating an exit via a CVA. At an adjourned meeting of creditors the CVA was approved by a majority. HMRC voted against the proposal. HMRC claimed to be owed £9 million but the Chairman of the meeting, being one of the administrators, admitted HMRC’s claim for voting purposes at £1.5 million. The balance of HMRC’s claim was in relation to Corporation Tax for accounting periods dating back to 2004. By the time of the adjourned creditors’ meeting, HMRC had provided a breakdown of its claims in the total sum of £9 million. If HMRC’s claim had been allowed in full, the proposals would have been defeated.

HMRC challenged the Chairman’s decision under rule 2.39(2) of the Insolvency Rules 1986 (“IR86”). At first instance the Court upheld the Chairman’s decision. HMRC appealed to the Court of Appeal.

The Court of Appeal decided that the relevant date for assessing HMRC’s claim was as at the date of the administration and not the date of the creditor’s meeting. A debt that is unascertained or unliquidated at the date of the administration can sometimes become ascertained or liquidated by further evidence at the date of the meeting. Nevertheless, such a debt should still be treated as unascertained or unliquidated if it was so at the date of the administration. Matters which post date the administration can be taken into account by the Chairman when settling the estimated minimum value of the claim for voting purposes. In contrast, the Court of Appeal referred to the position whereby a debt is liquidated or ascertained but disputed. In such circumstances, the correct approach is to accept such claims for voting purposes and mark them as objected to.

The Court of Appeal determined, therefore, that HMRC’s debt was only liquidated as at the date of the administration to the extent of the amounts declared in the Company’s self-assessment return. The rest of HMRC’s claim was at that date unliquidated or unascertained. The Court of Appeal went on to review the Chairman’s approach to establishing a minimum value of HMRC’s claim for voting purposes. It was decided that whereas the Chairman of a meeting of creditors may be entitled to adopt a rough and ready approach when settling a value on an unascertained or unliquidated claim, the Court must conduct a greater scrutiny of the factual and legal basis of the claim. This is in line with the Court’s function when hearing an appeal under rule 2.39(2) of IR86, whereby the Court should not merely review the decision of the Chairman but should form its own view based on the evidence and arguments advanced. The Court of Appeal found that HMRC had made out a detailed case to support their claim that the Corporation tax was due and the administrators had not provided any substantive evidence or argument to defeat that claim. Accordingly, a greater value ought to have been ascribed to HMRC’s claim.

Whilst the Court of Appeal did not accept that HMRC’s debt was liquidated or ascertained, it did suggest that the Chairman ought to have accorded a greater level of voting entitlement, which would have been sufficient to defeat the proposals put to the meeting. With the agreement of the parties, the Court of Appeal ordered that another meeting of creditors be summoned.

This case provides welcome guidance on how a Chairman should classify and deal with claims that are unliquidated or unascertained at a meeting of creditors. Whilst the processes involved in this case where an administration and a proposed CVA, the same principles are capable of being applied to other insolvency proceedings. One of the key points in the guidance provided by the Court of Appeal states that where there is a dispute between the insolvent and the creditor as to the amount of an unliquidated or unascertained claim, the creditor should be given the benefit of the doubt unless there is a sound basis to defend the amount claimed.

An IVA is no longer child’s play

The Child Maintenance and Enforcement Commission (“CMEC”) is the body responsible for assessing, collecting and enforcing child maintenance support under the Child Support Act 1991 (“CSA”). The case of CMEC v. Beesley & Whyman [2010] EWCA Civ1344 (CH) provides some clarity on how such creditors should be classified for the purpose of an IVA.

Mr Whyman sought to include CMEC in an IVA which was proposed and approved by his creditors. CMEC did not attend the creditors’ meeting, given that it considered that its claim was not a debt which would be bound by the IVA.

CMEC brought an application under section 262 of the Insolvency Act 1986 (“IA86”) for the IVA to be set aside. The application succeeded on the ground that CMEC was unfairly prejudiced by the IVA. However, the case included a determination by the first instance Judge that CMEC was a creditor capable of being bound by the IVA. CMEC appealed on this point and the matter came before the Court of Appeal.

The Court of Appeal reversed the first instance decision on the question of whether the CMEC was a creditor capable of being bound by the IVA. It agreed with the first instance Judge that the IVA unfairly prejudiced CMEC and commented that it would be a rare case where an IVA was not found to be unfairly prejudicial to the CMEC.

The Court of Appeal made its decision on two main grounds. First, it decided that whilst the child support liability was a bankruptcy debt within the meaning of section 386 of IA86 and whilst CMEC fell within the wide definition of “creditor” under section 383 of IA86, its debt would not be discharged by bankruptcy or a debt relief order. Secondly, the Court of Appeal found that owing to current legislation, CMEC could not compromise or waive arrears of child support and as a matter of law such debts were not capable of composition under an IVA.

Following the decision at first instance, it had been considered that child support liability may be avoided by virtue of an IVA. The Court of Appeal has now provided certainty on this point as it is clearly not possible for a debtor to compromise liability pursuant to the CSA by an IVA. The decision appears to be sound in accordance with considered opinion with regard to the nature of debts which can be compromised in an IVA. The decision demonstrates that when deciding whether a particular creditor is capable of being bound by an IVA regard should be had to the circumstances of that creditor in the event of bankruptcy.

It should be pointed out that proposed changes to the CSA will soon enable CMEC to accept part payments of arrears in satisfaction of existing liability. This could impact on the Court of Appeal’s decision in this case, although it is unlikely that, as a matter of policy, the Court of Appeal would change its view that child support ought not to be treated differently under an IVA than under bankruptcy.

Disability Discrimination Act 1995 (“DDA”) – Fair warning

A recent case decided in the Manchester High Court could have significant implications for practitioners acting as trustee in bankruptcy of individuals who may be classed as disabled under the DDA.

The case of Nicola Haworth v. Donna Cartmell concerned Miss Haworth’s application to annul her bankruptcy. Miss Haworth suffered a serious injury in an accident during her 20s, which caused her to suffer from anxiety and depression. Her mental condition gave rise to a specific phobia of opening mail and in particular official letters. Miss Haworth bred Arabian horses as a hobby. In 2005 HMRC received an anonymous tip that Ms Haworth was in receipt of more than £100,000 per year from her horse breeding and requested that she provide tax returns. When Miss Haworth failed to respond HMRC made an assessment of outstanding tax in the region of £192,000.

Miss Haworth’s mother contacted HMRC in 2007 and explained that her daughter was disabled. Following a petition presented by HMRC, Miss Haworth was made bankrupt on 29 August 2008.

Miss Haworth applied to annul the bankruptcy on the grounds that her mental condition prevented her from opening post received from HMRC and that she lacked the capacity to deal with the bankruptcy proceedings.

The Court found that Miss Haworth was disabled under the DDA and that as a public authority HMRC owed a duty to Miss Haworth to make reasonable adjustments and that it had failed in that duty. The Court suggested that following the notification that Miss Haworth was disabled, HMRC should have contacted Miss Haworth’s mother and waited for provision of a medical report before taking any action. The Court also decided that HMRC should have taken alternative enforcement methods against Miss Haworth.

This case concerned conduct which took place prior to 1 October 2010 when the DDA was replaced by the Equality Act 2010. Nevertheless the same principles would apply and the same decision is likely to have been reached applying current legislation.

The Court did not decide the question of whether a trustee in bankruptcy might also be classed as a public authority for the purposes of the applicable legislation. Whilst it may be stretching the definition of public authority to apply the disability legislation to a trustee in bankruptcy, it is correct to note that, like HMRC, a trustee in bankruptcy performs a statutory function.

If disability legislation was to apply to a trustee in bankruptcy, this might place an obligation on practitioners to assess whether an individual bankrupt could be classed as disabled and regard would have to be had to appropriate measures to ensure that the provisions of the legislation are not breached.

It is considered that HMRC experienced difficulty in this case because of the notice it received that Miss Haworth was disabled. Practitioners would be sensible to take particular care if they are informed that a bankrupt may be disabled.

Corporate Hospitality – A Thing of the Past?

The Bribery Act 2010 (“the Act”) was due to come into effect in April of this year. As has been heavily publicised in the media, the Government has delayed the implementation of the Act together with the consultation concerning its implementation.

The Act brings into effect four offences as follows:

  1. paying bribes;

  2. receiving bribes;

  3. bribery of foreign officials; and

  4. failure of commercial organisations to prevent bribery.

The definition of bribery is widely drawn and involves offering or promising someone “a financial or other advantage”. It is this wide definition of bribery and the last of the above offences which is cause for concern. Such an offence will be committed by a commercial organisation where a person associated with the commercial organisation (which includes not only employees but agents and external third parties) bribes another person (ie. offers or promises a financial or other advantage) with the intention of obtaining or retaining a business advantage and the organisation cannot show that it had adequate procedures in place to prevent the bribery from taking place.

It is unclear whether and to what extent corporate hospitality would fall under the definition of “financial or other advantage” such as to give rise to an offence under the Act. Unfortunately, the Act provides no guidance at all as to what may be classed as a “financial or other advantage” and what steps would be considered adequate to be taken by a commercial organisation in preventing such from happening.

It has been suggested that lavish or extraordinary corporate hospitality might be caught as one of the offences under the Act. However, unless and until the Government provides clear guidance as to what might be classed as lavish or extraordinary, practitioners should be aware of the need to review existing corporate hospitality to ensure that it will not fall foul of this new legislation.

Copyright 2006 - 2010 Taylors Solicitors

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