Business Recovery And Insolvency
Bulletin
September 2010
Welcome to the latest edition of
Taylors’ Business Recovery and
Insolvency Bulletin.
Whilst the harsh winds of the
current recession do not appear to
have resulted in as many insolvency
appointments as predicted, it is
clearly only a matter of time before
there is an upsurge. With that in
mind, the Government seems to be
busy finding ways to refine and
reform the way insolvency
practitioners operate. In this
edition we highlight a number of the
proposed reforms to insolvency
practice whilst providing the usual
case law update.
Should you require any further
information or guidance on any of
the articles contained in this
edition of our quarterly bulletin
please contact Andrew:
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Unless you have been marooned on a
desert island for the last 2 years or so you
will be all too aware of the fact that we
are in the midst of a recession with
substantial cuts anticipated in public
sector expenditure which threatens to derail
a fragile recovery.
With many UK companies facing a myriad of
challenges which threaten their economic
stability the demand for external advisors
who are experienced in dealing with
“turnaround” (or in other words delivering a
business recovery plan) is at a premium.
What constitutes turnaround, the advantages
of engaging a turnaround professional, who
to talk to and when are some of the key
issues examined in an
article by Andrew Livesey Head of Corporate
Recovery at Taylors.
Despite the roll-out of SIP16 and its
industry wide adoption, concerns still
remain within Government and the popular
press about the pre-pack process. The public
perception of pre-packs is somewhat skewed
with many non-insolvency commentators
failing to see the benefits of a process
that can preserve jobs and allow the
continuity of a good business model. In
response to the pressure, the Insolvency
Service is conducting a further review of
how the pre-pack process can be improved in
terms of its transparency with a view to
instilling confidence.
The possible options for reform presently
being considered by the Insolvency Service
are as follows:
- incorporating the provisions of
SIP16 into statute to force
practitioners to follow the disclosure
requirements and providing penalties for
non-compliance
- restricting the exit of a pre-pack
administration to compulsory liquidation
as opposed to voluntary liquidation or
dissolution so as to enable scrutiny of
the directors and the administrators’
actions by the Insolvency Service
- requiring different insolvency
practitioners to undertake pre and post
administration appointment work and
- requiring court approval for all
pre-packaged business sales
The full consultation document can be
located at the following link:
http://www.insolvency.gov.uk/insolvencyprofessionandlegislation/con_doc_register/RestructuringMoratoriumConsultationDocument.pdf
Comment
It is easy to criticise the Insolvency
Service for being over zealous particularly
given that the latest statistics demonstrate
a fall in the number of administration
appointments. However, the Government is
clearly bracing itself for an upturn in
insolvency cases and it is hard to envisage
a scenario where the pre-pack regime is not
reformed in some way. As for the above
proposals, the court has proven in the past
to be an unsuitable arbiter for pre-pack
business sales. Court applications will
generate uncertainty which will reduce the
number of pre-packs as directors are put off
by the hefty upfront costs that will be
incurred without the guarantee of court
approval.
It is likely that SIP16 will be brought
into a statutory framework which is sensible
given that most practitioners adhere to the
code anyway. It is also a good idea to bar
out pre-packs from the automatic CVL/dissolution
process to ensure at least some scrutiny by
the court and/or the Insolvency Service.
However, before these reforms are rushed
through by the Government, more needs to be
done to make the case for the benefits that
pre-pack administrations can bring to
individual cases and to the economy as a
whole, particularly as the number of
companies requiring urgent insolvency
assistance starts to increase.
The last edition of ‘Dear IP’ contains
reference to a report published by the
Office of Fair Trading (“OFT”) entitled “The
Market for Insolvency Practitioners in
Corporate Insolvencies”. The report contains
a detailed review of corporate insolvencies
of all type. Whilst the OFT’s conclusions
are relatively unsurprising, its
recommendations for how the current system
can be reformed provide some food for
thought. All 104 pages of the full report
can be found at:
http://www.oft.gov.uk/shared_oft/reports/Insolvency/oft1245
We summarise the key points of the report
as follows.
Problems highlighted by the report
The report concentrates on
administrations and CVLs, being the most
common types of insolvency process in terms
of volume of appointments and fee income
generated. The OFT found an imbalance of
power between secured and unsecured
creditors. The report determines that
because secured creditors have greater
influence over the administration process in
terms of appointment and fees, they have
more say in how practitioners conduct a
particular case. The OFT found that
practitioners provided a better service for
unsecured creditors where the secured
creditors are not paid in full. The report
concludes that the influence exerted by
secured creditors over practitioners leaves
unsecured creditors behind and that the
measures available to unsecured creditors to
exert more influence over practitioners are
ineffective. The OFT also found fault with
the current regime of regulation for
insolvency practitioners stating that the
system is too fractured leading to
inconsistent regulation and an imbalance in
how different practitioners operate.
Recommendations
Following the OFT’s findings the report
suggests the following reforms:
- the setting up of an independent
body, to be funded by the insolvency
profession, to consider creditor
complaints. This body would be given the
power to impose sanctions on
practitioners and, where appropriate, to
reduce the costs and expenses charged
with the power to order the insolvency
practitioner to reimburse any overcharge
- the Insolvency Service to become the
overall regulator of the 10 recognised
regulatory bodies for insolvency
practitioners to unify the process of
regulation. This would see a
corresponding reduction in the
Insolvency Service’s role in directly
regulating practitioners; and
- amendment to the current regulatory
framework to better protect the
interests of unsecured creditors.
Comment
The report acknowledges that existing
regulations already contain provision for
unsecured creditors to complain about the
conduct of an insolvency practitioner. The
OFT found, however, that such action can be
cumbersome and expensive, often leading to
unsecured creditors taking no action for
reasons of commerciality. The proposed new
complaints body will make it easier for
creditors to complain which means that it
will have to be properly resourced and clear
guidance will be needed on what is expected
of insolvency practitioners. The suggested
reform of the regulatory framework is to be
welcomed. Unlike accountants and solicitors,
there is no unified regulatory body for the
insolvency profession which can lead to
imbalance and inconsistency in terms of the
way that practitioners are regulated. The
OFT has clearly taken the view that the
replacement of the existing 10 regulatory
bodies with a new single regulatory body
would be too difficult to implement. The
recommendations are clearly a compromise
which will hopefully lead to improved
consistency and certainty for practitioners.
Regular readers of this bulletin will
recall the overview contained in our last
edition of the recent changes to the
Insolvency Rules 1986 (“IR86”) which came
into effect from 6 April 2010. One of the
headline changes concerned the ability of
practitioners to recover pre-appointment
costs in an administration which,
understandably, provoked much interest and
excitement. This excitement may be short
lived, however, given the decision of Judge
Purle in the case of Johnson Machine & Tool
Limited [2010] EWHC 582. Judge Purle also
delivered the infamous Goldacre judgment
which was also reviewed in the last edition.
Facts
The court heard an application for an
administration order which contained an
application for the pre-appointment costs
incurred by the insolvency practitioners to
be paid as an expense of the administration.
Decision
Judge Purle, whilst making the
administration order, declined to allow the
insolvency practitioners to treat their
costs as an administration expense. He
reasoned that the largest element of the
costs claimed by the proposed administrators
related to the negotiation of the pre-pack
sale. Judge Purle concluded that ordinarily
such costs would not fall properly to be
treated as an administration expense and in
his judgment such costs should be limited to
the costs incurred in advising on such
matters as the preparation and filing of the
appointment documentation.
Comment
This case considered the old rules and
the court was exercising its discretion
whether to allow such costs as an
administration expense. The judgment,
however, may be relevant to how the court
might interpret the new provisions allowing
pre-appointment costs which are contained in
new rules 2.33(2A) and 2.67(1)(h) of IR86.
It was expected that these new provisions
would enable practitioners to claim the
majority of costs incurred before
appointment, however, the rules are silent
as to the nature of the costs which can be
claimed. Until there is further
determination on the specific new rules,
Judge Purle’s decision will have at least
persuasive authority and should be borne in
mind when considering the recoverability of
pre-appointment costs.
Until there is more clarity on this issue,
practitioners should ensure that adequate
measures are adopted before appointment to
allow for such costs to be paid either by
agreement with secured creditors or with the
appointing company or its directors.
The decision of the Employment Appeal
Tribunal (“EAT”) in Oakland -v- Wellswood
(Yorkshire) Limited certainly caused a stir.
In this case the Employment Appeal Tribunal
(“EAT”) considered regulation 8(7) of the
Transfer of Undertakings (Protection of
Employment) Regulations 2006 (“TUPE”) which
provides that the provisions relating to
relevant transfers of a business
(regulations 4 and 7) do not apply where the
transferor is the subject of insolvency
proceedings instituted with a view to the
liquidation of assets. The EAT determined
that regulation 8(7) can apply to an
administration which is instituted with a
view to the liquidation of assets i.e. as in
a pre-packaged administration.
The decision generated much interest as it
had the potential to minimise the risk of
significant employee claims transferring to
a purchaser following a pre-pack thus
enhancing the saleability of a business and
increasing the number of companies that
could take advantage of the pre-pack
process. The case went to the Court of
Appeal where the appeal was allowed on a new
point which had not been raised before the
EAT. Consequently, the Court of Appeal
decided that it was not appropriate to make
a determination on the TUPE issue. The Court
of Appeal, nevertheless poured cold water on
the Oakland decision by proclaiming that
there were strong grounds for thinking that
the EAT had taken the wrong approach.
Many have bemoaned the failure of the Court
of Appeal to take the opportunity to give a
binding judgment on whether TUPE applies to
pre-packs and thus provide clarity on the
point. That opportunity may arise once more,
however, thanks to the decision of the
Employment Tribunal in the case of Coombs
and Parkash -v- Redweb Security Limited,
Redweb Security (UK) Limited and Redweb
Technologies Limited which reaffirms the
Oakland decision.
Facts
The claimants were both employed by
Redweb Security (UK) Limited (“UK”) which
went in to administration and sold its
business and assets to Redweb Technologies
Limited (“Technologies”) through a pre-pack
administration. Employment Judge Kearsley
agreed to determine a preliminary issue on
this case, namely whether regulations 4 and
7 of TUPE could be relied on by the
claimants so as to bring a claim against
Technologies or whether regulations 4 and 7
were not applicable pursuant to regulation
8(7).
Decision
The Employment Judge considered the
decision of both the EAT and the Court of
Appeal in Oakland and determined that the
main issue for decision was whether the
administration of UK had been instituted
with a view to the liquidation of its
assets. The Employment Judge decided that
there had been a pre-pack administration
and, therefore, that the administration was
instituted with a view to the liquidation of
UK’s assets. He found that he was bound by
the EAT’s decision in Oakland and,
accordingly, regulation 8(7) applied.
Comment
The Employment Judge made it very clear
that in making his decision, he was bound to
follow the reasoning in Oakland and
acknowledged the reservations of the Court
of Appeal although such were not binding on
him. He also commented that the Oakland
decision conflicted with the guidance
provided by the Department for Business,
Innovation & Skills (“BIS”) that regulation
8(7) was not intended to apply to
administrations. It is not clear whether the
claimants have appealed this decision and it
is hoped that the Court of Appeal will
finally have the opportunity to provide
clear guidance on the interpretation of
regulation 8(7).
If the case is heard before the Court of
Appeal it is highly likely that the Court
will elaborate on the reservations it had in
Oakland and confirm that regulation 8(7)
does not apply to administrations.
Accordingly, practitioners should be
cautious to accept Redweb as good authority
since it is not yet determinative on this
issue.
There are a number of cases involving
complaints about inordinate delay in taking
legal proceedings. However, very few such
complaints ever prevent a practitioner from
achieving the required result.
The recent decision in Stoneham -v-
Ramratten (Chancery Division, 5 May 2010,
unreported) acts as a reminder that whilst
the limitation periods laid down by the
Limitation Act 1980 (“LA80”) have
application, inordinate delay can still lead
to difficulties.
Facts
Mr Ramratten was the subject of a second
bankruptcy. Prior to this, Mr Ramratten had
sold a property registered in his sole name
and from the proceeds, acquired another
property which he also registered in his
sole name. This property was then
transferred into his wife’s sole name and
the explanation given was that the
subsequent transfer was made by mistake.
Following Mr Ramratten’s second bankruptcy,
the trustee sought to take steps to argue
that the transfer of the second property to
his wife was a transaction at an undervalue
and should be set aside under section 339 of
the Insolvency Act 1986 (“IA86”). A numbers
of years passed before a formal application
was made to the court. In fact, the trustee
in this case waited until just before the 12
year limitation period under LA80 had
expired before making his application. On
top of this, the transaction had taken place
just within the 5 year period for the
purposes of section 341 of IA86 and the
court did not hear the application for a
further 2 years after the claim had been
issued. Accordingly, 19 years had passed
between the relevant transaction and the
date of determination.
Decision
At first instance, the Judge declined to
make an order on the basis that the greater
prejudice caused by the delay was to the
bankrupt and his wife as opposed to the
creditors. Given the time that had elapsed,
the Judge determined that the bankrupt and
his wife were unable to produce any evidence
to rebut the presumption of insolvency and
further, had been denied the opportunity
(because of their age) to raise funds to
purchase the trustee’s interest in the
property or to apply to annul the
bankruptcy. Furthermore, the Judge
determined that of the 3 creditors of this
bankruptcy 2 were unlikely to still be in
existence and HMRC was likely to have lost
its records. Balancing these interests, the
Judge declined to make an order.
On appeal, however, the court determined
that there had to be something very unusual
to justify the court declining to exercise
its discretion and the delay by itself could
not be such justification. A warning was
given, however, that it was impossible to
say that delay could never be a factor in
the exercise of the court’s discretion if
considered in combination with other
factors.
Comment
Given the facts of this case, it is
difficult to see on what basis the court
might decide to reject a claim by a
practitioner which, whilst not void due to
limitation, involves significant delay
causing obvious difficulties for the
respondents. It should be noted, however,
that in this case, the court made a finding
that the bankrupt had been dishonest, that
he had lied and committed forgery. It is
likely that these considerations were very
much at the forefront of the appeal Judge’s
mind when making his decision. Had the
bankrupt’s conduct been less objectionable,
it is possible that the court might have
upheld the first instance Judge’s decision.
Care should, therefore, be taken to ensure
that where court action is to be commenced
it is done so as swiftly as possible.
Copyright 2006 - 2010 Taylors Solicitors
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