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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:

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:

» Turnaround - The Key Issues
» Pre-packs: More Consultation
» Oft Quoted
» A ‘Purle’ of Wisdom
» Oakland V Wellswood Revisited And Reaffirmed
» Sitting on Your Hands can be a Dangerous Strategy

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!

Turnaround - The Key Issues

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.

Pre-packs: More Consultation

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:

  1. incorporating the provisions of SIP16 into statute to force practitioners to follow the disclosure requirements and providing penalties for non-compliance
  2. 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
  3. requiring different insolvency practitioners to undertake pre and post administration appointment work and
  4. requiring court approval for all pre-packaged business sales

The full consultation document can be located at the following link:

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.

OFT Quoted

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.

Following the OFT’s findings the report suggests the following reforms:

  1. 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
  2. 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
  3. amendment to the current regulatory framework to better protect the interests of unsecured creditors.

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.

A ‘Purle’ of Wisdom: Limitation on Pre-appointment Expense Claims

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.

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.

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.

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.

Oakland v Wellswood Revisited and Reaffirmed

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.

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).

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.

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.

Sitting on Your Hands Can be a Dangerous Strategy

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.

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.

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.

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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