Insolvency Legal Update 2019 - Julian Dobson Legal Update October … · Insolvency Legal Update...

Insolvency Legal Update

2019

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We are solicitors dealing exclusively with insolvency matters. Based in the City of Brighton &

Hove, we are close to Brighton County Court, one of the busiest bankruptcy courts in the

country. The firm acts mainly for insolvency practitioners throughout England and Wales.

As a firm of solicitors, we have a Licensed Insolvency Practitioner (non-appointment taking). We

emphasize a practical approach in our dealings with clients, the courts and others.

For all enquiries on insolvency related matters contact:

Information [email protected]

Julian Dobson [email protected]

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Christine Boyce [email protected]

The contents of these notes are a summary of the relevant provisions. Legal advice should be

taken in relation to specific enquiries. Any liability is disclaimed.

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1 Frederick Terrace, Frederick Place, Brighton, East Sussex, BN1 1AX

Tel: 01273 766355 Fax: 01273 766350

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INDEX

ADMINISTRATION Conn v Ezair Re Charlotte Street Properties Limited (In Administration) [2019] EWHC 1722 (Ch) Administrators’ use of Section 234 Insolvency Act 1986 to recover properties Green & Newman v SCL Group Limited [2019] EWHC 954 (Ch) Decision to place company into administration and appointment of administrator as liquidator Hyde v Nygate [2019] EWHC 1516 (Ch) Application for permission for new claim against administrators – alleged failure to pursue objective under para 3(1)(a) Schedule B1 Wright v HMV Ecommerce Limited [2019] EWHC 903 (Ch) Validity of appointment by directors out of hours BANKRUPTCY Ardawa v Uppal & Jordan [2019] EWHC 456 (Ch) Annulment of bankruptcy order and exercise of Court’s discretion Ardawa v Uppal & Jordan [2019] EWHC 1663 (Ch) Trustee’s costs payable as an expense – subject to summary assessment Birdi v Price [2019] EWHC 291 (Ch) Application to remove trustee in bankruptcy Lambert v Forest of Dean District Council & Ors. [2019] EWHC 1763 (Ch) Annulment improper service and abuse of process Sleight (As Trustee of the Estate of Jillian Paula Mascall Deceased) v The Crown Estate Commissioners [2019] BPIR 430 Disclaimer of freehold - Application for vesting order in respect of freehold and/or surplus Tate & Hopkirk v Farrell & ors [2019] [2019] BPIR 671 Transaction defrauding creditors – s 423 Insolvency Act 1986 LIQUIDATION Burnden Holdings (UK) Limited (In Liquidation) v Fielding [2019] EWHC 1566 (Ch) Liquidator’s claims under Section 423 Insolvency Act 1986 – unlawful dividends Dumville v Rich [2019] EWHC 2086 (Ch) Whether compensation payable by a misfeasant director can be discounted? VOLUNTARY ARRANGEMENTS CFL Finance Limited v Bass [2019] EWHC 1839 (Ch) Application of good faith to voluntary arrangements

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31-36

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Julian Dobson Solicitors 2019©

ADMINISTRATION

Conn v Ezair Re Charlotte Street Properties Limited (In Administration) [2019] EWHC 1722 (Ch)

Administrators’ use of Section 234 Insolvency Act 1986 to recover properties Facts The Applicants were administrators of Charlotte Street Properties Limited (In Administration) (“the Company”) and were liquidators of an associated company Northern Estates Limited (“NEL”). The administrators sought an order under Section 234(2) of the Insolvency Act 1986 (IA86) requiring Mr. Ezair to transfer to them title to six properties (“the Properties”). Mr. Ezair was registered as the freehold owner of each of the Properties having acquired them between 1973 and 1984 as part of a larger portfolio. NEL was formed to acquire a business of managing and letting the portfolio of properties of which the Properties formed part. By an Agreement dated 05 April 1999 Mr. Ezair agreed to sell the portfolio to NEL in consideration for the allotment of 98 ordinary £1 shares. Completion was to take place following the giving of seven days’ written notice. Mr. Ezair received the shares from NEL and had therefore been paid the contractual consideration in full. Subsequently Mr. Ezair set up a family trust in Jersey and incorporated the Company. Both the family trust and the Company were established to avoid UK tax liability. There was a later Agreement dated 28 November 2003 between NEL and the Company whereby NEL agreed to sell the Company some of the portfolio properties which included the Properties for £1.3m. The contractual consideration of £1.3m was funded from a Northern Rock Loan of £800,000 and an inter-company loan from NEL. The Company furnished consideration by assuming liability for repayment of the loans. Whilst the Properties were shown as assets in the Company’s accounts the legal title remained in the name of Mr. Ezair. The Company fell into arrears under the Northern Rock Loan and LPA receivers were appointed. The Properties were then re-financed with Barclays. On 12 November 2015 NEL was subject to a winding up order and on 16 October 2017 the Company went into administration. Mr. Ezair continued to collect the rents and despite being requested to do so, did not account for them to the administrators. Previously the administrators’ solicitors had submitted TR1’s to Mr. Ezair requesting him to execute and return them to enable the Properties to be transferred to the Company. Following the issuing of the administrators application at an earlier hearing it was conceded that Section 234(2) IR86 would enable the court to order the Properties to be transferred to the Company, it would not however enable an order to be made in respect of the rents that continued to be collected by Mr. Ezair.

234 Getting in the company’s property.

234(1) [Application] This section applies in the case of a company where—

(a) the company enters administration, (b) an administrative receiver is appointed, or (c) the company goes into liquidation, or

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(d) a provisional liquidator is appointed;

and “the office-holder” means the administrator, the administrative receiver, the liquidator or the provisional liquidator, as the case may be.

234(2) [Court’s powers] Where any person has in his possession or control any property, books, papers or records to which the company appears to be entitled, the court may require that person forthwith (or within such period as the court may direct) to pay, deliver, convey, surrender or transfer the property, books, papers or records to the office-holder. 234(3) [Application of s.234(4)] Where the office-holder—

(a) seizes or disposes of any property which is not property of the company, and (b) at the time of seizure or disposal believes, and has reasonable grounds for

believing, that he is entitled (whether in pursuance of an order of the court or otherwise) to seize or dispose of that property, the next subsection has effect.

234(4) [Liability of office-holder] In that case the office-holder—

(a) is not liable to any person in respect of any loss or damage resulting from the seizure or disposal except in so far as that loss or damage is caused by the office-holder’s own negligence, and (b) has a lien on the property, or the proceeds of its sale, for such expenses as were incurred in connection with the seizure or disposal.

For Mr. Ezair it was put that it was a particularly complex dispute and it was not appropriate to summarily determine the matter under the provisions of Section 234. This argument was rejected by the Court who continued to consider the application. The Judge in considering Section 234(2) observed that the administrators must show that the Company “appears to be entitled” to “property”. This would include contractual and any legal or equitable interest in respect of property. For Mr. Ezair various arguments were put forward as to why he should not be ordered to transfer the Properties back to the Company. Decision His Honour Judge Halliwell found that Mr. Ezair held the Properties on a bare trust for the Company pursuant to the earlier 1999 Agreement and that as such he was under an obligation to transfer the Properties to the Company. In the alternative the Company would in any event have been entitled to an order for specific performance of the 1999 and later 2003 Agreements. In reaching his decision the Judge recognised that relief under Section 234 is discretionary and that it does not confer jurisdiction on the Court to entertain pecuniary claims or claims to an account and damages. This being the case, the Court could not reach any decision concerning the rents. Mr. Ezair’s claim to be entitled to be indemnified out of the trust assets in respect of his expenses was also considered and rejected by the Judge as he was satisfied that the amounts Mr. Ezair -was entitled to by indemnity -did not exceed the rents collected by him in respect of the Properties.

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Comment

• Section 234 is a powerful tool available to both administrators and liquidators and covers not only property but books, papers, records and property to which the company appears to be entitled. This decision demonstrates that the Section can be used even where there is an alleged dispute as to ownership of property.

• The Judge noted that at trial Mr. Ezair chose not to take the witness stand to give oral evidence thereby subjecting himself to cross-examination by the administrators’ Counsel.

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Administration

Green & Newman v SCL Group Limited [2019] EWHC 954 (Ch)

Decision to place company into administration and appointment of administrator as liquidator Facts Cambridge Analytica (UK) Limited (‘Cambridge Analytica’) hit the headlines both in America and in the UK. It was accused, amongst other things of interfering in the US Presidential Elections in 2016. Cambridge Analytica consisted of a group of companies involved in the acquisition of commercial data which was then subjected to analysis to facilitate target advertising and messaging. The amount of information involved was vast, and it was said to involve the misuse of data belonging to millions of individuals around the world. Its activities had come to the attention of Professor David Carroll (‘Prof Carroll’) who was an associate professor of media design at the Parsons School of Design in New York. He specialised in on-line behavioural advertising techniques and the de-anonymization of individual’s information. As a curious academic he had made a Subject Access Request (‘SAR’) to one of the Cambridge companies to find out what personal data of his was held by that company. The response to his request was not in his view satisfactory and therefore he instructed solicitors to issue a letter before action. In the meantime the UK Information Commissioners’ Office (‘ICO’) commenced a formal investigation into Cambridge Analytica. In March 2018 a whistle-blower went public on the company’s exploitation of personal data of Facebook users. Shortly thereafter the ICO raided the offices of Cambridge Analytica and seized laptops and servers. The Cambridge Analytica business comprised several companies whose ultimate holding company was Emerdata Limited. It was in March 2018 also that Prof. Carroll issued proceedings against some of the Cambridge Analytica companies. He sought an order that the company in question comply with the SAR request. Overnight the adverse publicity both here and in the US rendered the brand toxic with clients cancelling contracts and seeking return of payments made. On 24 April 2018 Crowe, a UK Insolvency firm were approached by Emerdata Limited for advice. The advice was that the relevant companies within the group were insolvent and that administration would facilitate the sale of the assets and preserve jobs. The relevant companies then submitted their own applications for administration orders. Indications from the directors were that they anticipated an outside investor would make a bid for the assets of the relevant companies. Mr. Green and Mr. Newman of Crowe agreed to act as administrators in the event that the administration orders were made. The applications came before Hildyard J on 02 May 2018. The Judge had concerns and therefore did not make the orders at that stage. In particular, he was troubled as to what seemed to be a very fine balance between administration and immediate liquidation. Overnight it was announced in New York that Cambridge Analytica were “closing their doors”. The following day the Judge requested the proposed administrators to reconsider. In particular he asked:

"Is this not time, despite the urgency… for a really, really considered view as to whether, in all these new circumstances, administration is really going to likely result in achievement of the statutory purposes? … It will not be determinative but it will be highly influential… and it will figure in my judgment if I were to order administration."

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Upon consideration the joint administrators confirmed their beliefs set out in their certificate and the joint administrators were appointed as administrators of the relevant companies. Following their appointment when they attended at the premises they realised that they could not continue to trade because the servers and laptops had been seized by the ICO and there was a significant degree of hostility encountered from the employees. Agents were engaged to market the businesses however, the end result was that four offers were received two of which were derisory and none of which were accepted. Once it became apparent that the businesses were not going to be sold as a going concern, the administrators sought a Statement of Affairs which they circulated to creditors with a view to placing the company into compulsory liquidation. Creditors overwhelmingly approved the joint administrators’ proposals. They placed the companies into compulsory liquidation and sought their appointment as liquidators. Prof. Carroll objected to this course of action. His objections were:

(a) real concerns about the making of the administration order;

(b) the need for an independent investigation and concern that the joint administrators would not cooperate in that process;

(c) the conduct of the joint administrators was below standards expected;

(d) the appointment of joint administrators as liquidators would undermine public confidence;

(e) to avoid the mechanistic exercise of totting up the value of creditors’ votes should be avoided.

Prof. Carroll claimed that the joint administrators should have told Hildyard J about the proceedings that he had commenced. Norris J disagreed and did not consider that the joint administrators are bound to seek out every piece of litigation and that as such they were not bound to inform the Court of such litigation. Prof. Carroll also raised concerns over funding. The administrations had been funded by Emerdata to which Prof. Carroll objected. However the Court took the view that the funding of the administrations in such a way was not unusual. On the question of costs, Prof. Carroll objected to the fact that the costs estimate had been exceeded. On this point it was noted that the approval of creditors was still needed and the fees proposed would be subject to scrutiny by a creditors committee. In any event such fees are open to challenge in any event. The more serious allegation was that the joint administrators were incompetent and lacked integrity in certifying that there was a reasonable prospect of achieving the purposes of the administration. Prof. Carroll argued that that lack of confidence prevented them from standing as liquidators. It was noted that Hildyard J had raised concerns over choice of administration against liquidation, and having reviewed the circumstances Norris J concluded that:

“….it is not possible to characterise the considered view of the proposed administrators (that there remained a real prospect of a better return to creditors than would be achieved in an immediate liquidation) as irrational, perverse or outside the range of views that might be held by reasonably competent practitioners….”

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Prof. Carroll through his solicitors had requested copies of all the materials that were produced at the administration order hearing together with notes and oral submissions. The administrators referred the request to the relevant companies as they were the applicants. Whilst that was the technically correct approach, Norris J stated that in his view the joint administrators should have provided immediately copies of pre-appointment certificates, estimated outcome statements and their Counsel’s skeleton argument. Prof. Carroll also complained that there was a general duty on the joint administrators to investigate data breaches before their appointment. On this point the Court said that there was not such general duty. On 04 April 2018 the ICO had sent an Enforcement Notice to one of the relevant companies requiring them to provide better answers than those given to Prof. Carroll’s SAR. The ‘data controller’ to whom the notice was sent was Elections (one of the relevant companies). The Court referred to the decision in Re Southern Pacific Personal Loans Ltd [2014] Ch 426 where a company holds and processes data then it is the company alone and not the company and its directors which is the data controller. The fact that a company becomes subject to an insolvency process does not make the officeholder a data controller. The officeholder will only become a data controller if he takes decisions about the processing of the data as principal in his capacity as liquidator (or administrator) rather than as agent of the company. In response to the Enforcement Notice the joint administrators did nothing as they did not consider themselves to be data controllers. Their view was supported by Norris J who found that the joint administrators were not guilty of misconduct in relation to the Enforcement Notice for the reasons stated above. Decision Norris J considered whether the administrators should be appointed as liquidators. On this point he held as follows:

1. The appointment of the administrators as liquidators would be conducive to the proper operation of the liquidation. The administrators have spent significant time on dealing with the complexities of the relevant companies and it would be pointless to require new officeholders to go over the same ground.

2. Joint administrators already have in place funding arrangements to enable them to undertake their work. A replacement of them as officeholders would risk that funding.

3. Norris J was satisfied that the joint administrators if appointed liquidators would do justice between all those interested in the liquidation.

4. The joint administrators had been the choice of the clear majority of creditors on their appointment as liquidators. The joint administrators if appointed would act in the “interests of all the creditors as a whole.” He therefore ordered that the joint administrators would be appointed joint liquidators of the relevant companies.

On the question of their release, Prof. Carroll objected to such release which would normally be granted forthwith. However, in view of the objection of Prof. Carroll, it was ordered that the discharge shall be effective 28 days after the date of the administrators’ final report. Norris J further ordered that any questions of the administrators arising out of the final report and the cost of dealing with those enquiries should be treated as costs of the liquidation.

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Comment

• This case dealt with the “very fine balance between administration and immediate liquidation”. The proposed administrators’ proposal that the companies go in to administration as opposed to liquidation became the subject of detailed scrutiny by the Court. Sometimes, as in this case, the decision can be very finely balanced and be difficult to determine.

• This case provides a useful guide to the considerations officeholders should bear in mind when faced with such a finely balanced choice.

• The case also confirms that in relation to breaches of the GDPR administrators or

liquidators are not under any duty to investigate breaches that took place prior to the administration/liquidation.

• This case once again confirms that an administrator/liquidator will not be a data

controller for the purposes of GDPR, unless they commence processing data as a principal. See Re Southern Pacific Personal Loans Ltd [2014] Ch 426.

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Administration

Hyde v Nygate [2019] EWHC 1516 (Ch)

Application for permission for new claim against administrators – alleged failure to pursue objective under para 3(1)(a) Schedule B1 Chronology 14/10/2010 Former Administrators (“FAs”) appointed

07/12/2010 FAs declare Objective 3 as the only one for them to pursue

19/10/2011 Contracts exchanged for sale of site

16/12/2011 Sale completed

March 2016 Joint Liquidators (“JLs”) appointed

03/10/2017 Application Notice issued by liquidators

23/10/2018 JLs serve draft amended Particulars of Claim which include an allegation that the FAs were negligent in failing to pursue a corporate rescue.

Facts This was an application by the joint liquidators of One Blackfriars Limited to amend their claim against the former administrators of the company. The JLs had issued an application notice against the FAs claiming that the site owned by the company had been sold at an undervalue. Subsequently the JLs applied to amend their claim to add a further claim that the FAs were negligent in failing to pursue a rescue of the company as a going concern under paragraph 3(1)(a) of Schedule B1 of the Insolvency Act 1986 (‘Objective 1’). The Court had to consider whether or not the Objective 1 claim was a ‘new claim’. As a new claim it must satisfy the requirements of Section 35(1) of the Limitation Act 1980. If the Objective 1 claim is a new claim which does not meet the requirements of Section 35 (1) of the Limitation Act 1980 and CPR 17.4 then it is statute barred. The JLs application being an “all or nothing application”. Paragraph 3 of Schedule B1 to the Insolvency Act 1986 (the "IA 1986") provides as follows (with additions in [ ] for the purpose of the Judgment):

(1) The administrator of a company must perform his functions with the objective of— (a) rescuing the company as a going concern ["Objective 1"], or (b) achieving a better result for the company's creditors as a whole than would be

likely if the company were wound up (without first being in administration) ["Objective 2"], or

(c) realising property in order to make a distribution to one or more secured or

preferential creditors ["Objective 3"].

3(2) Subject to sub-paragraph (4), the administrator of a company must perform his functions in the interests of the company's creditors as a whole.

3(3) The administrator must perform his functions with the objective specified in sub- paragraph (1)(a) unless he thinks either –

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(a) that it is not reasonably practicable to achieve that objective, or (b) that the objective specified in sub-paragraph (1)(b) would achieve a better result for the company's creditors as a whole.

3(4) The administrator may perform his functions with the objective specified in sub-

paragraph (1)(c) only if –

(a) he thinks that it is not reasonably practicable to achieve either of the objectives specified in sub-paragraph (1)(a) and (b), and (b) he does not unnecessarily harm the interests of the creditors of the company as a whole."

It was the alleged failure of the FAs to obtain a proper valuation of the site that was at the heart of the claim from the outset. Further, for a company in administration with a single asset to develop and sell, the choice between - Objective 1 and Objective 3 is stark. The Judge described them as “diametrically opposed and mutually exclusive objectives”. Expanding on the challenge of Objective 1 reference was made to the recent decision in Davey v Money [2018] 766 (Ch) concerning the alleged failure of administrators in that case to pursue Objective 1 in respect of Angel House Developments Limited. ('AHDL'). -In the passage below, Snowden J commented:

“283. Before considering the specific complaints in this regard, it is worth identifying clearly what Ms. Davey's case in relation to Objective 1 would have to amount to. The concept of rescuing a company as a going concern is not achieved by successfully realising all of its assets so that distributions of surplus monies can be made to shareholders after paying creditors in full. It connotes the retention of all or a material part of the business of the company together with the restoration of the solvency of the company so that the company can properly continue to trade as a going concern.

284. AHDL was essentially a one-asset company, whose business entirely depended

upon owning and managing Angel House. The concept of rescuing AHDL as a going concern would necessarily preclude selling Angel House. As a practical matter there was, moreover, simply no question of achieving Objective 1 by improving trading performance to such an extent that AHDL could generate sufficient cash internally to pay off all its creditors (including Dunbar) or by persuading the creditors (including Dunbar) to agree to waive a substantial proportion of their debts so as to restore the company to solvency. The only way in which Objective 1 could have been achieved was by finding a person or persons willing to recapitalise or refinance AHDL with new money so as to enable the existing debt owed to Dunbar, administration expenses and the unsecured creditors to be paid without selling Angel House. (my emphasis)”

The FAs pointed out that it was now over eight years since they reported to creditors on 07 December 2010 stating that in their view Paragraph 3(1)(c) Objective 3 was the only one which was reasonably practicable for them to pursue. -The FAs they confirmed that they would not consent to the Objective 1 claim on the grounds of limitation and discretion.

Section 35 of the Limitation Act 1980 ("LA 1980") provides:

"(1) For the purposes of this Act, any new claim made in the course of any action shall

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be deemed to be a separate action and to have been commenced—

(a) in the case of a new claim made in or by way of third party proceedings, on the date on which those proceedings were commenced; and

(b) in the case of any other new claim, on the same date as the original action.

(2) In this section a new claim means …any claim involving either—

(a) the addition or substitution of a new cause of action… (3) Except as provided by section 33 of this Act or by rules of court, neither the High Court nor the county court shall allow a new claim within subsection (1)(b) above, … to be made in the course of any action after the expiry of any time limit under this Act which would affect a new action to enforce that claim…. (4) Rules of court may provide for allowing a new claim to which subsection (3) above applies to be made as there mentioned, but only if the conditions specified in subsection (5) below are satisfied, and subject to any further restrictions the rules may impose. (5) The conditions referred to in subsection (4) above are the following—

(a) in the case of a claim involving a new cause of action, if the new cause of action arises out of the same facts or substantially the same facts as are already in issue on any claim previously made in the original action;…"

CPR 17.4 provides in relevant part:

"(1) This rule applies where –

(a) a party applies to amend his statement of case in one of the ways mentioned in this rule; and

(b) a period of limitation has expired under –

(i) the Limitation Act 1980…

(2) The court may allow an amendment whose effect will be to add or substitute a new claim, but only if the new claim arises out of the same facts or substantially the same facts as a claim in respect of which the party applying for permission has already claimed a remedy in the proceedings."

It was common ground that there was a four-stage test for the Court to apply when determining whether to grant permission for the disputed amendments as follows:

“26.1 Q1. Is it reasonably arguable that the opposed amendments are outside the applicable limitation period? If the answer is yes, go to Q2. If the answer is no, then the amendment falls to be considered under CPR 17.1(2)(b) (Stage 1).

26.2 Q2. Do the proposed amendments seek to add or substitute a new cause of action? If the answer is yes, go to Q3; if the answer is no, then the amendment falls to be considered under CPR 17.1(2)(b) (Stage 2).

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26.3 Q3. Does the new cause of action arise out of the same or substantially the same facts as are already in issue in the existing claim? If not, the Court has no discretion to permit the amendment (Stage 3).

26.4 Q4. If the answer to Q3 is yes the Court has a discretion to allow the amendment. (Stage 4).”

The first stage is not in issue in this application so the live questions in this case were:

“27.1 Do the proposed amendments constitute a new cause of action? (Stage 2) 27.2 If so, does it arise out of the same or substantially the same facts as are already in issue in the existing claim? (Stage 3) 27.3 If so, should the Court give permission as a matter of discretion? (Stage 4)”

For the JLs it was submitted unsuccessfully that there is a special and more generous amendment rule which applies to the Insolvency Rules because the claims were brought under Paragraph 75 of Schedule B1 IA86 and had been commenced by means of application notice and accompanying evidence. The Judge noting that the Objective 1 claim was simply not present in the application notice and draft particulars of claim. Subsequently the JLs served an expert’s report which stated:

“…..supports my view that a reasonably skilled practitioner would seek to pursue Objective (A) rescuing the company as a going concern, in the circumstances of the company”.

On this the Judge commented that the FAs were entitled to ignore those sections of the expert’s report as they were not reflected in the draft particulars of claim. Following hearing further arguments the Judge concluded that the Objective 1 amendments plainly constituted a new claim. Further the Objective 1 claim required additional factual investigation and further expert evidence. The point being that the Objective 1 claim did not arise out of the same or substantially the same facts and in fact was an entirely new factual case. Decision John Kimbell QC held that the Objective 1 claim was fundamentally different in character to the existing claim. It is based on an alleged failure by the FAs to pursue a completely different statutory objective to those in issue in the existing claim. The existing issues at trial are concerned with alleged failure to pursue Objective 2 at all and a failure to pursue Objective 3 competently. The original claim alleging a series of mistakes and errors including the appointment of the wrong or unsuitable agents, not engaging multiple agency, the conduct of the bidding process, the failure to explore the possibility of planning consent, all of which allegedly led to a sale of the site at an undervalue. The new claim did not arise out of anything like the same or substantially the same facts as already an issue:

“…..The court has no discretion to allow them because the conditions of Section 35 of the Limitation Act 1980 and CPR 17.4(2) are not met.” The amendment to the claim would not be allowed.

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Comment

• This case provides useful guidance to the statutory requirements and hurdles that will have to be overcome in order to amend a claim to add or plead a new claim and whether in doing so, whilst a new claim may be added, it must comply with the statutory provisions examined in this case.

• The length of trial based on the original pleadings i.e, the alleged undervalue sale was estimated to last five weeks. Had the additional claim been permitted the extensive further factual evidence that would need to be considered would have the effect of increasing the length of the trial substantially.

• The additional factual allegations that would need to be dealt with included the

question of whether the company would have been able to re-finance and continue to trade and would have achieved a funded rescue. This would also have included the question of whether the company could have completed the planned development of the site and would have built the project in a similar manner as was in fact done by the purchaser of the site from the administrators.

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Administration

Wright v HMV Ecommerce Limited [2019] EWHC 903 (Ch)

Validity of appointment by directors out of hours Facts On 28 December 2018 the directors of HMV filed notice of appointment of administrators. It was filed with the court electronically at 5.54pm. Later that same day there was a telephone hearing with the Judge during which Counsel sought a declaration that the administrators were validly appointed and that their appointment took effect at 17:54 that day. As the Court Office was not open the notice was filed purportedly pursuant to the Practice Direction 51O of the Electronic Working Pilot Scheme. Paragraph 2.1 of the Practice Direction allows filing of documents 24 hours a day every day of the year save in excepted cases. One of the exceptions is Paragraph (c) which states where the filing is of a notice of appointment by a qualifying floating charge holder under Chapter 3 Part 3 of the IR 2016 and the court is closed, the filing must be in accordance with Rule 3.20 of the IR 2016. It was noted that the exceptions do not apply in the current case because the appointment was made by the directors and not by a qualifying charge holder. The problem was the question of whether or not the electronic filing was in breach of the Insolvency Practice Direction (July 2018). 8.1 of the Practice Direction states:

"Attention is drawn to paragraph 2.1 of the Electronic Practice Direction 51O - The Electronic Working Pilot Scheme, or to any subsequent Electronic Practice Direction made after the date of this IPD, where a notice of appointment is made using the electronic filing system. For the avoidance of doubt, and notwithstanding the restriction in sub-paragraph (c) to notices of appointment made by qualifying floating charge holders, paragraph 2.1 of the Electronic Practice Direction 51O shall not apply to any filing of a notice of appointment of an administrator outside Court opening hours, and the provisions of Insolvency Rules 3.20 to 3.22 shall in those circumstances continue to apply."

The concern arose that the appointment had been made in breach of that Rule as it was made under the Electronic Working Pilot Scheme outside court hours. It was noted however that Paragraph 8.1 says that the Insolvency Rules 3.20 and 3.22 “shall continue to apply”. However those Rules only relate to an appointment filed by the holder of a qualifying floating charge and not an appointment filed by the company or its directors. Therefore any “continuing to apply” could only apply to a notice of appointment filed by a qualifying floating charge holder. The Judge explained that during the late night telephone hearing immediately following the appointment, none of the parties involved considered Paragraph 8.1 as being uppermost in their mind. The Court considered how the current situation could be remedied and it was noted that the defect could be waived pursuant to Rule 12.64 of the Insolvency Rules 2016 or alternatively the Court could extend the time for filing from 16:30 to 17:54. It was further noted that even if there was a defect in the appointment, the Court could grant a declaration under Paragraph 104 of Schedule B1 which provides:

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“104

An act of the administrator of a company is valid in spite of a defect in his appointment or qualification”.

The Court then considered the relevant principles and any potential breach of either Rules or Practice Directions. The principal elements identified being as follows:

(a) The starting point is to identify the purpose of the relevant provision;

(b) Consider the consequences of non-compliance of the provision and whether such consequences render the appointment a nullity or invalid;

(c) Was the failure to comply with the relevant provision inadvertent or was it a deliberate breach?

(d) Whether there could be some substantial injustice as a result of non-compliance. Decision Paragraph 8.1 is open to more than one interpretation. It is possible that it may only apply to filings by qualified charge holders, in which case there is no issue. However if it does apply, then the remedy will be to extend time or by making a declaration that the court was prepared to waive any non-compliance with the Rule or by granting alternative remedies. As such a declaration was granted confirming that the administration took effect and that the validity of such steps the administrators had taken since that time are valid and that time would be extended pursuant to CPR, Part 3, and waive any non-compliance pursuant to Rule 12.64. Comment

• It should be remembered that in the case of an appointment by a qualified floating charge holder this can only be made electronically pursuant to Rule 3.20 if it is made out of hours when the Court office is closed. The provisions of the Practice Direction Paragraph 8.1 and Paragraph 2.1 of the Practice Direction 5.1O of the Electronic Working Pilot Scheme can create an ambiguity which remains unresolved. Whilst there is no doubt that directors making an appointment of an administrator outside Court opening hours electronically will be granted relief they will nevertheless have to make an application to Court for the appropriate declarations and relief to be granted.

• An amendment or an update to the Practice Direction is likely.

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Bankruptcy

Ardawa v Uppal & Jordan [2019] EWHC 456 (Ch)

Annulment of bankruptcy order and exercise of Court’s discretion Facts This was an appeal against a decision to dismiss an application to set aside a substituted service order and to annul the bankruptcy order. The Appellant and Respondents were formerly husband and wife. The Second Respondent was the trustee in bankruptcy of the Appellant who took a neutral stance on substantive issues save to make representations concerning recovery of his costs and expenses. The petition debt was £8,834.80 being costs orders made against the Appellant in matrimonial proceedings. The bankrupt stated that he could pay it if the bankruptcy order was annulled. Since the original divorce the Appellant had remarried and had a second wife. That relationship produced one child but since then the couple had become estranged. Since September 2014 the bankrupt’s second wife was living with their son in a house at 26 Saltwood Avenue Milton Keynes which was subject to a tenancy in the sole name of the bankrupt’s second wife. On 21 September 2015 a statutory demand was issued. The process server attempted to serve the statutory demand on the Appellant at 26 Saltwood Avenue. He was met by a lady who said that the Appellant “had gone out”. The process server then sent a letter arranging a time to serve the statutory demand. He attended at the property but there was no reply despite lights being on. He posted the statutory demand through the letter box. There was no response to the statutory demand and on 20 January 2016 the Respondent issued a bankruptcy petition based on the demand. The process server duly attended the property at 26 Saltwood Avenue and met the same lady as before. She told the process server that she had been instructed by the Appellant “not to accept anything”. On 17 February 2016 the District Judge on reading that the process server posted the petition through the letterbox at 26 Saltwood Avenue deemed service on the Appellant. On 06 April 2016 the bankruptcy order was made. The Appellants case was that he was not living at 26 Saltwood Avenue but at another property 32 Bland Street Huddersfield which belonged to his parents. In the Appellants skeleton argument it referred to the fact that both he and his second wife “kept up the appearance of a family unit for the sake of the children”. Previously the District Judge in making the bankruptcy order concluded that the Appellant was living at 26 Saltwood Avenue and that he was aware of the proceedings at all material times. On Appeal the Hon. Mr. Justice Roth simply concluded that he could see no basis to disturb the District Judge’s finding that the second wife and the Appellant were continuing to live together as a family. Decision The primary obligation for a bankruptcy petition is to effect personal service. Substituted service requires a court to make an order to that effect under Rule 6.14 Insolvency Rules 1986 (Rule 10.14 Schedule 4 Insolvency Rules (England and Wales) 2016). In the current case the order for substituted service was made on 17 February 2016 over three weeks after the petition had been posted through the letterbox. The Court held that it had no jurisdiction to make a retrospective order for substituted service and that as such the bankruptcy order should not have been made.

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With that in mind the Court then considered the application to annul and the fact that this is a matter within the discretion of the Court. The Judge concluded that this was an undisputed debt and that the Appellant had been untruthful in his evidence regarding his place of residence. All the indications were that he was deliberately seeking to evade service. As such this was not a case where it was appropriate for the Court to annul the bankruptcy order. Comment

• This case provides a useful reminder of the Rules in relation to both the service of a statutory demand and a bankruptcy petition. Any order for substituted service must be made by the court under the appropriate statutory provision before service is then effected pursuant to that order and not afterwards.

• Notwithstanding the fact that the bankrupt had the means to pay the debt if the bankruptcy order was annulled, and that there was no suggestion that he had failed to pay any other creditors, the Court nevertheless exercised its discretion to refuse to grant the annulment in circumstances where the bankrupt had deliberately sought to evade service.

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Bankruptcy

Ardawa v Uppal & Jordan [2019] EWHC 1663 (Ch)

Trustee’s costs payable as an expense – subject to summary assessment

Facts This case concerned the question of costs in so far as who should pay them and whether or not those costs are subject to assessment irrespective of whether or not they also rank as an expense in the bankruptcy estate. The bankrupt had appealed against an earlier order dismissing his application to annul the bankruptcy order. On appeal the bankrupt was successful with regard to a previous order made for substituted service but otherwise unsuccessful in that his appeal was dismissed. This left the petitioning creditor Mrs Uppal and the trustee both seeking their costs of the appeal to be paid as an expense of the bankruptcy. The bankrupt resisted both applications for costs and challenged the level of costs involved. As a preliminary issue the Court had to decide whether or not the Insolvency Rules 1986 (‘IR86’) or whether the Insolvency (England and Wales) Rules 2016 (‘IR2016’) applied. In practical terms it made no difference as the provisions were effectively the same. Nevertheless the Court looked at the transitional provisions and in particular Schedule 2 para 13 of IR2016 which states:

"14 Applications before the court 14(1) Where an application to court is filed or a petition is presented under the Act

or under the 1986 Rules before the commencement date and the court remains seised of that application or petition on the commencement date, the 1986 rules continue to apply to that application or petition.

14(2) For the purpose of paragraphs (1), the court is no longer seised of an

application when-

(a) it makes an order having the effect of determining of the application; or (b) in relation to a petition for bankruptcy or winding up when-

(i) the court makes a bankruptcy order or a winding up order.

(ii) the court dismisses the petition, or (iii) the petition is withdrawn. 14(3) Any application to the court to review, rescind or appeal an order made

under paragraph 14(2)(a) is to be made in accordance with Part 12 of these Rules."

The IR2016 came into force on 06 April 2017 and the relevant dates in the current case are as follows:

20/01/2016 Petition presented 06/04/2016 Bankruptcy Order 30/06/2016 Application to annul 06/04/2017 Insolvency (England and Wales) Rules 2016 came into force

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19/04/2018 Order dismissing application to annul 24/07/2018 Permission to appeal granted

On this point the Court held that the order of the District Judge dismissing the original application on 19 April 2018 had the effect of bringing it within paragraph (a) of Section 14(2) insofar as that application had been determined. The Appeal was brought after IR2016 came into force and fell within Para 14(3) and so was governed by the IR2016. The petitioning creditor sought her costs of the appeal from the estate as an expense. The Judge noted that whilst she had been the successful party she had lost in part in relation to the substituted service order. Counsel for Mrs. Uppal argued that as the bankruptcy estate is vested in the trustee the bankrupt had no real standing to object to a costs order in favour of the petitioning creditor. This was rejected by the Judge. This was because the bankruptcy estate was likely to be in surplus and as such that gave “Mr. Ardawa clear interest in the potential for a costs order against the estate”. He is therefore entitled to be heard on any application for costs. Costs are governed by Chapter 8 IR2016 and in particular Rule 12.41 which states that CPR Pts 44 and 47 apply to costs, charges and expenses. CPR Rule 44.2 sets out the discretion of the court as regards costs and their amount in that the general rule is the unsuccessful party will be ordered to pay the costs of the successful party. In determining costs the court will have regard to all the circumstances including conduct of the parties and whether the party succeeded in whole or in part of its case. The Judge concluded that Mrs Uppal was the overall “winner” but that she would be disentitled to other costs because she had failed on the substituted service order point. Further the Court had been misled by evidence put forward on behalf of the petitioning creditor. Her claim for costs was for £19,923.84 including vat. The Court ruled she would only be entitled to recover 60% of those costs. As to the trustee’s costs the Court first of all considered the provisions of Rule 12.42 IR2016.

12.42 Requirement to assess costs by the detailed procedure 12.42(1) [Where costs payable as insolvency expense] Where the costs of any person are payable as an expense out of the insolvent estate, the amount payable must be decided by detailed assessment unless agreed between the office-holder and the person entitled to payment.

12.42(5) [Detailed assessment in any proceedings] In any proceedings before the court (including proceedings on a petition), the court may order costs to be decided by detailed assessment. 12.42(6) [Costs of trustee in bankruptcy or liquidator on standard basis] Unless otherwise directed or authorised, the costs of a trustee in bankruptcy or a liquidator are to be allowed on the standard basis for which provision is made in—

(a) CPR rule 44.3 (basis of assessment); and

(b) CPR rule 44.4 (factors to be taken into account when deciding the amount of costs).

The Judge took the view that Rule 12.42 applied to charges and expenses as well as litigation costs and that if the Judge decided to make an order for a detailed assessment of the trustee’s costs as expenses then he could also conduct a summary assessment. The trustee’s costs were £19,176 inclusive of vat. The Judge noted that the trustee had taken a neutral

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position and was only present at Court for the first day of the Appeal. He further noted that most of the work in opposing the Appeal had been undertaken by the petitioning creditor’s Counsel not the trustee’s. The Judge also noted that the total bankruptcy debt was £9,250.17 plus statutory interest. For the trustee it was argued that the legal costs of the Appeal fall outside Rule 12.42 and therefore are an expense of the bankruptcy. If the bankrupt wished to challenge the level of the trustee’s costs he could do so under Rule 18.35.

"18.35(1) [Application to court for permission to apply] A bankrupt may, with the permission of the court, make an application on the grounds that—

(a) the remuneration charged by the office-holder is in all the circumstances excessive;

(b) the expenses incurred by the office-holder are in all the circumstances

excessive. … 18.35(4) [Surplus of assets required] The court must not give the bankrupt permission to make an application unless the bankrupt shows that—

(a) there is (or would be but for the remuneration or expenses in question); or (b) it is likely that there will be (or would be but for the remuneration or expenses in question),

a surplus of assets to which the bankrupt would be entitled."

Decision Mr. Justice Roth ordered that the petitioning creditor receive 60% of her claim for costs. On the trustee’s costs he stated that:

“the fact the trustee’s costs and legal proceedings are payable out of the estate determines the source from which the funds would come. It does not in my judgment remove the normal rule of the court as regards to the costs of legal proceedings conducted before it.“

Further Section 363(1)(IA) gives the court power to exercise general control over a bankruptcy, and the court may determine the amount of costs that the trustee is able to recover in respect of the Appeal. The Judge stated that whilst he could do that by detailed assessment, in this case he would summarily assess the costs. As to the trustee’s costs he stated that they were “wholly unreasonable and disproportionate” The Judge summarily assessed the trustee’s costs at £6,000 plus vat total £7,200. Comment

• Whilst it is usual for the trustee’s costs to be paid as an expense from the bankruptcy estate, this case makes it clear that where in particular, an estate is in surplus, then those costs may be subject to either detailed or summary assessment.

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Bankruptcy

Birdi v Price [2019] EWHC 291 (Ch)

Application to remove trustee in bankruptcy Facts Mr. Birdi had been made bankrupt on 21 March 2012. His discharge was initially suspended but he was finally discharged in 2013. Mr. Birdi was also made subject to a Bankruptcy Restriction Order for a period of nine years. The original trustee Mr. Price was appointed at a meeting of creditors held on 20 July 2012. Following his retirement the current trustee Mr. Pettit was appointed trustee under a Block Transfer Order on 22 May 2014. The application to remove the trustee was made by three of the bankrupt’s creditors which included his wife. A fourth creditor dropped out shortly before trial and agreed to pay £12,000 towards the trustee’s costs. Throughout the bankruptcy Mr. Birdi had made numerous court applications challenging the trustee’s actions. Mr. Birdi was a skilled motor technician specialising in Ferraris. Around the time of his bankruptcy a company by the name of Precision Engineering Auto Limited (Precision) commenced trading. The trustee’s enquiries established that Precision was beneficially owned by the bankrupt and as a consequence the trustee entered the unit and seized equipment which was subsequently sold for £40,154 after costs. The current application by creditors to remove the trustee was based on a number of allegations:

1. That there are no funds available to distribute to creditors 2. That the length and cost of the bankruptcy is the fault of the trustee 3. Dishonesty and mismanagement 4. Complaint as to the way in which the trustee was appointed by creditors initially 5. Complaint as to the trustee’s conduct of the bankruptcy 6. That some of the creditors are ‘bogus’ creditors 7. Alleged fraud/misfeasance in relation to remuneration

The creditors sought the following:

(a) An Order under s 298(1) of the Insolvency Act 1986 (IA86) for the removal of the trustee

(b) An Order under s 298(4) IA86 requiring the trustee to convene a meeting of creditors to consider his removal

(c) That Mrs. Birdi is entitled to be repaid the sum of £300,000 paid to the trustee by her

for the trustee’s interest in the property - For the trustee it was stated that Mr. Birdi’s completion of the bankruptcy preliminary questionnaire was materially deficient and that he had failed to cooperate. He had also failed to disclose nine bank accounts and that the trustee had to deal with numerous court applications made by Mr. Birdi all of which were without merit.

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As a consequence, the position in the bankruptcy was that total asset realisations were £595,053 and that after associated costs and distributions of £556,827 there was a balance remaining of £38,226. Claims from 26 unsecured creditors totalled £1,048,373. Prior to issuing the application, the group of creditors comprised of the applicants and the fourth creditor Mr Antoniades had purportedly held a meeting of creditors at which they resolved to remove the trustee and replace him with the Official Receiver. As they had no standing to hold such a meeting, the outcome was ineffective. The Law Section 298 – Removal of trustee; vacation of office: "(1) Subject as follows, the trustee of a bankrupt's estate may be removed from office only by an order of the court or by a decision of the bankrupt's creditors made by a creditors' decision procedure instigated specially for that purpose in accordance with the rules." In Re Edennote Ltd [1996] 2BCLC 389 Nourse LJ stated:

"..… the court does not lightly remove its own officer and will, among other considerations, pay due regard to the impact of a removal on his professional standing and reputation".

Further in Doffman & Isaacs v. Wood & Hellard [2011] EWHC 4008 (Ch) Proudman J stated:

“….. The question of whether to remove an insolvency practitioner of any kind must therefore be measured by reference to 'the real substantial, honest interests' of the process, and to the purpose for which the office holder is appointed…..”

The Judge went further and stated:

“…..ultimately the assessment is whether removal of the office holder is in the interests of the bankruptcy process as a whole.”

Referring to the decision in AMP Music Box Enterprises Ltd v Hoffman [2002] EWHC 1899 (Ch), a distinction was drawn between an office holder who fails to live up to the standards required and the court is confident that he will not live up to those requirements in the future on the one hand, with a situation where an office holder has fallen short of the ideal in possibly one or more situations. Further it should be remembered that any replacement will have undesirable consequences in terms of costs and delay. In the current case the allegations were considered by the Court and the Judge identified that the real focus were the allegations made in relation to costs. Decision The trustee’s remuneration had been approved by a meeting of creditors held on 26 June 2013. Six Annual Progress Reports had been provided to creditors detailing the costs and disbursements incurred. Insolvency Rules 2016 Rule 18.34(3) (from 06 April 2017) provides that any challenge to the trustee’s remuneration must be made within 8 weeks of delivery of the report. No such challenges had been made and notwithstanding the applicants’ complaint that they had not seen any reports the Judge concluded that there was no basis for interfering with the remuneration of the trustee.

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The Judge held that there was no utility to be served in removing the trustee. On the question of convening a further meeting of creditors the court noted that under s 298(4) IA86 where a trustee is appointed by the court as opposed to creditors as in this case, a creditors’ decision procedure may be instigated for the purpose of removing him only if:

“(a) the trustee thinks fit or (b) the court so directs, or

(c) one of the bankrupt’s creditors so requests with the concurrence of not less than one-quarter, in value, of the creditors, (including the creditor making the

request).” It was further noted that the request under s 298(4) (c) qualifies as a “requisition” decision under Insolvency Rules 2016 Rule 15.18(1). Under that Rule a requisition must also have a statement of the purpose of the proposed decision. Further Rule 15.19(2) requires the requisitioning creditor to deposit a sum for the expense of the procedure. Notwithstanding compliance with the procedure the court may override the convenor’s obligation to implement a decision procedure and may direct him not to comply with it. In Managa Properties Ltd v. Brittain [2009] EWHC 157 (Ch) it was stated that even where more than 25% of creditors by value requisition a meeting:

" … the court is not obliged to direct the liquidator to call a meeting. The court may take the view that it would not be in the interests of the liquidation for such a meeting to be held. It might serve no other purpose other than to waste costs".

The formalities had not been complied with and the trustee was under no obligation to convene a meeting of creditors. The applications would be dismissed including Mrs. Birdi’s application for the return of £300,000. Comment

• Mr. Birdi was an extremely litigious bankrupt and had made numerous court applications including injunction proceedings.

• It was noted that Mr. Birdi had arranged his business affairs in such a way that there was understandable confusion.

• The Court was quick to identify that the real issue was not the removal of the trustee but was actually the level of the trustee’s remuneration. Whilst there was no doubt that both the legal costs and the trustee’s remuneration were substantial, the Judge placed reliance on the fact that creditors had been provided with annual updates as to the costs and remuneration incurred and as such, the Court was not prepared to go behind the outcome as stated in those reports.

• Whilst it is possible to extend the period of time in which to make a challenge in

respect of the trustee’s remuneration after the 8 weeks period has expired from the relevant Annual Report, the Court will be reluctant to do so in most cases.

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Bankruptcy

Lambert v Forest of Dean District Council & Ors. [2019] EWHC 1763 (Ch)

Annulment improper service and abuse of process Facts This was an application by Mr. Lambert to annul the bankruptcy order made against him on a petition presented by Forest of Dean District Council. The petition debt comprised of debts due under liability orders made by the Gloucester Magistrates’ Court for unpaid council tax in respect of several domestic properties and non-domestic rates for properties owned by Mr. Lambert at Linear Business Park. The petition debt was £72,752 the Council subsequently claimed £119,978. The application to annul was made under s 282(1)(a) of the Insolvency Act 1986 on the basis that the bankruptcy order ought not to have been made. Mr. Lambert argued that neither the statutory demand or petition were served on him and that he was unaware of the existence of the liability orders. The application to annul was opposed by the Council. However it did not maintain that the statutory demand and/or the petition were properly served. Instead the Council simply opposed the annulment on the grounds that it was an abuse of process. This was the second annulment application that Mr. Lambert had made and essentially it was a re-run of the first application which had been dismissed. There were concerns over the process server’s witness statements effecting service of both the statutory demand and the petition. The process server claimed to have spoken to a woman at 7pm in the evening who apparently confirmed that Mr. Lambert lived there. Mr. Lambert argued that he had never lived at the service address or traded from it, and in fact the address was the office of the company formation agents. He contended that the Council had his residential home address but had chosen not to use it. Mr. Lambert had also sought to challenge the liability orders themselves but had either failed to attend the hearing or had not complied with requests to provide information concerning the identity of the occupiers of the Linear Park properties. The trustees position was that they were neutral. The outstanding bankruptcy claims were £375,905. The trustees also identified a lease that had been granted in respect of various properties to a further company which was void under the provisions of s 284 of the Insolvency Act 1986. There were various applications and hearings a result of which Mr. Lambert was ordered to pay costs orders. Whilst he eventually paid some of the costs orders, he failed to identify the source of the funds. There was concern that the funds represented rents received in respect of the Linear Park properties and that they were a bankruptcy asset in any event. Decision ICC Judge Mullen held that the application was an abuse and that it should be dismissed on that basis alone. Notwithstanding that he also considered what the position would be in the event that he considered further the application to annul under s 282(1)(a). He noted the court retained a discretion. He found that the process server’s evidence to be extremely concerning and as such was prepared to accept Mr. Lambert’s case at the highest and treat the process server’s evidence as having been deliberately untruthful and that proper steps to bring the statutory demand to Mr. Lambert’s attention were not undertaken by the Council’s agent.

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It therefore followed that the statutory demand was not served and that the petition should not have been presented and the bankruptcy order should not have been made. At this point he considered that his discretion to annul the bankruptcy order was engaged. He noted that where the procedural steps to the making of the bankruptcy order are tainted with dishonesty i.e, that the process server’s evidence could not be taken as being truthful, then there must be a strong presumption in favour of annulling the bankruptcy order. Notwithstanding this, ICC Judge Mullen exercised his discretion and declined to annul the bankruptcy order. The grounds for refusing annulment were as follows:

(a) the debt remains indisputably due and owing;

(b) the liability orders on which the petition was founded are unassailable;

(c) there was no evidence that those debts can be paid;

(d) he could not be satisfied as to Mr. Lambert’s solvency He speculated that if he were to annul the bankruptcy order then the petition would be dismissed for want of proper -service and therefore the Council would be entitled to put in a further statutory demand and petition. In such circumstances a further bankruptcy order would be inevitable. He further noted that there is significant doubt as to the extent of the bankrupt’s estate and a background of non-cooperation with his trustees in particular as to the identity of the occupants of Linear Park and the income from the properties. He concluded that it would not be right to hamper the trustees’ investigations further and that the trustees should be allowed to get in the bankruptcy estate for the benefit of creditors with the benefit of the 1986 Act’s provisions for avoiding dispositions made after the presentation of the petition and its machinery for adjusting prior transactions. Comment

• This case demonstrates that even where there has not been proper service of either statutory demand or the petition, and there was a tainted dishonesty on the part of the process server, the court will not necessarily annul the bankruptcy order.

• The Court also in exercising its discretion not to annul considered what would be likely to happen in the event that the bankruptcy order was annulled i.e, that the process would simply be recommenced and that the trustees’ powers of realising and getting in the bankruptcy estate would be hampered as the provisions of s 284 would no longer be engaged until a new petition was issued which post-dated the antecedent transactions in question.

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Bankruptcy

Sleight (As Trustee of the Estate of Jillian Paula Mascall Deceased) v The Crown Estate Commissioners [2019] BPIR 430

Disclaimer of freehold - Application for vesting order in respect of freehold and/or surplus Facts An Insolvency Administration Order (IAO) had been made in respect of the estate of Jillian Paula Mascall (deceased). The IAO had been petitioned for by the deceased’s Executrix. The order was made on 22 December 2015 and the trustee in bankruptcy of the estate was appointed by the Secretary of State the same day. The deceased owned some twenty-seven properties all of which appeared to be in negative equity. Receivers had been appointed to some of the properties. The trustee in bankruptcy who was the applicant in this case for a vesting order had decided to disclaim twenty of the properties as “onerous property”. The disclaimer included two freehold properties which were subject to charges. Following disclaimer of two of the freehold properties the mortgagees sold the properties and from the two properties in question a surplus of £19,000 was left. The trustee in bankruptcy made an application for a vesting order under s 320 of the Insolvency Act 1986 in respect of both of the properties and their related surpluses. These being properties which he had previously disclaimed himself. There was some debate as to who the appropriate defendant was. Initially this was listed as a Government Legal Department as it was considered the properties had vested in the Crown as being bona vacantia. Correspondence from that department indicated that the effect of the disclaimer of the freehold properties was that the same would escheat to the Crown who were represented by Burges Salmon solicitors. Subsequent correspondence confirmed that if the freehold properties were bona vacantia then the Treasury Solicitor would be the appropriate defendant. However as the freehold property following disclaimer by the trustee does not vest in the Crown as bona vacantia but rather becomes subject to escheat to the Crown it would be left to the Crown Estate to deal with the properties. It was further suggested that any surplus would also belong to the Crown Estate. Burges Salmon in further correspondence set out the position of the Crown Estate and that was following legal advice that if the Crown Estate Commissioners undertook no act of possession entry or management no liability or responsibility in respect of the property arises in the circumstances of escheat. For that reason they did not propose to become involved in the vesting order application. The Court considered the provisions of s320 of the Insolvency Act 1986 which provides as follows:-

"320 Court order vesting disclaimed property (1) This section and the next apply where the trustee has disclaimed property under section 315. (2) An application may be made to the court under this section by-

(a) any person who claims an interest in the disclaimed property,

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(b) any person who is under any liability in respect of the disclaimed property, not being a liability discharged by the disclaimer, or (c) where the disclaimed property is property in a dwelling-house, any

person who at the time when the [bankruptcy application was made or (as the case may be) the] bankruptcy petition was presented was in occupation of or entitled to occupy the dwelling house.

(3) Subject as follows in this section and the next, the court may, on an application under this section, make an order on such terms as it thinks fit for the vesting of the disclaimed property in, or for its delivery to-

(a) a person entitled to it or a trustee for such a person, (b) a person subject to such a liability as is mentioned in subsection

2)(b) or a trustee for such a person, or

(c) where the disclaimed property is property in a dwelling-house, any person who at the time when the [bankruptcy application was made or (as the case may be) the] bankruptcy petition was presented was in occupation of or entitled to occupy the dwelling house.

(6) The court shall not make an order by virtue of subsection (3)(b) except where it appears to the court that it would be just to do so for the purpose of compensating the person subject to the liability in respect of the disclaimer. (5) The effect of any order under this section shall be taken into account in assessing for the purposes of section 315(5) the extent of any loss or damage sustained by any person in consequence of the disclaimer. (6) An order under this section vesting property in any person need not be completed by any conveyance, assignment or transfer.

For the trustee it was argued that he fell within s 320(2)(a) as he was claiming an interest by virtue of the fact that he would have an interest vested in him under the order he seeks. This circular argument was quickly rejected. The Judge commented that the legislation would require a proprietary interest in the asset in question and not someone who is merely interested in a much looser legal sense. The Judge also considered the -analogous position of an original tenant under a lease that had subsequently been assigned and in respect of which the assignee had become bankrupt. Following the bankruptcy of the assignee the trustee disclaimed the lease leaving the original tenant liable for the remainder of the lease (this being the position pre Landlord and Tenant (Covenants) Act 1995). The Judge in the case of Hill v East and West India Dock Co [1884] 9 App Cas 448 thought that the effect of the disclaimer in the circumstances resulted in a “revolting absurdity and shocking injustice”. He propagated the idea that the original tenant could apply for a vesting order as a person interested in a disclaimed property. In considering that position he concluded that the original tenant was not interested in disclaimed property having previously parted with interest in the lease on assignment.

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Decision His Honour Judge Davis-White QC concluded that the trustee in bankruptcy had no interest in the freehold properties following a disclaimer. He therefore had no locus standi to make such an application. He further considered what the Court would order if he was deemed to have an interest. - He considered it would be unrealistic to assume that the Court would re-vest the properties which had subsequently been sold to third parties back to the trustee in bankruptcy. On the question of the surplus, in the absence of a vesting order the trustee had no entitlement to the surplus. In reaching that conclusion the Court heard argument relating to the decision in Lee v Lee [1999] BPIR 926. In that case the mortgagee applied for and obtained a vesting order in respect of a property. The Court of Appeal, as did the Judge at first instance, took the view that the effect of a vesting order with no further provision would be that the entitlement to the surplus would have belonged to the mortgagee. However in that case, the bankrupt’s wife had a 50% interest and there was a surplus. The mortgagee did not want the surplus and consented to an order which provided that 50% of the surplus would be paid to the wife, and that the remaining 50% surplus would go to the trustee in bankruptcy for the benefit of creditors. The Judge noted however that the circumstances in that case were very different from the current case, and as he is unable to make a vesting order in the current case there can be no question of exercising the power to make an order in respect of any surplus. The trustee’s application was therefore dismissed. Comment

• This case confirms that following a disclaimer of a freehold or leasehold property, in the absence of a vesting order, the property does not vest in the Crown as bona vacantia but rather becomes subject to escheat to the Crown. Any party making an application for a vesting order in such circumstances following disclaimer by a trustee should ensure that they issue the application against the correct respondent, i.e, that the Crown Estate Commissioners are cited as the respondent.

• Following disclaimer of an asset by a trustee in bankruptcy it is clear that there is no route back to participating in the fruits flowing from that asset by means of an application for a vesting order.

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Bankruptcy Tate & Hopkirk v Farrell & ors [2019] EWHC 119 (Ch) Transaction defrauding creditors – s 423 Insolvency Act 1986 Facts This was a claim brought by joint trustees in bankruptcy of Mr. Farrell under s 423 Insolvency Act 1986 in respect of the following gifts:

(a) £400,000 transferred on 23 January 2009 from Mr. Farrell’s bank account to Mrs. F’s bank account

(b) £55,000 transferred on 23 January 2009 to Mrs. F’s bank account (c) £200,000 transferred to Mrs. F on 29 August 2009 (d) Transfer of Mr. Farrell’s 47% interest in the family home by way of declaration of

trust dated 17 September 2009 to Mrs F (e) £200,000 from Mr. Farrell on 28 September 2009 into the Robin Farrell Family Trust

Mr. Farrell ran Arch Financial Products LLP (‘Arch’) which is part of Arch Group. Both he and Arch were authorised by the FSA in relation to investment management. This involved the management of various funds both in the UK and abroad. Around late 2008 and 2009 FSA investigations were in progress concerning some of the funds under management and liquidity issues. The Trustees case was that there were financial difficulties which adversely affected Mr. Farrell’s personal wealth and that there were persons that might make claims against Mr. Farrell personally. The Trustees further alleged that the gifts were to protect Mr Farrell and his family’s financial position from such creditors. Mrs. Farrell’s defence was that the sole purpose of the gifts was to implement tax planning advice save in relation to the £55,000 which was for family/household expenditure. Further, notwithstanding the investigations, liquidity and other difficulties facing Mr. Farrell and his businesses, such matters did not cause Mr. Farrell to believe at the time of the gifts that any personal liability would arise. The evidence for the defence included contemporaneous documents, notes, correspondence and attendance notes of meetings held with tax and legal advisors, including meetings held on 19 January 2009 and on 28 August 2009. Mr. Farrell’s evidence as to his state of mind when making the various gifts was that he was following tax planning advice with the purpose of implementing that advice and an equalisation of assets between himself and his wife. The evidence relating to the position of Arch and its related entities was that the financial crisis of 2008/2009 caused it significant difficulties both in terms of liquidity and cash-flow and that Mr. Farrell:

“remained extremely “bullish” taking into consideration….” This view was based in part on new ventures that Arch and Mr. Farrell had become involved in. For the trustees it was pointed out that in the Judgment of Mr. Justice Walker and the Upper Tribunal Judgment certain evidence from Mr. Farrell was untruthful, whereas ICC Judge Jones found Mr. Farrell to be:

“a courteous, knowledgeable and helpful witness”. For the trustees it was pointed out that the gifts in question did not achieve an equalisation assets between Mr. and Mrs. F and that in relation to the £400,000 gift Mr. Farrell omitted to disclose that to one of his advisors. The Judge also failed to find that there were any claims against Mr. Farrell personally at the time of the latest gifts.

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Section 423 423 Transactions defrauding creditors

423 (1) [Transaction at undervalue] This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if—

(a) he makes a gift to the other person or he otherwise enters into a transaction

with the other on terms that provide for him to receive no consideration;

(b) he enters into a transaction with the other in consideration of marriage or the formation of a civil partnership; or

(c) he enters into a transaction with the other for a consideration the value of

which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by himself.

423 (2) [Order by court] Where a person has entered into such a transaction, the court

may, if satisfied under the next subsection, make such order as it thinks fit for—

(a) restoring the position to what it would have been if the transaction had not been entered into, and

(b) protecting the interests of persons who are victims of the transaction.

423(3) [Conditions for court order] In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose—

(a) of putting assets beyond the reach of a person who is making, or may at

some time make, a claim against him, or (b) of otherwise prejudicing the interests of such a person in relation to the claim

which he is making or may make. There was no dispute that the transactions were all gifts. For an order to be made under s 423 the court must be satisfied that it was made for the purpose of either sub-section (a) or (b). Further the test to be applied must be applied to each and every gift. Previous case law established that such a purpose does not have to be the dominant purpose. Decision ICC Judge Jones held in relation to the January 2009 gifts that in considering Mr. Farrell’s state of mind, tax planning was the purpose of the transactions. Further it cannot be inferred that Mr. Farrell had creditors in mind when making the January 2009 gifts. The only purpose of Mr. Farrell when transferring £400,000 was tax planning:

“This in my judgment reflected his concern to provide for his family and their future.” On the August and September 2009 gifts whilst the position of Arch and Mr. Farrell had altered, the Judge concluded that the sole purpose of the transactions was the implementing of tax advice and not for any purpose under s 423., the trustees having failed to establish on the balance of probability that Mr. Farrell had a claim identified by a third party (directly or indirectly) in mind when making the late August and September gifts.

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The trustees’ claims were dismissed. Comment

• In the words of the Judge this was a “finally balanced case”.

• This case contains useful guidance as to the tests that the court will apply in determining the true state of mind of a party who enters into transactions which are subsequently challenged under s 423.

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LIQUIDATION

Burnden Holdings (UK) Limited (In Liquidation) v Fielding [2019] EWHC 1566 (Ch)

Liquidator’s claims under Section 423 Insolvency Act 1986 – unlawful dividends Facts The liquidator of Burnden Holdings (UK) Limited (In Liquidation)(“BHUK”) brought various claims against Mr. and Mrs. Fielding who were the controlling shareholders of the Burnden Group (“Group”) of companies. BHUK went into administration of 02 October 2008. A compulsory winding-up order was made against it on 07 December 2009. The action was brought by BHUK’s liquidator against Mr. and Mrs. Fielding alleging breach of fiduciary duty in respect of two transactions. The first being the granting of a fixed and floating charge in favour of the Fieldings and the second a demerger transaction in specie by BHUK of the entire shareholding in Vital. The Group’s business was the manufacture and sale of conservatories. The Group had been involved in substantial litigation with a rival and although it had ultimately been successful the Group was facing a severe cash crisis in the Spring 2007. This was likely to be exacerbated by the winter 2007/2008. As a means of generating more cash the Group decided to demerge Vital which would be achieved by a distribution followed by a sale of 30% of the shares in Vital to Scottish and Southern Energy PLC (“SSE”) for £6m. £3m of the sale proceeds would then be loaned back to the Group by Mr. and Mrs. Fielding. The liquidator’s claim asserted that in relation to the distribution:

1. There was no declaration of dividend because there was no valid board meeting to approve it

2. The distribution was unlawful because the relevant accounts did not enable a

reasonable judgment to be made of the assets and liabilities, profits and losses of the company and that there were insufficient distributable reserves. Further it was a breach of duty on the part of the directors and that the directors are liable on a strict liability basis for breach of such fiduciary duty.

3. The distribution was a dishonest breach of their fiduciary duties because they knew BHUK was insolvent or likely to become insolvent and that they had failed to take into account the interests of BHUK’s creditors

4. The distribution was a transaction defrauding creditors under s.423 of the Insolvency Act 1986.

In relation to the grant of security the liquidator claimed:

(i) The grant of security was unauthorised because there was no board meeting of BHUK to resolve to enter into it;

(ii) Directors authorising the grant of security were in breach of fiduciary duty because it was of no benefit to BHUK;

(iii) The grant of security was a transaction defrauding creditors under s.423 if the Insolvency Act 1986.

The Group had been subject to administration, liquidation and pre-pack sales during the course of which three of the five servers for the Group were wiped and the remaining two

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were transferred to the purchaser. This meant that a lot of the company’s books and records were no longer available. Much of the evidence of the company’s books and records that remained was documentation and information shared with outside advisors and parties who retained copies. This meant that the only minutes of board meetings that survived were for two meetings. The Judge however accepted the Defendants’ evidence that there were regular board meetings with detailed financial information including cash-flow forecasts and other forecasts. Late production by the auditors referred to management accounts. On this basis the Judge accepted that there were regular board meetings and that management accounts were regularly produced detailing the company’s financial position. The Distribution The distribution was part of the demerger transaction. This was achieved by the following steps:

(i) Three new companies were incorporated including BHU Holdings Limited ("BHUH"). BHUH was owned by the existing shareholders of BHUK in the same proportion as their shares in BHUK;

(ii) The shareholders then transferred all of their shares in BHUK to BHUH;

(iii) BHUK's 100% shareholding in its subsidiary Vital was distributed to BHUH as a dividend

in specie; (iv) BHUH went into a members' voluntary liquidation. The liquidator then sold the sole

share in Vital to Vital Holdings Limited (“VHL”) in exchange for the allotment by VHL of shares to BHUH's shareholders. VHL was therefore owned by the existing shareholders in the same proportion as they held BHUH (and, before that, BHUK).

(v) The liquidator of BHUH also sold the shares in BHUK to Burnden Group Holdings Limited

(“BGHL”) in exchange for the allotment by BGHL of shares to BHUH's shareholders. BGHL was therefore owned by the existing shareholders in the same proportion as they held BHUH.

(vi) The ultimate effect was that Vital was wholly owned by VHL and the rest of the

Burnden Group was owned by BGHL, and both VHL and BGHL in exchange for an allotment by BGHL of shares to BHUH’s shareholders. BGHL were owned by the existing shareholders in the same proportion they had previously owned shares in BHUK.

(vii) The result was Vital was wholly owned by VHL and the rest of the Burden Group was owned by BGHL and both VHL and BGHL were owned by the existing shareholders in the same proportion they previously owned shares in BHUK.

(viii) Mrs Fielding then sold shares amounting to 30% of VHL’s share capital to SSE for £6m

(ix) Mrs Fielding then loaned £3m to Burnden Group.

The reason to demerge Vital was that its business was different from the rest of the Group and there was a need to generate cash within the Group. The Judge explained that if BHUK was rendered insolvent by the distribution and the Defendants knew it, then structuring a disposal of Vital by way of a distribution rather than a sale would be impossible to justify. However if BHUK was solvent and would remain solvent following distribution then there was nothing intrinsically wrong with disposing of Vital without BHUK receiving any value for it particularly when BHUK was funded almost entirely with funding from the Fieldings. This was subject to the requirement that the Companies Act requirements as to distributions were complied with.

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Evidence of discussions at the time indicated that there was a concern that there were insufficient reserves to enable a dividend in specie of Vital to be made. It was proposed that Vital would need to be re-valued before the dividend. It was recognised that if that valuation was incorrect then there was a risk that the distribution was not lawful. The reason the re-valuation was required was that there were insufficient profits available for distribution. This however had been questioned by David Richards LJ in an earlier stage of the proceedings when he commented that the revaluation was probably unnecessary and that all that was required was that there were sufficient distributable reserves to distribute the shares in Vital at their historic cost of £750,000. Revised management accounts were prepared for BHUK showing a re-valuation of Vital together with a dividend of £300,000 from a subsidiary K2 Glass. These were intended to be the relevant interim accounts for the purpose of distribution. The distribution was effected by a written special resolution resolving that the dividend in specie of the entire issued share capital of Vital should be paid. The statutory requirement in relation to the distribution was that sufficient distributable profits would be judged in the first place by reference to the most recent set of annual accounts, however where the distribution would contravene the relevant section if reference were only made to the company’s last annual accounts, interim accounts may be relied upon. ‘Interim Accounts’ mean “those necessary for a reasonable judgment to be made as to the amount of the items mentioned in the relevant statutory provisions.” Directors liability for unlawful distribution – strict liability or fault-based? The Court then considered the question of whether the liability of directors in making an unlawful distribution was strict liability or fault-based. The Court considered the conflicting authorities but concluded the position by the end of the 19th Century and following the decision Dovey v Cory [1901] AC 477 was as follows:

Directors should be treated as if they were trustees of the company’s funds. If they knew the facts which constituted an unlawful dividend they would be liable for breach of trust irrespective of whether they knew the dividend was unlawful. If they are unaware of the facts which render the dividend unlawful but had taken reasonable care to secure preparation of accounts so as to establish availability of sufficient profits to render the dividend lawful, they would not be personally liable if it turned out that there were in fact insufficient profits for that purpose. They were entitled to rely in this respect on the opinion of others, in particular auditors, as to the accuracy of statements appearing in the company’s accounts. As such liability is not a strict liability but is fault-based.

The liquidators argued that the distribution was never properly considered at a board meeting. There was no dispute however that a dividend was in fact declared as this was dealt with by a written resolution. On this point the Court concluded that there was no requirement for interim accounts to be laid before the company whether through a meeting of the directors or in general meeting. The liquidators sought to attack the nature of the interim accounts relied on for the purpose of distribution arguing that they did not comply. Whilst they could be considered to be a summary of the Group’s financial position, they were nevertheless sufficient to satisfy the statutory requirements as to the level of information they contained. The liquidators also alleged that some of the items in the interim accounts had been overstated or understated. Having considered each of the items in the accounts complained of, Mr. Justice Zacaroli found no basis for the liquidators’ objections to those items save for a provision in respect of legal costs in the sum of £80,000. Notwithstanding that the Court considered what the position would have been if the result was there were

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insufficient distributable reserves to enable the distribution to be lawfully made the question being would Mr. and Mrs. Fielding be then liable for breach of duty in causing the distribution to be made. The Court took the view that they would not be liable for breach of duty. This was because they relied on others to prepare the management accounts in circumstances where it was reasonable for them to rely upon their fellow director and professionals in concluding that the interim accounts were prepared in accordance with the requirements of the Companies Act, and that there were sufficient distributable reserves to enable the distribution to be made. Turning to the £80,000 provision for Addleshaw Goddard’s legal fees, the Court found that Mr. Fielding was at fault in failing to include a provision for them. The Court then considered whether or not the distribution was a dishonest breach of fiduciary duty. Whilst BHUK was solvent as at 12 October 2007 the liquidators contended that following the distribution it became insolvent on a balance sheet basis. The Court considered s.172(3) of the Companies Act 2006 which provides that:

“the duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of the creditors of the company”

The Court referred to the decision of David Richards J in BTI 2014 LLC v Sequana S.A. [2019] EWCA Civ 112, in which it was held that the duty to consider or act in the interest of creditors is engaged when the company is or is likely to become insolvent where ‘likely’ means probable. The Court referred to the two different tests for insolvency but noted that the focus in the current case for BHUK was on the balance sheet. The balance sheet test was set out in BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc [2013] 1 WLR 1408:

"Essentially, section 123(2) requires the court to make a judgment whether it has been established that, looking at the company's assets and making proper allowance for its prospective and contingent liabilities, it cannot reasonably be expected to be able to meet those liabilities. If so, it will be deemed to be insolvent although it is currently able to pay its debts as they fall due. The more distant the liabilities, the harder this will be to establish."

In carrying out the balance sheet test it was noted that only present assets of the company are to be taken into account. Similarly a commercial view must be taken of the company’s contingent and prospective liabilities. The Claimants argued that BHUK was or was likely to become insolvent because its solvency depended upon its subsidiaries K2 Con and Cestrum. Both those companies were insolvent and the liquidators argued that it followed that BHUK was therefore also insolvent. The liquidators also sought to rely on various ‘indicia’ of insolvency in respect of entities within the Group such as non-payment of VAT, dwindling profits and receipt of advice on insolvency. The granting of security The further challenge brought by the liquidators was the granting of security. Mr. and Mrs. Fielding had previously loaned BHUK £1m pursuant to a Loan Agreement dated 06 December 2004. In the following years they advanced further sums to companies within the Group and sought further security. Eventually further security was granted in favour of Mr. and Mrs. Fielding by way of fixing a floating charge in respect of the sums already advanced

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to the company. The liquidators sought to challenge the granting of the security as a transaction in breach of s.423 of the Insolvency Act 1986. Decision The Court concluded that the distribution was not rendered unlawful either on the basis of lack of distributable profits or on the basis that the interim accounts were such that no reasonable judgement could be made as to the matters identified in s.270(2) of the 1985 Act. The Court concluded that the Claimants did not establish that BHUK’s assets were less than its liabilities even if making proper allowance for its contingent liabilities required a provision to be included in the sum contended by the Claimants. In further considering BHUK’s insolvency and what the Defendants knew, the Court found that Mr. and Mrs. Fielding honestly believed that the funding that would be made available following the distribution and the sale to SSE of Mrs. Fielding’s interest in Vital would be sufficient to enable the Group to trade through its difficulties. On the distribution contravening s.423, the Court found that it did not breach that provision. As to the granting of security it was held that there was a commercial benefit to granting the security namely that the original facility granted by Mr. and Mrs. Fielding to the company was extended by a further two years and as such this was a commercial benefit to the company. As it was a commercial benefit it comprised consideration and therefore was not a transaction at an undervalue. The Judge also considered the decision in Re M C Bacon Ltd [1990] BCC 78, in which it was held that in granting a debenture for existing indebtedness the company parted with nothing of value. As such there can be no question of it being a transaction at an undervalue. Taking into account the commercial benefit argument as well, the Court concluded that the grant of security did not breach s.423 IA86. On the question of limitation, it was also noted that the grant of security claim was in fact in the nature of an action to “recover a sum recoverable by virtue of” and therefore fell within s.9(1) of the Limitation Act 1980. As such the limitation period was six years and therefore the claim was statute barred. Comment

• The Judge criticised the liquidator’s expert evidence on valuation for failing to take into account contemporaneous evidence relating to future trading prospects of the subsidiaries. Instead the expert limited himself to a snapshot of the asset position at the relevant valuation date only.

• The auditors had prior to the distribution given audit opinions on the accounts of BHUK and its subsidiaries prepared on a going concern basis. Whilst it was a clean audit opinion, it was noted that this is not to be equated with a determination by the auditors that the company was solvent. It did however indicate that the auditors concluded that there were reasonable grounds for believing that the company would continue in its operational existence for at least the next twelve months without entering into a formal insolvency process.

• This case confirms that there is no requirement where reliance is placed on interim

accounts that they be laid before the company whether at a board meeting or the company in general meeting.

• This case gives clear support for the view that directors may rely on professional advisors and even fellow directors in the preparation of accounts for the purposes of

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determining whether or not there are sufficient distributable profits or reserves to enable a distribution to be made.

• In determining whether or not BHUK was insolvent as a result of the distribution, consideration was given to the contingent liabilities for the purposes of the balance sheet. In particular potential liabilities under leases held by the company. On this point it was noted that the rent due under the leases had been paid up to date and that there was no evidence for example as to what claim the landlord could make in the event that the leases were disclaimed in liquidation. When considering the view at October 2007 the Court held that it was reasonable to conclude that the conservatory business was likely to be able to continue and therefore would be able to continue the ongoing rent under the two leases for the foreseeable future. As such no additional provision was required to be made in the interim accounts for contingent liability under the leases.

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LIQUIDATION

Dumville v Rich [2019] EWHC 2086 (Ch)

Whether compensation payable by a misfeasant director can be discounted? Facts This was an appeal brought by the liquidators of DCL Hire Limited (In Liquidation) (“DCL”), against an earlier decision of a Deputy ICC Judge. The liquidators had brought a claim against a defendant director Mr. Rich for misfeasance. Part of that claim was dismissed by the Deputy ICC Judge. In allowing another part of the claim, the compensation payable by Mr. Rich was reduced by 25% and interest was only awarded from the date of the liquidation. The liquidators appealed all three elements. DCL was in the business of vehicle hire. It went into creditors’ voluntary liquidation on 15 January 2016 with a deficit of £890,844. Mr. Rich was effectively the only active director of DCL and was therefore the only subject of the misfeasance proceedings. The first claim was described as the “Surfacing” claim. Mr. Rich owned 48% of the shareholding in the company whilst another 48% was owned by various shareholders on behalf of a Mr. Brown. Previously Mr. Brown had been found to be a shadow director with Mr. Rich being accustomed to act in accordance with his directions. In January 2013 Mr. Rich caused the company to make payments totalling £250,000 to a company known as O’Hara Bros Surfacing Limited (“Surfacing”). The liquidators alleged that payment was made without consideration. The payment was made by Mr. Rich at the direction of Mr. Brown and the liquidators alleged that the payment was a misfeasance. The Deputy Judge found that the payment was a repayment of a loan made by what was called the O’Hara Pension Scheme to DCL. The loan having been made in the previous October in the sum of £535,000. As such the Deputy Judge found that the DCL repayment of £250,000 was not a misfeasance but that if it was, he would relieve Mr. Rich from liability under s.1157 of the Companies Act 2006. The second claim was the vehicle claim. (“Vehicles”). DCL had acquired eight cars which were then passed to friends and associates of Mr. Brown. DCL only received limited payments back for the cars. The total purchase price was £216,000 and after some payments were received the balance outstanding was £175,869. The liquidators asserted that there was no justification for the transactions and there was no benefit to DCL. The Deputy Judge found that Mr. Rich was guilty of misfeasance but calculated the amount due to the company differently. He started with a figure of £116,790.65 but awarded only 75% and that if that was incorrect he would have in any event allowed a 25% discount pursuant to s.1157 of the Companies Act 2006. Finally, the Deputy Judge only awarded interest from the date of liquidation whereas the liquidators contended that it should be the date on which the loss was actually sustained by the company. Surfacing Claim There was no documentation for the payment of £250,000. The loan to DCL OF £535,000 had actually been received from one of Mr. Brown’s other companies C&MB Publishing Ltd (“Publishing”). On appeal the Court considered the very limited documentary evidence which included a cheque stub drawn on Publishing’s account for £535,000. It stated:

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(i) The document that the judge found to be "conclusive" was the cheque stub for the cheque drawn on Publishing's account which paid the £535,000. It read:

"DCL HIRE [VIA O'HARA PENSION]" The first two words and the square brackets were subsequently scrubbed out, probably by Mr Brown (as the judge found), though they were still readable. The judge found that this evidenced the fact that the payment was to be treated as emanating from the Pension Scheme, and not from Publishing (or anywhere else). The moneys either reduced a debt owed by Publishing to the Pension Scheme, or gave rise to a debt owed by the Pension Scheme to Publishing. He made no findings as to why the parties would have gone about an injection of the moneys in this way, and there was no evidence which assists on the point. He dismissed a suggestion, made by Mr Rich at the trial, that Pension Scheme moneys were misappropriated.

(ii) An email of 4th December 2012 from Mr Hambling a director of Surfacing, to Mr Rich. This email bore the heading "Pension Fund etc" and read:

"The attached letter arrived today. Would you be kind enough to pass it on to whoever needs to deal with it please. Also Charles [Brown] needs the following bank details from me: [Surfacing's bank details set out]" The attached letter is not available. It may or may not have been referable to "Pension Fund etc"; the judge did not consider that.

(iii) In a letter of 15th December 2012 Mr Brown said to Mr O'Hara:

"I have arranged for a direct payment of £250,000 to be made into O'Hara Bros Bank Account to repay the interest free loan that you gave to me to tide over the cash flow issues that I had. Thank you once again for your assistance in this matter."

Ultimately the Deputy Judge found that the £535,000 did fall to be treated as a loan from the O’Hara Pension Scheme and that the £250,000 was a part repayment of that loan. The liquidators challenged that analysis. On appeal Mr. Justice Mann noted that what was under appeal was the factual conclusion drawn from the evidence by the Deputy Judge. He referred to the authorities and in particular the comments of Lewison LJ in Staechlin v ACLBDD Holdings Ltd [2019] EWCA 817, in which he stated: “…The trial is not a dress rehearsal. It is the first and last night of the show.” Mr. Justice Mann went further and stated:

“……that an appellate court should not interfere with the trial judge's conclusions on primary facts unless it is satisfied that he was plainly wrong:….”

He considered that there were various views that might be taken of the evidence but that it could not be said that the Deputy Judge was wrong in his conclusion.

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The Vehicles Claim On this point the Deputy Judge found again that the matter was orchestrated by Mr. Brown and that Mr. Rich had no real input. It was noted that the transaction was of no benefit to the company and that there was no documentation put in place. Many of the payments that were received were received by Mr. Brown even after Mr. Brown’s own bankruptcy. Neither Mr. or Mrs. Brown had accounted to the company for the payments they received in respect of the vehicles. On the other hand Mr. Rich derived no personal benefit from the transactions. Notwithstanding that the Deputy Judge had found Mr. Rich was in breach of his duties as follows:

1. Mr. Rich did not know what his responsibilities were as a sole director;

2. He failed to keep proper records and did not know the true position as to the cars;

3. He sanctioned the purchase of the cars believing they were to be hired but had no documentation in place;

4. He had no idea what payments were made and did not make formal enquiries of Mr. Brown until August 2014;

5. He knew Mr. Brown was receiving some payments but did little to recover them;

6. He failed to exercise independent judgment and basically conceded control of the purchase procedure and consequential transactions to Mr. Brown;

7. He allowed Mr. Brown to part with a very significant part of the company’s assets for no good corporate reason and to retain the proceeds for himself.

On appeal the Court noted that what Mr. Rich did was to part with company assets in a transaction which the Judge found to be of no benefit to DCL. He did so at the behest of someone who was not a director though he had indirectly a substantial holding. Further he failed to do anything to ensure the company was paid for the cars. Decision As detailed above, the liquidators Surfacing Claim was rejected. As to the Vehicles Claim the Court agreed with the District Judge’s conclusion that Mr. Rich was liable for misfeasance. The Court however was not prepared to allow a discount in the amount payable by Mr. Rich in compensation. He would therefore be liable for 100% of the Claim. Mr. Rich would not be entitled to any relief in respect of the Vehicles Claim under s.1157 of the Companies Act 2006. As to interest the rate awarded by the Deputy Judge was 2.5%. The interest would not be payable from the date of liquidation as previously ordered but would be payable from the date of the purchase of the vehicles and that would reduce when recoveries took place. In the circumstances Mr. Justice Mann approved of the liquidators’ approach which was to treat all recoveries as having been made at the outset and seek interest on the constant net balance arising only.

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Comment

• Although it was not the subject of detailed argument, the Judge questioned the application of the 25% discount as part of the Deputy Judge’s discretion pursuant to the decision in Re Loquitur [2003] EWHC 999 (Ch). Mr. Justice Mann commenting that that decision was based on complex facts and did not necessarily give rise to the view that the Judge had discretion as to the amount of compensation payable on the facts.

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Voluntary Arrangements

CFL Finance Limited v Bass [2019] EWHC 1839 (Ch)

Application of good faith to voluntary arrangements Facts This was the final hearing of a bankruptcy petition. The petitioning creditor’s debt arose out of a settlement agreement in the form of a Tomlin Order under which the debtor was to pay a sum by instalments. There was also an opposing creditor (the “Laser Trust”) who was the assignee of a debt of £799,360,216. The opposing creditor wanted the bankruptcy petition adjourned to enable a further proposal for an individual voluntary arrangement to be put to creditors. The debtor had previously had an Individual Voluntary Arrangement (“IVA”) approved by creditors. On that occasion Kaupthing Bank hf (“Kaupthing”) voted in favour of the proposal. That voluntary arrangement was subsequently revoked by the court on the grounds that the debtor had reached a private agreement with Kaupthing to the effect that it would financially benefit from assets outside the voluntary arrangement. The court found that this was in breach of the principle of good faith and that there was a material irregularity. The petitioning creditor was CFL Finance Limited (“CFL”) who had served a statutory demand on the debtor Mr. Moises Gertner (MG) for £11,128,611. As the demand was not paid, CFL petitioned for MG’s bankruptcy. The original debt arose out of a personal guarantee given by MG. The debt due to Kaupthing also arose out of a personal guarantee. Kaupthing assigned its debt to the Laser Trust for the sum of $6m. At the hearing of the petition a challenge was made to the petitioning creditor’s debt on the grounds that it contravened the provisions of the Consumer Credit Act 2006. (“CCA”). The Court found that there is scant authority on the proposition that instalment payments provided in a compromise are required to comply with the CCA. The question was, did the terms of the Tomlin Order providing for payment by instalments fall to be regulated under the CCA? A further ground for challenge was that the interest provisions also breached the CCA. If those arguments succeeded then the petitioning creditor would not have an enforceable present debt and would therefore not be able to continue to petition for bankruptcy. The Court examined the question of whether or not the Tomlin Order provided credit or a financial accommodation and in particular the Court’s focus fell upon the instalment provisions. Having reviewed the authorities Briggs J commented:

“In my judgment the law does not provide that a structured settlement clause making provision for the payment of a debt over time extends credit or financial accommodation.”

On the question of whether or not the interest constituted a penalty and therefore rendered the terms unfair and in breach of the CCA was also rejected. Having purchased the debt from Kaupthing for $6m the Court considered the relationship, if any, of the Laser Trust to MG and the rationale behind Laser Trust’s apparent willingness to enter into a further IVA which would provide a very small return. It was asserted that the Laser Trust was not an associate of MG despite arguments being presented to the Court that the Laser Trust was not wholly independent. In examining the relationship between the Laser

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Trust and the debtor the Court emphasised the need for transparency and that every proposal for an IVA should be characterised by complete transparency and good faith. Evidence presented to the Court included the explanation that the opportunity to acquire the Kaupthing debt for just $6m “seemed to be a fair value given the possibility of earning a very large profit for the Laser Trust.” A further explanation was provided by reference to the charitable works of the Gertner family. Having considered the evidence the Court concluded that the Laser Trust had provided little visibility and that the lack of explanation led him to conclude that the evidence is unreliable. The role of the nominees was considered and in particular the investigation that they had carried out. The nominees having explained the nature of those investigations also confirmed that they had seen two boxes of documents provided to them but did not review them on the basis that the funds available to the nominees were insufficient to undertake any detailed analysis or consideration of papers. The Court was referred to the decision in Greystoke v Hamilton-Smith [1997] BPIR 24 which sets out guidance for nominees.

"..….. the nominee shall have taken such steps as are in all the circumstances reasonable to satisfy himself and shall have satisfied himself on three counts. Leaving aside compliance with the formal requirements of the Act and rules they are, first that the debtor's true position as to assets and liabilities does not appear to him in any material respect to differ substantially from that which it is to be represented to the creditors to be. Secondly, that it does appear to him that the debtor's proposal as put to the creditors' meeting has a real prospect of being implemented in the way it is to be represented it will be. A measure of modification to proposals is possible under s 258 so this question is to be approached broadly. Thirdly, that the information that he has provides a basis such that (within the broad limits inescapably applicable to what have to be the speedy and robust functions of admitting or rejecting claims to vote and agreeing values for voting purposes) no already-manifest yet unavoidable prospective unfairness in relation to those functions is present. Reverting, then, to only the three counts I have mentioned, what steps are reasonable in the circumstances for a nominee to satisfy himself will, inevitably, depend on a host of variables such as the strength of the grounds for such questions or doubts as shall have arisen, their materiality to the propriety or feasibility of the debtor's proposals, the quality of the debtor's answers to the nominee in intended resolution of those doubts, the ease or difficulty with which independent inquiry by the nominee may resolve any continuing doubts, the expense entailed in such further inquiry and the availability of funds to meet that expense. Plainly, the less inquiry the nominee undertakes, the more important, in terms of reliance upon it, becomes the fullness and candour of the information provided by the debtor. If, for whatever reason, the nominee's inquiries in questionable cases have been so restricted or unsatisfactory that the nominee would be unable to assure creditors that he had satisfied himself that those three minima were met, then he should not unequivocally report, under s 256(1)(a), that in his opinion a meeting of creditors should be summoned. Where such doubts have reasonably arisen it cannot be right for the nominee unquestioningly to accept whatever it put in front of him on the supposed basis that it is not for him but for the creditors to accept or reject the proposal; it is fundamental to the intended operation of IVAs that what the creditors vote upon is not the debtor's raw material but a proposal that, at least to the qualified extent I have described, has survived scrutiny and which, to at least that extent, has commended itself to an independent professional insolvency practitioner as proper to be put to, and capable of being not unfairly voted upon by the creditors. Although it may be said, in the broadest terms, that the plan of the 1986 Act in relation to IVAs is 'Leave it to the creditors', it is not, in other words, anything that is so to be left; the formalities apart, the 'it' to be left to them by the nominee has (at least in the cases of doubt which I have described and with which I am, for the moment, concerned) to have met the three minima I have mentioned."

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On the nominees’ enquiries the Court agreed that the nominees “were entitled, without more, to rely on the information they obtained for the purposes they obtained it.” Having said that this was “an extraordinary case and required more than the usual amount of investigation”. Notwithstanding that the investigations undertaken by the nominees were reasonable in the circumstances. In recognising that those investigations may have been limited by funding and time, the Court went further and said that it would not necessarily be bound by the opinion of the nominees and in fact may reach an alternative conclusion. Discretion as to the making of a bankruptcy order On this point it was noted that the court should take into account

(i) the class remedy nature of insolvency; (ii) if a meeting of creditors is held, whether it is likely that a majority by reference to the value of votes will pass the proposals; (iii) the proposal in the context of the claims to identify if a commercial return would be provided to creditors; and iv) all the circumstances of the case.

In considering whether to adjourn to enable a further meeting of creditors to consider a second IVA proposal or to make a bankruptcy order it was put to the Court that the Court should adjourn and that if the creditors passed the IVA then the petitioning creditor will have been paid a dividend and its debts erased. The Court referred to the view expressed by Mr. Justice Snowden who stated that jurisprudence does not favour such an approach. An adjournment may be given where the debtor can produce credible evidence that there is a reasonable prospect that the petition debt will be paid in full within a reasonable time. This in the current case was not the case as the dividend prospects for the petitioning creditor if the arrangement was approved, was 0.0028p in the pound only. CFL argued that the arrangement would simply cram down their debt leaving it without recourse and without a voice. As matters stood if the petition was adjourned and a meeting of creditors held, then as Laser Trust held 90% of the unconnected indebtedness and it votes in favour as indicated, then the proposal will be passed. Commenting further Judge Briggs noted that for Laser Trust to vote in favour of the arrangement where it has been said that the assignment of the Kaupthing debt was made on commercial grounds is extraordinary. Decision Judge Briggs held that:

“…… the return offered in the proposals for the arrangement were so small as to be properly regarded as de minimis and that there is little proportionate economic benefit to be gained by agreeing to the arrangement.

Laser Trust will benefit from assets not available to the general body of creditors which is manifestly unfair. To grant an adjournment would be to permit the Laser Trust to cram down CFL or act in a way that is detrimental or unfair to its interests and prejudicial.

There has been a failure to provide a “complete picture”; a good faith requirement.”

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Commenting further on the Laser Trust Judge Briggs stated:

“If there is not a true commercial reason, I infer that MG has influence over the Laser Trust causing it to act in his best interests…..”

The adjournment would be refused and a bankruptcy order would be made on the petition. Comment

• The challenge to the petition debt on the grounds that it was covered by the CCA and that therefore a failure to comply with those terms meant that it was no longer a liquidated sum capable of forming the basis of the petition was considered. This case confirms that where a settlement in the form of a Tomlin Order provides for payment by instalments, it is unlikely to breach the provisions of the CCA. One of the key factors in reaching that conclusion was that there was no actual extension to the original loan terms.

• This case emphasises the overriding need for good faith on the part of the debtor when putting forward a proposal for an IVA.

• Arrangements that provide for certain creditors to receive benefits outside the arrangement are in clear breach of that principle and will not be allowed.

• The case also examines the role of the nominee and the nature and extent of the enquiries that should be undertaken by the nominee in his or her report. There was a clear link between the extent of the enquiries required and the complexity of the debtor’s affairs.

Insolvency Legal Update 2019 - Julian Dobson Legal Update October … · Insolvency Legal Update...

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Transcript of Insolvency Legal Update 2019 - Julian Dobson Legal Update October … · Insolvency Legal Update...