Business Recovery And Insolvency
Bulletin
December 2010
Welcome to the latest edition of
Taylors’ Business Recovery and
Insolvency Bulletin.
With all the best wishes of the
season we bring you the festive
edition of our Business Recovery and
Insolvency Bulletin. We hope you’ll
enjoy our regular round up of the
most recent and relevant cases
concerning insolvency.
Should you require any further
information or guidance on any of
the articles contained in this
edition of our quarterly bulletin
please contact Andrew or Chris:
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On 10 December 2010, the High Court
delivered judgment on a claim brought by the
UK Pension Regulator in the estates of
Lehman Brothers and Nortel Networks. The
judgment was handed down by Mr Justice
Briggs and whilst the fine detail is not yet
available, the outcome of the decision is
clear and far reaching.
The UK Pension Regulator issued financial
support directions (“FSD”) of £2.1 billion
in respect of the Nortel Networks UK Pension
Plan and £130 million in the Lehman Brothers
Pension Scheme. The Regulator may issue an
FSD to any legal person connected or
associated with an employer which is either
a service company or is insufficiently
resourced and which participates in an
underfunded final salary pension scheme. An
FSD requires the recipient to put in place
financial support for the employer's
obligations. In this case, the target
companies were all in administration and the
issue for determination was whether the
FSD’s issued by the Regulator were payable
as expenses of the administrations of both
estates.
Decision
Mr Justice Briggs stated that he was
bound by precedent and found in the
Regulator’s favour. Accordingly, the FSDs
issued by the Regulator are payable as
administration or liquidation expenses.
Comment
This decision has conferred super
priority on the UK Pension Regulator and
pension trustees given that FSDs are now
payable before not only all unsecured
creditor claims, but also potentially before
the fees and expenses of the administration.
Many insolvency commentators consider this
decision will bar out companies with
significant pension deficits from being able
to utilise the rescue procedure. It also has
implications for the ability of such
companies to obtain credit in a market where
lending criteria is already restricted.
It is clear that the Judge delivered his
judgment with a heavy heart describing the
current position as a, ‘legislative mess’
and commenting that his decision could be,
‘an impediment to the achievement of the
objectives of the rescue culture.’ The Judge
invited legislative change which would be
welcome sooner rather than later.
The Courts in England and Wales have
been relatively quiet on what many would
label as the most significant decision of
the last 12 months. Likewise there do not
appear to be any noises coming out of the
Insolvency Service as to whether there is
likely to be clarification on the issue when
the new Insolvency Rules come into effect in
April of next year.
A recent decision in the Scottish Courts
may serve as an indicator as to whether the
Goldacre principle is here to stay.
Facts
A Scottish company was tenant of
premises in Worcester. The company went into
administration. The administrators sold the
company’s business and in doing so granted
the buyer a licence to occupy the Worcester
premises. The purpose of the licence was to
allow the tenant the opportunity to take an
assignment of the lease once the landlord’s
consent had been obtained. The assignment
never took place and the landlord sought a
declaration from the Scottish Court as to
whether the administrators were bound to pay
the unpaid rent as an expense of the
administration.
Decision
The Court decided that the rent payable
should be treated as an expense of the
administration given that the administrators
had allowed the premises to be used.
Comment
The outcome of this decision mirrors the
Goldacre result but it is not clear whether
the same reasoning was employed. The
reasoning in Goldacre hinges on the
application of the salvage principle which
is said to be applicable to liquidations and
administrations. It is also not clear
whether the liability to pay rent as an
expense is linked to the contractual
liability or with reference to the
administrators’ usage of the premises.
The decision is useful given that
Goldacre concerned a scenario where the
administrators were in actual physical
occupation of the premises. This case
indicates that the granting of a licence to
occupy is likely to be considered as ‘use or
retention’ under the salvage principle such
as to give rise to the payment of rent as an
expense.
The following two recent cases act as
a refresher of relevant issues to consider
when reviewing a creditor’s claim for
reservation of title.
GHSP v AB Electronic Limited [2010]
EWHC1828 (Comm)
GHSP was an American company that
supplied electro-mechanical control systems
for motor vehicles to AB, which was an
English company manufacturing automotive and
industrial position sensors.
Negotiations ensued between the parties
to seek to agree the terms of trade. However
those negotiations never concluded in
universal agreement. In this case AB was
facing a claim brought by GHSP for the
supply to it of a faulty batch of sensors.
One of the issues for determination was
whether the parties had concluded a contract
in relation to either of the parties’
relevant terms.
Decision
The Court determined that looking at
this case on the facts, neither party had
successfully registered its terms and
conditions. The case provides a useful
review of the ‘Battle of the Forms’ and the
‘last shot doctrine.’ Where contracting
parties each deliver to the other their
standard terms and conditions, the party
that was the last to send those terms
without reply from the other will generally
have its terms and conditions incorporated
into the contract.
In this case it was decided that both
parties had buried their heads in the sand
and consequently neither party had
successfully incorporated its terms and
conditions. This left the contract to be
interpreted with reference to the provisions
of the Sale of Goods Act 1979 (“SOGA79”).
Comment
The ramifications of this decision for
creditors claiming ROT are stark. SOGA79
provides that title to goods passes on
delivery, which means that unless an ROT
provision has been incorporated into the
contract of supply ROT cannot be claimed.
When considering ROT claims, care should be
taken to investigate the contractual
relationship and negotiations which took
place between the parties in order to
establish whether a creditor’s terms and
conditions apply to the contract of supply.
The lesson to be learnt here is to always
ensure that in addition to assessing whether
a creditor can refer to a ROT clause and
identify its stock, the contractual history
between the parties is equally as important
to establish whether a creditor can rely on
its ROT clause.
Facts
This case concerned goods supplied by
the Claimant to the Defendant. Upon the
Defendant entering into administration,
certain of the Claimant’s stock was sold by
the company between appointment and the sale
of the business with the remainder of the
company’s stock (whilst excluded from the
sale) was delivered to the buyer of the
business upon completion. The Claimant’s
terms and conditions contained an ROT
provision together with an insolvency
termination clause that entitled the
Claimant to terminate the contract if, among
other things, an administrator was
appointed. The Claimant claimed against the
company and the administrators for damages
for conversion.
Decision
The Judge decided in favour of the
Defendant company and the administrators
and, accordingly, the Claimant’s claim for
conversion failed. The contract between the
Claimant and the company provided the right
for the Defendant to sell and pass title in
the stock to its customers. Given that the
contract provided for the post insolvency
position and gave the Claimant the option to
terminate the contract, the administration
did nothing to interfere with the contract
and accordingly, notwithstanding the ROT
provision once the stock had been sold,
title had passed and therefore the claim of
conversion must fail.
Comment
This case stands as a useful reminder
that in the context of normal supply chain
contracts, the existence of an ROT provision
does not necessarily give rise to solid
grounds for a claim in the event that the
stock is sold or passed to a third party.
Facts
In the case of The Liquidators of PAL SC
Realisations 2007 Limited v (1) Inflexion
Fund 2 Limited Partnership and (2)
Autocruise Co Investment Limited
Partnership, PAL was one of the trading
companies in the Autocruise group which went
into administration on 5 October 2007.
In 2006, Inflexion Fund 2 Limited
Partnership (“Inflexion”) and Autocruise Co
Investment Limited Partnership (“Autocruise”)
provided finance for a management buyout of
the group. National Westminster Bank Plc
(“NatWest2) was the main funder and had
priority pursuant to a priority Agreement
between the lenders.
Following the administration, only NatWest
received any distribution in respect of its
security. The group was to enter into CVL
where it was anticipated that a large
prescribed part would be available to
unsecured creditors. Accordingly, Inflexion
and Autocruise decided to formally release
their security in order to share in the
prescribed part. Given that Inflexion and
Autocruise’s share of the liability was
sizable, their inclusion would have had an
impact on the dividend available to other
unsecured creditors. Accordingly, the
liquidators sought clarification from the
Court.
The Decision
The Court decided that because the debts
of Inflexion and Autocruise were unsecured
at the time they submitted their claim
against the prescribed part they were
entitled to participate.
Comment
Established authority on this point
suggests that a secured creditor cannot
participate in the prescribed part in
respect of any shortfall owed to it after
the realisation of its security. It must be
assumed, therefore, that the decision in
this case relied upon the fact that there
had been a total waiver of security. This
decision widens the options for secured
creditors to elect how to recover their
debts. The decision doesn’t clarify,
however, whether the ability to take part in
the prescribed part would be open to a
secured creditor who had already received a
dividend floating charge realisation and
subsequently released its security. Looking
at the reasoning in this case it is arguable
that a secured creditor could participate in
such circumstances, however, looking at
prior authority and the intent behind
section 176A this would be an odd outcome.
It is possible that further clarification
will be needed on this point either by a
decision in a higher Court or by virtue of
further changes to the Insolvency Rules.
Copyright 2006 - 2010 Taylors Solicitors
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