Business Recovery And Insolvency
Bulletin
June 2010
Welcome to the first edition of
Taylors’ Business Recovery and
Insolvency Bulletin.
Whilst we all digest the impact of
the latest QI statistics –
administrations down 40%,
liquidations down 17% and
bankruptcies down 10% - in this
issue we provide you with a helpful
summary of recent Insolvency Rule
changes and key case law.
Should you require any further
information or guidance on any of
the articles contained in this
edition of our quarterly bulletin
please contact Andrew:
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On 6 April 2010, the provisions of the
Legislative Reform (Insolvency)(Miscellaneous)
Provisions Order 2010 and the Insolvency
(Amendment) Rules 2010 came into effect and
brought about major changes to the
Insolvency Rules 1986. Some of the more
significant changes to the rules are
sign-posted as follows.
Advertising
Together with the new requirements which
came in to effect in April 2009, the new
provisions allow officeholders to choose
alternative media to publish advertisements.
For example, officeholders may publish
advertisements on a website address notified
to creditors.
Meetings and Resolutions
The changes aim to consolidate the
practice relating to meetings and
resolutions in different types of insolvency
process. Notable changes include:-
- The minimum period of notice for
meetings is reduced from 21 to 14 days
(other than final meetings in a
liquidation or bankruptcy where the
minimum notice will be 28 days).
- The power of the Court to order that
notice of a meeting may be given by
advertisement only (as in liquidation
and bankruptcy) is extended to
administration.
- Resolutions may be adopted by
correspondence in liquidation and
bankruptcy as is already the case in
administration.
- Remote attendance at meetings is
made easier.
- The requirement for annual meetings
in voluntary liquidations is abolished
and replaced with a requirement to send
a progress report if the liquidation
continues for more than a year.
Disclaimer Procedure
Disclaimer notices issued by a
liquidator or a trustee in bankruptcy no
longer need to be filed with the Court.
Instead the disclaimer notice is signed by
the officeholder at which point it becomes
effective. Where the disclaimer notice
relates to land a copy must be sent to the
Land Registry. A liquidator must also send a
copy of the disclaimer notice to the
Registrar of Companies. There is also no
longer a duty to keep the Court informed
which is replaced with a new requirement for
the officeholder to keep certain records.
Sanction
Liquidators no longer require sanction
to compromise calls, liabilities, debts and
claims between the company and debtors or
contributories. Sanction is still required,
however, to make any compromise with
creditors.
Likewise in bankruptcy, the trustee in
bankruptcy can compromise any debts, claims
or liabilities between the bankrupt and any
debtor without sanction. Sanction is also
not required for the compromise of any claim
by the trustee in bankruptcy against any
person. As in liquidation, the trustee in
bankruptcy will still require sanction to
make any compromise or arrangement with
creditors
Court Procedure
A number of amendments are made to Court
procedure. A selection of the more notable
changes is listed below:-
- There is a new form of application
notice which replaces the need for two
distinct forms (ordinary application and
originating application).
- New provisions which provide
specified persons with the right to
receive a copy of the complete Court
file relating to the particular
insolvency.
- Winding up petitions served by an
administrator are no longer treated as
petitions filed by a contributory which
removes the need for a directions
hearing prior to the hearing of the
petition. It is not clear whether the
same procedure also applies to the
Supervisor of a CVA.
- There is now no requirement to file
an affidavit in respect of any
insolvency proceedings. A statement of
truth in accordance with the Civil
Procedure Rules 1998 will suffice.
- Where an IVA is proposed without the
support of an interim order, the
requirement to report to the Court is
removed and replaced with a new
requirement to report to creditors. The
requirement to report to the Court
remains in circumstances where an
interim order has been made in respect
of an IVA.
- Where the appointment of an
administrator is required to take place
outside of Court hours, the notice of
appointment may be filed by e-mail. The
e-mail address is required to be
published on the Insolvency Service’s
web-site.
Remuneration and Expenses
Various changes are implemented with
reference to officeholders’ remuneration and
expenses. The most relevant changes are as
follows:-
- Officeholders may fix their
remuneration as a set amount instead of
or in addition to a percentage of the
value of property dealt with or on a
time basis.
- Creditors, members (in an MVL) and
bankrupts have the right to apply to the
Court for a review of officeholders’
remuneration and expenses. Officeholders
have to supply certain information
relating to remuneration and expenses on
request. Similar criteria which
currently apply to officeholders’
remuneration may now also be applied to
expenses incurred by the officeholder.
The deadline for challenging
officeholders’ remuneration and expenses
is within eight weeks of the report to
creditors recording them.
- An administrator or other qualified
insolvency practitioner is able to
recover any remuneration charged and
expenses incurred before the formal
start of the administration. This means
that an insolvency practitioner that has
incurred pre-administration fees and
expenses but is not ultimately appointed
may claim reimbursement and enjoy the
same priority as the appointed
administrator.
Electronic Delivery
Unless otherwise specified, documents
may be delivered by electronic means
provided that the recipient has consented to
such delivery and provides an electronic
address. The provisions do not apply to
petitions or applications to the Court. The
document must be accompanied by a statement
that the recipient may request a hard copy
(which must be delivered within 5 days of
the request) and give a telephone number,
e-mail address and postal address for this
purpose.
Forms
The new changes move away from the use
of prescribed forms in insolvency
proceedings. The use of prescribed forms is
replaced by an information requirement which
sets out the minimum information to be
provided in a particular form. This change
is used to facilitate the implementation of
the use of electronic communication.
As regards forms to be filed with
Companies House, the Registrar of Companies
will apply its own rules in relation to the
prescribed forms and the manner of delivery.
Companies House has yet to produce its own
set of rules and forms.
To further promote the use of electronic
delivery, the rules adopt the concept of
authentication of a document as opposed to a
signature. A document is sufficiently
authenticated if the identity of the sender
is confirmed in a manner specified by the
recipient or, where no manner is specified,
if a communication contains a statement of
identity of the sender and the recipient has
no reason to doubt the truth of that
statement.
Comment
The new rules have been designed to
streamline insolvency processes by
eradicating unnecessary bureaucracy and
embracing modern technology. The Insolvency
Service hopes that the changes will
ultimately benefit creditors by improving
efficiency and reducing costs.
Whilst the majority of the new changes
appear purely administrative in nature, some
of the amendments reflect significant
changes in policy. Worthy of special mention
is the enhanced facility for interested
parties to apply to the Court for the
review, not only of officeholders’
remuneration but also their expenses. It
will become increasingly important for
officeholders to monitor agent’s costs from
the outset of an insolvency process in order
to ensure that expenses are justified.
The Insolvency Service intends to follow
up the new changes with a completely new set
of Insolvency Rules scheduled to be rolled
out on 6 April 2011. The intention is to
tidy up the form of the present rules which
have been subject to numerous amendments
over the last 24 years. It is likely that
the Insolvency Service will also take the
opportunity to resolve any teething problems
which will be encountered as practitioners
get to grips with the new processes.
For an application under section 212
of the Insolvency Act 1986 to succeed, the
applicant (either the Official Receiver,
liquidator, a creditor or contributory) must
prove that the company in question has
suffered loss. This was one of the issues in
dispute in the unusual case of ED Games
Limited v Cipolletta (2009) Ch.
Facts
The liquidators of ED Games Limited
(“ED”) brought an action against one of ED’s
directors on a number of grounds under
section 212. One of the grounds stated that
the director had caused loss to ED by
allowing its VAT liability to HMRC to
increase. The liquidators argued that the
monies that should have been paid to HMRC
were instead used by ED as working capital,
thus enabling it to continue trading which
in turn increased the deficiency to ED’s
creditors. The director made an application
to strike out this part of the liquidators’
claim on the basis that it had no reasonable
prospect of succeeding. He argued that the
increase in the deficiency to ED’s creditors
did not constitute a loss to ED.
Decision
The Court concluded that whilst the
liquidators might experience considerable
difficulty in establishing a causal link
between ED’s failure to pay VAT and the
losses claimed, it was satisfied that an
increased deficiency to creditors
represented a loss to ED. Accordingly, the
liquidators were entitled to bring a claim
on this basis under section 212 and the
director’s application to strike out the
liquidators’ claim was dismissed.
Comment
The Court was only asked to consider
whether there existed reasonable grounds for
the liquidators to bring a claim. The Court
did conclude that there were significant
evidential difficulties for the liquidators
regarding causation. Nevertheless, the Court
entertained the possibility that an increase
in the deficiency to creditors, if caused by
the directors could give rise to a company
loss sufficient to justify an action under
section 212.
It is not clear whether this matter
proceeded to a final hearing although, given
the obvious attraction that this argument
will have to HMRC, it is possible that
further cases will be brought for
determination by the Court. Given that the
liquidators’ claim focused on the director’s
decision to continue trading at the expense
of creditors, it is surprising that the
Court did not comment that a claim should
have been brought for wrongful /fraudulent
trading. It remains to be seen whether the
Court would criticise a liquidator for
bringing an action under section 212 where
other statutory claims are more appropriate.
In the relatively recent case of
Sunberry Properties Limited v Innovative
Logistics Limited [2009] 1 BCLC 145 the
Court stated that the administrators and the
Court had discretion to consider how much it
would be fair to pay to a landlord in
respect of rent claimed as an administration
expense.
In the case of Re Toshoku Finance UK Plc
[2002] 1 WLR 671 it was determined that,
where a liquidator retains or uses property
for the purpose of the liquidation, the rent
incurred ought to be regarded as an expense
of the liquidation pursuant to rule 4.218 of
the Insolvency Rules 1986 (“the Rules”)
which is mandatory and does not involve the
exercise of discretion.
These cases demonstrate the previously
held view that the incurrence of
administration expenses is a discretionary
matter for determination by the
administrators or the Court, whereas the
incurrence of liquidation expenses is
subject to the strict application of rule
4.218. This derives from the fact that,
before the Enterprise Act 2002, no
equivalent to rule 4.218 existed in relation
to administration, leaving administrators
free to exercise discretion. The changes
brought about in 2003 went some way to
consolidate the rules on expenses by the new
provisions contained in paragraph 99 of
Schedule B1 to the Insolvency Act 1986 and
rule 2.67 of the Rules. Nevertheless, the
view remained that by virtue of the
differences between administration and
liquidation, the approaches for dealing with
expenses should remain distinct. The case of
Goldacre (Offices) Limited v Nortel Networks
UK Limited [2009] EWHC 3389 Ch has now
brought the two types of insolvency process
closer together.
Facts
Prior to entering into administration,
Nortel Networks UK Limited (“Nortel”)
occupied two commercial properties subject
to leases with the landlord Goldacre
(Offices) Limited (“Goldacre”). Upon
entering administration, Nortel continued to
use part of the leased premises for the
benefit of the administration. The
administrators had paid rent for the period
of Nortel’s use of the premises whilst in
administration. Goldacre requested payment
of the December quarter and applied to the
Court for a determination of whether future
rent is payable as an administration
expense.
Decision
Goldacre argued that the question of
whether the rent was payable as an
administration expense should be decided by
reference to the Rules. The Court agreed
with Goldacre’s submission and stated that
if rent fell within the Rules such would be
payable as an administration expense on a
mandatory basis and not as a matter of
discretion exercisable either by the
administrators or by the Court.
The Court referred to the decision in
Toshoku and determined that the liability to
pay rent was an expense of the
administration in accordance with the Rules.
The Court stated that rent was either in the
expense category in rule 2.67(1)(a) as an
expense ‘properly incurred by the
administrator in performing his functions in
the administration of the company,’ or in
the expense category in rule 2.67(1)(f) as a
necessary disbursement. The Court did not
make a final determination on the question
of which category applied given the decision
in Exeter City Council v Bairstow [2007] 4
ALL ER 437 which provides that such an
expense would fall under rule 2.67(1)(f).
The administrators argued that in the
event that rent was payable as an expense
under the Rules, the Court should exercise
discretion when deciding the amount of rent
claimable. The administrators referred to
the Sunberry decision and argued that rent
should be apportioned with reference to the
period of Nortel’s occupation and the extent
of the premises occupied. Ordinarily, the
Court would have been bound to follow the
decision in the Sunberry case, however, the
Court felt that it was not so bound as the
decision in Sunberry was made following a
concession by the landlord in that case that
it did not have an automatic right to rent.
The Court found that all liabilities due
under the terms of the leases during the
period of Nortel’s occupation whilst in
administration were payable as an expense of
the administration. Accordingly, the Court
ordered that the full quarter’s rent due in
December was payable as an expense of
Nortel’s administration and would not be
apportioned even if the administrators
vacated during the quarter. The Court
indulged the administrators by clarifying
that if the matter had involved the exercise
of discretion, the same outcome would have
been achieved. Nevertheless, the clear
principle espoused by the Court in this case
is that where property is used by a company
in administration, all liabilities under any
applicable lease, including rent, are
payable in full as an administration
expense.
The Court provided further guidance on
this new approach by stating that the
liability to pay rent is not treated as an
expense having priority until (and lasts
only so long as) the administrators make use
of or decide to retain the property.
Furthermore, the Court stated that upon
vacation of the property the rental
liability ceases to be payable as an
administration expense. It was also
explained that just because rent is payable
as an expense it does not impose an
obligation on the administrators to pay rent
straight away if there is some doubt as to
whether there are sufficient assets.
Comment
As is conceded by the Court at the
outset, this judgment was prepared in haste
at the request of the parties. Accordingly,
the decision has left many questions
unanswered which have caused some confusion
amongst insolvency professionals. The
following issues remain open to debate:-
- If the liability to pay rent as an
administration expense is mandatory as
opposed to discretionary then this
presumably presents a level playing
field as between administrators and
landlords. Accordingly, the
administrators should be able to take
advantage of any rent free periods which
may apply under the terms of the lease.
- It is assumed that the leases
considered in this case did not contain
a rent apportionment clause as,
presumably, this would have allowed some
scope for apportioning rent to the
period of occupation.
- Most leases stipulate that rent is
payable, not as a continuing obligation,
but on the quarter day. It must follow,
therefore, that where a company in
administration occupies premises during
a period where the quarter day does not
fall, there is no liability to pay rent
as an administration expense. In such
circumstances, the landlord may be
justified in applying to the Court for
leave to forfeit, but will still have to
satisfy the test in the case of Re
Atlantic Computer Systems Plc [1992] Ch
505.
It is likely that these and other issues
will be resolved either by further
determination by the Court or by clarifying
legislation. Until then, here is some
practical guidance:-
- When granting licences to occupy to
purchasers of the company’s business and
assets, care must be taken to ensure
that, where possible, the licence period
falls short of a quarter day to avoid
triggering liability. Administrators
should insist on payment of the licence
fee in full on completion if the
incurrence of a full quarter’s rent is
unavoidable.
- Practitioners will have to consider
the company’s full liability for rent
before appointment which may impact on
the timing of the appointment. It may be
possible to negotiate a variation of the
lease terms with the landlord in
appropriate cases.
- It should be borne in mind that this
case will have retrospective effect and
accordingly existing licence
arrangements may need to be reviewed.
This case requires practitioners to
consider all possible expenses which might
be incurred during the course of an
administration and, in an appropriate case,
it is recommended that advice be taken
before agreeing to take an appointment.
Although Enterprise Managed Services
Limited v Tony McFadden Utilities Limited
[2009] EWHC 3222 is a decision of the
Technology and Construction Court, it has
some interesting implications for
practitioners.
Facts
Tony McFadden Limited (“TM”) went into
administration in 2006 and subsequently
entered into voluntary liquidation in 2007.
Following administration, TM’s
administrators submitted a final account for
payment under a sub-contract in the sum of
£2.5m to Enterprise Managed Services Limited
(“Enterprise”). Following TM’s liquidation,
Enterprise counterclaimed for monies due in
relation to a separate sub-contract against
TM for overpayment of approximately £3m. In
June 2009, TM’s liquidators entered into a
deed of assignment with Tony McFadden
Utilities Limited (“TMU”) assigning the net
balance arising from the account of mutual
dealings between TM and Enterprise under
rule 4.90 of the Insolvency Rules 1986 (“the
Rules”). Following the assignment, TMU
referred the sub-contract under which the
net balance was due for adjudication. The
relevant sub-contract contained a clause
which stated:-
“The Sub-Contractor shall not assign, novate,
sub-contract or otherwise dispose of this
Agreement without the previous written
consent of the Contractor which may be
withheld at the sole discretion of the
Contractor.”
Enterprise issued an application to the
Court seeking (amongst other declarations) a
declaration that the assignment was not
valid and that the adjudicator did not have
jurisdiction and, therefore, the
adjudication should be discontinued.
Decision
The Court concluded that the prohibition
on assignment prevented the assignment of
the sub-contract itself and also of the
fruits of the performance of the
sub-contract. However, in this case it was
the net balance under rule 4.90 which was
the subject of the assignment which was not
prohibited by the contractual prohibition on
assignment in the sub-contract. The Court
relied on the decision in Stein v Blake
[1996] 1 AC 243 which provides that rule
4.90 is mandatory and applies automatically
on liquidation. Furthermore the original
claims cease to exist and are replaced by a
claim to the net balance.
As regards the question of whether this
matter was suitable for adjudication, the
Court concluded as follows:-
-
An adjudicator can only
deal with one dispute under one
contract, and as the case involved more
than one contract, it was not suitable
for adjudication
-
As Enterprise’s
counterclaim was against TM it would be
necessary to join in the liquidators and
it is not possible to adjudicate when
there are three parties
-
As stated in Stein v
Blake, rule 4.90 envisages the taking of
a single account which rules out the
adjudication process as such could only
be achieved by conducting a piecemeal
approach, contract by contract.
-
Adjudication was
impossible as the claims arising out of
the separate sub-contracts had ceased to
exist.
-
The adjudication
procedure is not the appropriate forum
for taking account of mutual dealings
under rule 4.90 as adjudication
proceedings can be re-opened which would
lead to uncertainty.
Comment
This case provides a useful restatement
of the principles laid down in Stein v Blake
in relation to insolvency set-off. It also
provides helpful guidance on how contract
terms prohibiting set-off will be applied in
relation to rule 4.90 and further the
unsuitability of the adjudication process to
determine such issues. It is likely that
similar considerations will also apply in
administration pursuant to the equivalent
insolvency set-off provisions contained in
rule 2.85 of the Rules.
Dealing with claims for the return of
customer deposits is rarely straightforward.
Claims often require detailed analysis of
records and accounts and may involve
consideration of complex issues of trust
law. Officeholders must ensure that the
legitimacy of such claims is investigated
fairly and properly.
If the officeholder makes the wrong decision
it could lead to either a breach of trust
claim by those claiming the deposits or,
alternatively, complaints by the creditors.
In such circumstances, and where there is
genuine doubt as to the correct position,
the officeholder is best advised to apply to
the Court for directions. Such an
application will provide the officeholder
with protection from liability going forward
and security for costs given that such are
usually ordered to be payable out of the
assets which form the subject of the
dispute. In the recent case of Re Equilift
Limited [2009] EWHC 3104 Ch the Court faced
a dilemma concerning the proportionality of
the costs which would be involved in
resolving a dispute over customer deposits
and adopted an innovative approach.
Facts
Equilift Limited (“Equilift”) supplied
and installed stair-lifts and went into
administration on 12 December 2008. Upon
entering administration Equilift operated
four bank accounts which held approximately
£171,000. Equilift subsequently entered into
voluntary liquidation and the liquidators
received 484 separate customer claims for
the return of deposit monies.
There were three categories of claimant,
namely, consumer customers, trade customers
and those who had paid for service
contracts. Equilift had no uniform policy in
place for dealing with customer deposits and
consequently there was real doubt as to the
validity of the customer claims. The
liquidators applied to the Court for
directions as to whether the customer claims
should be accepted or whether the fund was
available for distribution to creditors.
Decision
The Court expressed its concern that the
costs of resolving the customer claims could
exhaust the fund. The Court directed,
therefore, that the liquidators obtain the
opinion of leading Counsel on the merits of
the various customer claims. The liquidators
complied with this direction and Counsel
advised that, because of the manner in which
Equilift had dealt with customer deposits
such, no trust arrangement existed in favour
of any of the customers.
The matter came back before the Court where
Counsel’s opinion was considered. The Court
did not endorse the opinion, however, found
that the opinion was fair, balanced and well
reasoned. In the circumstances, the Court
decided that the liquidators should follow
Counsel’s opinion, however, because
Counsel’s opinion was not binding as an
authority, the Court accepted that the
liquidators might still face an action for
breach of trust. In this regard, the Court
referred to section 61 of the Trustees Act
1925 which provides a defence where it can
be demonstrated that a trustee has acted
honestly and reasonably. The Court concluded
that it was inconceivable that this defence
would not be open to the liquidators given
that Counsel’s opinion has been sought at
the direction of the Court. To further
improve the prospects of a defence to a
trust claim, the Court directed that the
liquidators notify customers of Counsel’s
opinion and that distribution be delayed for
two months after such notification.
Comment
This is a welcome example of the Court
working with officeholders to achieve a
positive result. It is likely to only apply
in cases where the complexity of the issues
and the likely costs are disproportionate to
the value of the asset in dispute. In all
cases, where Counsel’s opinion is to be
relied upon, the officeholders should always
make an application to the Court for
directions. It should also be remembered
that such applications will only be
entertained by the Court in cases of genuine
doubt. Where the issues involved in a
dispute are straightforward, the Court will
not intervene and will expect the
officeholder to have sufficient competency
to resolve the matter. This approach should
also be considered with caution. In this
case, if Counsel’s opinion is later shown to
be wrong, the protection afforded by this
ruling may not save the liquidators from a
breach of trust claim. Furthermore, because
Counsel’s opinion is not binding authority,
such protection may be lost if there is a
change in the law. Nevertheless, this case
remains of interest as an exercise and may
prove a useful tool for officeholders faced
with similarly difficult cases.
The case of Casson and Wales v The Law
Society [2009] EWHC 1943 provides useful
clarification on the definition of a
bankruptcy debt.
Facts
Messrs. Casson and Wales were practising
solicitors who were made bankrupt. After
they were discharged, they were ordered by
the Legal Complaints Service (“LCS”) to pay
compensation to certain of their clients for
the provision of inadequate professional
services. The bankrupts failed to comply
with the LCS’s order and the matter was
referred to the Solicitors’ Disciplinary
Tribunal. The bankrupts argued that because
the compensation awards related to conduct
that had occurred before their bankruptcy
such awards were bankruptcy debts from which
they had been released under sections 281
and 382 of the Insolvency Act 1986. The
Tribunal disagreed with the bankrupts and
found that the awards made by the LCS were
not bankruptcy debts and that the bankrupts
remained liable. The bankrupts appealed and
the matter came before the Court for
determination.
Decision
The Court accepted the Law Society’s
submissions that the awards were not
bankruptcy debts. The Court did not create a
new species of debt excepted from the
statutory definition of bankruptcy debt but
found that the liability was incurred after
the date of the bankruptcy. It was
determined that the power of the LCS to make
compensation awards was a matter of
discretion. Before bankruptcy, there existed
the risk of a complaint and the possibility
of an award being made, but no actual
liability or debt and nor was there any
contingent liability or debt. The liability
in issue arose upon the making of the
compensation awards by the LCS and
accordingly post dated the bankruptcy. The
bankrupts, therefore, remained liable to pay
the awards.
Comment
It is worthwhile noting that whilst the
bankrupts remained liable to pay the LCS
compensation awards, pursuant to the
statutory definition of a bankruptcy debt,
they were released on their discharge from
any liability arising out of any breach of
contract or negligence occurring before
bankruptcy. It is submitted that there is
very little distinction between the two
types of liability and the Court could
easily have found that the compensation
awards were linked to an obligation incurred
before bankruptcy pursuant to the definition
in section 382. The Court will undoubtedly
have been influenced by policy
considerations and the obvious injustice
which would have arisen if the bankrupts had
been able to avoid liability to pay the LCS
awards. It may have been relevant that the
bankrupts’ liability for negligence is
likely to have been insured whereas the
liability to pay the compensation awards was
not. That said, following the Court’s
reasoning, liability would have been avoided
if the awards had predated the bankruptcy
and may be avoided yet if the bankrupts are
made bankrupt again.
It would be interesting to see how this
issue would be dealt with in the context of
a corporate insolvency. One of the policy
considerations for the Court in this case
will have been to ensure that the awards
survived the bankruptcy to prevent the
bankrupts from escaping liability. The same
policy consideration would not apply where
the Court is asked to consider whether a
fine levied by an industry regulator after
liquidation is a provable debt. In a
liquidation scenario, the industry regulator
would be at pains to argue that the
liability is provable in order to partake in
any distribution. It may enhance the value
of any dividend, however, if the liquidator
is able to argue that such a liability, as
in this case, survives the liquidation. It
is doubtful that the Court would so keen to
follow a similar line of reasoning in a
liquidation.
Section 303 of the Insolvency Act 1986
enables a bankrupt, creditor or any other
person dissatisfied by any act, omission or
decision of a trustee in bankruptcy to apply
to the Court for an order confirming,
reversing or modifying any act or decision
of the trustee or for directions or any
order as the Court thinks fit. In the recent
case of Miller v Bayliss [2009] EWHC 2063
Ch, the Court had cause to consider this
provision when dealing with the concerns of
an associate of the bankrupt.
Facts
One of the main assets in the bankrupt’s
estate consisted of 300 shares in a private
company. Prior to the bankruptcy, the
bankrupt had transferred a further 187
shares to Mrs Bayliss and the bankrupt’s
wife for nil consideration. The trustee in
bankruptcy applied under section 339 of the
Insolvency Act 1986 for an order declaring
that the transfer of these shares was a
transaction at an undervalue and a
declaration that the shares formed an asset
in the bankruptcy. Mrs Bayliss defended the
application seeking an order under section
303 for relief on the basis that the trustee
in bankruptcy had sold the 300 shares held
in the estate for a sum less than offered by
Mrs Bayliss. Mrs Bayliss had offered to buy
the shares for £30,500. The trustee
eventually sold the shares to a third party
for £20,000.
Decision
The Court concluded that the trustee was
entitled to accept the lower offer. It was
right to say that Mrs Bayliss had made a
substantially increased offer, however, she
had not substantiated her offer with any
proof that the funds were available. The
Court, therefore, concluded that the trustee
in bankruptcy was entitled to continue to
market the shares and effect a realisation
to a third party who could demonstrate the
availability of funds. To use the Court’s
own expression, the trustee in bankruptcy
was at liberty to take the “bird in the
hand”.
The Judge referred to the test adopted in
Osborn v Cole [1999] BPIR 251 that the Court
will only intervene if the trustee in
bankruptcy has acted in bad faith, or
perversely or fraudulently, or so
unreasonably or absurdly, that no reasonable
person could have acted in that way. The
Court determined that the threshold to be
met for such challenges was stringent and
vey difficult and that Mrs Bayliss’s
procrastination in failing to provide
evidence that she was able to pay for the
shares enabled the trustee in bankruptcy to
deal with other interested parties whose
offers were met with funds. The Court
concluded that such actions were neither
unfair nor unreasonable, but instead were
professional, prudent and well judged.
Having dismissed the application, the Court
did not have cause to consider whether Mrs
Bayliss had standing to bring it.
Nevertheless, the Court commented that had
it needed to consider this point it would
have declined Mrs Bayliss standing on the
basis that she was not a person with an
interest in the bankruptcy.
Comment
This case provides a useful reminder as
to the limited scope for parties to utilise
the procedure in section 303 to complain
about the conduct of a trustee in
bankruptcy. It also provides a touchstone
for how officeholders should deal with
offers to purchase assets. It appears that
the Court sanctioned the trustee’s approach
in this case of finding the best realistic
proposal as opposed to the highest offer.
The Court also appeared to approve of the
trustee acting quickly to realise assets,
presumably in an effort to reduce the costs
incurred in the bankruptcy. It appears
incumbent on third parties, especially those
connected with the bankrupt, to provide
sufficient evidence of funding before the
trustee will be bound to apply due weight to
any offers they make.
Copyright 2006 - 2010 Taylors Solicitors
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