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Business Recovery And Insolvency
Bulletin
March 2011
Welcome to the latest edition of
Taylors’ quarterly Business Recovery
and Insolvency bulletin.
The insolvency statistics
published by the Insolvency Service
for the last quarter of 2010 show a
reduction from the corresponding
quarter in 2009 in the number of
liquidations at 11.3% and
administrations at 24.4%.
The same is true of personal
insolvency with the statistics
showing a drop in the number of
bankruptcy orders between
corresponding quarters of 29.2%.
Notwithstanding these trends the
Courts have been busy on insolvency
related topics and those cases that
have been reported are significant.
There is also a lot to digest on the
proposed plans to reform the
insolvency profession and
procedures.
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In our September edition, we commented
on the proposals put forward by the OFT in
their report “The Market for Insolvency
Practitioners in Corporate Insolvencies”. On
10 February 2011 the Insolvency Service
launched its consultation, inviting all
interested parties across the profession to
comment on the proposals contained in the
report.
The report concentrated on corporate
insolvency with, broadly, the following
recommendations:-
- The establishment of an Independent
Complaints Body to deal with a wide
range of issues including fees;
- Reform of the regulatory framework;
and
- Amendment to legislation relating to
administration and liquidation.
Whilst the obvious focus of the report
was on corporate insolvency, the Insolvency
Service is inviting views on both the
personal and corporate insolvency market.
The Government appears to be supportive of
the majority of the recommendations and it
appears that the report is being seized upon
as an opportunity for a wider reform of
insolvency procedure.
Comment
The consultation runs until 6 May 2011,
and is likely to be followed by new
proposals for potentially far-reaching
reform. This could explain why the new
Insolvency Rules, which were scheduled to
come into effect on 6 April 2011, have been
shelved until October 2012. The Insolvency
Service Policy Unit has stated that the
delay in implementing the new Rules has been
as a result of contributions and feedback
received from a wide range of insolvency
stakeholders and from the Insolvency Rules
Committee. The suspension of the
implementation of the new Rules may be in
anticipation of further substantive
amendments which could bring into effect
possible reforms in response to the
consultation. We will endeavour to keep you
updated on the position through this
bulletin.
Subscribers to this bulletin will
recall our brief report on the decision of
the EAT in OTG Limited v Barke and Others (“Barke”).
Following a full review of the decision
delivered on 16 February, we can now provide
a detailed review of the EAT judgment.
Facts
The case concerned 5 separate employment
tribunal appeals on the same issue
concerning the application of regulation
8(7) of the Transfer of Undertakings
(Protection of Employment) Regulations 2006
(“TUPE”) on transfers conducted in
administration proceedings. This regulation
provides that regulations 4 and 7 of TUPE do
not apply to “bankruptcy or analogous
insolvency proceedings which have been
instituted with a view to the liquidation of
the assets of the transferor”.
Decision
The judgment was delivered by Mr Justice
Underhill, the President of the EAT. In a
detailed and lengthy judgment the EAT
outlines the differing opinions on the
application of TUPE to certain types of
administration proceedings and in particular
pre-packaged administrations. The EAT split
the two main differing opinions into the
“absolute approach” where regulation 8(7)
never applies to any form of administration
proceedings and the “fact-based approach”
where regulation 8(7) applies if the
administration has been instituted with a
view to the liquidation of the assets.
In coming to a decision on the preferred
approach, the EAT considered the intention
of the legislation by reviewing the
legislative source of TUPE which is the
Council Directive 2001/23/EC (“the
Directive”). The EAT also undertook a
detailed review of the case of Abels v
Bedrijfsvereniging voor de Metallindustrie
en de Electrotechnishche Industrie [1985]
ECR 469 (“Abels”). The EAT found that the
stated purpose of the Directive was “to
provide for the protection of employees.” In
the case of Abels, the European Court
determined that whilst the Directive did not
apply to liquidation it did apply to the
Dutch Law equivalent of UK administration
proceedings. The European Court decided that
such proceedings were distinguishable from
liquidation and should be classed as “other
insolvency proceedings” to which the
Directive applied. The reasons given for
this decision where that “other insolvency
proceedings” often involved less supervision
of the Court and were instituted with the
intention of preserving the assets and
undertaking of the company.
The EAT applied the analysis in Abels to UK
administration proceedings with particular
reference to paragraph 3 of Schedule B1 to
the Insolvency Act 1986 (“Schedule B1”). It
was decided that the statutory purposes of
administration (rescuing the company as a
going concern, a better realisation for
creditors than in a winding up and a
distribution to one or more secured or
preferential creditors) where hierarchical
in nature. The EAT determined that this
meant that the primary purpose of any
administration, pre-pack or otherwise, was
always to rescue the company as a going
concern.
Following this analysis, the EAT preferred
the “absolute approach” and based its
reasoning on the following grounds:
- the distinction between liquidation
and other insolvency proceedings in the
Directive and TUPE must be determined by
reference to the legal characteristics
of the procedures and regard should not
be had to the intention of the
insolvency practitioner;
- it cannot ever be said that
administration proceedings are commenced
with a view to the liquidation of the
assets because paragraph 3 of Schedule
B1 dictates that all administrations are
commenced with a view to rescuing the
company as a going concern even if it is
known that this purpose cannot be
achieved prior to the appointment;
- the administrator is not required to
report to creditors on the stated
objective of the administration until
his proposals are sent to creditors
which leaves the employees in an
uncertain position;
- for the reason stated in ground 3
the “fact-based approach” will lead to
disputes which generate cost, delay and
uncertainty; and
- the purpose of the Directive is to
safeguard the rights of individual
employees and this must prevail in the
case of any doubt as to the
applicability of TUPE even if there is a
greater detrimental effect on the
employees by virtue of the undertaking
not continuing.
Comment
Whilst the decision in Barke is not
unexpected, the reasoning adopted by the EAT
is open to criticism which might extend the
prevailing uncertainty on the applicability
of TUPE to pre-pack administrations. The
main problems with this decision are
highlighted as follows:
- the argument for the “absolute
approach” hinges on a narrow
interpretation of paragraph 3 of
Schedule B1 which does not sit well with
recent authority on the statutory
purpose. Recent cases such as Re Kayley
Vending Limited [2009] BCC 578 (“Kayley”)
provide judicial approval for pre-pack
administrations and conclude that it is
possible for an administrator to be
appointed in reliance on the second or
third objectives;
- following on from this point, the
EAT refers specifically to a passage in
Sealy and Millman (located after
paragraph 2 of Schedule B1) which refers
to Kayley and cases decided on similar
grounds. It is apparent from this
transcript that the EAT was not referred
to the most up to date copy of Sealy and
Millman as no reference is made in the
passage to the case of Re Hellas
Telecommunications (Luxembourg) II SCA
[2009} EWHC 3199 (Ch) which further
cements the legitimacy of pre-packs and
endorses the selection of the
appropriate statutory purpose prior to
appointment. The EAT acknowledges that
the barrister arguing for the
“fact-based approach” referred to a
number of cases on the statutory
purpose, however, the EAT chose not to
refer to any of these cases in its
judgment. It is disappointing that the
EAT decided not to conduct any review of
these cases particularly given that they
demonstrate a wider approach to the
application of the statutory purpose
than that adopted by the EAT;
- in the 5 grounds relied upon by the
EAT as justification for the “absolute
approach”, a great deal of reliance is
placed on the absence of any requirement
for an administrator to state, at the
beginning of an administration, which of
the objectives under paragraph 3 of
Schedule B1 the administrator has
adopted. It is said that this would
cause disputes and cause uncertainty for
employees leading to increases in delay
and cost. This reasoning completely
ignores SIP 16 and the requirement for
administrators to ensure that a
statement complying with SIP 16 is sent
to all creditors and to the Insolvency
Service as soon as practicable following
appointment. The EAT makes no reference
to SIP 16 in its judgment despite the
fact that the paragraph which
immediately follows from the Sealy and
Millman transcript referred to in Barke
provides a useful summary of SIP 16 and
its use in pre-pack administrations.
This reasoning also does not take into
account that the administrator may be
required to confirm the appropriate
statutory purpose in evidence supporting
a Court application. It also ignores the
fact that an administrator will usually
engage with employees immediately
following appointment; and
- there is evidence in the judgment
that the EAT had difficulties
reconciling the pros and cons of the
conflicting approaches to the
applicability of TUPE. Reference is made
to the fact that there is little
difference in practice to liquidation
and a pre-pack administration which
shows that the decision is likely to
have been more motivated by political
factors. There is also recognition that
the application of TUPE to pre-pack
administrations might be prejudicial to
employees if it deters a buyer and
prevents the undertaking from
continuing. This factor is dismissed
with reference to the Directive and the
Abels decision. It is highlighted,
however, that an administrator and
potential buyer can still make use of
regulation 9 of TUPE by negotiating a
transfer with employees although this is
unlikely to be a practical option in
many pre-pack administrations.
The above flaws in the reasoning in Barke
may not provide the desired certainty on
this issue. Barke stands alongside Oakland v
Wellswood Yorkshire Limited (“Oakland”)
which means that the door is not closed on
an argument that TUPE does not apply to
pre-pack administrations particularly given
that the reasoning in Barke is open to
attack. Although it would be a brave
Chairman who opted to detract from Barke,
true certainty on this issue will not arrive
until the Court of Appeal has had the
opportunity to consider the issue or TUPE is
amended. Given that the Court of Appeal has
stated that it does not agree with the
decision in Oakland, it is likely that TUPE
will ultimately apply to all
administrations. It is a shame, however,
that the EAT has missed an opportunity to
provide the absolute certainty it patently
set out to achieve.
In the case of HMRC v. Maxwell and
Klempka [2010] EWCA Civ1379, the Court of
Appeal was asked to consider an application
by HMRC to reverse the decision of a
Chairman sitting at a meeting of creditors
for the approval of a CVA.
Facts
Mercury Tax Group Limited (“the
Company”) was placed into administration
with the administrators’ proposals
anticipating an exit via a CVA. At an
adjourned meeting of creditors the CVA was
approved by a majority. HMRC voted against
the proposal. HMRC claimed to be owed £9
million but the Chairman of the meeting,
being one of the administrators, admitted
HMRC’s claim for voting purposes at £1.5
million. The balance of HMRC’s claim was in
relation to Corporation Tax for accounting
periods dating back to 2004. By the time of
the adjourned creditors’ meeting, HMRC had
provided a breakdown of its claims in the
total sum of £9 million. If HMRC’s claim had
been allowed in full, the proposals would
have been defeated.
HMRC challenged the Chairman’s decision
under rule 2.39(2) of the Insolvency Rules
1986 (“IR86”). At first instance the Court
upheld the Chairman’s decision. HMRC
appealed to the Court of Appeal.
Decision
The Court of Appeal decided that the
relevant date for assessing HMRC’s claim was
as at the date of the administration and not
the date of the creditor’s meeting. A debt
that is unascertained or unliquidated at the
date of the administration can sometimes
become ascertained or liquidated by further
evidence at the date of the meeting.
Nevertheless, such a debt should still be
treated as unascertained or unliquidated if
it was so at the date of the administration.
Matters which post date the administration
can be taken into account by the Chairman
when settling the estimated minimum value of
the claim for voting purposes. In contrast,
the Court of Appeal referred to the position
whereby a debt is liquidated or ascertained
but disputed. In such circumstances, the
correct approach is to accept such claims
for voting purposes and mark them as
objected to.
The Court of Appeal determined, therefore,
that HMRC’s debt was only liquidated as at
the date of the administration to the extent
of the amounts declared in the Company’s
self-assessment return. The rest of HMRC’s
claim was at that date unliquidated or
unascertained. The Court of Appeal went on
to review the Chairman’s approach to
establishing a minimum value of HMRC’s claim
for voting purposes. It was decided that
whereas the Chairman of a meeting of
creditors may be entitled to adopt a rough
and ready approach when settling a value on
an unascertained or unliquidated claim, the
Court must conduct a greater scrutiny of the
factual and legal basis of the claim. This
is in line with the Court’s function when
hearing an appeal under rule 2.39(2) of
IR86, whereby the Court should not merely
review the decision of the Chairman but
should form its own view based on the
evidence and arguments advanced. The Court
of Appeal found that HMRC had made out a
detailed case to support their claim that
the Corporation tax was due and the
administrators had not provided any
substantive evidence or argument to defeat
that claim. Accordingly, a greater value
ought to have been ascribed to HMRC’s claim.
Whilst the Court of Appeal did not accept
that HMRC’s debt was liquidated or
ascertained, it did suggest that the
Chairman ought to have accorded a greater
level of voting entitlement, which would
have been sufficient to defeat the proposals
put to the meeting. With the agreement of
the parties, the Court of Appeal ordered
that another meeting of creditors be
summoned.
Comment
This case provides welcome guidance on how a
Chairman should classify and deal with
claims that are unliquidated or
unascertained at a meeting of creditors.
Whilst the processes involved in this case
where an administration and a proposed CVA,
the same principles are capable of being
applied to other insolvency proceedings. One
of the key points in the guidance provided
by the Court of Appeal states that where
there is a dispute between the insolvent and
the creditor as to the amount of an
unliquidated or unascertained claim, the
creditor should be given the benefit of the
doubt unless there is a sound basis to
defend the amount claimed.
The Child Maintenance and Enforcement
Commission (“CMEC”) is the body responsible
for assessing, collecting and enforcing
child maintenance support under the Child
Support Act 1991 (“CSA”). The case of CMEC
v. Beesley & Whyman [2010] EWCA Civ1344 (CH)
provides some clarity on how such creditors
should be classified for the purpose of an
IVA.
Facts
Mr Whyman sought to include CMEC in an
IVA which was proposed and approved by his
creditors. CMEC did not attend the
creditors’ meeting, given that it considered
that its claim was not a debt which would be
bound by the IVA.
CMEC brought an application under section
262 of the Insolvency Act 1986 (“IA86”) for
the IVA to be set aside. The application
succeeded on the ground that CMEC was
unfairly prejudiced by the IVA. However, the
case included a determination by the first
instance Judge that CMEC was a creditor
capable of being bound by the IVA. CMEC
appealed on this point and the matter came
before the Court of Appeal.
Decision
The Court of Appeal reversed the first
instance decision on the question of whether
the CMEC was a creditor capable of being
bound by the IVA. It agreed with the first
instance Judge that the IVA unfairly
prejudiced CMEC and commented that it would
be a rare case where an IVA was not found to
be unfairly prejudicial to the CMEC.
The Court of Appeal made its decision on two
main grounds. First, it decided that whilst
the child support liability was a bankruptcy
debt within the meaning of section 386 of
IA86 and whilst CMEC fell within the wide
definition of “creditor” under section 383
of IA86, its debt would not be discharged by
bankruptcy or a debt relief order. Secondly,
the Court of Appeal found that owing to
current legislation, CMEC could not
compromise or waive arrears of child support
and as a matter of law such debts were not
capable of composition under an IVA.
Comment
Following the decision at first
instance, it had been considered that child
support liability may be avoided by virtue
of an IVA. The Court of Appeal has now
provided certainty on this point as it is
clearly not possible for a debtor to
compromise liability pursuant to the CSA by
an IVA. The decision appears to be sound in
accordance with considered opinion with
regard to the nature of debts which can be
compromised in an IVA. The decision
demonstrates that when deciding whether a
particular creditor is capable of being
bound by an IVA regard should be had to the
circumstances of that creditor in the event
of bankruptcy.
It should be pointed out that proposed
changes to the CSA will soon enable CMEC to
accept part payments of arrears in
satisfaction of existing liability. This
could impact on the Court of Appeal’s
decision in this case, although it is
unlikely that, as a matter of policy, the
Court of Appeal would change its view that
child support ought not to be treated
differently under an IVA than under
bankruptcy.
A recent case decided in the Manchester
High Court could have significant
implications for practitioners acting as
trustee in bankruptcy of individuals who may
be classed as disabled under the DDA.
Facts
The case of Nicola Haworth v. Donna
Cartmell concerned Miss Haworth’s
application to annul her bankruptcy. Miss
Haworth suffered a serious injury in an
accident during her 20s, which caused her to
suffer from anxiety and depression. Her
mental condition gave rise to a specific
phobia of opening mail and in particular
official letters. Miss Haworth bred Arabian
horses as a hobby. In 2005 HMRC received an
anonymous tip that Ms Haworth was in receipt
of more than £100,000 per year from her
horse breeding and requested that she
provide tax returns. When Miss Haworth
failed to respond HMRC made an assessment of
outstanding tax in the region of £192,000.
Miss Haworth’s mother contacted HMRC in 2007
and explained that her daughter was
disabled. Following a petition presented by
HMRC, Miss Haworth was made bankrupt on 29
August 2008.
Miss Haworth applied to annul the bankruptcy
on the grounds that her mental condition
prevented her from opening post received
from HMRC and that she lacked the capacity
to deal with the bankruptcy proceedings.
Decision
The Court found that Miss Haworth was
disabled under the DDA and that as a public
authority HMRC owed a duty to Miss Haworth
to make reasonable adjustments and that it
had failed in that duty. The Court suggested
that following the notification that Miss
Haworth was disabled, HMRC should have
contacted Miss Haworth’s mother and waited
for provision of a medical report before
taking any action. The Court also decided
that HMRC should have taken alternative
enforcement methods against Miss Haworth.
Comment
This case concerned conduct which took
place prior to 1 October 2010 when the DDA
was replaced by the Equality Act 2010.
Nevertheless the same principles would apply
and the same decision is likely to have been
reached applying current legislation.
The Court did not decide the question of
whether a trustee in bankruptcy might also
be classed as a public authority for the
purposes of the applicable legislation.
Whilst it may be stretching the definition
of public authority to apply the disability
legislation to a trustee in bankruptcy, it
is correct to note that, like HMRC, a
trustee in bankruptcy performs a statutory
function.
If disability legislation was to apply to a
trustee in bankruptcy, this might place an
obligation on practitioners to assess
whether an individual bankrupt could be
classed as disabled and regard would have to
be had to appropriate measures to ensure
that the provisions of the legislation are
not breached.
It is considered that HMRC experienced
difficulty in this case because of the
notice it received that Miss Haworth was
disabled. Practitioners would be sensible to
take particular care if they are informed
that a bankrupt may be disabled.
The Bribery Act 2010 (“the Act”) was due
to come into effect in April of this year.
As has been heavily publicised in the media,
the Government has delayed the
implementation of the Act together with the
consultation concerning its implementation.
The Act brings into effect four offences as
follows:
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paying bribes;
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receiving bribes;
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bribery of foreign
officials; and
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failure of commercial
organisations to prevent bribery.
Comment
The definition of bribery is widely
drawn and involves offering or promising
someone “a financial or other advantage”. It
is this wide definition of bribery and the
last of the above offences which is cause
for concern. Such an offence will be
committed by a commercial organisation where
a person associated with the commercial
organisation (which includes not only
employees but agents and external third
parties) bribes another person (ie. offers
or promises a financial or other advantage)
with the intention of obtaining or retaining
a business advantage and the organisation
cannot show that it had adequate procedures
in place to prevent the bribery from taking
place.
It is unclear whether and to what extent
corporate hospitality would fall under the
definition of “financial or other advantage”
such as to give rise to an offence under the
Act. Unfortunately, the Act provides no
guidance at all as to what may be classed as
a “financial or other advantage” and what
steps would be considered adequate to be
taken by a commercial organisation in
preventing such from happening.
It has been suggested that lavish or
extraordinary corporate hospitality might be
caught as one of the offences under the Act.
However, unless and until the Government
provides clear guidance as to what might be
classed as lavish or extraordinary,
practitioners should be aware of the need to
review existing corporate hospitality to
ensure that it will not fall foul of this
new legislation.
Copyright 2006 - 2010 Taylors Solicitors
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