Business Support and Insolvency Autumn round up

Four months on from our inaugural newsletter – and where do we start??

Theresa out, Boris in; champagne super overs at Lords; hottest bank holiday on record; largest ever peacetime repatriation (of holidaymakers); Parliament unlawfully prorogued; Brexit on hold (again); and a general election two weeks before Christmas. It’s been anything but dull.

The team have been equally as active in the same period, having seen a significant influx of new work. Amongst the main highlights were:

• acting for the administrators of the Brazilian-themed dining chain Cabana Restaurants, which led to the sale of five sites at Covent Garden, the O2, Wembley, Westfield and White City, and the preservation of over 150 jobs.
• advising a US bank on the UK aspects of the restructuring of a global manufacturing business.

In the news

HMRC’s power grab in the Finance Bill

The draft Finance Bill published over the summer confirmed the government’s intention to restore HMRC’s status as a preferred creditor in insolvencies by April 2020, and also to make directors personally liable for corporate tax debts in certain circumstances. R3 has been campaigning hard against the proposals, on the basis that they will damage business rescue and lending, reduce returns to unsecured creditors, and impair entrepreneurialism – let’s see what happens after the election.

Review of HMRC’s loan charge

In September the chancellor, Sajid Javid, announced that an independent review of the Disguised Remuneration Loan Charge will be undertaken, to consider whether it is an appropriate response to disguised remuneration schemes, and the impact on individuals who have entered into such schemes. The independent review, led by the former Chief Executive of the National Audit Office will deliver its report to the new government after the election.

Airline insolvencies

Following the collapse of Monarch and Thomas Cook, the transport minister announced plans last month to change how planes are used in airline insolvencies, which include proposals to ensure that insolvency procedures prioritise passenger repatriation over repayments to creditors, and the introduction of  a ‘Flight Protection Scheme’ to fund passenger repatriation in the event of an airline becoming insolvent. R3 have warned that more consultation is needed before proceeding with the recommendations. Again, all on hold until after the election.

Cases that have caught our eye

Corporate insolvency

Re Burnden Holdings (UK) Limited (in liquidation):The case provides useful guidance for practitioners advising directors on the payment of dividends and/or granting security. The liability is fault-based, rather than strict. Provided directors take reasonable care to secure the proper preparation of accounts which show that a lawful dividend could be paid, they will not be held personally liable if it later transpires there were insufficient profits to declare a dividend.

Dingley and others v Nisa Retail Ltd - Re MKG Convenience Ltd (in liquidation): This case considered whether the defence of change of position could be raised against a liquidator’s claim under section 127 of the Insolvency Act 1986. There are two established defences to a claim under section 127, namely (1) that a validation order ought to be made where it can be shown by the party seeking it that the transactions were for the benefit of the company’s creditors and (2) the change of position defence (i.e. that the recipient of the payments had no knowledge of the winding up proceedings and acted in good faith). In this case the Court held that the change of position defence is constrained in the same way as the court’s discretion to validate a transaction. It therefore follows that if a defendant cannot obtain a validation order, it will not be entitled to rely on a change of position defence.

Re DCL Hire Limited: This case involved a claim for misfeasance against the sole de jure director of a company in liquidation and warns of the danger of acting on the instructions of shadow directors. The Court ruled that by mindlessly following the shadow director’s instructions, the sole de jure director was himself the cause of the loss.

Re Ariadne Capital: The Court placed the company into liquidation but declined to appoint the incumbent administrators as liquidators. The Court noted that whilst the principle of efficiency should be taken into account, and that it was generally proportionate to appoint existing office-holders (as they will have spent time and incurred fees in investigating the company’s affairs), creditors should also be entitled to have a say as to their preference. In this case, the costs of a new liquidator were outweighed by ensuring that an independent office-holder dealt with the liquidation.

Fraser Turner Ltd v PricewaterhouseCoopers LLP and others: A creditor brought a claim against a company’s administrators on the grounds that the administrators' sale of the business left behind certain contractual obligations owed to the creditor. The Court dismissed the claim on the grounds that the administrators had been acting in accordance with their duty to the creditors as a whole.  The Court emphasised that the administrators could not be criticised for treating one creditor unfairly (in this case the claimant, by leaving behind their contractual obligations) where they had been acting in accordance with their duty to the creditors as a whole. An obligation to one particular creditor could only arise where there was a special relationship, and in this case, the administrators had not done anything to assume such a relationship.

Addlesee v Dentons: The directors of a (now dissolved) company sued the company’s former solicitors on the basis of alleged misrepresentation and sought disclosure of documents which were the subject of the company’s legal advice privilege. The directors claimed that when the company was dissolved, the privilege ceased to exist. The Court rejected the argument that, where there was no legal person entitled to assert legal advice privilege, the privilege ceased to exist. The Court instead confirmed that legal advice privilege, once established, remains in existence unless and until it is waived.

Out of hours E-Filing

Although E-Filing at Court is available 24 hours a day, paragraph 8.1 of the Practice Direction on Insolvency Proceedings prohibits E-Filing of a directors’ appointment of administrators outside of Court opening hours. This has been considered in the following cases:

Wright v HMV Ecommerce Limited: In this case, the Court concluded that although the directors filed the notice of appointment outside of Court hours, the appointment was nonetheless valid. However, it declined to make a definitive ruling on whether directors can make an out of hours appointment.

S.J. Henderson & Company Limited (in administration) and Triumph Furniture Limited (in administration): The Court was asked to give a combined judgment in these two cases. The Court clarified that directors cannot appoint administrators outside of the Court’s usual counter hours (expect when making an administration order application). If a notice of appointment is filed outside of court hours, it will take affect from when the court counter reopens.

A notice of intention to appoint an administrator however, can be filed out of hours. Provided it is accepted by the Court staff, it takes effect on the date and time that it was filed.

Personal Insolvency

Lambert v Forest of Dean District Council and others: This case concerned a second application to annul a bankruptcy order. The Court ruled that after the first application had been struck out for failure to comply with a directions order, the secondly application would be refused, primarily as an abuse of process but also on its merits, even in circumstances where the bankruptcy order ought not to have been made.

Re Digby-Rogers Digby-Rogers v Speechly Bircham LLP: The Court granted an appeal allowing a bankruptcy petition to be adjourned (for the sixth time) to give the debtor time to receive a large payment from a mining project, despite the absence of evidence showing the anticipated payment. The Court noted that where a debtor wishes to settle a petition debt and applies for an adjournment, both the prospects and timing of the anticipated payment and the views of creditors must be assessed.

Martin v McLaren Construction: The Court set aside a statutory demand for payment under a guarantee on the grounds that the guarantee's beneficiary had not actually made formal demand under the guarantee. The case serves as a warning for anyone presenting a bankruptcy petition to ensure that the sums due have first been properly demanded. The Court also made clear that there was no discretionary element to its decision. It could not allow the statutory demand, notwithstanding the defect, as there was fundamentally no guarantee liability owing unless and until it had been properly demanded.

Azuonye v Kent: This case concerned the tricky world of second bankruptcies. The Court ruled that if a debtor is discharged from their first bankruptcy, but later adjudged bankrupt for a second time, the debtor’s liability for future payments under an income payments order made in the earlier bankruptcy is a provable debt in the later bankruptcy, and not enforceable by the trustee in the earlier bankruptcy.

And finally…

Ollie has decided to take part in this year’s Movember which is great on two fronts. Firstly, he is raising money for a fantastic cause (if you would like to find out what Movember is all about further information can be found here). And secondly, Ollie is growing a moustache and currently looks like a cross between Freddie Mercury and Ned Flanders. See for yourself…

If you would like to make any donations to Ollie’s ‘Mospace’ you can do so by clicking here.