Insolvency

1. No 3 day notices of pre-packs!
2. Administration overview
3. Administration appointments by directors
4. Administration employees
5. Updated insolvency rules
6. Pre-pack rules
7. Substantive rule changes
8. New SIP9, payments to insolvency office holders

No 3 day notices of pre-packs!

The Government has just announced that it is not continuing with its much disputed proposals from last year to introduce legislation to control pre-pack administrations. These proposals, which were first announced last year, have not been welcome : Insolvency Practitioners were concerned that a requirement to give 3 days’ notice of a proposed sale to creditors would undermine many of the benefits to businesses and their employees of the rapid rescue procedure. The proposals had also failed to satisfy creditors, who did not consider the delay would give them sufficient time to respond.

The Government has said that it is not now convinced that there any benefits in introducing further legislative controls at this time. back to top

Administration overview

Whilst the fall-out from the bank collapses of recent years continues to produce significant decisions in complex business insolvencies, it is noticeable that in 2011 it has been the little things causing some of the biggest problems.

One of the most contested points of the Insolvency Act 1986 (“Act”) during much of 2011 has been in relation to directors seeking to appoint an administrator using the ‘out-of-court’ procedure. Specifically, the question of what notice directors must give for a valid appointment to take effect has been before the court frequently, with the unsurprising result that the position now is so unclear that the cautious view is to recommend that directors make a full application to the court to appoint an administrator where there is no qualifying floating charge holder.

By contrast, there now appears to be greater certainty to the long-standing question of whether TUPE 2006 applies to the employees of companies in administration following consistent decisions at two judicial levels. This is a question that has been a problem for practitioners since the current regulations were introduced several years ago. Whilst the result may not be attractive to potential purchasers of distressed businesses, the result is some welcome clarity in this area. back to top

Administration appointments by directors – challenges to validity

In April 2011, a director of a company succeeded in setting aside the appointment of administrators made by co-directors using the out of court procedure pursuant to paragraph 22 of Schedule B1 of the Act, Minmar (929) Limited v Khalatschi [2011] EWHC 1159 (Ch) (“Minmar”). The High Court held that the administrators’ appointment was invalid for two reasons:

1. The articles of the company in question required directors’ decisions to be unanimous or made at meetings of directors held and convened in accordance with the articles. Although the decision to appoint administrators in this case purported to have been made at a directors’ meeting, it was found that this meeting had not been convened or held in accordance with the company’s articles of association. The challenging director had not been party to the decision. The court held that the provisions of paragraph 105 of Schedule B1of the Act, which provides that the acts of directors include the acts of a majority of directors, did not mean that company could dispense with its internal management rules.
   
   
2. No notice of intention to appoint an administrator had been given by the directors to the company, prior to the notice of appointment being filed, as required by rule 2.20 of the Insolvency Rules 1986 (“Rules”) and therefore the directors had not complied with paragraph 26(2) of Schedule B1 of the Act.

Whilst the first part of the decision in Minmar is not new law, it has highlighted the need to carefully check, and strictly comply with, the articles of association of any company when dealing with a possible directors’ appointment of administrators. This may mean that a proposed appointment may be delayed whilst requisite notices of meetings are given, until all the directors are available to attend a meeting or a board decision is ratified by shareholders. However, administrators may no longer be willing to agree to appointments relying on paragraph 105 of Schedule B1 of the Act.

The court will not always salvage an invalid appointment. Whilst they were willing to do so in Re Derfshaw Ltd [2011] EWHC 1565 (Ch), where post Minmar the administrators were concerned that as notice of the intended appointment had not been given to the company their appointment might be invalid and applied successfully for a retrospective administration order, the courts have also held:

• An invalidly appointed administrator is not the subject of a defective appointment. The appointment is a nullity which cannot be remedied under the Rules and acts of the administrator whilst purportedly appointed cannot be validated, (Re Frontsouth (Witham) Ltd [2011] EWHC 1668 (Ch) (“Frontsouth”))
  
  
• A company cannot apply to appoint an administrator unless the articles grant the shareholders this authority; a shareholders’ resolution will be insufficient if the articles provide that the powers must be exercised by the directors, Frontsouth
  
  
• Where a company was insolvent at the time the directors applied for a retrospective order in respect of potentially defective appointments, as it could not be shown at the time of the application that any of the statutory purposes could be achieved, no order would be made, (Re Care Matters Partnership Ltd [2011] EWHC 2543 (Ch)).

The second part of the decision in Minmar, has highlighted a practical problem: there is a lack of clarity in the Rules relating to the giving of notices of intention where directors wish to appoint administrators using the out of court route and there is no qualifying floating chargeholder. This has led to a flurry of contradictory cases considering to whom notice should be given, how and when, without arriving at a satisfactory solution:

• In a situation where notice of an intention to appoint was not served by the directors on the company’s registered office strictly in accordance with the Rules, it was held that service of the notice on the company’s solicitors, who were authorised to accept service, was sufficient notice for the appointment to be valid. If there had been no notice given, the appointment would be invalid, but the court considered that provided the intention to appoint was notified in some way, the requirements of the Rules were satisfied, Re Bezier Acquisitions Ltd [2011] EWHC 3299 (Ch)
  
  
• The Rules do not specify how much notice must be given to persons other than a qualifying floating chargeholder, but in National Westminster Bank plc v Msaada Group [2011] EWHC 3423 (Ch) (“Msaada”) the court has determined that this should also be a minimum of 5 business days. Failure to give such notice was said to render the appointment invalid; the court did not consider that the requirement to give notice to the company or any other party under rule 2.20(2) only arose where a notice of intention to appoint had first been given to a qualifying floating chargeholder. The court did not find that it could overlook any procedural defects in the appointment process.
  
  
• In complete contrast, the court in Re Virtualpurple Professional Solutions Ltd [2011] EWHC 3487 (Ch) (“Virtualpurple”) held that where there is no qualifying floating chargeholder, the director did not have to give any notice under rule 2.20(2), but even if there had been a qualifying floating chargeholder, a failure to give notice should not invalidate the appointment. The court in this case declared that as a matter of policy the courts should be slow to find an administration appointment invalid on a technicality: to do otherwise is to act contrary to the policy of the rescue culture and there was no express provision in the Rules to say that failure to give notice under rule 2.20(2) would invalidate an appointment.

The decisions in Msaada and Virtualpurple were handed down on the same day without reference to each other, leaving practitioners with conflicting judgments of equal weight. Unless, as is considered unlikely, an administrator takes this point to a higher court, it could be argued that administrators and their advisers can decide that they prefer one decision over the other. Both Minmar and Msaada can be distinguished from Virtualpurple, as there was evidence of bad faith in the conduct of the directors in these cases and there was no bad faith in Virtualpurple, where also there was only a sole director and no other parties involved.

At the most fundamental level, there is now a concern as to which of the prescribed forms should be used for these appointments. In Msaada, the court said that a form 2.8B should be used for giving all notices of intention, even though this is clearly designed to be used where there is a qualifying floating chargeholder. The question which follows is whether form 2.9B or 2.10B should be used for the appointment of administrators. Neither form is entirely appropriate. Form 2.9B is to be used where a notice of intention has been issued; it is the practice in some cases now to use this form but delete the parts which relate to the giving of a notice of intention to a qualifying floating chargeholder, amend it to record that notice has been given to other parties instead and attach a board resolution approving the appointment. Another view is that form 2.10B is the appropriate form, as it is prescribed for use where there is no qualifying floating charge, but to amend the form where notice has been given to other parties or attach a statutory declaration that a notice of intention has been served. Other suggested solutions include using both forms, writing to the court and asking the Registrar to confirm a choice of form or avoiding the out of court route altogether and applying for a court order permitting directors to appoint administrators where there is no qualifying floating charge holder.

There has been discussion of a possible revision of the Rules to address the conflicts between the Act and the Rules that this body of case law has highlighted, perhaps along the lines of the Scottish rules where it is clear that there is no need for notice of intention to appoint to be given to any party where there is no qualifying floating chargeholder. Until any such change, particular care should be given to ensure that the Rules are followed precisely. To err on the side of caution and do more than is required, rather than less, is the better course of action. back to top

Administration and employees

The automatic transfer employee protection provisions contained in the Transfer of Undertaking (Protection of Employment) Regulations 2006 (“TUPE 2006”) DO apply to the employees of companies in administration where the undertaking is transferred to another entity.

One of the significant changes introduced by TUPE 2006 was to disapply certain employee protections where the employer company is the subject of “bankruptcy proceedings or any analogous proceedings which have been instituted with a view to the liquidation of the assets of the transferor” with the effect that the employees of such companies do not automatically transfer to a purchaser or qualify for unfair dismissal protection. The long standing question has been whether the “analogous proceedings”, a term unhappily taken from the EC Directive, included administration. The Government guidance issued on TUPE 2006 has been to apply the ‘insolvency protections’ where the whole or part of the undertaking is transferred as a going concern and to have regard to the purpose of the insolvency procedure rather than its outcome. This approach was followed in the case of Oakland v Wellswood (Yorkshire) Limited [2009] IRLR 250, where the Employment Appeal Tribunal held that the question of whether the ‘insolvency exception’ from TUPE 2006 applied to companies in administration would depend on the facts in each case and whether the administrator intended to liquidate the assets of the company at the commencement of the administration.

This approach has now been rejected by the Court of Appeal. In Key2Law (Surrey) LLP v De’Antquis [2001] EWCA Civ 1567 (“De’Antiquis”), the Court of Appeal has endorsed the earlier statement of a lower court in OTG Limited v Barke [2011] UKEAT 0320_09_1602, which held that in every case companies in administration are not to be exempt from the application of TUPE 2006. The reasoning was that as the primary objective of administration is the rescue of the business as a going concern, this is inconsistent with the liquidation of the assets.

In De’Antiquis, the Court of Appeal held it was unsatisfactory to allow the application of the insolvency exception from TUPE 2006 to be dependent the administrator’s approach up to the time of appointment, as this did not reflect the usual conduct of an administration, where an administrator considers all the possible options and the objective of the administration may change over time. It would not be possible therefore to be certain at the time of appointment that the administration proceedings were commenced with a view to the liquidation of the company’s assets and therefore fall within the scope of TUPE 2006.

Whilst this approach will have the merit of introducing certainty to administrations and more protection to employees, it will not be commercially attractive to the potential buyers of distressed businesses. It will no longer be possible for a purchaser to select the employees it wishes to retain, amend their terms of employment and leave the rest of the employees as the responsibility of the insolvent company; all employees will automatically transfer with continuity of employment rights and dismissal by reason of the transfer will be automatically unfair. However, the good news for purchasers of companies in administration is that De’Antiquis does not preclude them from benefitting from the assumption by the National Insurance Fund of certain employee liabilities in respect of the employees that do transfer to the purchaser, including statutory redundancy pay, arrears of pay, payment in lieu of notice and holiday pay up to the statutory limits, amounts in excess of these limits will be payable by the purchaser.

A further point for administrators to consider when preparing a business for sale is the retention and dismissal of employees, particularly key employees. Where TUPE 2006 applies, any dismissal in connection with the transfer, which is not for an economic, technical or organisational reason is automatically unfair. The question of when a dismissal by an insolvency practitioner takes place and whether it is connected with a transfer is frequently litigated. A recent decision of the Court of Appeal has given a wide interpretation to the meaning of a dismissal in connection with the transfer.

In Spaceright Europe Ltd v Baillavoine [2011] EWCA Civ 1565, the Court of Appeal held that the pre-transfer dismissal of the managing director of a company in administration was unfair, even though at the time of the dismissal no specific transfer of the business, or even a potential transferee had been identified. The administrator was unsuccessful with his argument that the dismissal was to make the company more attractive to purchasers and therefore was for an economic, technical or operational reason. The Court of Appeal held that to be an economic, technical or operational reason, the reason had to relate to the business as a whole and not be solely in connection with the administration. In this case, the role of the dismissed employee was probably also relevant; he was the managing director and therefore performed a key role in the business which it could be assumed would continue post transfer.

Some liability to employees unfairly dismissed because of the transfer: arrears of wages and holiday pay (up to the statutory limits and in respect of the period before the insolvency) are met from the National Insurance Fund. If such an employee brings a successful claim for unfair dismissal or breach of contract, the employment tribunal will determine on the joint and several liabilities between the insolvent company and the transferee. In Pressure Coolers Ltd v Molloy [2011] IRLR 630 where an employee was dismissed shortly after his employment had transferred from an insolvent company by way of a "pre-pack" administration sale, the transferee rather than the Secretary of State was liable to pay the employee's basic award for unfair dismissal. back to top

Insolvency Regulation

In addition to the constant flow of case law affecting insolvent business, the regulatory framework that insolvency practitioners have to operate in is undergoing continuous change. The next 12 – 18 months promise to be eventful. back to top

Updated Insolvency Rules

The long-running rewrite of the Insolvency Rules 1986 (as amended) (“Rules”) continues to make slow progress with the updated Rules now not expected until at least October 2013. This project was intended to be the re-organisation of the Rules after the substantive amendments that have come into effect in 2009 and 2010. Currently, no draft Rules have been published so it is not possible to consider the overall impact of the intended changes. The Insolvency Service has indicated that the earliest any drafts may be available, for review and comment is the summer of 2012. back to top

Pre-pack rules

Following the Government’s sudden abandonment of its controversial proposals to introduce statutory rules to control the conduct of pre-pack sales in administration and liquidation, the Insolvency Service has said that it still wants to consult with Insolvency Practitioners and creditor bodies in March 2012 on how to improve regulation of pre-packs to increase creditor protection and transparency. back to top

Substantive rule changes

Administration expenses and pensions: Lobbying for changes to the rules governing administration expenses, not least following the Court of Appeal decision in Bloom v Pensions Regulator (Re Nortel) [2010] EWHC 3010 (Ch) allowing liabilities in relation to pensions pursuant to a financial support direction to be included as expenses, is not yielding any prospect of immediate change.

Appointment of administrators by directors: In the course of 2011, it became clear that there are inconsistencies between the provisions of the Insolvency Act 1986 (“Act) and the Rules relating to the appointment of an administrator out of court by directors of a company where there is no qualifying floating charge. It has been recommended to the Insolvency Rules committee that this is an issue that should be addressed. back to top

New SIP9, Payments to Insolvency Office Holders and their Associates: applies to all new appointments after 1st November 2011

The new SIP 9 codifies existing best practice and imposes reporting requirements on Insolvency Practitioner’s in addition to those set out in the Act and Rules to ensure that an Insolvency Practitioner’s fees and expenses are reasonable and proportionate and that all parties have sufficient information to determine the basis and level of Insolvency Practitioner remuneration. back to top