Insolvency
- New Insolvency Rules
- Pre-appointment costs
- Administration expenses
- Successive notices of intention
- Using the correct forms
- Retention of title
- Check whose goods are being sold
- Removal of administrators
- Removal of liquidators
New Insolvency Rules
The Insolvency (Amendment) Rules 2010 came into force 6 April 2010 and, with some exceptions that
apply in all cases, apply to insolvency proceedings commenced after that date. These amendments are
part of a protracted programme of modernisation of the rules and comprise a number of substantive
changes to both the law and procedure relating to insolvency proceedings aimed at reducing the
administrative burden and cost whilst increasing transparency and consistency with the Civil Procedure
Rules.
For insolvency practitioners and creditors the main changes are:
- Administrators’ pre-appointment fees and charges may be recoverable as administration expenses out of floating charge realisations. These costs must be included in the statement of proposals and approved by the creditors;
- Administrators’ remuneration can be calculated by reference to: a percentage of the asset value, time costs or a fixed fee or any combination of these bases;
- Provisions for the use of electronic communications and remote attendance at creditors’ meetings;
- A simplified procedure for disclaiming onerous contracts, including leases.
The final modernisation stage presently proposed for 2012: the restructuring and reordering of the rules,
is back under debate. The Insolvency Service has recently written to insolvency professionals inviting their
views as to whether to continue with the full consolidation. A forceful argument is being made that the
costs of the transition, including the replacement of prescribed forms, will outweigh any benefits. The
conclusions from this consultation are expected in 2011. The Insolvency Service has indicated that if the
final consolidation work is not done now, it may be a very long time before it is back on the agenda.
Pre-appointment costs
Re Johnson Machine and Tool Company Limited [2010] EWHC 582 (Ch)
In this case, which was heard before the New Insolvency Rules came into force, the court declined to
make an order allowing the payment of pre-appointment costs, which included negotiating a proposed
sale of the business, as an expense of the administration.
Of significance to Insolvency Practitioners looking to recover pre-appointment fees under the New
Insolvency Rules are the comments of the judge that pre-appointment costs, which the new rules refer to
as costs incurred “with a view to the administration of the company”, were confined to the preparation
of appointment documents only and not costs associated with a pre-pack sale.
Administration expenses
Bloom v The Pensions Regulator [2010] EWHC 3010 (Ch)
This very recent decision on whether the cost of complying with an Financial Support Decision (FSD), or
the monetary obligation imposed by a Contribution Notice issued by the Pensions Regulator pursuant to
his powers under the Pensions Act 2004, ranks in the administration or liquidation of the company as a
provable debt, or as an expense, or neither of those, will cause considerable concern for the
administrator or liquidator of a company with a pension deficit.
The court has held that as a general rule where statute has imposed a financial liability which is not a
provable debt on a company in an insolvency process then, unless it constitutes an expense under any
other sub-paragraph in the expenses regimes for liquidation and administration, it will constitute a
necessary disbursement of the liquidator or administrator and be an expense in that insolvency process,
with a super-priority as against the claims of any unsecured creditors and floating charge holders.
The Judge noted an apparent inconsistency in the fact that liability arising under a FSD made after
commencement of administration will rank as an expense, whereas if the FSD had been made even a day
before, it would rank as an unsecured creditor. This, and the amounts involved in this case, brought by
the administrators of the Nortel and Lehman Brothers’ groups of companies, means that an appeal is
expected in 2011, but not yet confirmed.
Form or substance?
The importance of using the correct forms and complying precisely with the terms of the insolvency
legislation has been emphasised.
Successive notices of intention
Re Corner Care Limited [2010] EWHC 893
The court confirmed that paragraph 28(2) Schedule B1 IA86 does not permit directors to appoint an
administrator after the expiry of a notice of intention but, provided there are good reasons for an
appointment not being made in that interim moratorium, there was no reason why a second notice of
intention could not be filed. Insolvency Practitioners should note the court’s warning that it would not
allow the filing of a chain of notices by unscrupulous directors, merely as a way of protecting the company
from creditor action without actually taking any substantive steps.
Using the correct forms
Re Kaupthing Capital Partners II Masters LP [2010] EWHC 836 (Ch)
In this case, the court found that a Guernsey registered LP could not be categorised as a company for the
purposes of Schedule B1 and therefore the notice of the administrators’ appointment had been given on
the wrong form. As a consequence of using the wrong form, the judge held that the administration and all
acts of the administrators were invalid. This was not a defect that could be remedied by the court: there
were no “insolvency proceedings” that could be cured. Nor did the judge find it possible to make an
order appointing the administrators back dated to the purported start of the administration, because such
an order would expire automatically after a year and the administration had already been extended. It was
not possible to make successive orders to extend the administration as an administration could not be
extended after it had expired.
This case highlights that the use of the correct forms is mandatory, although minor defects in completing
the administration forms may not of themselves make the appointment invalid. A notable consequence of
the administrators not being validly appointed was that there was no provision for the payment of their
remuneration.
Whose assets are they?
Retention of title
Sandhu v Jetstar Retail Limited [2010] EWHC B17 (Mercantile)
Some useful guidance has been provided for dealing with ROT claims in trading administrations. The court
distinguished between a clause for the supply of stock for resale from one where the goods supplied are
intended to be used by the company in its business. In this case, the court found the ROT clause was not
effective as it was inconsistent with the intention of the parties that the stock would be sold on to
customers. The relevant contract contained provisions that clearly anticipated and allowed the purchaser
to on-sell the stock it had purchased (without discharging its balance with the supplier), and to continue
to do so even following the purchaser's insolvency.
The court also declared that ROT clauses are only a right for a supplier to recover goods that are not
paid for, not a ‘security’ for a debt owed to the supplier. This means a creditor cannot, as is often the
case, demand the value of the goods from the administrator as a priority debt in the insolvency.
Check whose goods are being sold
The New Northumbria Hotel Limited v Maymask (148) LLP [2010] EWHC 1273 (Ch)
This case contains several reminders of best practice for Insolvency Practitioners negotiating pre-pack
sales. Administrators must take care to ascertain the rights of third parties to goods on the premises
occupied by a company in administration before they sell any goods and make provision in the sale
agreement for any third party claims to the assets being sold. Administrators should also ensure that they
do not enter into any agreements with regard to the assets of the company before they are appointed
and that notice of their appointment is given to the company as soon as reasonably practical. The court
noted that in certain circumstances this requirement can be satisfied by giving notice by email.
Challenges to office holders
Where insolvency proceedings have become hostile, Insolvency Practitioners will be reassured to learn
that the court does not readily admit applications to end their appointment.
Removal of administrators
Clark and another v Finnerty and another [2010] EWHC 2538 (Ch)
The High Court held that there are no general principles that a court should apply in determining an
application for an administrator's removal whether to remove an administrator from office. Beyond the
need for good cause to remove an administrator from office, it will depend on the facts of a particular
case. The decision suggests that, in practice, a court is unlikely to remove an administrator from office
without some element of unfair harm to a stakeholder from the administrator's conduct, or impropriety
or misconduct on the part of the administrator. The court did not seem to consider that it held a distinct
jurisdiction under which to review the conduct of an administration.
Removal of liquidators
Abbey Forwarding Ltd (in liquidation) v Hone [2010] EWHC 2029 (Ch)
The shareholders and former directors of a company in liquidation brought an action under s 172 IA86 to
remove the liquidator of the company and replace her with another liquidator. The court noted that s
172 does not specify any grounds for the removal of a liquidator, but that case law has determined that
substantial grounds have to be established: in the absence of bad faith, the court will only interfere with
the act of a liquidator if he has done something so unreasonable and absurd that no reasonable person
would have done it. On the facts of this case the court held that the liquidator had not failed to take the
only reasonable course of action, there were alternate courses of action open that were equally
reasonable.