Winding-Up – Compulsory versus Voluntary
Internet Investment Corporation Ltd 
[2009] ALL ER (D) 98
Chancery Division:  6th November  2009

Facts:
A creditor contributed a total of £100,000 to a company set up to raise funds for the development of a patent.  The creditor held various shares in the company but despite numerous enquiries was never told how the money that he had invested had been used. He applied to have the company wound up on a compulsory basis and the director sought a voluntary liquidation on the basis of solvency.

Decision:
The fact that following a compulsory winding-up order the company’s affairs would be scrutinised could be a factor in favour of a compulsory liquidation.  This factor could apply equally to a contributories petition, which this was, provided that the contributory could show that his rights would be prejudiced by a voluntary winding-up.  In the circumstances the creditor could show that and the court agreed that a compulsory winding-up order was appropriate.

Winding-Up – Misfeasance and Preferences
Re:  Mark Richard Phillips and others –v- Neil McGregor Paterson
[2009] EWHC 2385
Chancery Division:  2nd October 2009

Facts:
Following the compulsory winding-up of the Company the liquidators issued claims for misfeasance/breaches of fiduciary duty against one of the directors.  Whilst the public interest unit (“PIU”) of the Insolvency Service investigated the company’s affairs the misfeasance proceedings were stayed.  That stay was lifted when the PIU decided not to take further action.  The claim had included allegations regarding withdrawals in respect of which validation orders had been sought, the reduction of the director’s loan account amounting to preferences and the repayment of personal loans on the same basis.  The liquidators applied for summary judgment which was granted and the director appealed.

Decision:
The Court took the view that the decision on the question of misfeasance/breach of fiduciary duty and, in particular, preferences was not one that could be dealt with by way of summary judgement and was an issue that could only be resolved at trial after full examination of all the evidence.  The question whether the company could pay its debts as and when the alleged preferences were made was not one that could be determined on a summary judgment basis.  The fact that the PIU had decided not to proceed against the director should result in a court being slow to take the view that the evidence regarding the alleged misfeasance was so strong that there was no realistic prospect of the director successfully defending the claims.  The appeal was allowed.


Administration – Administrators Powers
In the matter of  Zegna III Holdings Inc. and others
[2009] EWHC 2994 
Chancery Division – 20th November 2009

Facts:
The company in question in this case was redeveloping a property.  The redevelopment fell behind schedule and was over budget and the Company was unable to pay monies due to a creditor (C) who had agreed to provide general management and co-ordination services. The Company was also in default of its loan agreement with its bank which had a floating charge over the property.  An Administration Order was granted and the Administrators terminated the agreement having decided it was in the interest of all Creditors to do so.   The Administrators’ legal advice was that the C had breached its agreement with the Company and the Company was entitled to terminate it. The contractors on site were overwhelmingly of the view that the creditor was not sufficiently competent to complete the redevelopment on time and to budget.  C then applied to remove the administrators on the basis that they had wrongfully terminated the agreement and were in breach of their duty to act in the interest of the Company’s creditors as a whole.

Decision:
The Court took the view that it was not possible to assess, in the context of the application that had been made, whether there had been a wrongful termination of the agreement but even if there had it would not necessarily amount to a breach of the administrators’ duty to act in the interests of the creditors as a whole.  Administration is a form of class remedy and the duty of the administrators did not mean that they had to perform their obligations in an identical way in relation to every unsecured creditor.  It was quite possible that terminating the contract with a particular creditor could be in the interests of the creditors as a whole and treating creditors differently or unequally was not necessarily unfair if there were sound commercial reasons for that.  The court could not interfere with the administrators commercial judgement unless it was based on a misunderstanding of the law or was unfair to a particular creditor or contractor.  In this case it was the creditor’s interests as a contractor that resulted in it being treated less favourably than other contractors rather than its interests as a creditor.  The application was an attempt to enforce the agreement and was not really about the administration.  Even if the creditor was right the claim was one for breach of contract, however, the court would not lift the moratorium and grant permission to continue such a claim during the administration. The application to remove the administrators was therefore refused.

Liquidation – Service of proceedings out of the jurisdiction
Anderson Owen Limited (In Liquidation); David Merrygold –v- Philip Bates and Nicole Bates
[2009] EWHC 2837
Chancery Division : November 2009

Facts:
Philip Bates and Nicole Bates were director and company secretary respectively of the company in question. The company went into liquidation in April 2005.  Philip Bates was convicted of fraudulent trading and in December 2008 the liquidator brought proceedings against Nicole Bates seeking a declaration under section 212 Insolvency Act 1986 that she had received company monies and wrongfully paid out those monies to Phillip Bates.  She lived in Germany. In November 2008 an EU regulation providing a procedure for service of documents via designated transmitting agencies and receiving agencies in Member States was passed.  On 10th December the liquidators applied for and obtained an order under rule 12.12 Insolvency Rules 1986 giving the liquidator permission to serve sealed copies of the proceedings on her in Germany by post.  This did not amount to good service in accordance with German law nor did it comply with the provisions of the EU Regulation.  Nicole Bates applied for service of the proceedings on her in Germany to be set aside on a number of grounds including the failure to comply with the EU Regulation.

Decision:
The court held that even if proceedings which had been brought against Nicole Bates fell within the scope of the EU Regulation (so that on the face of it good service had not been effected) it had power under rule 7.55 Insolvency Rules 1986 to correct any such defects.  Service of the proceedings was therefore not set aside although an extension of time was granted for the filing of a defence.  It was pointed out that the purpose of the rules on service was to ensure that proceedings were brought to a defendant’s attention and that the defendant had an opportunity to deal with them.  In this case there had been no substantial injustice caused by the method of service. The purpose of service was to bring the proceedings to the defendant’s attention and the liquidators, as requested by the defendant, served the proceedings on her German lawyers. There was no doubt that she had been informed of the facts of the claim against her and the nature of it.  The Judge did express the view that proceedings under section 212 of the Insolvency Act 1986 generally are outside the ambit of the EU Regulation in any event.

Administration – Distribution of Assets/Constructive Trust
Re: Farepak Food & Gifts Limited
[2009] ALL ER (D) 286
Chancery Division: 23rd October 2009

Facts:
Farepak went into administration in October 2006 having operated a Christmas savings scheme involving a large number of people.  Agents collected money from customers which was paid into the Company’s bank account.  Following payment in full, goods were delivered to agents for distribution to customers.  If orders were cancelled payments were refunded by the Company via the agent.  The Company ceased trading on the 10th October 2006 and on the 12th October a director declared a trust over monies paid into a named bank account.  The administrators were appointed on the 13th October but agents continued to collect monies and pay them into the Company’s customer bank account.  An application to court was made by the administrators seeking the court’s view on whether any of the sums in the customer bank account were held on trust for the agents either for their own benefit and/or the customers.  The court did not make an order in relation to the application at that stage but expressed the view that agents receiving monies from customers acted as agents for the Company and not the customers so that when paying agents, customers were effectively paying the Company.  The court also stated there could be no trust for the benefit of customers before 10th October 2006.  As a result of that decision the administrators were unable to distribute any of the sums in the bank account to customers.  The administrators and liquidators then carried out further investigations and based on evidence compiled during those investigations identified various categories of beneficiary and made application to the court for a final order as to the distribution of monies paid into the company’s bank account on or after the 11th October 2006.

Decision:
The Court held that agents were agents of the Company and not the customers.  Customers could not bring claims in relation to monies paid into one of the Company’s bank accounts as these were legally payments to the Company.  Whilst there was no trust in relation to monies paid before the 10th October 2006 there was a constructive trust in relation to monies paid to the Company (and agents) once the Company had ceased trading and had indicated that payments shouldn’t have been received. Customers who paid agents before the 11th October 2006 had to accept that they had no trust claim in relation to those payments. In addition customers could not assert trust claims against the joint liquidators in relation to monies that had not actually been paid into one of the Company’s accounts even if agents had received more monies than had been paid to the Company as there was no money held by the liquidator representing those amounts.  The joint liquidators were directed to request details from Customers of payments made to the Company.  Any who did not reply and any giving dates for payments before the 11th October should be treated as having no trust claim.  Those replying and giving payment dates on or after the 11th October should be treated as entitled to a trust claim.  Any remaining monies following such distribution would be transferred to the joint liquidators account to be used for the liquidation generally.

Administration – Pre-Pack
Clydesdale Financial Services Ltd and others –v- Smailes
[2009] EWHC 1745
Chancery Division : October 2009

Facts:
A solicitors practice went into administration on the advice of an insolvency practitioner who subsequently became the administrator.  The administrator engaged a valuer for the business who carried out a desk top review of the assets.  With the help of the administrator a sale of the business was negotiated.  No notice of the sale was given to general creditors until a month after the administrator was appointed at which point a letter was sent informing creditors of the sale. One of the creditors applied to remove the administrator on the basis that it was questionable whether the sale had achieved the best price for the business and the administrator did not have sufficient independence to review this, the letter informing the creditors of the sale did not comply with SIP 16 and there had been no consultation with creditors prior to the sale by either the administrator or the solicitors.

Decision:
The court took the view that there should be a review of the sale as there was no clear evidence that it was the best deal available at the time and the court also agreed that the administrator was not sufficiently independent so as to review that.  Accordingly the administrator was removed.  The court also said that the letter informing the creditors of the sale did not comply with SIP 16 however this alone was not sufficient to justify removing the administrator nor was the lack of prior consultation with creditors about the sale.  The court expressed the view that keeping creditors in the dark about a potential sale was a legitimate course of action in respect of a pre-pack provided it was done on an honest basis and with a view to obtaining a better deal for creditors.

Administration – Pre-pack
Re: Kayley Vending Limited
[2009] EWHC 904
Chancery Division: 15th May 2009

Facts:
The company’s business was the supply of cigarette vending machines to pubs.  It got into financial difficulties and a proposed CVA was refused as a result, principally, of opposition by HMRC.  The company then began negotiations to sell the business as a going concern with two potential purchasers who were the two main competitors of the company.  A valuer advised that in the event of a liquidation, if the company’s machines could not be serviced they would have to be removed and sold at a much lower valuation.  A pre-pack sale  of the business was proposed and the issue which the court had to decide was whether to approve the proposed administration order taking into account SIP 16.

Decision:
The court took the view that it had to be comfortable that the pre-pack procedure was not being abused to the disadvantage of the creditors. If this might have been the case it would be inappropriate to approve the making of the administration order.  The court was helped by being given information in relation to the pre-pack sale in accordance with SIP 16 and said that in most cases the information required by that standard should be included within any administration. The court was satisfied that granting an administration order would result in a reasonable prospect of a better return to the creditors as a whole and the administration order was approved.


Administration – Duties to creditors
Tallyia-Marie Charalambous and others –v- B & C Associates and others
[2009] EWHC 2601
Chancery Division: 22nd October 2009

Facts:
A claim was issued by the ex-wife of a company’s managing director. The holding company was owned by the trustees of a shares trust whose beneficiaries included the couple’s children.  The company went into administration and a divorce petition was issued by the wife.  She was not granted any financial provision as her husband had no assets but the court intended that the children would benefit from disposal of the Company’s assets by way of payments by the Company, indirectly, into the trust.  There was, however, nothing available for the Company’s creditors at the end of the administration and the wife on her own behalf and on behalf of the children issued proceedings alleging that the administrators had been negligent or acted wrongfully in the conduct of the administration.  The administrators applied to strike out the claim on the grounds that the wife was an unsecured creditor and as a general rule no duty of care was owed by administrators to unsecured creditors unless a special relationship existed between them. This was not the case here.  In addition it was argued that the children were not creditors of the Company as such but beneficiaries under a trust of which the Company itself was a creditor therefore no special relationship could exist.

Decision:
The court agreed that administrators do not owe a general common law duty of care to unsecured creditors in respect of the conduct of the administration.  In addition there was nothing in the facts of this case which suggested that a special relationship existed.  The purpose of the administration was to realise monies which would be paid to the trust but there was never a suggestion that the company’s assets would realise sufficient funds to pay the administrators costs, satisfy monies due under a debenture and leave a surplus for unsecured creditors.  This claim was therefore struck out.


Bankruptcy – Bankruptcy Debts
Casson –v- Law Society and Wales –v- Law Society
[2009] EWHC 1943
20th October 2009

Facts:
Casson & Wales were solicitors and had been partners. Both were made bankrupt and discharged after a year. Complaints by previous clients to the Legal Complaints Service were upheld and both were ordered to pay compensation which they failed to do.  The Law Society then brought disciplinary proceedings against them in which they argued that because the complaints related to services provided by the partners before they were made bankrupt any liabilities arising were bankruptcy debts which were released when they were discharged from bankruptcy.  The Law Society argued that because the adjudicator exercised his discretion to award compensation after the commencement of the bankruptcies the awards of compensation were not bankruptcy debts.  The solicitors appealed.

Decision:
The court confirmed the general principle that where there was a discretion whether to make an award, any sum awarded by way of that discretion did not exist as a debt or a liability until the award was made. The tribunal was right that the solicitors' liability to pay compensation had not arisen prior to the bankruptcies and so was not discharged when they were discharged from bankruptcy.  The appeal was therefore dismissed.