Administration – Transactions at undervalue
Clydesdale Financial Services Ltd and others –v- Smailes and others [2009] EWHC 3190
Chancery Division : 8th December 2009

Facts:
This case has been reported on in previous Briefings and involves a firm of solicitors that went into administration.  The solicitors dealt with personal injury claims in respect of which after the event insurance was provided by a number of insurers including the applicant. The solicitors firm owed substantial sums to various insurers and when in financial difficulty sold its work in progress and other assets to another firm before going into administration.  The previously reported case involved the removal of the administrators to allow an independent investigation of the sale of the business.  In the meantime the applicant insurance company claimed against the former administrators on the basis that it was a creditor in respect of unpaid premiums for after the event insurance policies. An application was also made against the purchasers of the business on the basis that the insurance company was a “victim” of the sale.  The purchasers argued that there were only nine policies in which a loan had been made by the solicitors to the client and in all other cases, where a policy was issued but no loan made, there was no liability to pay the premium and on that basis the insurance company was not a creditor.  If it was not a creditor it could not therefore be a “victim” of the transaction under Section 423 Insolvency Act 1986.

Decision:
The court held that because the making of the loans and the issuing of insurance policies were part of a scheme for litigation funding put in place by the solicitors, where the purpose of the insurance policy was to secure loans the insurer had no real prospect of successfully showing that it was a creditor in cases where no loan had been made.  In the other cases the insurer in fact had a claim against the solicitors’ client for the unpaid premium and was only not pursuing that claim so as to preserve its position as a creditor of the solicitors.  That amounted to an abuse of process and those claims were dismissed.  Importantly, on the question of whether the insurer could be seen to be a “victim” of the sale of the business, the court’s view was that the appropriate question was whether the insurer was a person who was or could be prejudiced by the transaction and therefore a ‘victim’.  This did not require it to be a creditor.

Administration – Claims by Liquidators
Parkinson Engineering Services Plc (in Liquidation) –v- Swan & another [2009] ALL ER (D) 232
Court of Appeal : 21st December 2009

Facts:
The company in question went into administration in May 2003 and joint administrators were appointed.  The administration order was discharged in November 2003 and the company was wound up.  The order discharging the administration released the administrators from liability under Section 20 of the Insolvency Act 1986 except in relation to claims against them notified in writing by the date of the release.  In 2009 proceedings were issued in the name of the company, at the instigation of the liquidator, against the defendants for negligence in their duties as administrators.  The defendants argued that the effect of the section 20 release was to prevent any claim against them. The liquidator sought to get around that issue by applying for an order substituting himself as claimant in place of the company and for an order under s 212 Insolvency Act 1986 allowing him to proceed with the claim against the administrators despite their release.  That application was successful and the administrators appealed.

Decision:
The court accepted that the effect of section 20 meant that the original claim could not succeed but provided the liquidator was given leave to substitute himself as claimant under section 212 of the Act this problem could be overcome.  The court held that the substitution was necessary as without it the claim could not be continued.  The Judge weighed up the issue of the merits of the claim against the administrators as against the delay and concluded that it was reasonable in that respect.  In addition the administrators had been aware of the potential claim prior to the expiry of the limitation period.  The administrators' appeal was therefore dismissed.

Insolvency – Property/transaction at undervalue
Paul Delaney –v- Can Chen and others
[2010] EWHC 6
Chancery Division:  8th January 2010

Facts:
This case involved a property with a freehold value of £275,000.  The property was sold to a purchaser for the sum of £210,000 the intention being that the seller would, on sale, be granted a 21 year tenancy of the property which was similar to a sale and leaseback transaction.  The tenancy was unassignable. The sale was challenged by creditors of the seller and at the first hearing the Judge accepted that there was a transaction at undervalue in the sum of £65,000, being the difference between the freehold value of the property and the consideration paid.  An order was made transferring the property back to the seller.  The buyer appealed arguing that what he had acquired was a freehold subject to a tenancy so that the value of the freehold reversion was the relevant figure. In the circumstances it was argued that the value of the tenancy must have been £65,000 leaving the value of the freehold reversion at £210,000 so that there was no undervalue.

Decision:
It was confirmed that the property could have been sold to another purchaser at its full unencumbered value so that the sale price was lower than it needed to have been and was therefore an undervalue. Having said that, the Court held that if the property had been sold for £275,000 and a long lease taken, the premium for which was £65,000, the payment of the premium would not have been a transaction at undervalue.  In this case therefore the result was no different.  The creditors had to establish that the transaction was at an undervalue, in other words that the tenancy had a premium value of less than £65,000 and they had failed to do so.  In the circumstances therefore there was no evidence on which the Judge could reach the conclusion that the transaction was at an undervalue.  Accordingly, the provisions of Section 423 Insolvency Act 1986 had no relevance and could not be used to set aside the transaction.

Liquidators – Counsel’s Opinion
In the matter of  Equilift Ltd
[2009] EWHC 3104
Chancery Division – 27th November 2009

Facts:
The company in question, which was in liquidation, managed its finances by transferring deposits received from consumers between four accounts and subsequently other deposits and payments were also held in those accounts. Following the liquidation the liquidators identified potential proprietary claims in respect of the accounts and took written advice from Counsel so the court could consider the competing arguments. Counsel’s advice was to the effect that after a specified date the arrangements were probably not effective to create a trust in favour of the customers.   The case involved the extent to which the Liquidators could rely on Counsel’s advice to make a distribution.

Decision:
The Court was satisfied that the advice from Counsel was fair, balanced and well reasoned. Whereas ordinarily because there were arguments on both sides a full hearing would be justified, in this case the expense of a hearing was such that the customers could not be expected to incur those costs.  The Court’s view was that litigating the matter further when funds were limited was disproportionate.  It was accepted that acting on Counsel’s advice could potentially expose the liquidator to a breach of trust claim even if any distribution was in good faith and in accordance with that advice, however, in those circumstances the Court had discretion to assist the trustees which, provided they acted honestly and reasonably, it would do.  The Court also took the view that it was perfectly reasonable to expect the customers to accept Counsel’s advice, however, they should be told of the advice so that they had the opportunity, at their own expense, to argue for a different outcome.

Lehman Brothers – The ongoing saga
In the matter of Lehman Brothers International (Europe) (In Administration)
[2009] EWHC 3228
Companies Court: 15th December 2009

Facts:
This case involves ongoing litigation, which has been included in previous Briefings, primarily relating to money paid into accounts by Lehman Brothers which should have been segregated and put into separate client money accounts.  The cases have involved the application of a Client Assets Source Book (CASS7) which was issued by the FSA and contained directions as to how such monies should have been dealt with.  The court was asked to consider a number of issues in relation to the CASS7 code and the way in which Lehman Brothers had dealt with the monies.

Decision:
The Court’s judgment established the following general principles:

1. The starting point for the interpretation of CASS7 was that Lehman Brothers should have acted in compliance with its terms.  In addition both domestic legislation and the general law could be used in interpreting the guide;
2. When Lehman Brothers received client money the provisions of CASS7 imposed a statutory trust on that money.  Where money was held in a mixed account this could be protected by the general rule that any payment out of the account which was not for trust purposes was deemed to be a payment of Lehman Brothers’ own money and not trust monies;
3. CASS7 was restricted to client money held in segregated accounts and money outside of those accounts could not form part of the client money pool.  If a beneficiary wanted to identify monies outside of the segregated accounts it would need to apply the usual principles of tracing.  This was likely to be difficult in this case particularly where accounts had gone into overdraft and in any event where the company was insolvent;
4. There was a general rule that unless creditors could show a proprietary claim to certain assets they should not be entitled to claims which would prefer them to the general body of the Company’s creditors.  The provisions of CASS7 did not impose on the company an obligation to top up the client money pool in any way.  The proper approach was to look at how much money was in fact segregated as opposed to what should have been segregated and to share the funds on that basis.