Legal Update

Law Society issues Practice Note on Debt Relief Orders
The Tribunals, Courts and Enforcement Act 2007 (the Act) introduces a new form of debt relief called a Debt Relief Order (DRO). The final provisions of the Act come into force on 6 April 2009.

The Law Society has issued a Practice Note providing some general information about DROs, including a link to the Insolvency Service website, which provides details about eligibility for DROs. The Practice Note also provides a summary of the procedures for making DRO applications.

Modernisation of the insolvency rules delayed until 2011
The Insolvency Service has announced that there will be a further delay to the modernisation of the Insolvency Rules 1986.  The changes had been expected to come into force on 1 October 2009.
The revised timetable is:

• 6 April 2010 - a Legislative Reform Order and Insolvency (Amendment) Rules 2010 to implement the proposed modernisation measures, by way of changes to the Insolvency Act 1986 and the existing Insolvency Rules.
• 6 April 2010 – consolidation of the Insolvency Rules by publication of a completely new set of Insolvency Rules together with several smaller insolvency statutory instruments.

Case Law Update

Winding Up - Replacing a Liquidator
Managa Properties Ltd -v- Louise Brittain
[2009] All ER (D) 60
Chancery Division  6 February 2009

Facts:
This case involved a company set up by Panos Eliades and known as Panix Promotions Limited which went into compulsory liquidation following a New York Court granting judgment against it for US$7m which it was unable to pay. 
To help pay for the litigation the company had entered into a facility agreement with Managa Properties Ltd (which was owned by Mr Eliades’ brother) for a loan of around £2.7m.  Managa lodged a proof of debt in respect of that sum which amounted to nearly 25% of sums due to all unsecured creditors.  The proof was not accepted or rejected by the liquidator for some time and in July 2007 Managa called for a creditors’ meeting to consider replacing the liquidator.  The liquidator refused to call a meeting and Managa therefore applied to Court for an order to that effect.  The application was initially refused and Managa appealed.  In the meantime the liquidator did formally reject the proof on the basis that the company had not provided sufficient evidence to substantiate the claim and accordingly Managa also applied for leave to challenge that rejection. 

Decision:
The judge refused the application for a direction to call a creditors’ meeting saying that the Court had complete discretion on applications of this kind and even if an application was made by a creditor owing more than a quarter of the company’s total debt, the Court was not bound to make an order.  Managa had to show that calling a meeting was in the best interests of the liquidation.  Even if the creditors’ meeting was called, the liquidator would inevitably mark Managa’s vote at the meeting as objected to or rejected for voting purposes so that there would be an application to determine the validity of Managa’s debt.  Practically speaking any meeting that the Court directed the liquidator to call would have no real purpose.  The Court also noted that the debt was in essence between two brothers and even though it had fallen due more than four years before the company went into liquidation, the loan had not been called in by Managa.  The Court said that the liquidator should ask questions about the transaction and indeed she had started to do so. 

The judge did grant Managa leave to appeal the liquidator’s rejection of its proof but said that the letter rejecting the proof (which fell within r 4.82 as it was not sent in the context of a creditors’ meeting) although brief amounted to a written statement of reasons for the rejection as required by the rule and that the liquidator did not have to go into more detail. 

Administration - Information and Data Protection
Madoff Securities International Ltd (2009)
Chancery Division 27 February 2009

Facts:
The joint provisional liquidators of Madoff Securities International Limited applied for directions regarding transferring data to the trustee in bankruptcy of the US parent company.  That US company was involved in a complex and large scale fraud investigation and the issue in this case was whether information relating to the English company and in the possession of the joint provisional liquidators could be given to the US Trustee or whether to do so would be a breach of the Data Protection Act 1998.  The joint provisional liquidators also applied for an order requiring the Trustee to take part in interviews under s235 Insolvency Act 1986.

Decision:
The Court was satisfied that it was in the public interest that there be a thorough investigation of the fraud so that the transfer of information was necessary in those circumstances.  In addition legal proceedings would almost undoubtedly be required to assist in unravelling the fraud and establishing legal rights which would also justify the information being given.  With regard to the s235 application the Court held that whilst the section did not limit the liquidators’ ability to require company office holders to attend interviews, as questions could only be asked about a company of which a person was an office holder, requiring the US Trustee to attend would not achieve any purpose and therefore application was dismissed.

Voluntary Winding Up - Prescribed Part
International Sections Ltd (in creditors’ voluntary liquidation)
[2009] All ER (D) 48
Chancery Division 30 January 2009

Facts:
In this case the liquidator of International Sections Limited applied under s176A(5) Insolvency Act 1986 for an order to disapply in the prescribed part.  Total realisations under the floating charge amounted to just over £18,650 so that the prescribed part would be just over £6,700. The liquidator’s best estimate was that the cost of agreeing creditors’ claims and distributing the prescribed part would be at least £3,300, leaving around £3,400 for the unsecured creditors equivalent to 1.48 pence in the pound.  Two thirds of the creditors were owed less than £1,000 so they would receive no more than £14.80 and even the largest unsecured creditor would receive less than £1,000.

Decision:
The liquidator’s application was refused on the grounds that the cost of making and distributing the prescribed part was not disproportionate to the benefit to the unsecured creditors.  The Court took the view s176A(5) gives the Court an overriding discretion and it could refuse to disapply the prescribed part, even if the costs were disproportionate.  The Court should only disapply the prescribed part in exceptional circumstances.  With regard to the return to individual creditors, the judge said that the benefit to the unsecured creditors as a whole should be considered and not each individual creditor’s position.  It was better for unsecured creditors as a whole to receive a small return than nothing at all. 

Company Directors - Misconduct
Lexi Holdings (in administration) -v- Luqman and others
[2009] All ER (D) 269
Court of Appeal  26 February 2009

Facts:
In this case the managing director of the company in question, who had previous fraud convictions, committed a fraud on the company.  The Third and Fourth Defendants were both his sisters and the Third Defendant was the controlling shareholder, and initially the only other director of the company.  The Fourth Defendant was appointed an additional director at a later date.  The company went into administration in October 2006 following which judgment in the sum of around £60,000 was entered against the managing director and an application for summary judgment made against the other directors on the basis that they had acted in breach of their duties.  At the hearing of that application the judge found that the Third and Fourth Defendant by their total inactivity had breached their fiduciary and common law duties of care owed to the company, however, the question was whether this had caused any loss.  The trial judge held that they were only liable for misappropriations by the First Defendant in relation to sums paid to them and not generally.  The company appealed that decision arguing that the overall misappropriations had been caused by their inactivity as directors.

Decision:
The Court held that the Third and Fourth Defendants had known of the managing director’s fraud convictions and should have known that his director’s loan account required an explanation.  That loan account demonstrated dishonesty on a large scale and had in fact had been in the name of the managing director and the Third Defendant so that she ought to have known about it.  She could not in those circumstances do nothing and should have sought advice and spoken to the auditors.  She had not done so and was therefore liable for all of the misappropriations.  The Fourth Defendant should also have known either from the Third Defendant or in properly carrying out her duties as a director that the loan account had been fictitious so that again the Court was satisfied that losses had been caused by her failing to perform her duties as a director.  Accordingly both Defendants were liable for the full amount. 

Voluntary Arrangement - Postponement of Creditors’ Meeting
Checkprice (UK) Ltd
2009 All ER (D) 88
Chancery Division  27 February 2009

Facts:
On 15 July 2008 the company went into administration and the joint administrators proposed a CVA failing which a petition to wind up the company would have to be presented.  At the time of the initial creditors’ meeting there were two outstanding assessments from HMRC for excise duty and VAT.  The company argued that it had various cross claims against HMRC.  As HMRC had already requested some substantial modifications to the proposals the administrators did therefore not take a vote on the original proposals as they knew that HMRC would not approve.  Instead they formally adjourned the meeting to give time for HMRC to review the assessments in the hope that they would be withdrawn.  This was not, however, the case.  Accordingly the original reason for postponement of the creditors’ meeting was no longer in existence, however, the administrators continued with the application on the basis that a postponement would give time for an appeal against the assessments to be heard, to enable them to consider the claims against HMRC and any other proposals which would help to have a clearer picture of the way forward. 

Decision:
The Court took the view that the administrators’ suggestions were without merit as they were based on a concern that if their proposals were not approved and a CVA was not possible, the only alternative was for the company to be wound up which would mean that the appeal against the HMRC assessments would not be pursued.  This was not however the only alternative as the proposals could be voted on and if not approved directions could be sought from the Court at that stage including directions that the administration should continue so that the assessments could be determined.  The Court directed the administrators therefore to call a creditors’ meeting within six weeks. 

CVA – Time Limit for Claims
Joint Supervisors of Energy Holdings (No.3) (in liquidation) -v- Gold Fields Mining LLC
[2009] EWCA Civ 173
Court of Appeal  11 March 2009

Facts:
The company in question was subject to a CVA.  One of the creditors had not been given notice of the creditors’ meeting and so lodged a claim form after the deadline which was defined as the “claims date”.  Under the terms of the CVA the claim would only be considered if the failure to lodge the form in time was not due to wilful default or lack of reasonable diligence or if the creditor had not had notice of the meeting but had lodged a claim within 28 days of becoming aware that a meeting had taken place.  The creditor did not comply with this time limit and the supervisors therefore rejected its claim.  The creditor made application to court which held that the supervisors had wrongly excluded the claim.  The supervisors then appealed. 

Decision:
If the creditor without notice of the meeting had lodged his claim form after the claims date and after the end of the 28 day period, according to the supervisors he was excluded from participating in the CVA and this would be the case even if the failure to comply with the time limits was not due to wilful default or lack of reasonable diligence.  If a creditor with notice on the other had lodged a claim form before the claims date and a second claim came to light after the claims date, that second claim might be accepted if lateness was not the result of wilful default/lack of reasonable diligence.  On the supervisors construction however they would not be able accept the late second claim even if the first one had been lodged in time.  Applying the supervisors approach therefore would result in a disparity between the treatment of CVA creditors who had notice and those who did not and this could not be the general objective of the CVA.  The Court did not therefore accept the supervisors’ construction of the terms of the CVA and their appeal was dismissed.

Bankruptcy - Appealing against a Bankruptcy Order
Watts -v- Newham London Borough Council
[2009] All ER (D) 72
Chancery Division  5 March 2009

Facts:
The Local Authority served a statutory demand on the debtor in respect of unpaid Council Tax of around £11,500.  The debtor applied to have the demand set aside but that application was refused and a bankruptcy petition was issued.  The petition was adjourned on two occasions on the basis that the debtor wanted to apply for a review of her liabilities but none of those applications were successful either.  Eventually a bankruptcy order was made which the debtor then sought to annul, however, that application was also refused on paper.  A further application was then made which was dismissed but in the meantime the Local Authority had reviewed the assessment against the properties and reduced them to £1,385.  The debtor therefore appealed against the Bankruptcy Order and the refusal to annul it. 

Decision:
Both appeals were dismissed although (slightly unhelpfully) the judge did say that the debtor should have been granted permission to appeal but even if she had the appeal would have been dismissed.  With regard to the appeal against the annulment of the bankruptcy order, again the Court held that the Deputy Registrar had failed to take into account a material matter being the Claimant’s application challenging the assessments on the properties and an oral hearing should have been required.  Having said that, however, all the conditions for a valid bankruptcy petition were still met on the current facts and so the Court exercised its discretion to refuse the annulment of the bankruptcy order.

Bankruptcy - Transactions at an Undervalue
Trustee in the Estate of Lesley Tina Margaret Peppard -v- Harrington (1) and Nash (2)
2009
Chancery Division  13 January 2009

Facts:
The bankrupt’s father had provided her with £25,000 for the purchase of a house.  When that house was sold the proceeds were used to purchase a further property occupied by the bankrupt’s son as a tenant who allegedly also paid mortgage arrears on the property.  The bankrupt then transferred the property to her son.  The transfer was stated to be not for money “or anything which has a monetary value”.  The transfer form also provided that the bankrupt was the principal debtor under the mortgage.  The son then executed a declaration of trust stating that he and the bankrupt’s father were tenants in common in shares whereby the first £25,000 of the net sale proceeds were payable to the father on any sale.  Following the transfer, a bankruptcy order was made and the Trustee made application to the Court on the basis that the transfer of the property was at an undervalue, that the son had no right to execute the declaration of trust and had no beneficial interest in the property. 

Decision:
The Court held that the transfer of the property by the bankrupt to her son was for nil consideration and was a transaction at undervalue.  Whilst there was a dispute on the evidence as to who paid the mortgage arrears, on balance it appeared that they had been paid by the son so as to avoid possession proceedings.  Payment of the mortgage arrears did not therefore represent consideration for the transfer of the property.  In addition, the mortgage debt was similar to the actual value of the property so that the effect of the transfer was to exchange the property value for an indemnity from someone whose ability to pay had to be in doubt.  The value transferred from the bankrupt to the son was much greater than the value from the son to the bankrupt so his taking on of the mortgage liability and granting of an indemnity to the bankrupt could not be proper consideration.  In addition the declaration of trust from the bankrupt’s son to the bankrupt’s father could not effectively transfer a beneficial interest in the property as the son had no right to grant the declaration of trust in the first place.  That grant was therefore a preference which was avoidable in accordance with the relevant provisions of the Insolvency Act 1986.

Bankruptcy – Annulment
William Lawrie Paulin –v- Nancy Paulin (1)  Cativo Limited (In Liquidation) (2)
[2009] EWCA Civ 221
Court of Appeal 17 March 2009

Facts:
In this case a husband and wife were involved in matrimonial proceedings.   Following the wife obtaining an Interim Maintenance Order the husband petitioned for, and obtained, an order for his own bankruptcy.  The wife applied for the bankruptcy order to be annulled on the grounds that the husband was deliberately trying to defeat her matrimonial claims.  The Judge initially refused her application but then reconsidered and held that on the evidence at the time of presentation of the petition the husband was able to pay his debts so that the bankruptcy order should be annulled.  The husband appealed.