Resolving the rules of insolvency—Re Kingstons Investments Ltd

Resolving the rules of insolvency—Re Kingstons Investments Ltd

In what ways has Re Kingstons Investments Ltd shed light on long-standing ambiguities in the Insolvency Rules 1986? Jamie Riley, commercial litigator at 11 Stone Buildings, explores the case and explains why the final decision will be so important for insolvency lawyers.

Original news

Re Kingstons Investments Ltd (in Creditors’ Voluntary Liquidation); subnom Adlon Ltd v Sale (as Liquidator of Kingstons Investments Ltd) and another [2015] EWHC 1619 (Ch), [2015] All ER (D) 122 (Jun)

The proceedings concerned a company in creditors’ voluntary liquidation.

The applicant creditor of the company applied for an order, under rule 4.70(2) of the Insolvency Rules 1986, SI 1986/1925 (IR 1986), varying or setting aside the decision of the first respondent liquidator and chairman at a meeting of the company’s creditors to admit the applicant as a creditor for voting purposes for a lower sum than the applicant contended should have been admitted, with the result that a resolution for the appointment of a joint administrator was defeated.

The Companies Court, in allowing the application, held that the first respondent liquidator had erred in treating a liquidated claim (the moiety) as an unliquidated claim and in the application of the rules. The moiety claim was a provable debt under the rules and the applicant had, on the evidence, established its claim. It had not been open to the respondents to use a sum by way of set off against the moiety claim.

What were the facts of the case?

The applicant, Adlon, is a construction contractor that entered into a joint contract tribunal (JCT) contract with Kingstons Investments Ltd (the company) for the design and construction of a commercial and residential development. A dispute arose between the parties when the company defaulted in making interim payments in respect of certified sums following practical completion. The matter was referred to adjudication, by which time most of the development had been sold. The adjudicator awarded Adlon a sum equivalent to the outstanding interim payments. The company failed to make any payment of the adjudication award, which Adlon sought to enforce in proceedings before the Technology and Construction Court. The enforcement proceedings were settled by a consent order pursuant to which the company agreed to a judgment being entered against it.

Despite agreeing to the judgment, the company still failed to pay the sums owed. Soon after negotiating the consent order, the company’s directors arranged to place the company into creditors’ voluntary liquidation (CVL). They approached the first respondent, Ms Sale, an insolvency practitioner operating a sole practice. During the negotiation of the consent order, the directors had made no mention of their plans for the company to enter CVL.

By this stage, Adlon had presented a winding up petition on the same day that the notices of the s 98 creditors meeting were sent out. The petition debt was based not only upon the judgment but also upon an additional claim under the JCT contract for delay, damage, loss and expense—the so-called DDLE claim. In advance of the meeting, Adlon submitted its proof of debt for voting in a total sum made up of the judgment—an outstanding half of the 3% retention under the JCT contract (the moiety) and the DDLE claim. Adlon also submitted a proxy form in which it nominated another insolvency practitioner as liquidator instead of Ms Sale.

At the s 98 meeting, the second respondent, who was one of the directors, acted as chairman and admitted Adlon’s proof only in respect of the judgment debt—thus rejecting the moiety and DDLE claim for voting purposes. In the event, the directors’ nominee, Ms Sale, was voted in as liquidator. Adlon did not appeal the chairman’s decision at the s 98 meeting. The petition was still on foot and Adlon had expressly reserved its position.

In her report of the s 98 meeting, Ms Sale—now the liquidator—highlighted various concerns and areas of investigation raised by creditors regarding the conduct of the directors both in relation to the manner in which the affairs of the company had been conducted and as to the lack of transparency in providing information ahead of the meeting. In particular, there was a dramatic shift in the ‘cash at bank’ position of the company in the lead up to CVL with a sum in excess of £1m suddenly reducing to a balance of £198.

Adlon decided not to pursue the winding up petition on the return date but instead sought to agree the appointment of its nominee. Ms Sale agreed to convene another meeting of creditors for that purpose. In advance of the second creditors’ meeting, Adlon provided a substantial amount of detail and documentation in support of all its claims.

At the second meeting, Ms Sale, the liquidator, was chairman. In dealing with the proofs for voting, she unquestioningly admitted the proofs of other creditors, principally made up of claims by the second defendant and other connected creditors. However, in relation to Adlon’s proof, she was not so accommodating. The liquidator admitted the judgment debt in full although marked it as objected to on the basis of a counterclaim asserted by the company’s directors. In relation to the DDLE claim, the liquidator applied the same set-off to reduce the amount claimed but allowed the balance. As for the moiety, the liquidator initially rejected it on the basis that it was a future debt but when Adlon’s nominee explained that this was an incorrect approach, she admitted it but only for £1. In so doing she treated the moiety as an unliquidated claim and applied IR 1986, r 4.67(3) rather than IR 1986, r 4.70(3).

The result was that the resolution for a joint appointment was defeated by a very narrow margin. Adlon appealed under IR 1986, r 4.70(2), seeking to set aside the liquidator’s decision on its proof and an order that its nominee be jointly appointed—as would have been the outcome of the meeting had the liquidator properly dealt with its proof.

What are the main points of interest for insolvency lawyers arising from this case?

The key points of interest were:

  • the impact of cross claims on the decision of the chairman of a creditors’ meeting when deciding whether to admit a creditor’s proof for voting
  • the task of the court on an appeal under IR 1986, r 4.70(4)
  • whether it is appropriate to convene a new meeting to consider the proposed resolution afresh or order a joint appointment

We will look at each of these in more detail below, in each case exploring the arguments raised and the ultimate decision from the Registrar.

What was the impact of cross claims?

The arguments raised

It was argued on behalf of Adlon that a chairman cannot reject or reduce a liquidated claim for voting purposes on the basis that it may be reduced or extinguished by a cross claim. Relying on the authority of Emery v UCB Corporate Services Ltd [1999] [2001] EWCA Civ 675, [2001] All ER (D) 226 (Apr), it was argued that the fact that the creditor has a claim is not altered by the possibility that the debtor’s cross claim may succeed at some future point. As to the respondents’ argument that the set off had to be applied because of the provisions of IR 1986, r 4.90, it was argued that IR 1986, r 4.90 did not apply. It was part of a separate chapter within dealing with the adjudication of proofs for a dividend—a process which is carried out exclusively by the liquidator, as opposed to a chairman, and which involves a separate appeal procedure. Alternatively, it was submitted that at the very least the existence of a cross claim gave rise to a doubt that the debt claimed was owed such as the proof should be accepted for voting purposes but marked as objected to in accordance with IR 1986, r 4.70(3).

On behalf of the second respondent director, it was submitted that Emery v UCB had no direct application to the present case because the decision arose in the context of voting on an individual voluntary agreement in relation to which there is no automatic set-off provision as provided in IR 1986, r 4.90 for liquidations. In a written submission after the hearing, counsel for the second respondent referred to the guidance given by Lord Hoffman in Stein v Blake [1995] 2 WLR 710, [1995] 2 All ER 961 in support of the proposition that insolvency set off was automatic and mandatory.

The decision of Registrar Barber

The Registrar found that there are strong arguments in favour of treating the valuation of a debt for voting purposes as an example of a situation in which claim and cross claim should continue to be considered separately—notwithstanding IR 1986, r 4.90. This was because in Stein v Blake, Lord Hoffman himself acknowledged that for certain purposes, claim and cross claim must continue to be considered separately.

However, given that the respondents had not addressed Emery v UCB and had only referred to Stein v Blake after the hearing, the Registrar erred on the side of caution and did not reach a concluded view on whether the chairman at a creditors meeting would be precluded from applying a set-off to reject a liquidated claim for voting purposes.

Nonetheless, the Registrar held that IR 1986, r 4.90 and Lord Hoffman’s guidance in Stein v Blake did not displace IR 1986, r 4.70(3). This meant that, following Emery v UCB, where the chairman is really in doubt as to whether a debt is owed because of a cross claim in favour of the company, the chairman should allow the claim for voting but mark it as objected.

The Registrar rejected the argument that Emery v UCB was of no application to the current case. In all material respects, IR 1986, rr 4.70(3) and 5.22 are identical. The authorities to which Adlon’s counsel referred made clear that in general the schemes should be approached in the same way. For example, see Power v Petrus [2008] EWHC 2607 (Ch), [2008] All ER (D) 319 (Oct) per Lewison J at paras [10]-[11].

What was the role of the court on an appeal under IR 1986, r 4.70?

The arguments raised

In Re a Company (No. 004539 of 1993) [1995] 1 BCLC 459, [1995] BCC 116, Blackburne J stated that:

‘The task of the court, on an appeal under r 4.70(4) is simply to examine the evidence placed before it on the matter and come to a conclusion whether, on balance, the claim against the company is established and, if so, in what amount.’

In undertaking this task, he continued, the court was not confined to the evidence that was before the chairman at the time that he made his decision, but was entitled to consider whatever admissible evidence on the issue the parties chose to place before the court. This was qualified by Lewison J in Power v Petrus as excluding evidence of events which took place subsequent to the meeting.

On behalf of Adlon, it was argued that these authorities had to be seen in their own context. In particular, the issue in Re a Company was whether the debt of the creditor had been compromised by an agreement so that it no longer existed. Furthermore, it was submitted that the subject of an appeal under IR 1986, r 4.70(4) is the chairman’s ‘decision’. Accordingly, it was in relation to that part of the decision that was said to be incorrect that an applicant had to establish his case. Therefore, the rule should not be read as requiring the applicant creditor to prove his entire case on a balance of probabilities. Such a requirement was inconsistent with the procedure for evaluating proofs for voting as being a quick, rough, and ready process.

The respondents seized upon the quotation from Re a Company as a basis for arguing that even if the court is satisfied that the chairman misdirected herself, the outcome of the appeal isn’t dependent solely on that issue, but, instead, the court must look at all available evidence and determine if Adlon was a creditor and, if so, in what sum.

The decision of Registrar Barber

The Registrar expressed the view that the respondents’ arguments amounted to an over simplification and that it was necessary to guard against an over-literal application of Blackburne J’s words. Reviewing the relevant authorities, she concluded that the scope of the factual enquiry to be undertaken by the court on an appeal under IR 1986, r 4.70 must depend on the scope of the appeal. In Re a Company, the issue was whether the debt existed. Therefore, the reference to the court being required to determine ‘in what amount’ the claim is established was strictly obiter.

In support of her conclusion, the Registrar relied upon the judgment of Lewison J in Power v Petrus in which he referred to an ‘examination of the objection to the proof’. The Registrar determined that the scope of the enquiry depended upon the scope of the objection. If, for example, a creditor lodged a proof of debt in relation to ten separate debts of which nine were admitted but the tenth was denied, it could not sensibly be argued that, in order to successfully challenge the rejection of the tenth, the creditor must make out his case on the other nine—which had already been admitted. Further support for this conclusion was to be found in Re Portsmouth City Football Club Ltd (in administration) [2012] EWHC 3088 (Ch), [2012] All ER (D) 34 (Nov) in which Mann J focused on that element of a proof which had been rejected.

To underline her conclusion on the need to have regard to the scope of the appeal, the Registrar stated the following reasons and guidance:

  • such appeals are in many cases time critical, as their outcome often has a significant impact on key decisions in an insolvency which may have far reaching consequences as to the manner in which it is administered—the legislature has recognised this by imposing tight time constraints on the issue of such appeals
  • the court should be mindful of the fact that it will assist the party favouring the status quo to press for a wider factual enquiry in order to defeat or delay the appeal
  • the decision reached on the appeal will only determine the validity of the proof at a given meeting—it will not determine the claim for the purpose of participating in a dividend
  • while the court may regard evidence predating the meeting that was not available to the chairman, it must exclude evidence of events subsequent to the meeting—this means that the court may well be ruling on a position which, by the date of the hearing, had become historic
  • the court should take active steps to ensure that appeals are resolved quickly and efficiently and that the scope of any factual enquiry is kept to a minimum in order to justly dispose of the matter

What order should be made?

The arguments raised

Counsel for the liquidator, Ms Sale, argued that the only relief to be granted should be an award of costs. It was openly argued that were a new meeting convened then the result was bound to be the same because she would reject Adlon’s proof in its entirety. Furthermore, if Adlon’s nominee were appointed a joint liquidator then it was likely that creditors representing at least 10% of the total debt would summon a further meeting to remove Adlon’s nominee.

For the second respondent director it was argued that the court should direct a new meeting at which the creditors could reach a decision taking into account the additional costs associated with a joint appointment.

On behalf of Adlon, it was argued that a second meeting should not be directed and that the court should simply appoint its nominee and grant associated relief. In support of that argument, the guidance of Lewison J in Power v Petrus was referred to and the following factors were relied upon:

  • the meeting had involved a single, clear-cut issue, namely whether Adlon’s nominee should be appointed
  • all those entitled to vote at the meeting did so—the problem arose because the chairman had not allowed Adlon to vote in the correct amount
  • the reversal of the chairman’s decision on the moiety meant that Adlon would have secured the majority
  • mathematically the outcome of the meeting could be declared and as such it was an appropriate case for a re-count and not re-run
  • the liquidator had confirmed that she was investigating preference claims against the directors and so it was appropriate to appoint a joint liquidator to ensure such investigations were conducted fully and independently

The decision of Registrar Barber

Having regarded the court’s approach in Power v Petrus, the Registrar considered that the starting point in such cases is that a new meeting should be ordered unless there is something in the evidence to displace that default position.

On the facts of this case, the Registrar concluded that the factors relied upon by Adlon, the delay caused by this matter coming to court for determination and the liquidator’s open lack of objectivity were sufficient to displace the default position. Accordingly, the Registrar declined to direct a new meeting to take place and instead ordered the joint appointment of Adlon’s nominee.

What practical lessons can be taken away from this case?

This case has provided some necessary clarification on the role of the court and the test to be satisfied on an appeal under IR 1986, r 4.70(4). The nature of the chairman’s decision and the scope of the appeal determine the extent of the court’s investigation into the creditor’s claim. For those creditors whose proof for voting is said to have been decided wrongly by the chairman, it means that they need to establish their claim only to the extent that it has been rejected by the chairman or opposed by another creditor. It is not necessary to establish all claims in their full amount irrespective of whether the chairman had accepted them in part or in the majority. As a corollary, chairmen whose decisions are appealed and creditors who support the decisions should not expect to maintain the status quo by introducing arguments or evidence challenging those parts of the proof in respect of which no objection is made to the chairman’s decision and no appeal is made.

This decision underlines the importance of chairmen clearly explaining what part of a proof is accepted or rejected and why. It also demonstrates that where there is a risk of imbalance or lack of objectivity on the part of the liquidator, the court will be prepared to take matters into its own hands and not refer the matter back to a meeting of creditors.

Finally, although the Registrar did not reach a final determination on the impact of cross claims, she nonetheless gave a useful indication that the set-off provisions under IR 1986, r 4.90 do not apply to the evaluation of voting proofs.

Jamie Riley is a commercial litigator dealing with all types of business litigation and advisory work, both domestically and internationally, in commercial, commercial chancery and insolvency matters. He has an established practice in banking, fraud, asset tracing and has developed a strong reputation in the commercial fields of media, broadcasting and sport. In Re Kingstons Investments Ltd, Jamie was counsel for the applicant.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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Voting and attending at creditors' meetings

Creditors' meetings in liquidation

Challenging office-holders

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First published on LexisPSL Restructuring and Insolvency

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.