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As 2014 draws to a close, George Hilton of 11 Stone Buildings looks at the most significant corporate, cross-border and personal insolvency cases of 2014.
The joint administrators of three companies in the Lehman Brothers group sought clarification on the payment of a surplus pursuant to the administration of Lehman Brothers International (Europe) (LBIE), a private unlimited company and subsidiary of the ultimate group parent holding company.
Two shareholders in LBIE had made substantial ordinary unsecured claims against LBIE and one of the shareholders had a very large claim as a subordinated loan creditor. An option open to the administrators was to place LBIE in liquidation with a view to making calls on the shareholders as members under the Insolvency Act 1986, s 74(1) (IA 1986) and with a view to invoking the ‘contributory rule’, whereby a contributory of a company in liquidation could not recover any claims it might have until full discharge of its obligations as a contributory. The liquidators applied to the court to determine which claims could be made against the surplus before return was made available to the two shareholders as members and the order in which those claims ranked.
David Richards J, held:
Application of these principles gives rise to the following waterfall ranking of payments in a liquidation or administration:
Accordingly, this judgment serves as a warning for the members of unlimited companies that, on liquidation of the unlimited company, they might be liable to contribute not only to the subsidiary’s proved debts on liquidation, but also to statutory interest and unproved liabilities.
This case raised the question of whether administrators are personally liable for converting retention of title (ROT) goods.
Frankice Ltd was a member of the Agora Group of companies and owned a portfolio of adult gaming centres. The group of companies entered into administration. The administration was very complex and beset with issues—Frankice had previously carried on business in breach of gambling legislation, several of its directors had been convicted of mortgage fraud and offences under the Gambling Act 2005 and its accounting and stock records were deficient.
MDM had a longstanding relationship supplying gaming machines to Frankice. Each invoice contained a ROT clause stating:
‘Terms strictly 30 days net. The legal ownership of goods herein is retained by the Seller until full and final settlement is made.’
MDM claimed nearly £4m in Frankice’s administration in respect of machines that it alleged were subject to the ROT clause. MDM subsequently went into voluntary liquidation but the liquidator assigned its claim to Blue Monkey Gaming Ltd (BMG).
BMG claimed damages of more than £7m against the administrators personally, arguing that the administrators had caused or procured Frankice to use MDM’s machines outside the ROT terms on which they were supplied and without applying to the court under IA 1986, Sch B1, para 72 Sch and had failed to return the machines to MDM after an alleged unequivocal demand for their return.
The court gave judgment for the defendant, holding that:
the administrators had not converted or wrongfully interfered with machines in which MDM had title.
This case raised issues around rent as an expense of the administration.
Properties leased by a high street retailer were retained by the administrators for the benefit of the administration. The rent for these properties was payable quarterly in advance. An advance quarterly rental payment fell due in March 2012. The company was unable to pay the rent and consequently went into administration. Trading continued in some of the premises. The relevant issues to be determined at first instance included whether the rent falling due both before and after the administration was to be treated as an expense of the administration.
At first instance, the deputy judge concluded that quarterly rent falling due during the period of the administration was a provable debt even though the administrators were using the property during the course of that quarter for the purposes of the administration. Quarterly rent payments falling due during the course of the administration were to be treated as an expense of the administration.
The landlord appealed, contending it was entitled to full payment of the rent as an expense of the administration.
Lord Justice Lewison, in the leading judgment of the Court of Appeal allowed the appeal, holding that:
Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration) [2009] EWHC 3389 (Ch) and Leisure (Norwich) II Ltd and others v Luminar Lava Ignite Ltd (in administration) and others [2012] EWHC 951 (Ch),[2012] 4 All ER 894, two cases that had been relied on at first-instance, were overruled.
This case concerned the question of whether a landlord is liable for empty rates on disclaimer by a tenant’s liquidator.
The appellants, freehold owners of a property, granted a lease over the property to WFL. The terms of the lease required the tenant to pay all outgoings including rent and rates. The appellants were entitled to a right of re-entry in the event of default, defined to include entering into an insolvency procedure.
WFL’s tenancy obligations were guaranteed by WFH. WFL assigned the lease to another company, WFG, and guaranteed WFG’s rents and rates liabilities under an authorised guarantee agreement.
WFH and WFG were subsequently wound up and the liquidator disclaimed all interest in the property under IA 1986, s 178. The appellants continued to call on WFL, as guarantor under the agreement, to make good the default of WFG paying the rent. The appellants did not exercise any right to take physical possession of the property. The council made rate demands of the appellants, as landlords, totaling £580,000.
The questions for the court were whether:
The appellants submitted that they could not be said to be ‘entitled to possession’ within LGFA 1988, s 65(1)because LGFA 1988, s 178 preserved the lease for the purposes of the guarantor's obligations, and WFL could seek an overriding lease under the Landlord and Tenant (Covenants) Act 1995, s 19.
Relying heavily on Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70, [1996] 1 All ER 737, the judge held that the disclaimer determined the lease and gave the landlord the right to immediate possession irrespective of the subsistence of the guarantor’s obligations. LGFA 1988, s 178(4)(b) preserved the liabilities of the guarantor although those rights were contractual in nature and did not give the guarantor an immediate right to possession. The appeal was dismissed.
This case is of interest as a restatement and clarification of the Eurosail judgment (BNY Corporate Trustee Services Ltd and others v Eurosail-UK 2007–3BL plc and others [2013] UKSC 28, [2013] 3 All ER 271)
The appellant was the company secretary of a property company which carried out a business receiving deposits for properties in Dubai and then passing them on to developers. The company deposits received had not been paid into a separate fund but had been mixed with the company’s funds. After the crash of the Dubai housing market the company went into liquidation. The respondent liquidator of the company applied to set aside two payments to the appellant which were deemed to be undervalue transactions.
The question for the Court of Appeal to consider was whether those undervalue transactions occurred when the company was insolvent within the meaning of IA 1986, s 123—an issue that would determine whether the transactions had taken place at a relevant time for the purposes of IA 1986, s 241.
The first instance decision pre-dated the Supreme Court judgment in Eurosail. Applying the ‘point of no return’ test, HHJ Purle QC had held on the facts the company was not insolvent because it was paying its debts as they fell due and was not subject to creditor pressure.
On appeal, Warren J held that HHJ Purle had applied the wrong legal test and had failed to take into account the fact that the company, although not a Ponzi scheme, was using new customer deposits to pay off its debts, thus effectively replacing them with long-term debts.
Lewison LJ in the leading judgment of the Court of Appeal referred to and clarified Lord Walker’s judgment inEurosail, and held, dismissing the appeal that:
This case is an interesting example of the English Courts being reluctant to assist a South Korean administrator in restraining the exercise of an ipso facto clause.
A shipowner company entered into rehabilitation proceedings in the South Korean bankruptcy court and an administrator was appointed. The English court made an order that the rehabilitation be recognised as ‘foreign main proceedings’ for the purposes of the Cross-Border Insolvency Regulations 2006, SI 2006/1030 (the Regulations).
Just prior to commencement of the rehabilitation proceedings the company had entered into a long-term affreightment contract with the applicant, a Brazilian shipping company, as charterer. The contract was governed by English law and London arbitration. One of its clauses provided for termination with immediate effect on notice in writing for default including insolvency. The applicant sought to terminate the contract pursuant to this clause and applied for an order permitting it to commence an arbitration seeking declaratory relief as to its entitlement to terminate the contract.
The company’s administrator wanted to continue the contract as it was very profitable and important to the company’s rehabilitation. Accordingly, the company’s administrator, submitting that the insolvency default clause was invalid under South Korean law, applied to the English court, seeking a stay on arbitration proceedings under Sch 1, art 21(1)(a) of the Regulations or pursuant to the court’s power under Sch 1, art 21(1) to ‘grant any appropriate relief’ to protect the assets of the company.
Morgan J dismissed the administrator’s application holding that:
The question as to what would have happened had the administrator relied on Sch 1, art 21(1)(g) to request additional relief that might have been available to the English insolvency office under English law remains at large.
The company was incorporated in Portugal and had its centre of main interests in Brazil. Following a resolution of shareholders, it presented a petition in England for a compulsory winding-up order and was wound up underIA 1986, s 221 as an unregistered company. After the winding-up order had been made proceedings for the involuntary dissolution of the company commenced in Portugal.
The liquidators applied to the English Companies Court for a declaration that if the company was dissolved in Portugal, as appeared imminent, the winding-up in England would survive and continue to have effect notwithstanding the dissolution and that the liquidators would remain authorised to discharge their functions.
Chief Registrar Baister granted the declaration sought, holding:
These cases addressed the limits of common law assistance in cross-border insolvency cases.
The Privy Council decided two closely related appeals, deciding in favour of PwC in both. The appeals both concerned companies incorporated in the Cayman Islands and ordered by the Grand Court of the Cayman Islands to be wound-up. In both cases, attempts were made by the companies’ liquidators to obtain from the companies’ former auditors, PwC, information, whether in oral or documentary form, relating to the companies’ affairs.
The Grand Court of the Cayman Islands has a statutory power to order any person, whether or not they are resident in the Cayman Islands, to ‘transfer or deliver up to the liquidator any property or documents relating to the company’. The Grand Court made such an order at the liquidators request and PwC duly complied with it, delivering up material in its possession belonging to the companies. The liquidators of both Singularis and Saad attempted to invoke the corresponding wider statutory powers conferred on the Supreme Court of Bemuda to obtain material belonging to the auditors themselves.
In Singularis the court held that the principle of modified universalism survives—namely that the court has a common law power to assist foreign winding up proceedings so far as it properly can. A domestic court’s recognition of the status of a foreign liquidator would be meaningless if it entitled him to take possession of the company’s assets but gave him no means of identifying them (Norwich Pharmacal Co and others v Commissioners of Customs and Excise [1973] 2 All ER 943 applied).
The power is limited in a number of ways:
Each judge delivered a separate judgment—although there was consensus to the extent that Cayman law would only permit the provision of documents belonging to the company and not the auditors (as in Bermuda) and that the domestic courts could not apply statutory powers that were available to the receiving court when those powers were not available to the domestic courts.
In Saad, PwC appealed against a decision that the Supreme Court of Bermuda had jurisdiction to make an order winding-up the company. The company’s liquidators obtained an order for delivery up of PwC’s files in relation to the company in the Cayman Islands court and PwC delivered up all of the files in relation to the company. The company’s liquidators, asserting that PwC had only partially complied with the court order, presented a further winding-up petition in the Supreme Court of Bermuda with a view to invoking the Bermudan Supreme Court’s wider statutory powers to require PwC to provide further material.
PwC successfully appealed the decision of the Bermudan Supreme Court and it was ordered that the winding-up order be stayed and the winding-up order in Bermuda was discharged. The Privy Council held:
A claim had originally been brought successfully by the respondent against the appellant in respect of some monies owed pursuant to a loan agreement. It transpired that the respondent had been declared bankrupt after issuing proceedings but before obtaining judgment against the appellant. The Official Receiver had been appointed as the respondent’s trustee in bankruptcy after the bankruptcy order had been obtained. The appellant appealed on the basis that the respondent’s intervening bankruptcy rendered the judgment a nullity.
A line of decisions on the effect of bankruptcy on the issuing or maintaining of proceedings was considered by Lord Justice Floyd, in the leading judgment of the Court of Appeal, including Heath v Tang [1993] 4 All ER 694,Pickthall v Hill Dickinson LLP [2009] EWCA Civ 543, [2009] All ER (D) 235 (Jun) and Thames Chambers Solicitors v Miah [2013] EWHC 1245 (QB), [2013] All ER (D) 249 (May).
The Court of Appeal dismissed the appeal, holding that:
In relation to the penultimate point, the extent of knowledge required on the part of a bankrupt is an issue that may merit further judicial clarification. The ramifications of the last point also appear particularly ripe for further interpretation in future decisions of the courts.
This is an important personal insolvency decision involving a Russian debtor who had made himself bankrupt in England in circumstances where he appeared to have a tenuous or transitory connection with the jurisdiction.
The debtor had previously been in charge of a vast international fruit empire but, after his businesses suffered financial difficulties, he travelled to London for two days and presented a bankruptcy petition pursuant to the UK court’s jurisdiction under IA 1986, ss 264(1)(b) and 265(1)(b). The applicants, who comprised certain Russian Banks, applied to annul the bankruptcy order under IA 1986, s 282(1)(a) and, alternatively, for rescission underIA 1986, s 375 on the basis that the court ought not as a matter of discretion to have made it. The creditors argued, among other things that:
Chief Registrar Baister refused the applications, holding that:
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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First published on LexisPSL Restructuring and Insolvency
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