R&I—pick of the cases in 2014

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.

Corporate insolvency

Re Lehman Brothers International (Europe) (in administration)  [2014] EWHC 704 (Ch), [2014] All ER (D) 153 (Mar)

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:

  • LBIE’s members had a wide obligation to contribute on liquidation under IA 1986, s 74(1) as a result of its unlimited company status—this included:
    • proved debts, then
    • statutory interest on proved debts, and then
    • unproved liabilities
  • the contributory rule and equitable netting-off rule in Cherry v Boultbee [1839] 9 LJ Ch 118 did not apply in administration—this is because there is no statutory mechanism for making calls on contributories in administration (such provisions only exist in liquidation)
  • foreign currency creditors who had suffered a currency loss on their debts between the date of commencement of the administration and the date of payment of their distributions were entitled to claim for these currency losses and such claims would rank as unproved liabilities, payable only after payment in full of all proved debts and statutory interest on those debts
  • if the administration of LBIE were to be followed by liquidation, interest accruing during the period of the administration which was not paid before the commencement of the liquidation would neither be a provable debt nor payable as statutory interest—however, creditors whose contracts/judgments specified interest rates could claim in the subsequent liquidation of LBIE as an unproved claim
  • the claims of the shareholder under its subordinated loan agreements were subordinated not only to provable debts but also to statutory interest—it was noted that the terms of the subordinated loan facilities were similar to those relied on by institutions to meet their capital adequacy requirements which was consistent with the subordinated loan capital qualifying as part of LBIE’s regulatory capital
  • LBIE would be entitled to lodge a proof of claim in the distributing administration or liquidation of either of its shareholders—the mandatory rules of set off would apply

Application of these principles gives rise to the following waterfall ranking of payments in a liquidation or administration:

  • fixed charge creditors
  • expenses of the insolvency proceedings
  • preferential creditors
  • prescribed part creditors
  • floating charge creditors
  • unsecured provable debts
  • unprovable debts (eg currency claims)
  • shareholder’s subordinated loan facility claim
  • shareholder’s or members unsecured claims

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.

Blue Monkey Gaming Ltd v Hudson [2014] All ER (D) 222 (Jun)

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:

  • IA 1986, Sch B1, para 72 did not apply—the words ‘dispose’ and ‘disposal’ in para 72(1) and para 72(3) did not cover the continued use of the machines
  • Frankice was lawfully in possession of 242 machines when the administrators were appointed
  • the possession was never revoked or terminated by MDM before the administrators completed the asset sale agreement
  • MDM could have required the administrators to make payment to it as a condition for continued use of the machines by invoking IA 1986, Sch B1, para 43, para 74— this was consistent with the administrators consenting to the machines being free of charge during the administration
  • MDM had never made an unequivocal demand for the delivery-up of its unpaid machines

the administrators had not converted or wrongfully interfered with machines in which MDM had title.

Cases affecting landlords in the event of their tenant’s insolvency

Pillar Denton Ltd v Jervis  [2014] EWCA Civ 180, [2014] 3 All ER 519

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:

  • applying the equitable ‘salvage principle’, an officeholder (either liquidator or administrator) must make payments at the rate of the rent for the duration of any period during which he retains possession of the demised property for the benefit of the liquidation or administrator
  • rent is to be treated as accruing on a daily basis and is payable as an expense of the administration or liquidation
  • the fact that rent payable in advance could not be apportioned under the Apportionment Act 1870 did not inevitably lead to the conclusion that the salvage principle did not apply

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.

Schroder Exempt Property and another v Birmingham City Council [2014] EWHC 2207, [2014] All ER (D) 143 (Jul)

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 had been entitled to immediate possession of the whole property, and
  • as such, whether the court in the first instance had been correct to find that the appellants were the owners of the property within the meaning of the Local Government Finance Act 1988, s 45(1), s 65(1) (LGFA 1988) and whether they were liable for the rates

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.

Carman (liquidator of Casa Estates (UK) Ltd) v Bucci [2014] EWCA Civ 383, [2014] All ER (D) 33 (Apr)

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:

  • the appeal court is entitled to apply the correct legal test to the facts where the court at first instance has not done so and, further, is not prevented from challenging factual conclusions reached by the first instance judge.
  • IA 1986, s 123(1), (2) were not intended to change pre-1986 law on solvency
  • the cash flow and balance sheets tests should both be considered—a finding of cash flow solvency does not dispense with the need to consider balance sheet solvency
  • when applying the cash flow test the court should consider how the company is managing to pay its debts—t is not enough to show the company is for the time being paying debts as they fall due (the absence of creditor pressure was immaterial)
  • expert evidence indicated the company was also balance sheet insolvent

Cross-border insolvency cases

Pan Ocean Co Ltd Re; Fibria Celulose S/A v Pan Ocean Co Ltd [2014] EWHC 2124 (Ch),[2014] All ER (D) 03 (Jul)

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 administrator had a good arguable case that the ipso facto default clause was automatically void in South Korean law—nevertheless, the validity of ipso facto clauses are treated differently in many jurisdictions and the UK Supreme Court, in Belmont Park Investments v BNY Corporate Trustee Services [2011] UKSC 38, [2011] All ER (D) 259 (Jul) had chosen to treat ipso facto clauses in bona fide commercial context as valid exceptions to the anti-deprivation rule (The UK Supreme Court had taken into account domestic policy considerations when reaching this decision—although these policy questions were evidently viewed differently in the Korean jurisdiction, Morgan J decided that he had the free choice to prefer the English policy choice and duly did so.)
  • the court did not have the power under Sch 1, art 21(1)(a) to restrain the shipping counterparty from serving a termination notice since serving such a notice was not the ‘the commencement or continuation of individual actions or individual proceedings’
  • the non-exhaustive words ‘any appropriate relief’ in Sch 1, art 21(1) are capable of being given a wide literal meaning although, the very width of their literal meaning and consideration of Sch 1, art 21(1)(g) in particular led to the conclusion that it was not intended that they should be given such a wide literal meaning—further, the court did not have the power to grant relief beyond that which it could grant in domestic insolvency

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.

Re Agrenco Madeira—Comercio Internacional Lda  [2014] All ER (D) 118 (Apr)

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:

  • IA 1986, s 225(1) provided a statutory exemption, permitting winding-up as an unregistered company of a company that was incorporated outside the UK and had ceased doing business in the UK notwithstanding that it had been dissolved under the laws of the country in which it was incorporated
  • the wording in IA 1986, s 251(1) was sufficiently broad—‘may be wound up’ as opposed to ‘a winding up order may be made’—that it covered the situation in which a company was dissolved in its place of incorporation after a winding-up order had been made
  • such a conclusion was consistent with principle and statutory construction
  • a contrary conclusion would be absurd given that a fresh winding-up order could be made on a petition presented after dissolution

Singularis Holdings Ltd v Price Waterhouse Coopers and PriceWaterhouseCoopers v Saad Investments Company Ltd (In Liq) [2014] UKPC 36, [2014] All ER (D) 154 (Nov); [2014] UKPC 35, [2014] All ER (D) 94 (Nov)

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:

  • it is only available to assist the officers of a foreign court of insolvency jurisdiction or equivalent public officers—the power is not available to assist a voluntary winding-up which is essentially a private arrangement and, although subject to the directions of the court, is not assisted by or on behalf of an officer of the court
  • it is a power of assistance which exists for the purpose of enabling a foreign court to surmount the problems posed for a world-wide winding up of the company's affairs by the territorial limits of each court's powers and it did not enable the foreign court to do something which it could not do under the law by which it was appointed
  • the power was only available when it was necessary for the performance of the office holder’s functions
  • the relief sought had to be consistent with the substantive law and public policy of the assisting court

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:

  • the Supreme Court of Bermuda’s statutory jurisdiction to wind-up companies did not extend to winding-up overseas companies
  • although PwC was a stranger to the petition and the court would not normally be prepared to entertain submissions from strangers to a winding-up on the issue of whether the winding-up order should have been made, PwC was only a stranger in the most technical sense—it was the sole target of the order
  • the Supreme Court and Court of Appeal of Bermuda ought to have exercised their power to stay the winding up on the basis of the lack of jurisdiction

Bankruptcy cases

Pathania v Adedeji and others [2014] EWCA Civ 681, [2014] All ER (D) (01) Jun

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:

  • since the bankrupt respondent’s estate had not vested in his trustee in bankruptcy at the time that he had obtained judgment, the judgment could not be said to be a nullity
  • in any event, in order for the judgment to be set aside on appeal, it was not enough to show that a cause of action vested in the official receiver, he must show that:
    • the respondent had known that the Official Receiver had become trustee
    • his estate had become vested in the Official Receiver, and
    • he knew that this was so before judgment on the claim was entered (interpreting dicta of Mann J in Pickthall)
  • this case could be distinguished from Pickthall since the fact that the Official Receiver (as trustee in bankruptcy) had been prepared to assign the judgment to the respondent for money even after judgment had been entered showed that the claimant could, in any event, have achieved his objective without committing an abuse of process

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.

Re Kekhman, [2014], All ER (D) 107 (Apr)

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:

  • the bankrupt was a ‘bankruptcy tourist’ who had tried to evade Russian law by ‘forum shopping’ which meant the bankruptcy order would not be recognised by the Russian courts, and
  • there had been material non-disclosure at the hearing of the petition

Chief Registrar Baister refused the applications, holding that:

  • jurisdiction founded on personal presence in England on the day of presentation of the petition should not be circumscribed by any condition that the legislature had not seen fit to impose
  • residence in the UK need not be prolonged and the courts are prepared to countenance legitimate forum shopping provided that the debtor does so properly and there are no countervailing factors to which equivalent or greater weight should be given
  • the debtor’s expert Russian law evidence was to be preferred, to the effect that the English bankruptcy order would be recognised in Russia
  • there was no bankruptcy regime available to the debtor under Russian law and so the court could act to fill the lacuna
  • there was utility in the bankruptcy—the trustees report showed that the trustee had made a number of realisations and the prospect of further realisations remained
  • although there had been material non-disclosure, annulment would be disproportionate

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

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