Monthly Update - March 2014

Monthly Update - March 2014

Welcome to this month's highlights. There are a number of interesting case updates and news analysis from this month put together by the Restructuring and Insolvency team at LexisPSL. Find out more below.


Below is a round-up of some of the key cases reported in March.

When is a share not a share?

In Fons HF (in Liq) v Pillar Securitisation S.à.r.l, the Court of Appeal held that a shareholder loan agreement could constitute a ‘debenture’ as it is an instrument which evidences a debt. The effect of this decision was to bring two shareholder loan agreements within the meaning of debenture within the definition of ‘shares’ under a legal charge and so were part of the secured property available to Kaupthing as the secured creditor under the Kaupthing legal charge. Borrowers and their lawyers should revisit the definition of ‘Shares’ in any security document taking security over shares, to check if a shareholder loan agreement would be caught or remains outside the security net.

For further details, see Banking & Finance News Analysis: When is a share not a share?

Judgment in the Lehman waterfall case

Following his earlier statement of conclusions, on 14 March 2014 David Richards J gave a full reasoned judgment in Re Lehman Brothers International (Europe) (in administration) which addressed a number of issues arising from the likelihood of a surplus in the estate of Lehman Brothers International (Europe) (LBIE) after payment of all proved debts. Richards J gave his reasoning for the following decisions:

• LBIE's members (two other Lehman group companies, LBHI2 and LBL) have a very wide obligation to contribute on liquidation under the Insolvency Act 1986, s 74(1) (IA 1986) as LBIE is an unlimited company. Accordingly, the members must contribute to:
◦ proved debts
◦ statutory interest on the proved debts
◦ unproved liabilities
• the (i) contributory rule (that a contributory/member can't recover anything until he has fully paid any obligations as contributory) and (ii) equitable rule in Cherry v Boultbee (which produces a netting-off effect that is similar to set-off and applies in circumstances where set-off itself is not applicable, because there is not the necessary similarity in claims) do not apply in administration (only liquidation)
• creditors (whose contractual or other claims are denominated in a foreign currency) which suffered a loss due to currency movements between the date of commencement of the administration and the date of payment can claim that loss, but only as an unprovable debt (payable after all proved debts and statutory interest)

For further details, see News Analysis:Full reasoned judgment in Lehmans waterfall case.

High court changes the playing field on mis-selling claims in administration

The applicant in Hockin v Marsden obtained a court order under Insolvency Act 1986, Sch B1, para 74 requiring the administrators of the company to assign the benefit of a mis-selling claim to the applicant. Without an assignment of the benefit of the claim to the creditors would be lost. In requiring the assignment to an interested creditor, the court potentially gives a solution to a situation where insolvency practitioners are reluctant to pursue claims on the basis of the costs that would be incurred in pursuing claims that are far from straightforward. Administrators will now be required to either pursue a mis-selling claim or assign the claim to a creditor who is wishes to pursue the claim. This may not be an easy choice for administrators in some cases.

For further details, see News Analysis: High Court changes the playing field on mis-selling for companies in administration.

Mortgagee duty to take reasonable care to sell for the best price reasonably obtainable

The recent case of Aodhcon v Bridgeco considered the duty of a mortgagee to obtain the best price reasonably obtainable on the sale of a mortgaged property. The mortgaged property was a development of an existing property which the claimant contented was worth £1.25m but had been sold by the mortgagee for £852,000.

The judge confirmed that the duty of the mortgagee was not to sell at the best price reasonably obtainable but to take reasonable care to sell for that price. Applying previous case law, the mortgagee would not have breached that duty unless it was plainly on the wrong side of the line. The judge considered that the mortgagee had not been in breach of duty in the way it had marketed the property for sale and its selling decisions had been within an acceptable margin of error.

The case can be found at: Aodhcon v Bridgeco [2014] EWHC 535 (Ch), [2014] All ER (D) 50 (Mar).

What happens to money held on trust when a company goes into liquidation?

Peter Head, barrister at 11 Stone buildings, considered the decision in the recent case of Bailey v Angove in relation to the construction of an agency and distribution agreement. The following key principles could be derived from the case:

• whether or not a trust arises in favour of a principal under an agency agreement owed monies by an insolvent agent will depend on the proper construction of the agreement—including whether or not the agent’s authority to collect in monies due to the principal survives the termination of the agreement
• the court is unlikely to conclude that monies received by office holders on behalf of insolvent companies prior to their insolvency which are payable to a principal are held for it on constructive trust on the basis of unconscionability, unless the monies were paid for no consideration such that they represented no more than a windfall to creditors (Neste Oy v Lloyds Bank plc)

For further details, see News Analysis: What happens to money held on trust when a company goes into liquidation?

Clear and distinct—UK court stays proceedings in favour of Saudi courts

In the case of Akers v Samba Financial Group, the Companies Court considered an application for a stay of proceedings pursuant to the Civil Procedure Rules 1998, SI 1998/3132, Pt 11 by the defendant financial group. The proceedings sought a declaration under IA 1986, s 127 that the transfer of shares in five Saudi Arabian companies was a void disposition of Saad Investments Company Limited's (SICL's) property. The claim was made by the joint liquidators of SICL (a Cayman Islands company). In granting the stay, the court decided that the courts of Saudi Arabia were clearly and distinctly a more appropriate forum. The case gives an interesting overview of which law governs:

• whether or not the company had a proprietary interest in the assets disposed of, and
• any underlying trusts

For further details, see News Analysis: Clear and distinct—UK court stays proceedings in favour of Saudi courts.

Signing on the dotted line—'I Accept' button constitutes a signature under Consumer Credit Act 1974

A question arose in the case of Bassano v Toft and others as to whether the signature of the borrower was in the form prescribed by the Consumer Credit (Agreements) Regulations 2010, SI 2010/1014, reg 4(3)(a) which requires it to be in 'the space in the document indicated for the purpose'. The words 'I Accept' appeared in such a space, but Mrs Bassano's name appeared on the previous page. The judge decided that the statutory regulation was fulfilled. In this case, the signature was made by the electronic communication of the words 'I Accept' which were in the space designated for a signature. They constituted a good signature because the word 'I' can be treated as being the mark which is unambiguously that of Ms Bassano affixed for the purposes of authenticating and agreeing to be bound by the terms of the document.

For further details, see News Analysis:Signing on the dotted line—'I Accept' button constitutes a signature under Consumer Credit Act 1974.

An on demand loan really is repayable 'on demand'

The case of Swallowfalls v Monaco Yachting & Technologies SAM focused on the construction of the repayment clause of a loan agreement. The court had to consider the apparently conflicting position in the loan agreement which provided that the loan was repayable both on demand and on the occurrence of an event of default.

For further details, see News Analysis:An on demand loan really is repayable 'on demand'.

When can an executor be removed?

The main issue in the case of National Westminster Bank plc v Lucas and others was how an executor was to conduct the administration of an estate (in this case the estate of the deceased television presenter Jimmy Savile) when there was a contest between the will beneficiaries on the one hand, and potential claimants on the other, where the claims might render the estate insolvent. The court considered the effect of IA 1986, s 284 which (when read in conjunction with the Administration of Insolvent Estates Order 1986, SI 1986/1999, Art 3) has the effect that where the estate of the testator is found to be insolvent, any disposition of property in the period after his death is void except to the extent that it was made with the consent, or subsequent ratification, of the court.

For further details, see News Analysis: When can an executor be removed?


Changes to partnership taxation—what you need to know

Andrew Allen, partner and specialist in the legal sector at Francis Clark, Chartered Accountants looks at the implications of the new guidance from HMRC on limited liability partnerships (LLPs) for both LLPs and individuals and how this will affect the way law firms operate. HMRC has revised its guidance on the draft Finance Bill legislation containing the LLP salaried members rules, which will treat members as employees where three main conditions are met. The legislation will not be fully effective until Royal Assent of the Finance Bill 2014, which is expected in July 2014.

For further details, see Practice Management News Analysis: Changes to partnership taxation—what you need to know.

E-disclosure—a technological arms race for litigators

Adrian Palmer, chief executive officer at Proven Legal Technologies, explains how the latest technology can give law firms an advantage over the other side in the disclosure process.

For further details, see News Analysis: E-disclosure—a technological arms race for litigators.

The financial crisis gripping the UK care home sector

Updated research into the financial health of UK care home companies from Company Watch, specialists in tracking and predicting corporate financial health worldwide, confirms that despite some signs of improvement in the sector, almost a quarter of care home operators are still financially vulnerable. What are the key pressure points putting care homes at risk of financial failure? Steve Parker, a licensed insolvency practitioner and a partner at Opus Restructuring and Nick Hood, business risk analyst at Company Watch, share their views. For further details, see News Analysis: The financial crisis gripping the UK care home sector.

The challenges of harmonising insolvencies and restructurings

On the 12 March 2014 the European Commission issued a recommendation containing detailed provisions seeking to harmonise insolvencies and restructurings throughout the EU. The objective is to shift the focus away from liquidation towards encouraging viable businesses to restructure at an early stage to prevent insolvency.

For our analysis of the challenges facing the European Commission as they seek to implement this recommendation, see News Analysis: The challenges of harmonising insolvencies and restructurings.

Insolvency law—key areas of reform

The Financial Law Committee of City of London Law Society has published a second discussion paper on secured transactions reform. In our news analysis article, Richard Calnan, banking partner at Norton Rose Fulbright, and chairman of the working party of the Financial Law Committee of the City of London Law Society, commented on the Committee's paper which focuses on the requirement to draw a distinction between fixed and floating charges under insolvency legislation.

The key problem as the committee sees it is that a secured creditor with a fixed charge gets the net proceeds of sale of the charged assets but a secured creditor with a floating charge ranks behind a large number of other people. The problem is exacerbated by the difficulty of deciding in practice whether a charge is fixed or floating. The uncertainty which this engenders is particularly unfortunate in an area where certainty is of paramount importance.

For further details, see News Analysis: Insolvency law—key areas of reform.

Appeal Tracker: Dubai Islamic Bank PJSC v PSI Energy Holding Company BSC and others

An application for permission to appeal to the Court of Appeal in Dubai Islamic Bank PJSC v PSI Energy Holding Company BSC and others is due to commence between 14 March and 4 April 2014. In the previous judgment, the claimant (the Bank) brought a claim, against various defendants in respect of a debt for some US$432m, which it contended was due under a restructuring agreement, following an event of default. The Commercial Court held that, on the facts, the Bank was entitled to the sums claimed. For further details, see News Analysis: When a restructuring agreement fails

Lexis®PSL Restructuring & Insolvency blog

Take a look at our blog here: Lexis®PSL RandI blog. We especially welcome any comment from practitioners on current news and practice in R&I, what's happening in court, in deals or the type of work that is predominant at the moment.

R&I webinars with R3

This month saw the fifth joint LexisNexis/R3 webinar on 'Partnership Insolvency" featuring Mark Sands, a partner at Baker Tilly and Stewart Perry, a partner at Clyde & Co as guest speakers, with Eleanor Stephens, head of the LexisPSL R&I team chairing.

To subscribe and access the webinar programme, see: R&I/R3 Webinar programme.

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.