Increase in fees for Bankruptcy and Winding Up Petitions presented after 6 April 2010
The deposit on a Creditors Bankruptcy Petition has increased from £430 to £600 and the deposit on a Winding Up Petition from £750 to £1000.  The total cost of presenting a petition to include Court fees now stands at £790 for a Bankruptcy Petition and £1190 for a Winding Up Petition.

Third Party (Rights Against Insurers) Act 2010
On 26 March 2010 Parliament passed the above Act, although there is at this stage no date for it to come into force.  The Act in summary simplifies the position of creditors of an individual or company subject to formal insolvency proceedings where the individual or the company has insurance against the creditor’s claim.  The Act transfers the rights of the individual or company to receive payment under the insurance policy to the creditor.

Amended Insolvency Rules
Just a reminder that the modernising and consolidating amendments to the Insolvency Rules 1986 came into effect on 6 April 2010.  Those changes to the Rules include a provision for an Administrator to recover fees and costs incurred prior to an appointment as an expense of the Administration.  Other details in respect of the changes appeared in the March edition of this Briefing which can be found here.

Case Law Update

Winding Up – Fraudulent Trading
Goldfarb -v- Higgins and others
[2010] EWHC 613
Chancery Division  March 2010

Facts:
This case involved a claim brought by a liquidator of a company against its two directors following the deliberate failure by the Company to account to HMRC for VAT.  Both directors defended the claim on the basis that they had not known of the failure and each blamed the other on the basis that the other controlled the business and affairs of the company.  The Court had to decide what sums should be awarded and how liability should be shared between the two directors.

Decision:
In the case of fraudulent trading the Court stated that the purpose of damages was to compensate the company, not to punish the directors, and any damages should reflect the losses caused to the creditors.  The Court therefore held the two directors liable for the amount of VAT that should have been paid.  In terms of apportioning liability, the Court took the view that there was no automatic rule that liability would be joint and several and the issue to be considered was the extent to which each of them controlled the company’s affairs and had benefited from the fraud.  In this particular case, however, liability was shared equally between them.

Bankruptcy - Disclaimers
Young –v- Official Receiver [2010]
Chancery Division 23 March 2010

Facts:
The bankrupt in this case had presented his own petition which stemmed from a planning dispute over land owned by him.  The Official Receiver as Trustee in Bankruptcy disclaimed the bankrupt’s interest in the land and the bankrupt subsequently brought proceedings against various individuals and their solicitors for damages in respect of the planning dispute.  The issue in this case was whether the damages claim vested in the bankrupt or the Official Receiver.  The Court initially held that it vested in the latter and the bankrupt appealed arguing that the disclaimer had also operated to disclaim his interest in the damages claim on the basis that the two claims were inter-related.

Decision:
The Court held that the disclaimer only related to the interest in the land and not the damages claim. The claim for the loss in value of the land was a separate cause of action from the land itself and did not form part of the disclaimer which remained vested in the Official Receiver.

Administration – Payment of Pre-Appointment Expense in Pre-Pack
In the matter of Johnson Machine & Tool Co. Limited
In the matter of Empire Surfacing Limited [2010] EWHC 582
Chancery Division 18 March 2010

Facts:
This case concerned an application by the administrators of two companies for a declaration that costs incurred pre-appointment should be treated as administration expenses.  Both administrations were pre-packs with the existing directors and owners purchasing the companies business and assets from the administrators.

Decision:
The Court made it clear that it has a discretionary power to allow pre-appointment costs as an expense of the administration and contrasted the situation where an administration operates for the benefit of the creditors from one where an advantage was given to the management of the company.  In the first case the Court took the view that it was appropriate to allow pre-appointment costs.  In the latter, however, it was not enough simply to show that the purpose of the administration was to get a better result for creditors than in the winding up.  The Court noted that SIP 16 had been complied with and that there would be a better outcome for creditors than on a winding up, although unsecured creditors were unlikely to be paid anything.  What the Court had to consider was whether the advantage to the directors in obtaining a business without its debts was outweighed by the advantage for the creditors from the pre-pack, and in cases where the directors were the purchasers it was unlikely that the balance of advantage would be in the creditors’ favour.  The Court also held that the creditors did not have authority to approve payments to the administrators in respect of pre-appointment costs, and that these would not amount to an administration expense, partly because pre-appointment costs did not reflect time spent on any matter arising in the administration.  Whilst it may be appropriate to order costs in respect of, for example, the preparation of a witness statement to comply with the relevant authorities in respect of the administration, a distinction should be made between those costs and the costs in advising the directors with regard to their position within the insolvency generally.  If the costs incurred as a result of the insolvency advice would have been incurred in any event, it would very rarely be appropriate for those costs to be paid as a expense of the administration.

Bankruptcy – Annulment
Redbridge London Borough Council –v- Mustafa [2010]
Chancery Division 19 March 2010

Facts:
A bankruptcy petition was issued in respect of unpaid council tax and a bankruptcy order made.  The bankrupt subsequently provided evidence that the property had been let to tenants so that there was no debt owed to the Council, who advised the bankrupt to take legal advice and annul the bankruptcy.  In the meantime, a trustee was appointed and the same advice was given again to the bankrupt.  The bankrupt did make an annulment application some 18 months later when significant costs had been incurred by the trustee.  At the hearing of the annulment application, the District Judge took the view that the Council should have applied to set the bankruptcy order aside and an order for costs was therefore made against it.  The Council then appealed.

Decision:
The Court held that the Council, as creditor, was not obliged to obtain an annulment of a bankruptcy order which had been made properly and, in the circumstances, the Council’s conduct had not been unconscionable, there was no duty on them to do anything more.  The bankruptcy order was not misconceived and it should not therefore follow that the costs of the annulment should have been paid by the creditor.  The District Judge had also not considered the bankrupt’s delay in making the application.  The order for costs was therefore set aside.

Administration –Pre-Packs
Hellas Telecommunications (Luxembourg) II (SCA) [2009] 3199
Chancery Division February 2010

Facts:
This case dealt with complex issues regarding the question of a company’s centre of main interests (“COMI”) as it involved a company incorporated in Luxembourg that relocated to London.  However, the relevant issue for this Briefing involved the negotiations for the sale of the company by way of pre-pack
.
Decision:
The Judge pointed out that the bidding process for the sale of the company had been lengthy and the company to which the business sold was, at the end of that process, the only remaining bidder who was also approved by the major creditors of the company.  Whilst the Court accepted that information may have been given to that company which has not been provided to other bidders, the company was clearly insolvent and the only alternative was the pre-pack sale.  The Judge pointed out that it should not be assumed from the fact that the Court makes an administration order when a pre-pack sale has been arranged that the Court approves that pre-pack, however, in this particular case, the evidence was compelling and he gave liberty to the administrators to complete the sale.  The Judge did comment that if it was obvious that a pre-pack sale would amount to an abuse of the administrator’s powers, the Court could refuse to make the administration order.  The Court also commented on the importance of following the guidelines in SIP 16 in such cases.

Individual Voluntary Arrangements – Interim Orders
Selby Hall (1) Philip Shivers (2) –v- Jan Van Der Heiden [2010] EWHC 537
Technology and Construction Court 15 March 2010

Facts:
A breach of contract claim had been issued against an individual and the trial date fixed.  On the morning of the last working day before the trial, the individual instructed new solicitors who informed the Claimant that their client had applied for an interim order under section 252 of the Insolvency Act 1986.  This was the first indication to the Claimant that the individual was or might be insolvent.  Further information was requested but no response received and the Claimant’s solicitors were subsequently informed that the interim order had been granted and, if the Claimant wanted the action to continue, they had to make application to the Court that had granted the order.  The Claimant argued that the Court dealing with the breach of contract case had jurisdiction to decide whether the trial should continue.

Decision:
The Judge agreed, noting that there was nothing in the Insolvency Act which prevented the High Court exercising jurisdiction under section 252, that the High Court did have the necessary jurisdiction and indeed that those aspects of the insolvency proceedings which related to the trial should be transferred from the County Court to the High Court so that they could be dealt with on the trial date which had been fixed for five months.  The Court therefore had jurisdiction and the trial continued.

Liquidation – Limitation
Frederick Flack and Partners (in Liquidation) –v- Flack [2010]
Court of Appeal 17 February 2010

Facts:
The company in question was run by a sole director and shareholder who wanted to retire and wind up the company.  A payment was made to him in respect of the value of his shares.  In addition, a loan to his son which was one of the assets of the company was then repaid.  The son was then declared bankrupt and his trustee brought a claim against the company seeking a declaration that the repayment of the loan amounted to a preference.  The company agreed to repay the money to the trustee, however, it was not in fact paid and the trustee wound the company up.  A liquidator was then appointed over the company and a claim was issued against the sole director seeking an order that the money paid to him for his shares had been paid in breach of section 263 of the Companies Act 1985.  The director argued that, as the claim had been brought outside the six year limitation period, it should be dismissed and the liquidator conceded the point.  The liquidator then brought a further application on the basis that he should not have made the concession as the relevant provision of the Limitation Act extended the limitation period to 12 years on the basis that the value of the shareholding had been held on trust for the company.

Decision:
The Court held that the circumstances of the case were such that the liquidator satisfied the Court that the concession on limitation should be withdrawn and the claim should be allowed to proceed on the correct legal basis.  There was on that basis no limitation defence and judgment should have been entered in favour of the liquidator.

Bankruptcy – Orders for Possession
Robert Harry Pick (as Trustee in Bankruptcy of Sharon Leslie Sumpter) –v- Sharon Leslie Sumpter and Robert George Sumpter [2010]
Chancery Division 3 February 2010

Facts:
The trustee in bankruptcy applied for an order for possession and sale of a property worth around £250,000 with equity of around £171,000.  Mr. and Mrs. Sumpter owned 50% of the property each and an order for possession and sale was made at trial (which the Sumpters did not attend).  The Judge however included a condition in the order that it would take effect unless the Sumpters paid the sum required to clear the bankruptcy debts and expenses.  That sum was thought to be around £25,500 and was included in the order.  The trustee applied for the order to be reviewed and the period for making the payment was extended.  The trustee appealed.

Decision:
The appeal Judge took the view that the original Judge’s approach had been wrong and that by giving the Sumpters time to pay the bankruptcy debt, he had effectively treated it as mortgage arrears so that the trustee could not obtain possession.  The Judge had not, in extending the period of time for making the payment properly considered the interests of creditors and the £25,000 figure should not have been fixed as it did not include the trustee’s remuneration or solicitors’ fees.  The Judge should have made a straightforward order for possession without the condition being attached and that order was made by the appeal Judge.

Bankruptcy – Statutory Demand
Wallace LLP –v- Yates [2010]
Chancery Division 2 March 2010

Facts:
Mr. Yates instructed his solicitors to act for him in a property matter whereby a claim brought by the lessees of the property owned by Mr. Yates was withdrawn so that he was then entitled to be paid his reasonable costs by the lessees.  The solicitors sent Mr. Yates a number of invoices for the work that they had done which were not paid and a statutory demand for a liquidated sum payable immediately was made.  In the meantime, the lessees applied for assessment of the costs of their claim against Mr Yates which the solicitors estimated at around £4,150 and the relevant tribunal allowed in the sum of £3,850.  Mr. Yates obtained an order setting aside the statutory demand on the basis that, when the demand was issued, the sum in dispute was an unliquidated one.  The solicitors appealed.

Decision:
The Judge held that although Mr. Yates knew before the statutory demand was issued that his solicitors were bringing action to determine the issue of the lessees’ contribution to their costs, he did not know what the actual figure would be and so it could not be argued that he had agreed to pay a minimum figure.  For a debt to be “immediately payable” in accordance with the Act, sums had to be liquidated and payable immediately, and that was not the case here.

Insolvency – Jurisdiction
Byers Hosking and Akers (Liquidators of Madoff Securities International Limited –v- Yacht Bull Corporation and Financiere Meeschaert S.A.
[2010] EWHC 133
Chancery Division 1 February 2010

Facts:
This case concerned the ownership of a yacht which was moored in France and acquired using money from Madoff Securities, which was subsequently wound up, having committed various frauds.  A French company had invested in one of Madoff’s largest creditors, had suffered losses and therefore issued proceedings in France seeking compensation.  As part of those proceedings, the French company obtained an order for the arrest of the yacht and the liquidators applied to lift that order and made an application to the English Court for a declaration that Madoff was the sole beneficial owner of the yacht so that the French company was prevented by the relevant regulations from commencing or continuing proceedings against it.  The Liquidators also argued that the payments by Madoff to purchase the yacht were transactions at undervalue and the yacht should be transferred to Madoff.  The French company argued that the relevant regulations meant that the liquidators’ claim had to be brought in France or, in the alternative, that the French Commercial Court already had before it the issue of ownership of the yacht when the liquidators made the application to lift the arrest so that the English Court had to decline jurisdiction.

Decision:
The Court’s decision was detailed and involved examination of the relevant regulations and the alternative cause of action brought under sections 238 and 423 of the Act in relation to the alleged undervalue transaction.  Overall, the Court’s view was that it had not had jurisdiction to determine the claim made by liquidators against the French company, as there was no direct link between those proceedings and the insolvency legislation or winding up of the company that the liquidators were concerned with.  The exception under the relevant regulations did not give jurisdiction and the liquidators’ claims were stayed until the issue of the beneficial ownership of the yacht could be resolved.