UK: Insolvency & Corporate Recovery Update

Last Updated: 17 December 2010
Article by Derek Ellery, Damien Bechelli and Steven Jansch

The current economic climate continues to be reflected in the number of cases which are coming before the courts concerning the law relating to insolvency and insolvency procedures. This bulletin provides a round up of some of the most significant recent decisions.

English High Court considers balance sheet test of insolvency

In July 2010, the High Court considered the exact scope of the test for whether a company is unable to pay its debts, set out in section 123(2) of the Insolvency Act 1986, commonly known as the "balance sheet test". In BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc and others, the court held the balance sheet test does not simply track the balance sheet in a company's accounts.

Instead, at the date the test is applied, assets should be valued at their present value. Contingent or prospective assets are not taken into account.

The value of liabilities must take into account contingent and prospective liabilities, as required by the statute. However, this involves considering the relevant facts of the case when deciding what value to assign to those liabilities. They would not be aggregated at their face value with book debts as this would be commercially illogical. In this case, the court assigned no value to liabilities which were contingent on exchange and interest rate fluctuations.

There has been surprisingly little judicial interpretation of the balance sheet test of insolvency and this case provides welcome clarification.

Pensions Regulator's financial support direction is an expense of administration

On 10th December the High Court in England ruled that a financial support direction or contribution notice issued by the Pensions Regulator was an expense in an administration or liquidation. As such the amount due under these notices will have a super priority ahead of unsecured creditors. The Administrator argued, unsuccessfully, that as the obligation to pay under the notices did not arise until after the insolvency commenced then the regulator could not rank in the insolvent estate as a creditor. The decision will considerably strengthen the position of the Pension Regulator when seeking to make recovery from group companies.

Administrator challenged over grant of a licence to occupy

In the Scottish Court of Session case of Cheshire West and Chester Borough Council a petition was presented by a landlord seeking an order that payment of rent be treated as an expense of the administration, and raising an action for relief under paragraph 74 of schedule B1 to the Insolvency Act 1986 on the basis that the administrator had acted so as to unfairly harm the interests of the landlord. The administrator sought to have the action struck out as it was an attempt to avoid the moratorium on actions against companies in administration, and opposed the order regarding expenses.

The action followed the company going into administration and then selling its business on terms that a licence to occupy the premises was granted to the purchaser, who then carried on the business for six months from the landlords premises.

The court considered that the administrators had permitted a third party to occupy the premises in flagrant breach of the terms of the lease. They did so without having received any signed licence nor any signed guarantee of the licensee's obligations and in such a way that neither they nor the landlords were able to sue the occupiers of the premises for payment of rent during the course of the licence. They did so in order to sell the company's business at a price which appeared better than could have been realised under liquidation, and therefore was better as regards achieving the purpose of the administration and for the creditors as a whole. However it was argued that it was done in a manner which unfairly harmed the interests of the landlords. The court considered this fell fairly and squarely within the provisions of paragraph 74, and so ruled in favour of the landlord that the claim may proceed.

Administrators need to have regard to the landlord's interest in the way they deal with the property in the sale of business as a failure to do so may leave them open to claims under paragraph 74. What relief the landlord will be granted if the action is successful is unclear.

With regard to the treatment of the rent as an expense, the court considered the matter is now to be determined exclusively by reference to the insolvency rules. If the rental liability falls within the rules, then it is payable as a matter of mandatory obligation, not as a matter of discretion, either on the part of the administrator or on the part of the court. Here, the court considered that the rent from the date of administration during the period of the licensee's occupation did fall within the rules and was to be treated as an expense. The judge went on to say that even if he was wrong in the view that the court does not have a discretion when deciding whether or not rent falls to be treated as an expense of the administration, and that he did in fact have a discretion on this point, he would have exercised that discretion in favour of the landlord in any event. The same result would therefore be achieved by a different route.

Park Gardens – Procedure for approval of liquidators remuneration made easier

In the decision on the application of the Joint Liquidators of Park Garden Investments Ltd the Court made some observations in relation to approval of remuneration that are likely to be of interest to insolvency practitioners and their advisors.

  • No requirement to remit to a Reporter and/or the Auditor

    The practice has developed of remitting the insolvency practitioner's accounts to a Reporter and (at least in the Court of Session) also to the Auditor of Court, both of whom then report to the Court. The Court has confirmed, however, that this practice is not binding on the Court and there is no requirement for the Court to remit either to a Reporter or to the Auditor of Court.

    The appropriateness of dispensing with the usual practice of remitting will depend on all of the circumstances relating to each particular case. The three key issues which led the Court to depart from that existing practice in this case were:-
    • only the Bank had a financial interest in the outcome of the liquidation and therefore in the level of outlays and remuneration claimed by the Liquidators. There was no realistic prospect of any other party having any such interest;
    • the unsecured creditors had been unwilling to form a Liquidation Committee in this particular liquidation; and
    • the level of outlays and remuneration claimed did not on the face of it give rise to any obvious concerns.
  • Further applications in respect of outlays and remuneration can be made by motion.

    The standard practice as it currently exists is for each accounting period to be dealt with as a separate matter before the Court. This entails a separate Note being lodged with the Court on each occasion. In this case the Court granted the application by the Liquidators to allow future applications by way of motion rather than separate Notes so as to save expense.

    It is clear that the Court is willing to facilitate changes where those changes will save unnecessary expense being incurred. That benefits unsecured creditors. It is also clear from the decision that this is a process which will be kept under review.

Individual director of a corporate director not liable under s212 of the Iinsolvency Act 1986

The Supreme Court has ruled that an individual, who was a director of a company (Paycheck) which was the sole corporate director of a number of other companies, was not a de facto director of those companies. The decision, by a majority, arose out a situation where an individual had established a scheme for the administration of the tax affairs of contractors, a separate company being established for each company for whom Paycheck acted. Paycheck was the sole corporate director in each case. These companies became insolvent. The only creditor of the companies was HMRC. It argued that dividends paid by those companies had been misapplied by the director of the companies and as such the director was guilty of misfeasance and liable to account to the companies for the dividend. HMRC argued that since the individual was the sole director of the corporate director he was a de facto director of the insolvent companies and personally liable for the misfeasance under section 212 of the Insolvency Act 1986.

The Supreme Court concluded that you had to look at the separate legal personalities of the individual and Paycheck and the mere fact of acting as a director of a corporate director was not enough to make the individual a de facto director of the subject companies. If the individual was a de facto director simply because he was the guiding mind behind the sole corporate director, then this would be so in the case of every company with a sole corporate director. As long as the acts were done by the individual entirely within the ambit of the discharge of his duties as a director of the corporate director, it was to that capacity that his acts had to be attributed. It had not been shown that the individual was acting as a director of the underlying companies in this case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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