UK: Insolvency And Re-Structuring Case Reporter

Last Updated: 21 October 2011
Article by Derek Ellery, Damien Bechelli and Steven Jansch

Transactions at undervalue – exercise of Court discretion not to set aside

In both corporate and personal insolvency matters, transactions which have been entered into in the period prior to the insolvency commencing may be set aside if it can be shown that the transfer of assets out of the ownership of the company or individual was made at an undervalue, thus reducing the amount available to creditors.

The recent High Court case of The Trustee in Bankruptcy of Claridge v Claridge considered whether a transaction had been made at undervalue. It was found that a transaction at undervalue had taken place. The judge however declined to make an order in favour of the Trustee in Bankruptcy as under the circumstances it would not be just to do so.

The first and second respondents, the husband and wife, had jointly obtained a loan secured against a property solely owned by the wife. The loan was used to pay off the existing mortgage and legal fees and the balance was used to repair and renovate the house. The husband was declared bankrupt shortly after and the Trustee in Bankruptcy applied to the Court under section 339 of the Insolvency Act 1986 for an order requiring the wife to repay half of the loan, as the transfer of the husband's part of the loan to the wife to repay her mortgage and renovate the house had been made for no consideration.

Although it was held that this did amount to a transaction at an undervalue the Court has a discretion in exceptional cases not to set the transaction aside, and in this case refused to make an order.

The factors the Court considered in exercising its discretion were:-

  • the recipient had in good faith altered her position by spending the money on home improvements,
  • the transaction could not be easily reversed,
  • the recipient remained liable to the mortgage lender for the full amount advanced to the husband and wife therefore she obtained limited benefit from the transaction, and
  • the late stage at which the Trustee introduced the claim for the transaction to be set aside.

The Removal of Administrators – Court reluctant to interfere

The Court has discretion to remove an administrator from office at any time under schedule B1 of the Insolvency Act 1986. However, there must be good and sufficient grounds for removal.

In the recent case of Finnerty v Clark, the Court of Appeal considered whether demonstrating that another administrator might have reached a different conclusion on a matter did not constitute 'good and sufficient' grounds for the Court to exercise its discretion to remove an administrator from office.

The appellants in this case wanted the respondent administrators to challenge a claim for default interest by applying to the Court under section 244 (extortionate credit transactions) of the 1986 Act. Under section 244, the Court can make various orders upon application of the office holder if it regards a transaction entered into within the last 3 years is extortionate. The appellants had offered to fund the cost of the challenge and had provided an unlimited undertaking in respect of an adverse costs order. A successful challenge would most likely save the company as a going concern. The administrators did not make the application.

The Court of Appeal dismissed the applicant's appeal against an order preventing them from removing the administrators on grounds that no good ground had been established for the removal from office. The fact that a new administrator may reach a different conclusion on the section 244 application was not a sufficient ground for the removal of the administrator.

This case highlights the Court's reluctance to interfere with the decisions of the officeholder unless some misconduct, personal unfitness or imputation on the integrity of the administrator can be proved. The Court will respect the decisions of the administrator, and the fact another administrator might reach a different decision is not a reason to remove the administrator.

Validity of extension of out of Court administration – importance of procedural compliance

Following changes to the Insolvency Act 1986 made by the Enterprise Act 2002, it is now possible for the holder of a floating charge, the Company or its directors to appoint an administrator out of Court. The appointment lasts for one year but can be extended out of Court with the consent of all creditors.

The recent High Court decision in Frontsouth (Witham) Limited (in Administration) looked at whether the failure to obtain written consent of one secured creditor to the extension of administrator's office could be waived under rule 7.55 of the (English) Insolvency Rules. Rule 7.55 provides that no insolvency proceedings shall be invalidated by any formal defect or irregularity unless substantial injustice has been caused and this cannot be remedied. A similar rule applies in Scotland under rule 7.32 of the Scottish Insolvency Rules.

In this case, the initial appointment of the administrators was made out of Court pursuant to paragraph 22(2) of schedule B1 of the 1986 Act. Such appointments cease to have effect after one year unless extended upon the written consent of the creditors. Written consent was not received from one of the secured creditors. Despite this, the administrators deemed the extension to have taken place and continued in office for a further 6 months. Towards the expiry of the period of extension, they applied to the Court to have their appointment extended for a further term of 1 year. This was granted.

When application to the court was made for a further extension, the original defect (failing to gain consent of the creditor at the first extension) was raised. The applicant administrators requested the Court to use its power under rule 7.55 to waive the defect.

After considering recent authority the Court found that rule 7.55 could not be used to cure the defect. The Court concluded that since the insolvency process had expired, there were no proceedings to which rule 7.55 could apply. The Court found it had jurisdiction to re-appoint the administrators, but a question then arose as to who could make this application. It was concluded that the former administrators were not able to apply to the Court as their appointment had now ceased; instead, the former directors, shareholder or creditors would be required to make the application.

'Anti-deprivation' principle upheld by the Supreme Court

The recent Supreme Court case of Belmont Park Investments PTY v BNY Corporate Trustee Services Ltd considered whether 'flip' clauses in finance agreements could be struck out under the English Law anti-deprivation principle.

It is contrary to public policy for parties to be able to contract out of insolvency legislation. The anti-deprivation rule provides that a person who possesses property cannot contract to pass the property to a third party in the event of his insolvency, thus denying his creditors the right to be paid out of the assets.

The documentation was highly complex but included provisions whereby the respective priorities of the Lehman Brothers Special Purpose Vehicle (LBSPV) over certain collateral and the holders of notes issued by LBSPV depended on whether there had been an 'Event of Default' under a swap agreement (generally an insolvency event). If there was no event of default, LBSPV had priority over collateral provided under the agreement – if there was, the note holders had priority.

The central question was the validity of these provisions altering priority.

The Court considered that it should not be quick to set aside arrangements and invalidate them when doubt might be cast over long standing commercial arrangements. The Court confirmed the continued existence of the anti-deprivation rule and the decision provides a useful summary of situations where it has been held to apply or not to apply. However it does not apply unless there is an intention to gain an advantage over creditors on insolvency. Good faith and the commercial sense of the transaction can prevent the anti-deprivation principle applying. It will also not apply if the deprivation is for reasons other than insolvency such as a provision for forfeiture on breach.

The arrangements in this case were not struck out by the anti-deprivation principle. The Court was particularly influenced by the fact the collateral was purchased from the money subscribed by note holders and the availability of the collateral reflected the risk the note holders had agreed to assume.

This case illustrates the willingness of the Court to give effect to contractual terms agreed by parties. The Court determined that the principle should be applied in a common sense manner and should not apply to bona fide commercial transactions where the deprivation of the property of one of the parties on bankruptcy was not the main purpose.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.