UK: Insolvency Update

Last Updated: 3 January 2012
Article by Denise Fawcett

This article first appeared in Solicitors Joural.

Majority Rule

In the case of Minmar (929) Ltd –v- Khalastchi and another [2011] EWHC 1159(Ch) the Court considered whether an out of court appointment of administrators, made by the directors of a company, was valid where the decision of the directors was not taken in accordance with the company's Articles of Association.

The decision to appoint administrators was made by the majority of the directors of the company but the decision was made without a proper board meeting, no notice of the meeting had been given to directors, there was no quorum and only one person was in attendance.

The effect of Paragraph 105 of Schedule B1 of the Insolvency Act 1986 is that, where something is to be done by the directors of a company, it is to be done by a majority of the directors. The court held that this did not mean that the majority of directors could dispense with the rules of internal management set out in the Articles of Association. On these grounds it was held that the appointment was invalid and should be set aside.

In addition, the appointment was found to be invalid on the grounds that notice of intention to appoint an administrator was not given to the company. It was argued that this was not necessary since this is merely an additional obligation imposed by Insolvency Rule 2.20(2), to be complied with only in circumstances where persons entitled to appoint an administrator or administrative receiver were to be served with such notice, in compliance with Paragraph 26(1) of Schedule B1. The Court considered that the additional persons to be served with notice would be concerned with this whether or not there were persons to be served under Paragraph 26(1) and that notice should be given regardless. It was noted that there is no prescribed form or period of notice specified. As no notice was given to the company at all, the appointment of administrators was considered invalid on this ground too.

The Court acknowledged that it is difficult to reconcile paragraphs in Schedule B1 when trying to determine the notice that needs to be given. However, this decision gives some clarity as to the practice that the Court expects to be adopted in circumstances where the Insolvency Act is not only ambiguous but contradictory.

Moral Hazard

The Pensions Regulator ("tPR") has reached a settlement with Michel Van De Wiele NV ("VDW") in relation to its claim against VDW for a contribution to the Bonas Group Pension Scheme, a scheme of which Bonas Machine Company Limited ("Bonas") was the employer. VDW has, as a result, been issued with a Contribution Notice (one of tPR's "Moral Hazard" powers) in the sum of £60,000. This is substantially lower than the £5 million contribution that tPR's Determinations Panel (the "DP") decided should be made and a small contribution to the "buy out" deficit in the scheme of around £23 million.

The settlement follows a hearing in the Upper Tribunal of VDW's application to bar tPR from pursuing certain allegations made against it. Whilst Mr Justice Warren was not required to decide the claims against VDW, he considered them in some detail. In the course of giving judgement, he expressed a view that the amount that the DP had decided should be paid by VDW was too high and that the amount should not have been more than around £100,000.

TPR is able to serve a Contribution Notice, under the Pensions Act 2004, upon a person associated and connected with an employer (i.e. an employer who is obliged to provide a final salary pension to its employees past and/or present) where (amongst other things) tPR is of the opinion that the person was a party to (or knowingly assisted in) an act or deliberate failure to act and where the main purpose or one of the main purposes of it was to prevent recovery of the whole or any part of a debt due to the pension scheme. tPR is required to act reasonably.

VDW was Bonas' parent company. Its only client was a company in the VDW group. Bonas was loss making and entirely reliant upon VDW's support. VDW decided to withdraw that support and Bonas went into Administration. The assets of the company were immediately sold to another VDW group company incorporated by VDW for that purpose.

TPR relied on three acts in support of its claim: walking away from the pension scheme without openly engaging with the Trustees of the scheme or TPR; minimising the sum paid by VDW for the assets of the business; and retaining the business while avoiding ongoing liabilities.

It was clear, from the evidence, that VDW had taken professional advice and had considered the possibility of contacting tPR to seek advance clearance from tPR. It had also considered the possibility that tPR may use its Moral Hazard powers against VDW as a result of the sale. VDW had chosen not to seek clearance. The DP were in doubt that VDW took a calculated and deliberate risk in relation to the use of tPR's powers and had a purpose of minimising the amount that it paid into the scheme by failing to consult with creditors and by selling the business assets to a subsidiary without properly marketing the business for sale. Mr Justice Warren noted that there was no obligation to contact tPR or the Trustees but concluded that there could be a deliberate failure to do something even where there is no obligation to do it.

Mr Justice Warren considered that the liability imposed under a Contribution Notice could not be more than the amount that had been lost by the scheme as a result of relevant act or failure to act and that the amounts to be imposed on persons under Contribution Notices were intended to be compensatory and not a penalty. Therefore, if it was the case that the employer would not have been able to pay the debt to the scheme, had the act or failure to act not occurred, then there would be no loss. In the case of Bonas, the loss to the scheme was the amount that it would have received in its insolvency had the assets been sold a higher market price.

Mr Justice Warren considered whether the cessation of the business of Bonas, causing the non-payment of future contributions to the scheme, could be said to be an act preventing payment of the debt to the scheme. He considered that it did not have this effect, it merely caused the debt itself to increase.

Mr Justice Warren's views do not have to be followed in the Upper Tribunal. However, if this is the view that the Upper Tribunal takes in future then the threat of a Contribution Notice may have less impact as a deterrent to others contemplating the same type of arrangements as VDW. It would appear that the most that tPR could require a person to contribute to the scheme, in the event of a sale at an undervalue, is the amount that it should have paid in any event, reduced further where there are other creditors that would have shared the additional proceeds of sale. Such persons will therefore be dissuaded from applying for clearance in advance of the event since the price attached to clearance is likely to be higher than the amount payable under a Contribution Notice.

Mr Justice Warren was of the view that a Financial Support Direction ("FSD") could be issued, in some cases, in order to recover additional funds or support for the Scheme. An FSD can be issued where the employer has insufficient assets to pay half of the debt to the scheme but an associated and connected person could pay the balance. That person could be required to provide support to the scheme e.g. payment, a guarantee, a charge over assets etc. The effect of this is to ensure that an underfunded scheme has access to all of the value in a group of companies. If Mr Justice Warren is correct then a party to a deliberate attempt to cause detriment could not be penalised for this but merely required to provide compensation to the scheme for its actual loss whereas a company that merely finds itself in a position of wealth, whilst the employer is not, without any deliberate act or intention to cause detriment to the scheme, may be required to support the scheme up to the full value of the debt due from the employer.

No Surrender

In Peoples Phone Ltd –v- Theophilos Nicolaou [2011] EWHC 1129 (Ch) the High Court held that the supervisor of an Individual Voluntary Arrangement could not conclude the IVA and thereby prevent a potential creditor ("P") from participating in the final dividend, where P's entitlement was the subject of court proceedings yet to be determined.

P was a landlord who had entered into a Deed of Surrender that released the debtor from liabilities under the lease. However, P was seeking rectification of the deed on the grounds that it was not intended that liability for rent arrears would be released.

The supervisor took the view that the question of whether P's claim was valid was to be considered at the time of the distribution and at that time there was no debt due under the terms of the Deed of Surrender.

On hearing P's application to reverse or vary the supervisors' decision, the Court considered that it should be adjourned and the rectification application decided in the first instance. In the event that the Deed of Surrender was rectified, P's status as a creditor would be reinstated from the date of the Deed of Surrender and P would therefore be entitled to a dividend.

Meanwhile, in Re WW Realisation 1 Ltd (In Administration) [2010] EWHC 3604, the Court held that a distribution could be made to secured creditors without any further provision being made for liabilities that may be payable as an expense of the administration unless such claims were notified to the administrators within 28 days of further letters being sent to potential claimants.

The decision followed an application for directions made by the applicants as administrators (under paragraph 63 Schedule B1 of the Insolvency Act 1986) and liquidators (under section 168(3) Insolvency Act 1986). The administrators had already sent letters to landlords and local authorities inviting them to submit claims as expenses of the administration.

Anti-Social Administration Orders

An application was made for an administration order in relation to a social club on the grounds that it was a company under paragraph 111(1A) of Schedule B1 of the Insolvency Act 1986.

The Court held that the club was not an unregistered company and could not be the subject of a winding-up order. The application for an administration order was then refused.

Social clubs will have to turn to their constitution where the business needs to cease and the club needs to dissolve.

Understanding Employers

On 18 May 2011 Jobcentre Plus, R3 and the Insolvency Service entered into a Memorandum of Understanding. This was an extension of an existing voluntary partnership between the three bodies.

The purpose of the partnership is to ensure cooperation and sharing of information between the organisations and development of joint practises. The intention is to assist Jobcentre Plus in providing a service to redundant employees and to actively support Insolvency Practitioners by having experts on hand to answer questions and deal with employee queries. Insolvency Practitioners will be encouraged to give "early warning" of potential redundancies to Jobcentre Plus.

It will be for R3 to communicate to Insolvency Practitioners the practise to be followed.

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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