UK: Insolvency Litigation: Recent Cases And Issues - August 2017

The Court of Appeal has confirmed that a term could not be implied into a conditional fee agreement between a liquidator and solicitors, and that the solicitors would only be paid out of recoveries made. However, the liquidator was not liable for the fees because of a common understanding between the parties. We cover this, and other issues affecting the insolvency and fraud industry, in our regular update:

Liquidator not liable for fees despite wording of CFA

The Court of Appeal in Stevensdrake Limited v Stephen Hunt and Stephen Hunt as Liquidator of Sunbow Limited [2017] has held that a term could not be implied into a conditional fee agreement (CFA) between a liquidator (Hunt) and solicitors (Stevensdrake) acting on his behalf, and that the solicitors would only be paid out of recoveries made, as this contradicted an express term in the CFA to the contrary.

Despite that, Hunt was held not liable for those fees as there was clear evidence of a shared common understanding, acted on by both parties, that payment would only be made out of any recoveries.

Background

The full details of the background to this case can be seen from our coverage of the first instance decision in which the court held that there was a necessary and implicit term in the agreement between Stevensdrake and Hunt that payment would be made on a recoveries basis only. Stevensdrake appealed.

The Court of Appeal, allowing the appeal in part, held there was no justification for going outside the terms of the CFA and making it subject to contrary terms founded on other agreements which may have been made. The CFA was a short, coherent and comprehensive agreement clearly imposing a responsibility for payment regardless of recoveries that worked perfectly well without the need for any implied term.

As per the Supreme Court decision in Marks and Spencer plc v BNP Paribas Securities Services Trust co (Jersey) Ltd [2015], a term will only be implied into a contract if:

  • It does not contradict any express term in the contract - the term sought to be implied did.
  • It is necessary to give business efficacy to the contract - it was not as the CFA worked perfectly well without it.
  • It is so obvious that it 'went without saying' - that was not the case here as it was contradicted by an express term of the contract.

The Court of Appeal concluded that it did not matter how strong the contemporaneous evidence was, it is a cardinal rule that no term can be implied into a contract if it contradicts an express term of that contract. Under the CFA, personal liability for payment by Hunt arose once "success", as defined, was achieved and so was an immediately enforceable liability, regardless of whether any recovery had been made.

However, the court went on to uphold the finding at first instance that there was a shared common understanding that the fees would be paid from recoveries and that Hunt would not be personally liable for any shortfall. An estoppel by convention arose. There was ample evidence in the correspondence between the parties of a shared common understanding and of it being communicated, shared and acted upon by both parties to the CFA. It would be unconscionable for Stevensdrake to resile from the parties' shared common understanding as Hunt would undoubtedly have withdrawn his instructions from Stevensdrake and found solicitors prepared to do the work on a recoveries only basis.

Comment

It is of course very common for professionals to be engaged in insolvency cases on the basis that payment of fees will be made from assets recovered into the insolvent estate. This decision is therefore a good overall result in that it recognises this principle, which is widely accepted in the industry.

Insolvency practitioners should, however, ensure that any arrangements re payment of fees and disbursements are clearly and accurately set out in the engagement terms or any CFA, rather than in an informal agreement. Unless the evidence is as clear cut as in this case - and each case will be fact specific on this point - arguing estoppel by convention will be difficult and costly and so is best avoided.

Settlement agreement applies to all claims arising from individual's employment, but not to claims arising out of his obligations as a director

In the case of Officeserve Technologies Limited (in liquidation) and another v Anthony-Mike [2017], the High Court was asked to consider whether a settlement agreement (the Settlement Agreement) entered into between a company (Officeserve) and its former director and employee (AM) applied to claims against AM arising out of his obligations as a director, as well as claims by AM arising in relation to his employment. In the event that it did so apply, the court was then asked to consider whether the Settlement Agreement was void under section 127 of the Insolvency Act 1986 (IA 1986).

Background

AM was a former director and employee of Officeserve as well as an 80% shareholder in it. Officeserve acquired two companies with the intention of expanding its business. Payment in relation to those acquisitions was delayed in part and Officeserve began to suffer financial difficulties before the outstanding payments were made. In respect of those outstanding payments a statutory demand for some £3.7 million was issued, followed by a winding up petition.

A review of Officeserve's finances was then undertaken by members of the board. That review highlighted significant expenditure committed by AM which, they alleged, was related either to AM's personal affairs or to matters unrelated to the business. AM's employment was terminated shortly thereafter.

Officeserve and AM entered into the Settlement Agreement which provided (among other things) for AM to transfer 8.325 million ordinary shares (comprising his 80% shareholding) as directed by Officeserve for nil consideration. AM also agreed to further provisions (such as returning company property) and those provisions, along with the share transfer, were expressed in the Settlement Agreement to be in full and final settlement of:

  • his employment claims and any other claims AM may have arising out of his employment or its termination, his holding of office or any connected matter; and
  • any claims Officeserve may have against AM in connection with or arising from his employment.

In both cases the release covered known and unknown claims.

Prior to execution of the Settlement Agreement, a winding up petition had been presented in relation to Officeserve, with the winding up order being made after its execution. The liquidators applied for declarations that AM had misapplied monies in his capacity as director of Officeserve and that certain payments made to him were void under S127 IA 1986, and an order that AM repay the sum of approximately £535,000.

AM argued that the Settlement Agreement had compromised any claims that Officeserve could make against him; it acted as a total bar to any future claims of any sort.

The liquidators argued that the Settlement Agreement only covered claims arising in relation to AM's employment and not to claims against him arising out of his actions as a director. If the Settlement Agreement did include 'director' claims it should be void under s127 IA 1986 and the court should not exercise its discretion to validate the agreement.

Decision

The court held that the Settlement Agreement only compromised any employment claims AM may have against Officeserve.

The ordinary and natural meaning of the words used was to release AM from any claims connected with or arising out of his employment. None of the evidence before the court supported AM's position that the Settlement Agreement released him from any claims connected with or arising out of his actions as a director. On its true construction the Settlement Agreement did not protect AM against the claims being made against him in these proceedings.

The court went on to confirm that if its decision on the Settlement Agreement was wrong, the Settlement Agreement would be void under s127 IA 1986 in any event. If the Settlement Agreement did operate to release AM from any liability for the liquidators' claims - or to create an enforceable promise not to sue on them - it would be caught by s127 IA 1986.

S127 IA 1986 works to void any disposition of a company's property that is made after the commencement of winding up proceedings to ensure that property is available for distribution to creditors. 'Property' is wide enough to include money, things in action and obligations arising in relation to property. The court held that the release of contractual rights, such as a debt by a creditor company in favour of the debtor, will constitute a disposition of the property of the company within the meaning of s127 IA 1986.

The Settlement Agreement did not release AM from his obligations to Officeserve in his capacity as a director. Even if it did, the settling of Officeserve's claims against AM as a former director would be a disposition of property and the Settlement Agreement would therefore be void. The court also went on to say that it would not exercise its discretion to retrospectively validate the Settlement Agreement; it would not be in the interest of Officeserve and its creditors to do so.

Comment

While the primary focus of this case was whether the Settlement Agreement, on its terms, applied equally to 'employment' and 'director' claims, the decision provides some helpful guidance on whether the settlement of a company's claims against a former director would be a disposition of property and therefore void under s127 IA 1986.

Floating charge valid even where company has no (un-charged) assets at time of creation

The Court of Appeal has recently confirmed that whether or not a company has assets when a floating charge is created is irrelevant to its validity and that an administrator can be properly appointed under such a charge.

Background

In Saw (SW) 2010 Ltd and another v Wilson and others [2017], a loan was advanced in 2007 by a lender (CHL) to a company (the Company) secured by fixed and floating charges. The security included a prohibition against giving any other security without CHL's prior written consent. The charge also contained a clause providing that if any of the Company's property subject to the floating charge was encumbered in any way without CHL's prior consent, the floating charge would automatically take effect as a fixed charge.

In 2008, the Company entered into a further loan with another lender (NBS) granting security by way of a debenture and a legal charge. CHL's prior consent was not sought or obtained with the effect that CHL's floating charge automatically crystallised.

The Company experienced financial difficulties and NBS purported to exercise its right to appoint an administrator under its debenture pursuant to paragraph 14 of Schedule B1 (para 14) to the Insolvency Act 1986 (IA 1986). NBS obtained CHL's consent to do so as required under paragraph 15 of the same provision.

The administrators' appointment was challenged by shareholders and creditors of the Company. They argued that the appointment was not valid because:

  • The debenture was granted without the prior written consent of CHL with the result that CHL's floating charge crystallised when the debenture was granted.
  • This meant the debenture itself could not constitute a floating charge because when it was granted the Company did not have any property to which it could attach and the directors of the Company had no power to acquire any property for the Company to which it could attach in the future.
  • The debenture was not enforceable at the time of the administrators' appointment as there remained no property of the Company to which it could attach.

The Court of Appeal's decision

The Court of Appeal held that the administrators were validly appointed.

The court considered the provisions of para 14 and s251 IA 1986 together with the leading cases examining the nature of floating charges, namely re Yorkshire Woolcombers Association Limited [1903] and re Spectrum Plus Limited [2005]. It held that whether a charge created a qualifying floating charge had to be assessed at the time of its creation and did not depend on a company having uncharged assets when it was created or the power to acquire uncharged assets in the future. It is a matter of construction of the instrument itself and, on its true construction, the debenture manifested the essential characteristics of a floating charge.

The court also found that the argument that the floating charge was unenforceable when the administrators were appointed, again because there were no assets to which the charge could attach, was misconceived. It is not a statutory requirement that there are assets available to enforce against. A floating charge simply has to be enforceable i.e. any condition precedent to enforcement has been satisfied and there must be a debt for which it stands as security.

Further, the court found that although there was neither authority nor academic writing precisely on the point, such as there was tended to affirm the view that the effect of the automatic crystallisation of CHL's earlier floating charge affected only the priority, rather than the validity, of the later NBS debenture.

Comment

The case confirms that so long as the consent of prior ranking creditors has been obtained, and the charge has become enforceable, administrators can be appointed pursuant to a second or subsequent qualifying floating charge, regardless of the issue of available assets on creation. Whether there will be any ultimate benefit in the appointment will depend on whether there is an excess of realisable assets once prior charge holders have been paid and administrators' costs and expenses met.

Binding articles of association prevents sole director from appointing administrators

The Court of Appeal in Randhawa and anor v Turpin and others [2017], held that administrators were not validly appointed by a sole director where the company's articles of association required a quorum of two directors for board meetings. The Duomatic principle, which allows members of a company to reach an agreement without the need for strict compliance with the formal procedures, could not rectify the position as one of the two registered shareholders was a dissolved company which was unable to consent to a change in the articles of association.

Background

The shareholders of BW Estates Ltd (the Company) were S who held 75% of the shares and B, a dissolved company, which held 25% of the shares. B was never removed from the Company's register of members. S was the sole director and acted on the instructions of his father who was the beneficial owner of S's shares.

The Company suffered financial difficulties and S purported to appoint the defendants as joint administrators of the Company pursuant to paragraph 22(2) of Schedule B of the Insolvency Act 1986 (para 22(2)). The claimant creditors of the Company challenged the validity of that appointment as the Company's articles of association provided for a quorum of two for both a directors' and shareholders' meeting.

The defendants argued their appointment was valid under the Duomatic principle (Re Duomatic Ltd [1969]), which provides that where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.

First instance decision

The High Court held that the administrators' appointment was valid as there had been a consistent course of conduct under which S (and his father) had informally sanctioned the exercise of all the directors' powers by a single director and that operated as an informal variation of the company's articles. The consent or acquiescence of the only existing registered shareholder (S) was sufficient to trigger the Duomatic principle. It held the shares held by the dissolved B could be disregarded.

The claimants appealed.

Court of Appeal decision

Before the Court of Appeal the defendants also argued that on B's dissolution, the Company became a single member company for the purposes of s381(1) of the Companies Act 2006 (CA 2006) allowing S alone to constitute a valid quorum for a members' meeting. The Duomatic principle then operated to validate the appointment of the administrators.

The Court of Appeal held that the defendants' appointment was invalid.

It found that the Company had never become a single member company. The meaning of the word 'member' in the Companies (Tables A to F) Regulations 1985 Sch 1 para 40 and relevant parts of the CA 2006 was a matter of construction in the particular context. Here, 'member' included any member registered on a company's register of members whether alive or dead, in an insolvency procedure or dissolved. B remained on the Company's register of members despite its dissolution. It was appropriate to construe 'member' as encompassing the member's successor in title where the member was dissolved, rather than to deem the company transformed into a single member company upon the dissolution.

The court's findings in relation to the Duomatic principle were:

  • The assent of all the shareholders who have the right to attend and vote at a general meeting of a company is required and not simply those shareholders who may be available at the time. B was still a registered member (albeit it was dissolved) and had not been given notice of, nor had it assented to, the appointment of the defendants. B could not simply be ignored.
  • The principle cannot be engaged where one of the registered shareholders is a corporation which no longer exists as it requires the consent of all registered shareholders and a dissolved company is incapable of consenting.
  • On dissolution, B's property passed to the Crown and the Crown had not consented to the appointment.
  • The Company's articles of association could not be amended by a course of conduct by S (and his father) without invoking the Duomatic principle and which again failed for the reasons above as all registered shareholders had not consented.

Further, the court also held that that there was no separate, inalienable right of a company's director to appoint administrators pursuant to para 22(2), which could not be restrained by the quorum provisions in the articles. Directors had to act in accordance with a company's articles by which it had agreed to be bound.

Comment

The court found that the director's resolution to appoint was incurably invalid. The articles were not followed and were not capable of being informally varied. Checking the resolution passed to appoint them against the articles of association will help ensure there are no inaccuracies and that administrators are validly appointed.

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
Events from this Firm
21 Sep 2017, Seminar, London, UK

Has Cloud replaced traditional outsourcing models? We will compare cloud to outsourcing, consider whether they have effectively become the same thing for many solutions and assess some of the advantages and disadvantages of each model.

3 Oct 2017, Seminar, London, UK

Join us over breakfast for our third retail-focused seminar.

17 Oct 2017, Workshop, Birmingham, UK

This practical workshop will take in-house counsel through the life of a brand, providing guidance on issues which regularly arise.

 
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.