UK: Re Brelec Installations Limited - Falied CVAs and Undistributed Assets - The Continuing Story

Last Updated: 23 October 2000
Article by Stephen York

In the last few years the courts have frequently been asked to look at issues arising on the termination or failure of voluntary arrangements, in particular, what effect a subsequent insolvency procedure has on a VA and what happens to the trust assets held by the supervisor on termination.

In Re Brelec Installations Limited these issues came before the Vice Chancellor. Here, although the company had made the agreed contributions to the supervisors, management accounts evidenced that, within six months of the start of the arrangement, it was trading at a loss, so that the continuing contributions were being made at the expense of the post-arrangement creditors. This was a breach of three express terms of the VA - (1) that the company was to pay contributions from "profits"; (2) that it was to pay ongoing liabilities of the Crown creditors; and (3) that it was not to incur credit other than in the ordinary course of business.

The company was subsequently placed into creditors’ voluntary liquidation and the supervisors applied to court for directions as to whether the monies they held were held on trust for the CVA creditors or were available for creditors in the liquidation.

The liquidator looked to the specific terms of the VA and argued that:

The failure to pay ongoing liabilities, make contributions from "profits" and provide monthly management accounts meant a ‘failure’ of the arrangement. On the wording of the proposal, this obliged the supervisors to issue a certificate of non-compliance and therefore the arrangement had automatically terminated.

The supervisors had no discretion to allow the VA to continue because the word "shall" in the VA meant that they had a positive obligation to distribute the funds they held at the date of the failure of the arrangement and then petition for the company’s winding up.

Monies paid by the company to the supervisors before the failure were held on trust for the VA creditors, but monies paid after the ‘failure’ of the arrangement could not be retained on trust for CVA creditors and therefore belonged to the company in liquidation.

The court rejected these arguments and held:

The question of whether a VA has failed (and if it has, what is to happen to any trust assets), depends on the terms of the particular arrangement.

Express breaches of the terms of this VA did not automatically bring the VA to an end, but merely enabled the supervisors to issue a certificate of non-compliance once a failure had occurred.

The express wording in the conditions to the proposal specifying that the supervisors "..shall issue a certificate of non-compliance" was permissive rather than mandatory. In the judge’s view it meant no more than "shall have power" to issue a certificate.

Even if the arrangement came to an end on the basis of its express terms, it did not follow, (in the absence of a specific term requiring such allocation), that subsequent contributions had to be treated as held by the supervisors for the benefit of the company.

The liquidator’s only remedy in such a situation may be for him to commence wrongful trading proceedings against the directors and to consider invoking the antecedent transaction provisions of the Insolvency Act 1986.

The Hon. Mr Justice Blackburne stated that proposals are often put together with some haste, with modifications being made at a meeting of creditors, and that in practice proposals are often clumsily worded. The court’s approach must be to construe the terms of the VA in a practical fashion to achieve the purpose of the arrangement. He held that a "failure" within the meaning of the terms of the proposal here did not of itself cause the arrangement to terminate. That only occurred if the supervisors took the formal step of issuing a certificate of non-compliance.

The judge emphasised the purpose of the instalment payments. It was plain that the contributions were paid by the company to the supervisors and held by them for the benefit of CVA creditors. On that basis, to say that the monies were held on anyone else’s behalf was wholly inconsistent with the company’s intention when the contributions were made. Although leave to appeal was readily given by the Vice Chancellor, lack of funds in the liquidation prevent an appeal to the Court of Appeal on the issues raised.

Summary

Mr Justice Blackburn VC stated that his judgment arises from the interpretation of the terms of the particular proposal. Another judge may have interpreted the VA terms differently. It is, however, clear following Brelec that a breach which entitles a supervisor to terminate an arrangement does not have the effect of terminating the trust unless the supervisor takes positive action, as envisaged by the arrangement, to bring both the arrangement and the trust to an end.

Whilst it is worth noting the court’s practical approach to the interpretation of proposals, it is clearly preferable to include clear, comprehensive, express terms in them dealing with the effect of subsequent insolvency both on the arrangement and on any trust attaching to any undistributed monies.

The law in this area, in our opinion, remains unclear and unsatisfactory. Earlier decisions in this area appear to be contradictory, and the decision in Brelec is explained as being arrived at on the basis of the particular terms of the proposal. Pending any appeal court decision, it does therefore seem that, where any dispute may arise as to the construction of the terms of a proposal and there has been breach of its terms, the safe course is for supervisors and/or liquidators to apply to court for directions before making a distribution to creditors. This will avoid later claims or proceedings and avert complaints about misconduct to disciplinary bodies.

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.

For further information please contact Jeremy Bennett (Insolvency), Tim Pope (Insolvency) or Duncan Haymes (Insolvency)

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