Where a company is subject to an insolvency process the acting insolvency practitioner must ensure the correct treatment of creditors; otherwise his decisions may be subject to challenge.
Two recent cases illustrate how this can throw up difficult issues for IPs and for creditors in establishing their claims.
Voting at a creditors' meeting according to the amount of a debt that is 'ascertained' - HMRC v Portsmouth City Football Club (in Administration)
Portsmouth FC, which was in administration, entered into a company voluntary arrangement, which was approved by creditors in June 2010. To enter a CVA the proposal must be approved at a meeting by at least 75% by value of the company's creditors.
HMRC claimed over £35m of which the administrator disallowed £13m. The total of £35m would make HMRC a creditor for 25.2% of the debts and therefore able to block the CVA proposal. HMRC favoured a winding up of the company.
The disallowed parts of the claim related to unpaid PAYE and NICs on certain payments to players. At the date of the administration these claims had not been raised by HMRC. After that date and before the CVA proposal meeting a formal assessment was issued for the tax, which HMRC argued made the debt due, as a tax assessment gives rise to an obligation to pay unless the taxpayer makes a successful appeal. In making the assessment HMRC treated the payments as a sham scheme for tax avoidance and assessed PAYE on the full amounts disregarding any part that might be justified.
The insolvency rules allow a creditor to vote in respect of a debt for an unliquidated amount of any debt whose value is not ascertained. For the purposes of voting (but not otherwise) this is based on a value of £1 unless the chairman agrees to put a higher value on it. The chairman valued the disputed part of the HMRC debt at £1. The chairman's decision on any matter under this Rule is subject to appeal to the court by any creditor or member of the company. HMRC appealed.
The court did accept that there is an underlying liability on an employer who fails to account for PAYE and NIC before any formal claim is made by HMRC and before any formal assessment. If and to the extent that the payments were shams there was a claim accordingly. The nature of the claim is therefore one which relies on payments being treated as shams, and may fail to the extent that that was wrong. That value would have to be determined in some sort of inquiry. So both the basis of the claim, and its quantum, could not be treated as certain as at the date of the administration, and the question becomes whether that claim thus described is unliquidated or unascertained.
The court concluded that the Revenue debt was not unascertained in the sense that while the amount is disputed, its determination is not dependent on anything other than an inquiry within the context of a piece of litigation. However, it did conclude that the debt fell to be treated as unliquidated.
The fact that the claim had not been asserted as at the date of the administration indicated to the court that HMRC did not feel it was of a definable amount at that date, and the circumstances of its emerging indicated an intention to make the claim as high as possible and leave it to the taxpayer to challenge it. Neither the court nor the Chairman knew the material on which it was based, but the fact that it apparently encompassed all the payments made, with no apparent acknowledgment that payments might have some value, supports the view that that is the basis on which the claim was ultimately made. As at the date of the administration there was no articulation even to that extent. As at that date there was no more than an underlying claim (which the court assumed for these purposes to exist) for an amount which depended on establishing a sham and then, if that were established, perhaps determining the real value of image rights for which players were "paid". The court was of the view that in those circumstances the creditor cannot "fairly" put a figure on the claim, or at least cannot "fairly" claim the whole amount due to be his debt.
The court was keen to make clear that it was not saying that any debt which can only be finally established by litigation is as an unliquidated debt for the purposes of the Insolvency Rules. There will be many disputed debts, both as to liability and as to amount, which will not fall to be dealt with as an unliquidated debt but which the chairman will have to allow and mark as disputed. The uncertainties as to the quantification of the debt seemed to the court to make it unliquidated for present purposes. HMRC could, in fact, have removed this difficulty if they had served an assessment, which itself gives rise to a defined liability, but they had not done that by the date of the administration which is accepted as being the relevant date for these purposes
Creditors' claims which become time barred during the administration - Leyland Printing Company Limited (in Administration) v Leyland
The companies entered into administration in May 2002, and were still in administration in 2010, several administrators having been in office over this period.
Due to the long running nature of the administration, directions were sought from the court as to the proper treatment of creditors' claims and, specifically, whether the administrator or subsequent liquidator of the companies can and should accept any claims that have become statute-barred since the making of the administration orders for the purpose of proving and receiving a dividend from the realisations that have been made during the course of the administrations
It was discovered that there appeared to be a problem with the status of creditors' claims given the longevity of the administrations. Essentially, apart from one unsecured creditor of LPC, who had legal proceedings pending at the commencement of its administration, all other creditors' claims had become statute-barred under the provisions of the Limitation Act 1980, by, at the latest, May 2008.
It would appear that one of the administrators or his staff had mistakenly confused the effect of liquidation (which, for the purposes of the Limitation Act, causes time to cease running as against creditors' claims at the date of the commencement of the winding up) with an administration (which, under the law applicable to pre-Enterprise Act administrations, does not). Further, no formal acknowledgment of any creditors' claims appears to have taken place which could have operated to stop time running for Limitation Act purposes.
The court agreed with the administrator that the approach of distributing the surplus assets (after satisfaction in full of the claim of the creditor who had commenced litigation) amongst the companies' shareholders would produce an unfair result, and would represent an unexpected windfall for the shareholders. However, the court could see no proper alternative to this course. The court would not allow the fact that members and creditors had not objected, or responded negatively, to the course proposed in the Administrators' latest Progress Report as their agreement to the admission to proof of statute-barred claims. Whilst the administrator indicated, in the Progress Report, his belief that creditors' claims should be accepted, he acknowledged that he could not determine that issue himself, and that the matter must be resolved by the court.
With regret, the court concluded, that there was no justification for the administrator admitting to proof any claims that have become statute-barred since the making of the administration orders. In the absence of consent from the shareholder or shareholders of each company, neither the administrator, nor a subsequent liquidator, of that company can or should accept any of the statute-barred claims for the purpose of proving and receiving a dividend from the realisations that have been made during the course of the relevant administration.
The court did however agree to afford the administrator an opportunity to communicate the terms of this judgment and Order to the shareholders of each company; and to invite them to confirm in writing, whether or not they consented to the admission to proof of the statute-barred claims. If all of the shareholders in either company did so consent, then the administrator was to be at liberty to re-apply for his discharge from office and, for authority to agree the claims of, and to make payments to, the companies' preferential and unsecured creditors. Notwithstanding that order the court agreed that distributing the companies' surplus assets amongst the companies' shareholders, and without regard to the claims of all of the companies' creditors, would produce an unfair result since it would appear to be through no fault on the part of the companies' creditors that their claims had become statute-barred.
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.