Restructuring Business

Transcription

1 Restructuring Business Autumn 2014 An Industrial Revolution Changes to the Industrial & Provident Society regime Also inside this issue: Pre-packs after the Graham Review All change for SMEs? IFT Turnaround Legal Adviser of the Year The future of insolvency litigation funding Taking the strain out of distraint Brief case reports and much more

2 Foreword A Season of Change We re into Autumn now, and there is very much that feeling of a shift in the air. In many ways, Autumn represents a new start; that whole back to work feeling after the holidays and long dry days of Summer. It is certainly a new start for the United Kingdom following the result of Scotland s referendum. Having one of the largest restructuring teams of any law firm in Scotland, we will be watching the devolution of more powers to the Scottish Parliament with interest. The extent of these powers is as yet unknown, although the Scotland Act 2012 will introduce various tax changes for Scotland as well as power for the Scottish Government to be able to borrow from the capital markets and issue bonds. The detail of the new Scotland Bill will be decided by the party(ies) that form the next UK Government in May It is clear, however, that Scotland s currency, monetary policy, financial services regulation and EU membership will continue. In the wider economy, the debate about when interest rates will rise in the UK continues in earnest, with a couple of members of the Bank of England s Monetary Policy Committee recently voting for interest rate rises, leading to speculation this may not to be too far off. The European Commission s European Economic Forecast for Winter 2014 cautions that, although Europe s economic recovery is expected to spread and gain strength, it remains fragile. The formal insolvency market continues to be quiet and we have recently seen the number of administrations fall to record low levels. We have, however, been fortunate to have acted in recent months on some high profile restructurings, including the restructure and sale of one of the UK s largest care home operators, European Care Group, the CVA of retailer Mamas and Papas and the administration of the law firm Davenport Lyons. We have also been busy acting for a number of private equity firms and hedge funds on several high profile loan portfolio sales. The change for us is that work is now coming from a variety of different stakeholders. There has also been some change to our Restructuring team. We are pleased to announce the promotion of Nick Gavin-Brown to partner in our London office. Nick specialises in complex restructuring assignments, particularly in the Care and Education sectors. James Cameron has also been promoted to partner, leading our Manchester team. James has strong relationships with the major banks and invoice discounters, and also specialises in complex pension restructurings and schemes of arrangement. Jamie White is re-locating back to the North and, whilst stepping down as Head of Restructuring, will be taking up a new role heading up our Restructuring offering in the English regions. Autumn is a season of change, and we are seeing lots of it across our practice. Some changes have already been implemented; for example to the Industrial & Provident Society regime (see An Industrial Revolution ), whereas some changes are on the way; for example to the SME landscape (see The Small Business, Enterprise and Employment Bill all change for SMEs ). We must wait and see how other changes take effect; for example how the insolvency profession will take on board the recommendations of the Graham Review (see Pre-Pack Administrations following the Graham Review ); and how insolvency litigation will be funded once the exemption from the Jackson Reforms expires next April (see Insolvency Litigation how will it be funded now? ). Autumn is also the time of our annual Restructuring and Insolvency Conference, held at The Brewery in London on 7th October (see our website for further details), and we hope to see many of you there. All in all, it promises to be an interesting and hopefully busy season, and there is plenty to look forward to. We hope you enjoy this edition of Restructuring Business and, as ever, your support and feedback is welcomed and appreciated. Steven Cottee Partner London T: M: E: steven.cottee@pinsentmasons.com

3 Contents Pinsent Masons Restructuring Business Autumn Pre-Pack Administrations following the Graham Review Tom Pringle reviews the recommendations of the Graham Review. The Small Business, Enterprise and Employment Bill all change for SMEs? Sharon Smith summarises some of the key changes of interest set out in the Bill. An Industrial Revolution Tom Pringle considers the impact of changes to the Industrial & Provident Society regime. Insolvency Litigation how will it be funded now? Gemma Kaplan considers the temporary exemption from the Jackson Reforms and the future of insolvency litigation funding. Taking the Strain out of Distraint Serena McAllister looks at how the Taking Control of Goods Regulations 2013 have finally abolished the remedy of distraint. Brief Case Here various members of the team look at key cases over the past few months, focusing on the implications for restructuring professionals. Horizon Watch A look at recent and upcoming dates involving legal developments. Diary Room Our latest guest to get quizzed is London based restructuring solicitor Andrew Robertson. Team News Our usual round-up of team news across the UK. Magazine editor: Sharon Smith While we take every care to confirm the accuracy of the content in this edition, it is not legal advice. Specific legal advice should be taken before acting on any of the topics covered. 1

4 Pre-Pack Administrations following the Graham Review Tom Pringle outlines the Graham Review recommendations. 2

5 What has happened? The Graham Review into Pre-pack Administration (the Graham Review ), led by Teresa Graham, published its report on 16 June 2014 and its recommendations were immediately adopted by the Department for Business, Innovation and Skills. The Graham Recommendations The Graham Review set out the following six recommendations: 1. Pre-pack pool: before the sale, connected parties (i.e. those involved in the management of the insolvent company) should approach a pre-pack pool, being a group of independent experienced business people in relevant sectors, to disclose details of the proposed transaction for the pool to consider and then issue a statement on the reasonableness of the proposed sale. 2. Voluntary viability review: connected parties should complete a viability review statement on the newly pre-packed company, setting out why they believe the new company will remain a going concern for at least 12 months. Should the company not survive for those 12 months, a future insolvency office holder can take this into account when considering whether there are claims against directors and when submitting their conduct report to the Secretary of State. 3. SIP 16 redraft: following its last revision in November 2013, where changes were made to introduce greater transparency to creditors on pre-packs, SIP 16 should be redrafted to incorporate the recommendation about connected party sales. 4. Marketing: the marketing of the business to be pre-packed should comply with six principles of good marketing and any deviation from these principles should be brought to the attention of creditors. The business should be independently marketed as widely as possible for an appropriate period. If internet marketing is not used, this should be justified. 5. Valuations: SIP 16 should be amended, so that valuations should be carried out by a valuer holding professional indemnity insurance. 6. Monitoring: the monitoring of SIP 16 statements (which should include the pre-pack pool member s opinion and the viability review) should be undertaken by the industry s recognised professional bodies, not the Insolvency Service. Who does this affect and how? The recommendations of the review will impact on all those involved in pre-pack administrations. The effect of the recommendations may mean that pre-packs, particularly those involving sales to connected parties, become a less attractive option. Next steps? Compliance with the recommendations is voluntary at this stage, and some comfort may be taken from the fact that the Government has, so far, resisted calls for legislation. Indeed, Teresa Graham states in the report that she is a de-regulator at heart. The Graham Review commented that the Government should only legislate as a last resort if the voluntary reforms are not successfully taken up and implemented by the market. However, as recommended by the Graham Review in order to encourage such take up of the recommendations, provision has been included in the Small Business, Enterprise and Employment Bill (currently passing through Parliament) for such a backstop power to be granted to the Secretary of State. This would enable regulations to be made to impose requirements and conditions on sales by administrators to connected parties. The most positive aspect of the Graham Review is the conclusion that pre-packs (if used well) are an effective restructuring tool, with businesses being more likely to survive following a pre-pack than a business which has been sold out of a company trading in administration. As Graham commented, in many circumstances a pre-pack administration is the best or perhaps more fairly the least worst outcome for all stakeholders in a business including all classes of creditors. It does appear now that change is inevitable, even though many in the insolvency profession may consider such change to be largely unnecessary. Relevant background The Graham Review (commissioned by Vince Cable) was undertaken on the back of increasing concerns that pre-packs included a lack of creditor involvement, sales at undervalue to connected parties, conflicts of interest by insolvency practitioners, and allegations that pre-packs caused economic harm by allowing inefficient businesses to carry on trading. The aim of the recommendations of the Graham Review is to address these concerns through a self-regulation regime. It is not envisaged that the court will take a role in this regulation. As the conclusion to the review says: The decision on whether or not to attempt a pre-pack deal is a commercial one and best left to the insolvency practitioner Courts act best where there is a dispute between two or more parties, but informing unsecured creditors ahead of the business being sold through a pre-pack could destroy value in the company, making this an unpalatable option. Effectively opening up the pre-pack to ex-ante unsecured creditor scrutiny could jeopardise the pre-pack itself, destroy value and prevent the rescue of the business. (Court involvement ex-post by contrast would create too much uncertainty, thereby jeopardising deals). Tom Pringle Associate London T: M: E: thomas.pringle@pinsentmasons.com 3

6 The Small Business, Enterprise and Employment Bill all change for SMEs? Introduced as a Bill to help make the UK the most attractive place to start, finance and grow a business, the Small Business, Enterprise and Employment Bill is ambitious in scope and heralds significant change to the SME landscape. Sharon Smith takes a look at some of the key changes of interest to restructuring and insolvency professionals. 4

7 What has happened? Announced by the Queen on 4th June 2014 as a Bill to help make the UK the most attractive place to start, finance and grow a business, the Small Business, Enterprise and Employment Bill (the Bill ) has begun its march through Parliament. Who does this affect and how? Provisions in the Bill will impact on businesses, creditors and insolvency professionals. Amongst the many themes covered by the Bill, and in addition to provisions aimed at improving access to finance for small and medium sized businesses, there is an extensive package of measures designed to modernise and streamline insolvency procedures, with a view to reducing unnecessary administrative burdens and costs, and providing more consistent outcomes for stakeholders in insolvency cases, including better returns to creditors. There are also provisions to strengthen the insolvency regulatory regime (so as to increase confidence in the overall insolvency framework) and extend the rules on director disqualifications (to ensure directors are held more accountable for their actions). Next steps? The Bill still has some way to go in its passage through Parliament. We understand the intention is for the Bill to come into force before the May 2015 general election, however this might be overly ambitious considering the size and scope of the Bill, which is large and far-reaching. Although the words Small Business are included in the title, and there is a clear primary purpose to support the growth of, and improve access to finance by, small (and medium sized) businesses, the Bill arguably extends well beyond this. It will be interesting to see how the Bill progresses over the next several months and what amendments are made to it in its journey to enactment. Relevant background The following summarises some of the key changes set out in the Bill, which are likely to impact on restructuring and insolvency practitioners. Office holder actions New powers for Administrators to bring wrongful and fraudulent trading actions The Bill will amend the Insolvency Act 1986 (the Act ) to provide administrators with the same right as liquidators to bring wrongful and fraudulent trading actions. The idea is that this will enable more actions to be brought where justified and save unnecessary costs (of having to put companies into liquidation first). New powers for Administrators and Liquidators to assign causes of action The Bill will amend the Act to allow administrators and liquidators to assign to third parties certain causes of action which only they can currently bring under the Act. Relevant causes of action include those relating to wrongful or fraudulent trading, transactions at an undervalue and preferences. The office holder will be permitted to assign the proceeds of such action as well as the right of action itself; effectively the office holder can assign the civil recovery claim to a creditor (or group of creditors), former director or any other third party. It is anticipated that a market would develop in assigned civil actions and this would increase the number and frequency of actions being taken against delinquent directors (and thereby act as a deterrent to any future improper behaviour by them). Changes to insolvency procedures Powers exercisable without sanction of creditors for routine actions in liquidation and bankruptcy The Bill will amend schedules 4 and 5 of the Act, so that a liquidator or trustee in bankruptcy may exercise all powers set out in those schedules without the prior sanction of creditors, the court or the Secretary of State. Abolition of meetings of creditors and contributories The Bill will amend the Act to abolish physical meetings of creditors (and in corporate insolvency) contributories as the default means of decision making in insolvency procedures, in circumstances where an office holder seeks a decision from creditors (or contributories). Where an office holder seeks a decision about an issue arising in the course of insolvency proceedings, it will only be possible for a creditors (or contributories ) meeting to be called if this is demanded by a certain proportion of creditors (or contributories). Instead, a new deemed consent procedure will be introduced, pursuant to which the proposed decision will be deemed consented to by the creditors or contributories, as long as a certain proportion of them don t object. Ability for creditors to opt not to receive certain notices The Bill will amend the Act to provide that creditors may opt out of receiving certain notices that the Insolvency Rules 1986 require an office holder to send to creditors. Extension of Administrator s term of office The Bill will amend the Act to increase the period by which creditors may consent to continue administration proceedings to one year (from six months), thereby reducing the need for court involvement. Prescribed part payment to unsecured creditors The Bill will amend the Act, so that an administrator may distribute a prescribed part to unsecured creditors without the permission of the court (reducing the need for court involvement). Sales to connected persons Following publication of Teresa Graham s Review on Pre-Pack Administration, and the Government s response to it, the Bill will 5

8 amend the Act to reserve power to the Secretary of State to make regulations to prohibit pre-pack sales to connected parties, unless certain conditions are met (which could include, for example, prior consent of the creditors). Small Debts The Bill will amend the Act to provide that creditors who are owed only a small amount by an insolvent entity will no longer be required to submit a proof of debt to participate in the distribution of assets. Trustees in Bankruptcy The Bill will amend the Act to provide that, on the making of a bankruptcy order, the Official Receiver will become the trustee in bankruptcy automatically. If the court thinks fit, it may appoint the supervisor of any individual voluntary arrangement of the bankrupt in place of the Official Receiver. Individual Voluntary Arrangements A debtor or any of his creditors has 28 days to challenge the approval of an IVA. Currently, this 28 day period begins on the date that the report of the creditors meeting (called to consider the IVA proposal) is made by the chairman of the meeting. The Bill will amend the Act, so that this 28 day period will begin instead on the date that the creditors approve the IVA proposal. Progress reports in voluntary winding up The Bill will amend the Act to provide that progress reports must be given to creditors where the liquidator changes within the first year of a creditors voluntary winding up. Regulation of the Insolvency Profession Regulation of insolvency practitioners The Bill will amend the Act to provide for a greater number of recognised professional bodies ( RPBs ) to regulate insolvency practitioners ( IPs ). Power to establish single regulator of IPs The Bill will provide a power for the Secretary of State to introduce (via regulations in due course) a single regulatory body for IPs. Directors Disqualification The Bill will amend the Company Directors Disqualification Act 1986 to: provide that the court may, on an application for a disqualification order, take into account conduct of the director in relation to an insolvent overseas company; enable disqualification orders to be made against persons who influence the conduct of a disqualified director; require an office holder to submit a report on the conduct of a director in all cases, even if the office holder does not consider the director unfit to hold office; and extend the period in which the Secretary of State may apply for a disqualification order against a director of an insolvent company to three years (from two years). Access to Finance Assignment of receivables The Bill will confer power on the Secretary of State to make regulations so as to be able to invalidate bans on assignment of receivables in supply of goods or services contracts. It is anticipated that this will facilitate receivables financing transactions for SMEs (which is good news for asset based lenders as well as SMEs). Provision of credit information and referrals to other lenders The Bill will enable the Treasury to make regulations to require designated banks to provide information about their SME customers to designated credit reference agencies ( CRAs ) and to require such CRAs to provide such information to other finance providers. Cheques presented by electronic means The Bill will update the Bills of Exchange Act 1882 to provide that cheques (and other instruments such as bills of exchange and promissory notes) may be presented for payment by electronic imaging of both faces of the cheque (instead of by presenting the physical cheque or instrument). Sharon Smith Senior Practice Development Lawyer Manchester T: M: E: sharon.e.smith@pinsentmasons.com 6

9 An Industrial Revolution Tom Pringle looks at the significant changes to the Industrial and Provident Society regime that have come into force in recent months. How has the updated and consolidated regime governing these bodies with Victorian origins affected lenders, the insolvency profession and the individuals sitting on their boards? 7

10 Dear Dairy Industrial and Provident Societies could not enter administration Until April of this year, this remained the case and, other than receivership, liquidation was the only insolvency procedure available to such societies. What has happened now? What s in a name? Community Benefit Societies, Co-operative Societies and Registered Societies Readers may recall that back in 2009, the High Court considered the status of receivers of an Industrial and Provident Society which was registered under the Industrial and Provident Societies Act 1965 (the 1965 Act ) (In the matter of Dairy Farmers of Britain Limited [2009] EWHC 1389 (Ch)). Unlike the wider provisions of the Insolvency Act 1986 (the Insolvency Act ) relating to winding up, Schedule B1 of the Insolvency Act ( Schedule B1 ), governing administration, applies to companies registered under the Companies Acts (although it also applies, with modifications, to LLPs and general partnerships). The Enterprise Act 2002 (which introduced the Schedule B1 regime), specifically provided (at s255) that the Treasury may order that CVA and administration provisions of the Insolvency Act will apply to: 1. Industrial & Provident Societies; and 2. Friendly Societies (whether registered or not). However, in 2009 no such order had been made. Therefore, in the Dairy Farmers case, the High Court concluded that an Industrial and Provident Society was not bound by Schedule B1, and that Industrial and Provident Societies could not go into administration. The court also decided that, although a secured creditor could appoint receivers over the assets of an Industrial and Provident Society (other than in Scotland), these could not be deemed to be administrative receivers (but rather receivers and managers). On 1 August 2014: section 1 of the Co-operative and Community Benefit Societies and Credit Unions Act 2010 (the 2010 Act ) replaced section 1 of the 1965 Act; and the Co-operative and Community Benefit Societies Act 2014 (the 2014 Act ) came into force. Prior to this, on 6 April 2014, a number of statutory instruments emanating from the 2010 Act came into force, with wide ranging effects on Industrial and Provident Societies, the most relevant of which for the purposes of this article are discussed below. The 2014 Act was designed to consolidate the changes to the 1965 Act regime, particularly those following from the 2010 Act, into a single piece of legislation. In the words of the Law Commission, the aim of the consolidation is to reproduce the effect of the current legislation, while putting the law into a more logical, accessible, clear and modern form. The headline result of this is that the title of Industrial and Provident Society is now obsolete, and equivalent societies registered after 1 August 2014 are now to be registered either as a Community Benefit Society or a Co-operative Society. Together, these are known as Registered Societies. Existing Industrial and Provident Societies are also now known as Registered Societies, and are now deemed to be registered under the 2014 Act. Administration now available The key change to readers of Restructuring Business is likely to be the fact that, on 6 April this year, the catchily named The Industrial and Provident Societies and Credit Unions (Arrangements, Reconstruction and Administration) Order 2014 (SI 2014 No 229) came into force. This meant that, for the first time, Industrial and Provident Societies and Credit Unions registered under the 1965 Act became subject to the provisions of the Companies Act 2006 and the Insolvency Act relating to Administration, Company Voluntary Arrangements and Schemes of Arrangement. But not to Registered Social Housing Providers While permitting the Treasury to make an order applying the Insolvency Act to Industrial and Provident and Friendly Societies, the Enterprise Act made it clear that no such order can be made in relation to such societies that are a private registered provider of social housing, or those registered social landlords under the Housing Act 1996 or the Housing (Scotland) Act

11 Summary of FCA Guidance on key requirements for registration as a Community Benefit Society or a Co-operative Society* Any such society must: be carrying on a business, industry or trade; have at least 3 members (unless it has only two members who are both registered societies); provide rules that make provision for all of the matters required by s14 of the 2014 Act; and use a permitted name. Community Benefit Society The business must be run primarily for the benefit of people who are not members of the society, and must also be in the interests of the community at large. Usually charitable or philanthropic in character. Interest on share and loan capital It is unusual for a community benefit society to issue more than nominal share capital (for example, one 1 share per member). Where it does issue more than nominal share capital or where members make loans to the society, or both, any interest paid must not be more than a reasonable rate necessary to obtain and retain enough capital to run the business. Neither profits nor assets can be distributed to members. They must be used to further the objects of the society or for a similar purpose to the main object of the society. On dissolution assets cannot be distributed to members, only to another body with similar objects or used for purposes. Any proceeds of sale of assets should be used to further the society s business activities only. Co-operative Society Formed primarily to benefit their own members, who will participate in the primary business of the society. There should be a common economic, social or cultural need or interest among all members of the co-operative. The business will be run for the mutual benefit of the members. Control of the society lies with all members and is exercised equally ( one member, one vote, rather than being based on financial contributions), with officers elected by the membership. Interest on share and loan capital Where part of the business capital is the common property of the co-operative, members should receive only limited interest (if any) on any share or loan capital which they subscribe. A society may not be a bona fide co-operative if it carries on business with the object of making profits mainly for paying interest, dividends or bonuses on money invested with or lent to it, or to any other person. Profits If the rules of the society allow profits to be distributed, they must be distributed among the members in line with those rules. There should normally be open membership. *Full guidance can be found in the FCA s guidance note at: Although the Treasury has the power to extend the insolvency regimes (that have been extended to Industrial and Provident Societies) to incorporated or registered Friendly Societies, this has not happened to date. Therefore, it remains the case that Friendly Societies are not capable of entering administration or a CVA. However, the FCA confirmed that certain societies which are registered under the 1974 Act (specifically working men s clubs, benevolent societies and specially authorised societies) can convert to become a Registered Society (either a Community Benefit Society or a Co-operative Society) under the 2014 Act. This allows them to take advantage of the benefits of having the status of a corporate body and limited liability of its members (which are already enjoyed by Friendly Societies that are incorporated under the 1992 Act). Open Society Registered Societies become more accountable The corollary of the administration regime being made available to Industrial & Provident Societies, and their becoming more company-like is that their activities and officers are now subject to increased scrutiny. Investigations Registered societies remain governed by the FCA, which retains investigatory powers in respect of the affairs of the societies. The FCA (and its predecessor the FSA) already had some investigatory powers under section 48 of the 1965 Act, although this was limited to obtaining documents and information in certain circumstances. The Co-operative and Community Benefit Societies and Credit Unions (Investigations) Regulations 2014 (SI 2014/574) have increased the FCA s powers to be more akin to the Secretary of State s powers in relation to companies. The safety valve to avoid excessive use of these investigatory powers is that the FCA can only exercise these powers to the extent necessary to maintain confidence in registered societies. 9

12 And still not to Friendly Societies although some forms of societies may convert About Friendly Societies The general concept of a Friendly Society (according to HMRC) is that the membership contributes to a fund to be used for the welfare of the members or for their assistance when in need or distress. the term can cover societies with a wide range of differing activities and objectives including social purposes. A long list of the activities of registered Friendly Societies is set out in Schedule 2 to the Friendly Societies Act 1992 (the 1992 Act ). Friendly Societies can either be: registered but not incorporated (under the Friendly Societies Act 1974 (the 1974 Act )); registered and incorporated (under the 1992 Act);or unregistered. To clarify, historically, a Friendly Society could be registered either under the 1974 Act or under the 1992 Act. Under the 1974 Act, societies other than Friendly Societies could also be registered, including cattle insurance societies, benevolent societies ; working men s clubs, old people s homes societies (for the purpose of providing homes for people over fifty (!)) and specially authorised societies. Since the 1992 Act however, no new societies could be registered under the 1974 Act. The 1992 Act created a new structure under which a Friendly Society could be incorporated as well as registered. These societies must include the word limited in their names. An existing registered Friendly Society may convert to an incorporated society, although is not obliged to. An incorporated Friendly Society may undertake the same activities as a registered (but unincorporated) Friendly Society, however may also establish subsidiary companies. Registered Friendly Societies are registered by the FCA (previously FSA) and registration can provide a society with a formal structure for its operations. However, a Friendly Society may also be unregistered ; if it calls itself a Friendly Society and provides for the welfare of its members, but has not applied for registration pursuant to either the 1974 Act or the 1992 Act. Disqualification of board members With effect from 1 April 2014, board members of Registered Societies (as well as credit unions) now fall under the auspices of the Company Directors Disqualification Act 1986 (the CDDA ). This means that directors of Registered Societies (whether described as such, or as board members, trustees, committee members or any other title) are now subject to the same disqualification regime for misconduct in office as the directors of a limited company or the members of an LLP. If a disqualification order is given against such an individual (or they agree to a disqualification undertaking), they will be prohibited from serving on the board or committee of a Registered Society for the period set out in the order. However, they can also be disqualified as directors of companies and members of LLPs as a result of their conduct on the committee of a Registered Society. All board or committee members should therefore ensure that they take their responsibilities just as seriously as they would as a Companies House registered director of a body corporate. This could come as a culture shock to societies, such as social clubs, that have until now been run on a more relaxed and informal footing. Tom Pringle Associate London T: M: E: thomas.pringle@pinsentmasons.com 10

13 Insolvency Litigation how will it be funded now? A temporary exemption from the Jackson Reforms? The largest shake-up of the Civil Procedure Rules 1998 came into effect on 1 April 2013 on the implementation of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 ( LASPO ), following a review by Lord Justice Jackson, commonly referred to as the Jackson Reforms. The Jackson Reforms aimed to promote access to justice and crack down on the rising cost of civil litigation (thus protecting public funds and the wider public interest). However, whilst the overriding objective in the Civil Procedure Rules was amended to ensure that cases are dealt with justly and at proportionate cost, the most controversial change brought about by the reforms must be the removal of the ability to recover a Success Fee and after the event ( ATE ) insurance fees from the losing party in civil litigation cases. A temporary exemption was provided for insolvency litigation until April 2015, however what happens when this expires? With only six months to go until the expiry date, Gemma Kaplan considers the rationale for the exemption and the future of funding for insolvency litigation. 11

14 There was at least temporary good news for insolvency practitioners ( IPs ) when the UK Government announced that insolvency litigation would receive a two year exemption from the Jackson Reforms, until April This exemption was provided in order to allow time for the insolvency profession, as well as key creditor groups such as HMRC, to review alternative procedures. So why should insolvency litigation be exempt? It is common for insolvent companies to have claims against third parties, which could result in greater returns to creditors. However, in insolvency situations, a company has no money and frequently few assets to enable those claims to be brought. The financial burden and risk for IPs is often further heightened by improper behaviour by directors, who might intentionally dissipate assets or put them in the names of third parties, leaving it difficult for such assets to be realised for the benefit of creditors and leaving no funds available to investigate directors conduct or to fund litigation. Following the Conditional Fee Arrangements Order 1995, conditional fee arrangements ( CFA s), were made available for insolvency litigation cases. Abolishing the recoverability of Success Fees from the losing party removes a significant incentive for IPs to litigate on behalf of creditors. Without CFAs, IPs would generally not be in a position to commence litigation and nor would they be likely to obtain legal advice. CFAs themselves work because the Success Fee Uplift received by claimant solicitors who are successful in their cases compensates for the deferred payment of fees and disbursements. For those cases where the claim is unsuccessful, the IP would normally rely on ATE insurance to pay the winning party s costs. Absent direct funding, IPs will not be able to afford to pay those costs from the company s assets yet another reason why ATE premiums and their recoverability are vital to the future of insolvency litigation. If IPs and their legal advisers cannot recover any Success Fee from the defendant, that fee would have to be recovered from any damages the court awards, reducing the sums payable to creditors (which, in almost all corporate insolvencies, will include HMRC). Creditors would therefore be faced with a dilemma: either not to approve the IP litigating at all, potentially enabling a rogue director to escape scot-free and reducing their likely return; or to authorise the pursuit of the case, however potentially losing a significant amount of any damages recovered. Those in the insolvency industry believe that, when faced with rogue directors, the threat of having the Success Fee and ATE recovered from them in addition to damages is a strong negotiating tool encouraging settlement before trial. In turn, settlement results in reduced legal costs, lower IP fees and ultimately higher returns for creditors. The concern is that without the threat of recoverable costs and in the absence of litigation funding (which tends only to be available to high value claims), directors will be more comfortable in the knowledge that most creditors won t be able to afford a lengthy court battle. Applying the in the public interest test, returns to creditors rank highly in this category and it goes without saying that insolvency litigation is a viable tool for office holders in maximising returns. Should the exemption be removed, only a few large cases involving wealthy, motivated creditors are likely to go ahead. Smaller, well-run businesses and taxpayers would lose out, to the benefit of irresponsible directors (who would have no deterrent not to behave the same way again). Another worthy point often overlooked is that IPs are officers of the court and do not act on their own behalf. They act on behalf of creditors and, as such, only pursue meritorious cases and have a duty to minimise costs. Where are we now? Many in the insolvency industry had expected the Government to use the two year exemption period either to put forward alternative proposals for insolvency cases or extend the exemption indefinitely. Following the temporary exemption, two working groups were established in 2012, neither of which identified alternative funding options. It would seem that the only viable solution therefore is for a permanent exemption to be provided. R3 has launched a press and parliamentary campaign to call for a permanent exemption for insolvency litigation from the Jackson Reforms. However, it was reported on 15th September 2014 that the Government has indicated that it does not propose to extend the period of the insolvency exemption and that the Jackson Reforms will apply to insolvency litigation from April No further details have been released at the time of going to print, however if true, this indication will take many in the industry by great surprise. R3 s campaign for permanent exemption R3 advocates that the criticisms of civil litigation do not apply to insolvency litigation, which already achieves Jackson LJ s aims of working in the public interest (by returning money to creditors, (including businesses and taxpayers), as well as by deterring and punishing blameworthy behaviour by directors) and protecting public funds (because it is often public funds that benefit through returns from an insolvent estate to HMRC). R3 maintains that, in assessing the impact of the Jackson reforms, the Government did not consider the impact on creditors who benefit from successful insolvency litigation (including HMRC and businesses). 12

15 As part of their lobbying, R3 commissioned a report on the impact of the reforms, published by Professor Peter Walton (University of Wolverhampton). The report is a key part of R3 s campaign and the research was supported by the ACCA, ICAEW, ICAS, IPA, JLT Specialty, Moon Beever and Moore Stephens. Its findings are discussed below. Risks and likely implications if the exemption is not extended findings of R3, ICAEW R3 estimates that ending the exemption for insolvency litigation could cost creditors more than 150 million per year. Professor Walton s report found that most of the money currently recovered through insolvency litigation would be lost if the changes were extended to cover these cases. At particular risk would be those cases in which less than 100,000 is at stake (estimated at 78% of all insolvency cases), because the costs of litigating would be disproportionate to any amount recovered. Professor Walton also found that removing the insolvency litigation exemption would remove the incentive to settle before court in the vast majority of cases brought by IPs. Professor Walton s report also concludes that there are no viable alternatives to the current regime that are capable of achieving the same level of returns to creditors and ensure those guilty of misconduct do not benefit at the expense of creditors. The majority of claims currently realise 50,000 or less. Whilst the quantum of these claims are small, they are high in number and would be unlikely to be pursued without CFAs and ATE insurance because the costs involved in these cases would be too high. The current system encourages a large majority of cases to settle. However, most IPs consider that, without a permanent exemption for insolvency litigation from the Jackson reforms, fewer litigation cases will be brought and fewer of those cases will settle. Additionally, it is expected that of those cases that do settle, they will settle for less than they would have done had a permanent exemption been available. It is generally accepted that HMRC is the largest unsecured creditor in formal insolvencies and has become the single largest beneficiary from actions brought by insolvency practitioners against directors and third parties. However, the benefit to HMRC (and thus to UK tax payers) is not mentioned in the Government s consultation Proposals for Reform of Civil Ligation Funding and Costs in England and Wales Implementation of Lord Justice Jackson s Recommendations (November 2010). R3 s research demonstrates that CFA-backed insolvency litigation claims are valued at approximately 300m per year, and realise m per year, of which 50-70m relates to monies owed to HMRC. Furthermore, ICAEW has warned that the UK s reputation with the World Bank could be at risk unless the Government permanently carves out insolvency litigation from the Jackson Reforms. Quote ICAEW Director, Professional Standards, Bob Pinder The UK is recognised by the World Bank as having one of the most competitive and successful insolvency environments in the world because of its speed and returns to creditors. Insolvency litigation already works in the public interest and protects the tax payer, which are some of the main aims of Lord Justice Jackson s reforms in the first place. If the current exemption of insolvency litigation is not made permanent, then it could severely damage the current effective process and affect our standing with the World Bank. What are the options for alternative funding? Professor Walton s Report or previously The Walton Report identified four alternatives: (1) third party funding, (2) damages based agreements and (3&4) an assignment of claims under s.213 and s.214 of the Insolvency Act 1986 (the Act ). Third party funding does not work well in the overall insolvency litigation market. IPs criticise third party funders for taking a large percentage of the proceeds of claims (sometimes up to 50%) and in practice very few cases are taken on. Funders have been accused of cherry picking those claims which look like they will be the easiest wins, generating the best outcome for funders. Damages based agreements ( DBAs ) became permitted in the UK under The Damages-Based Agreements Regulations DBAs are contingency fee arrangements where lawyers fees are contingent on success and calculated as a percentage of damages awarded. Lawyers can receive potentially higher returns for successful cases than they would have got under CFAs (and some lawyers are being tempted with very high percentage realisations). However, as lawyers fees are calculated by reference to sums recovered, if a case is lost (and no sums are recovered), there are no fees due to the lawyers. DBAs also carry a risk of liability for lawyers for adverse costs orders if the case is lost. R3 have found no evidence, even anecdotal, that DBAs are being used at all in insolvency litigation. Professor Walton s report found 13

16 that DBAs are only being suggested by IPs where the claim is weak (and not attractive to solicitors). Where the claim is strong and consequently lawyers would do better out of the case than they would under a CFA, it appears that IPs would prefer to use a CFA to maximise the realisation for the estate. The uncertainty surrounding DBAs has caused them to be unpopular generally and in particular in the context of insolvency litigation where CFAs are still seen to work reasonably efficiently. With respect to assignment of claims under the Act, the Small Business, Enterprise and Employment Bill (which is currently making its passage through Parliament) includes a provision granting new powers for office holders to assign to third parties (including, for example, creditors) certain causes of action (including in respect of transactions at an undervalue and preferences, as well as for wrongful and fraudulent trading) that only they can currently bring under the Act when a company goes into administration or liquidation. The office holder would be able to assign not only the cause of action itself but also the proceeds of such an action. The rationale behind this provision is that creditors might find it more attractive to take an assignment of these claims, rather than funding them whilst they remain under the control of the IP. It is anticipated that a market in assigned civil actions would develop, and this would increase the prospect of actions being taken more frequently against directors where there has been misconduct. IPs would understandably be concerned, however, to show that they have taken appropriate measures to ensure that any claims they assign are meritorious and genuine. What next? There do not appear to be any viable alternatives to the current insolvency litigation regime, which are capable of achieving the same level of return to creditors and ensuring that directors guilty of delinquent behaviour continue to be brought to justice. With a lack of viable alternative proposals and time fast running out until the temporary exemption expires, it would be surprising if the exemption for insolvency litigation is not extended. However at the time of going to print, there is reported indication that the exemption will not be extended, and if this is the case, the landscape for insolvency litigation will change dramatically and heated controversy will remain. Glossary ATE (or After the Event insurance) is a kind of insurance taken out after the actionable event has occurred and protects a claimant from having to pay certain legal costs. In the event the claimant loses the case, ATE insurers undertake to pay the defendant s costs. The insurance may also cover the claimant s disbursement costs and other expenses. Generally for ATE insurance taken out before 1 April 2013, the premium was not paid by claimants, but was recovered from defendants, in cases which the defendants lost. CFAs (or Conditional Fee Arrangements ) or Success Fees are a means of funding litigation, usually entered into by claimants, under which the lawyer agrees not to take a fee unless the claim is successful. If the claim is successful, the lawyer will charge his base costs, together with an uplift (known as a CFA Uplift or a Success Fee Uplift ). Previous to the Jackson Reforms, Success Fees were payable by the losing party in addition to the ordinary legal costs of the winning party. Since 1 April 2013 however, (without an exemption) Success Fees are no longer payable by the losing side; if a Success Fee is charged now, it must be paid by the winning party, typically out of damages recovered. The Success Fee can be up to 100% of the basic fee. DBAs (or Damages Based Agreements ) are a method of funding cases, involving contingency fee arrangements, where a lawyer s fees are contingent on the lawyer s success in the case, and are calculated as a percentage of damages awarded. With DBAs, claimant lawyers can increase their fees beyond what is recoverable from defendants. DBAs have been available for use in civil litigation cases since 1 April Gemma Kaplan Associate London T: M: E: gemma.kaplan@pinsentmasons.com 14

17 Taking the Strain out of Distraint As debtors struggle with difficult economic times, commercial landlords and certain government agencies, including HM Revenue & Customs, always had the comfort that they could turn to the self-help remedy of distraint (or distress), allowing them to seize and sell a debtors goods as a quick and easy way of recovering arrears without the necessity of obtaining a court order. The common law remedy of distraint has historically had a bad press, with complaints from debtors that it was heavy-handed and archaic, so it is surprising that this area of the law has managed to escape major reform until now. The passing of the Taking Control of Goods Regulations 2013 on 6 April 2014 has finally abolished the remedy of distraint and brings enforcement laws kicking and screaming into the 21st century. Serena McAllister highlights the notable changes brought about by the new legislation and looks at whether it was all worth the wait? 15

18 Reform Taking Control of Goods Regulations 2013 The laws of distraint have been calling out for radical reform for some time. Having made their first appearance in legislation in the Magna Carta in 1215, when land barons were permitted to levy distress over King John s property, the principles upon which distraint laws are based have not altered drastically over the past 800 years. Having their roots in medieval practice and more tailored to levying distress over cattle than retail goods, it is not surprising that these laws require modernisation, not least because of their conflict with human rights laws, but also to bring conformity and clarity to an otherwise complicated area of law. The path of reform has, however, not been an easy one. The review of civil enforcement laws was first recognised as early as the 1980 s when the Law Commission issued a report in This was followed by an independent review of bailiff law by Professor Jack Beatson in 2000, which identified the need for rationalisation and simplification of the enforcement process. In 2007, the Tribunals, Courts and Enforcement Act first pushed at the door to abolish distraint and it has taken a further 7 years for these provisions to be fully implemented. On 6 April of this year, The Taking Control of Goods Regulations 2013 enacted the primary legislation and brought into effect a number of revised rules which were first identified in Professor Beatson s report. The legislation has controversially abolished the remedy of distraint in its entirety, introducing the new enforcement processes (1) Taking Control of Goods ( TCG ) for the recovery of debts, and (2) Commercial Rent Arrears Recovery ( CRAR ) for the recovery of commercial rent arrears. These changes apply equally to England and Wales, however the distraint laws are still valid in Northern Ireland. Distraint in Scotland was abolished some years ago and this remains the position across the border. Key Changes So what are the key changes? The new procedures are comprehensive and this note provides an overview below. Taking Control of Goods The introduction of a notice period is one of the more notable reforms. The Regulations now require the authorised enforcement agent ( EA ) to give 7 clear day s notice of his intention to take control of the debtor s goods (excluding Sundays, Bank Holidays, Good Friday and Christmas Day). This period can be reduced by application to court providing for a shorter notice period if the creditor can satisfy the court that the debtor is likely to move or dispose of the goods earlier. The walking possession agreement (an agreement under which a debtor is permitted to retain custody of goods but not remove, dispose or otherwise deal with them pending payment) has been replaced by the controlled goods agreement. The effect of the new form of agreement is the same as the previous, save with the sting in the tail that if a debtor refuses to sign the controlled goods agreement, then the EA can take control of the goods immediately and remove them from the premises With similarities to the old rules, tools of trade are exempt from seizure, however the new regulations have now introduced a financial limit, so that only items necessary for use by a debtor personally in his trade or employment with an aggregate value of 1,350 or less will be exempt from seizure. This will be a important change for those looking to enforce against sole traders, as vehicles and other valuable equipment with a value of more than 1,350 will now be subject to seizure, notwithstanding if this is used and is necessary for the purposes of the debtor s trade. Vulnerable debtors (such as the elderly, disabled and unemployed) are now given additional protection in that EAs will be required to give vulnerable persons adequate opportunity to seek assistance and advice before removing goods; or face forfeiting their fees for enforcement action. With regards to ownership, the new Regulations now provide guidance on the interpleader process, which is the process used to determine ownership of seized goods where a third party makes a claim. The Regulations now place the onus firmly on the third party claimant to start interpleader proceedings, requiring that a prospective claimant make a payment into court of an amount equal to the value of the goods in order to do so, effectively asking them to put their money where their mouth is. There are other less consequential changes however, for the main part, they deal with the practical issues of enforcement. The new Regulations codify: days and times for enforcement (6am-9pm on any day or usual business hours); modes of entry (by door or any usual means of entry ) rather than the typical method of entrance through an open window; a limit on taking control of goods from the date of service of the notice of enforcement (12 months); additional requirements around sale of goods and the provision of notices to the debtor at all of the various stages of the enforcement process. Distraint n. Law, the seizure of someone s property in order to obtain payment of rent or other money owed (Oxford English Dictionary) 16

19 Commercial Rent Arrears Recovery As with taking control of goods, the CRAR also introduced a notice period of 7 clear days prior to a landlord attending on a tenant to take control of goods at the leased premises. The key notable revision is that the new procedure restricts the use of CRAR to only wholly commercial premises and also restricts the recovery to pure rent. Pure rent is regarded to be sums referable only to possession and use of the premises, and will not include service charge, unpaid rates or insurance costs (which is an erosion from the previous position under distraint when landlords could recoup these sums). The Regulations have set a minimum of rent due before CRAR can be used at 7 days rent. This is unlikely to cause any impact on commercial landlords where rent is often paid quarterly. The right for a superior landlord to recover rent from a sub-tenant has also had similar changes under the Regulations, restricting CRAR to the recovery of pure rent only from the sub-tenant and requiring that 14 clear days notice is served by the superior landlord on the sub-tenant prior to it taking effect. Similar changes have been made as to the practicalities of enforcement as with taking control of goods above in relation to timings, modes of entry and notice to sell goods. Taking Control of Goods (Fees) Regulations 2014 The final key reform is the introduction of a new fee structure set out in the above Regulations. Enforcement agent s fees have historically been a matter of some contention; raising complaints from aggrieved debtors as to the level of fees imposed and concerns from creditors as to the lack of certainty. The previous fees were based on The Sheriffs Fees Order 1921, which was widely accepted as not fit for purpose in today s modern enforcement regime. The new fee scale is based on fixed fees for different stages of enforcement, with incentives for debtors to engage and settle the debt as early as possible to avoid costs penalties. The new structure now gives transparency and certainty, so that creditors and debtors are now aware as to potential costs consequences and risks, which will allow them to make more informed decisions. Worth the wait? There is no doubt that the new legislation has brought some welcome long awaited changes and brings conformity to enforcement action, although creditors argue that the element of surprise has been lost, working in favour of the debtor and allowing it to spirit away goods from the premises during the notice period, undermining the Regulations effectiveness. The other school of thought is that the longer notice period gives the debtor a final opportunity to pay, thereby potentially avoiding the seizure process altogether. Commercial landlords, riding on a high from the Games Station decision, have been brought back down to earth by CRAR, which restricts both their ability to take control of goods from tenants and sub-tenants and the amount of lease arrears which they can recover. As a result, we are likely to see an increase in landlords requiring rent deposits to cover their exposure. Where secured lenders are concerned, the new Regulations do little to protect floating charge assets which may be potentially at risk of seizure if not properly protected, with priority handed to the creditor taking control. Taking an optimistic view, the introduction of a longer notice period will give the debtor a final opportunity to pay, which they did not previously have. However, lenders would be prudent to ensure that borrowers engage with them immediately upon notice of enforcement being served on them by a creditor (such as HMRC), as once attendance at the premises is made after the 7 day notice period has expired, it is likely to be too late and secured assets lost. Of wider concern is the financial limit which has been now imposed on tools of trade, allowing more expensive items used in businesses to be exposed to seizure. This may have serious implications and could, in some cases, prevent a debtor trading entirely. Lenders would be well advised to seek legal advice as to how best to protect their position if they believe that any borrowers in their portfolio are at risk. If goods are taken control of prior to the appointment of an insolvency practitioner but before sale, the question of who has priority will be subject to the same rules as for distraint with regards to the timing of seizure and dependent upon whether the controlled goods are taken by a judgment creditor, a landlord or HMRC. Significantly however, given the number of new stages involved in the enforcement process and the introduction of national standards for taking control of goods, there will be more opportunities for insolvency practitioners to challenge an invalid act of taking control of goods and have it declared void if enforcement procedures are not properly adhered to. What next? Now that momentum in enforcement law has gathered, the Ministry of Justice has committed to a post implementation review of the new regulations at 1, 3 and 5 years, which is somewhat of an improvement on the 8 centuries it took previously! Watch this space for updates on how the new rules will play out in practice and whether these reviews will bring about further reform. Serena McAllister Senior Associate London T: M: E: serena.mcallister@pinsentmasons.com 17

20 Brief Case Here various members of the team look at key cases over the past few months, focusing on the implications for restructuring and insolvency professionals 18 While we take every care to confirm the accuracy of the content in this edition, it is not legal advice. Specific legal advice should be taken before acting on any of the topics covered.

21 Contents 20 Fair game administration rent landlords pay-as-you-go Re Game Station Limited (In Administration) (Jervis v Pillar Denton Limited) [2014] EWCA Civ 180 (24 February 2014) 22 Bribe or not, principal still has a claim bribe agency principal claim fiduciary duty FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC Who gets what waterfall priorities subordinated debt statutory interest contributory rule Re Lehman Brothers International (Europe) and others [2014] EWHC 704 (Ch) 24 A debenture disguised as a loan agreement meaning of debenture loan agreement Fons HF (In Liquidation) v Corporal Ltd and another [2014] EWCA Civ Fees: my basic human right receivers fees human rights Barnes v Eastenders Cash & Carry PLC and others [2014] UKSC Court gives permission where consent was not forthcoming administrators sale of assets fixed charge security Rollings (as Joint Administrators of Musion Systems Ltd) v O Connell [2014] All ER (D) Peering into the shadows de facto directors shadow directors Smithton Ltd (formerly Hobart Capital Markets Ltd) v Naggar [2014] EWCA Civ No stand for a former liquidator former liquidator standing challenge to consent order misfeasance Re Mama Milla Ltd (In Liquidation) [2014] EWCA Civ Tracing allowed even when no transaction link liquidator tracing no transaction link Relfo Limited (In Liquidation) v Varsani [2014] EWCA Civ Liquidators protect your documents from disclosure liquidators litigation privilege dominant purpose Rawlinson & Hunter Trustees SA & others v Akers & another [2014] EWCA Civ 136 (20 February 2014) 19

22 Fair game Re Game Station Limited (In Administration) (Jervis v Pillar Denton Limited) [2014] EWCA Civ 180 (24 February 2014) The question of how rent is to be treated in administrations has been the subject of much debate and case law over recent years. The much awaited decision of the Court of Appeal provides clarity on this issue and has been hailed as a victory for landlords. What has happened? In February of this year, the Court of Appeal handed down its landmark ruling in the case of Re Game Station Limited, the collapsed electronics retailer which went into administration in The main issue before the Court of Appeal was how the treatment of rent payable under a lease held by a corporate tenant in administration should be treated; specifically, whether rent is an ordinary provable debt (and should be treated as an unsecured debt) or whether it is an expense of the administration (and should be paid in priority to unsecured creditors). Under previous law, established in the cases commonly known as Goldacre and Luminar, the courts had determined that when rent was payable in advance, no apportionment of rental liability was granted when a corporate tenant entered administration. This had the result that (a) where a rent payment date fell prior to the date of administration, the full amount of rent due ranked as an unsecured debt; and, (b) where a rent payment date fell after the date of administration, the full amount of rent due ranked in priority as an administration expense. In either case, this was, regardless of the period of use of the rented premises by the administrators. The position was considered different to a situation where rent was payable in arrear. In that situation, the administrator or liquidator was to pay the rent as an expense of the administration or winding up for any period during which he retained possession of the property for the benefit of the insolvency process; apportionment of rental liability was thus possible in such a situation. The Court of Appeal in the Game Station case found that the difference in these positions left the law in a very unsatisfactory state. The Court of Appeal overturned the decisions in Goldacre and Luminar and ruled that, where property leased by a company in administration (or winding up) was retained by the office holder for the benefit and use of the administration (or winding up), rent is payable for the period during which the property is so retained by the office holder as an expense of the administration (or winding up) on a pay-as-you-go basis (accruing from day to day), regardless of whether the rent payable date fell prior to, or following, the date when administration (or winding up) began. In practice, where administrators retain rented premises for the purpose of the administration, this is likely to include trading the premises, assigning them to a company which purchases the business, or selling the premises on the open market. Who does this affect and how? The decision will have a widespread impact on insolvency practitioners, landlords, creditors and buyers of distressed businesses. Importantly, this ruling applies equally to liquidations and administrations. It will be interesting to see how, and to what extent, market practices change in response to the decision, including how rental payments will be apportioned in practice. For administrators, there is likely to be a subtle shift in how they plan the business as the timing of rent payment dates has now become tactically irrelevant. For landlords, in some cases they will find their position much improved (for example, in circumstances where three months rent is payable quarterly in advance and the tenant enters administration a day or so following a rent payment date). However on the flip side, (for example, in circumstances where three months rent is payable quarterly in advance and the tenant enters administration a couple of months following a rent payment date), landlords will now be unable to require three months rent payment in advance, which may have cash flow implications for them. Other creditors may find themselves better off or worse off, depending on the circumstances of any particular case. This ruling sees a return to the methodology established by applying the salvage principle, which provides that landlords should receive full value for the property in circumstances where the company in administration uses it for its own purposes. This approach has found favour with landlords who (post the Goldacre and Luminar decisions) had found themselves victims in cases where companies strategically entered administration immediately following a quarterly rent date thereby effectively avoiding having to pay rent for that quarter, even while in possession. This decision has similarities to the flexible or pay-as-you-go approach adopted by Re. Atlantic Computer Systems, which also focused on the degree of use of premises by administrators to produce a fair outcome. It is interesting that the courts now appear to have gone full circle on this issue. 20

23 Next steps? The Court of Appeal refused permission to appeal, and we are not aware of any appeal made to the Supreme Court. Therefore, unless the government enacts legislation to prevent the retrospective effect of this case, landlords who have not been paid for use of a rented property during administration and/or liquidation may take this opportunity to contact administrators/liquidators to attempt to recover such unpaid rent. This is something which should be borne in mind by officeholders entering into any settlement negotiations concerning landlords claims and it would be prudent for officeholders to make provision for any impending claims where possible. Relevant background Historically, the issue of rent payable by a corporate tenant in administration appeared to be settled and the flexible or pay as you go approach was adopted, which was given judicial approval in the leading case of Re Atlantic Computers Systems Plc (No 2) [1990]. This was turned on its head in 2008 when the High Court passed judgment in Goldacre (Offices) Ltd v Nortel Networks UK Ltd and stated that if a quarter s rent (payable in advance) fell due during a period in which administrators were retaining the property for the purposes of the administration, the whole of the quarter s rent was payable as an administration expense. This applied even if the administrators were to give up occupation later in the same quarter. Goldacre) prevented lease liabilities from being administration expenses if they fell due for payment before the administration, even if they covered a rent period during which the tenant in administration made use, and was in occupation, of the leased premises When this issue came before the High Court again in Game Station, the court considered itself bound to follow existing law, however, gave permission for an appeal to the Court of Appeal. This was driven by the facts of the case (under the terms of the lease, rent was payable quarterly in advance, however the Game group entered administration the day following a quarter rent payment date with the rent remaining outstanding) and the consequential frustration of the landlords. Following the Goldacre and Luminar decisions, this had become an increasingly common situation. Landlords felt further aggrieved when a swift sale of the business to a new company in administration meant that the purchaser of the business effectively had a three month rent free period under the leases which they had acquired, to the landlords detriment. The Court of Appeal, in applying the equitable salvage principle in the Game Station case, has effectively determined that the office holder must make payments at the rate of the rent for the duration of any period during which he retains possession of the leased property for the benefit of the administration (or winding up). These rental payments are treated as accruing from day-to-day and are payable as expenses of the administration (or winding up). The duration of this period is a question of fact and is not determined by reference to the timing of rent payment days (whether before, during or after such period) nor, it would now seem, by reference to whether rent was expressed to be payable in advance or in arrear. That decision was followed by the High Court in 2012 in the case of the collapsed nightclub chain Luminar in Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd, when the judge ruled that the same logic (as that applied in 21

24 Bribe or not, principal still has a claim FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45 This Supreme Court decision provides certainty for insolvency practitioners in holding that bribes and secret commissions remain the property of the principal. What has happened? The Supreme Court has held that where an agent received a bribe in breach of his fiduciary duty to his principal, he held that bribe on trust for his principal, meaning that the principal had a claim to it. Who does this affect and how? The distinction is clearly important for insolvency purposes. A principal with a personal claim against the agent for profits would only rank as an unsecured creditor. On the other hand, a principal with a proprietary right of claim would effectively rank in priority to the agent s unsecured creditors. In addition, a proprietary right of claim would enable the principal to trace the profits in equity, for example if the profits had been used to purchase property. Next steps? It is now clear that any profits gained by an agent in the course of his agency, however obtained, whether wrongfully or not, will be the property of the principal held on trust for him by his agent. While the case deals with a rather complex area of law, it has important practical implications for insolvency practitioners. The case brings welcome clarity to an area of law which had lacked both judicial and academic consensus for centuries. Indeed, the president of the Supreme Court, who gave the judgment in this case, had previously come to a contrary decision on the issue. There had been considerable uncertainty over claims made by principals against agents that had breached the no conflict nature of the agent s fiduciary duty to their principals. While it was widely accepted that any profits made by an agent (which resulted from acting in the capacity of agent) would be held on trust for the principal, it was far less clear what the position was in the case where the profits had been wrongfully obtained. In both cases, it was clear that the principal would have a personal claim against the agent equal to the profit gained, but only in the first case would the principal also have a proprietary right of claim. This legal development will be welcomed by insolvency practitioners for the certainty it will bring when such claims are in issue. Relevant background The appellant agent ( C ) appealed against a decision concerning the appropriate remedy available to the respondent investors ( F ) in respect of a secret profit which C had received. While advising F in relation to their purchase of a hotel, C had entered into an agreement with the sellers of the hotel under which C was to receive a fixed commission of 10 million for securing a purchaser. C failed to notify F of that agreement and received the commission when F bought the hotel. F sought to recover the 10 million from C. The Court of Appeal held that C had received the commission on constructive trust for F. 22

25 Who gets what Re Lehman Brothers International (Europe) and others [2014] EWHC 704 (Ch) In this case arising out of the Lehman Brothers administration, the High Court considered the waterfall application of subordinated debt and statutory interest, and the contributory rule in administration and liquidation. What has happened? The administrators of Lehman Brothers International (Europe) ( LBIE ) and its shareholders made a joint application to the High Court seeking clarification on a number of important issues resulting from the administration process. The shareholders of LBIE were two other Lehman Group companies (LB Holdings Intermediate 2 Limited ( LBHI2 ) and Lehman Brothers Limited ( LBL )). The facts of this case were unusual as LBIE was an unlimited company and there was likely to be a surplus once all unsubordinated, provable debts had been paid. In this case, the High Court considered the priority of subordinated debt, statutory interest, and the contributory rule in administration and liquidation. Who does this affect and how? The decision refined the ranking of waterfall payments and the court confirmed that subordinated debt ranks below not only provable debts, but also statutory interest. This will be of interest to creditors because it provides clarity as to where they will rank in the distribution of payments. In addition, the court held that currency conversion claims will rank as a non-provable debt and will be paid after all provable debts and statutory interest. The court confirmed that members of an unlimited company are liable to contribute to the assets for the payment of statutory interest as well as non-provable liabilities. However, shareholders in unlimited companies will take comfort from the fact that the court held that the contributory rule will only apply when a company enters into liquidation and not in a distributing administration. Next steps? Although it is unusual to have a surplus available in an administration, this decision has provided guidance on a number of issues relevant to insolvency practitioners, creditors, and shareholders alike. In particular, foreign currency claims have been recognised as a non-provable debt, which provides grounds for such creditors to submit a claim. In addition, the decision illustrates the issues that lie behind unlimited liability and whether it is commercially sensible to operate under such a structure. Relevant background Lehman Brothers was one of the most high profile casualties of the financial crisis and its European trading company, LBIE, went into administration in September Compared to the rest of the group, LBIE was relatively well capitalised and its administrators were left with a surplus to distribute after repaying all general unsecured, unsubordinated creditors. The main purpose of the application was to determine the claims that could be made against the surplus before any return was made. The court also considered whether interest accrued during the administration should be provable or payable in a subsequent liquidation. Priority of subordinated debt Central to the application in this case were the claims that could be made against the assets of LBIE after payment of all its general unsecured, unsubordinated creditors. In Re Nortel Companies, the Supreme Court provided guidance on the order of priority for payment in a liquidation of a company and in an administration being as follows: 1. fixed charge creditors; 2. expenses of the insolvency proceedings; 3. preferential creditors; 4. floating charge creditors; 5. unsecured provable debts; 6. statutory interest; 7. non-provable liabilities; and 8. shareholders. LBHI2 and LBL submitted that their liability as shareholders should be limited to proved debts. Unsurprisingly, this did not hold much water. The court took the view that shareholders of an unlimited company are required to contribute, without limit, to the liabilities of the company and that this extends to all debts. Indeed, it was held that the liability of the shareholders should extend to provable debts, statutory interest and non-provable liabilities. Contributory Rule The contributory rule prevents a contributory (including a shareholder with unpaid share capital) from recovering any claims they have as a creditor against a company in liquidation. Both LBL and LBHI2 had unsecured claims against LBIE. LBHI2 also had a claim as a subordinated loan creditor. The shareholders were concerned that if LBIE was to be placed into liquidation, they would be required to pay as contributories under the contributory rule as per section 74 of the Insolvency Act This would prevent the shareholders from recovering a claim until their obligations as contributories were discharged. Although it was accepted that the contributory rule would apply when the 23

26 company went into liquidation, the question arose as to whether the same rule applies when a company is in administration and distributes assets. The court held that the power only arises in liquidation and that no debt can be called from the shareholders when the company is in administration. Calculating Interest The rules provide that in a distributing administration, statutory interest is payable from the start of the administration until the debt is paid. However, in a liquidation, statutory interest is paid for the period of the liquidation. Contractual interest for the period before administration is provable but is not provable when the administration begins. The court considered whether the shareholders were liable to make contributions for the purposes of paying the interest. It was held that creditors are entitled to seek contractual interest as a non-provable liability and would rank immediately after claims for statutory interest that accrue during the liquidation. Foreign Currency Claims The court also had to deal with the issue of claims that had been converted from a foreign currency. The position is that the debt is converted into sterling on the date the administration or liquidation starts. This is useful when dealing with waterfall payments but it can lead to a loss of value if the exchange rate drops. It was unclear whether such claims constituted non-provable debts payable after statutory interest. It was held that such claims are non-provable and rank behind statutory interest. This refined the order of payments following the Nortel decision and provides clarity on the order of payments in an administration or liquidation. A debenture disguised as a loan agreement Fons HF (In Liquidation) v Corporal Ltd and another [2014] EWCA Civ 304 The Court of Appeal gave a broad meaning to the term debenture. What has happened? The Court of Appeal held that a loan agreement could constitute a debenture as it is an instrument which creates and acknowledges a debt. Who does this affect and how? This case is of wide ranging application to all stakeholders in a corporate debtor. The decision gave a wide interpretation to the term debenture (and, it would seem, a wider interpretation than that construed under legislation) and is important in the context of contractual interpretation. The decision may provide some comfort to lenders that, where the definition of Shares (in a share charge or security agreement) includes the term debenture, a shareholder loan agreement is likely to form part of the secured assets. Next steps? This judgment should be borne in mind when drafting a share charge or any other security document which contains a charge over shares. Borrowers should take care with the definition of Shares in any security document where security is taken over shares and consider whether certain assets should be specifically excluded from the definition. Following the Court of Appeal decision, the City of London Law Society ( CLLS ) raised concerns about the consequences of the decision on the loan markets, and in particular whether this meant that all loan agreements should be characterised as regulated investments under the Financial Services and Markets (Regulated Activities) Order 2001 (which is expressed to cover debentures as well as instruments which create and acknowledge debt). However, the Financial Conduct Authority responded that it did not consider that the court s decision has altered the regulatory scope of the Financial Services and Markets regulations. This is good news for loan market participants (particularly those who are not authorised financial institutions) in providing clarity that the case has not extended the scope of these regulations. Nevertheless, the decision has left the law surrounding the term debenture in a rather confused state, as the term now appears to have different meanings under case law and legislation. Relevant background In 2007 and 2008, Fons HF (in Liquidation) ( Fons ), as shareholder of Corporal Limited ( Corporal ), provided Corporal with two unsecured loans. Fons subsequently charged its shares in Corporal to Kaupthing Bank Luxembourg S.A. The benefit of the share charge was transferred to Pillar Securitisation SARL ( Pillar ). Following the liquidation of Fons and Kaupthing, it transpired that Fons right to be repaid under the unsecured loan agreements was worth more than its shareholding in Corporal. The charging clause included a charge over the Shares and the definition of Shares included the term debentures. The court considered whether, by virtue of including the term debentures, the charge extended to cover two shareholder loan agreements. The conclusion was that the loans were also charged as they were instruments which created or acknowledged debt and were thereby debentures. Importantly, the judgment stressed that the test of commercial common sense was not an overriding criterion of construction; it applied only where the wording in a document was ambiguous. 24

27 Fees: my basic human right Barnes v Eastenders Cash & Carry PLC and others [2014] UKSC 26 It is a general principle of the law of receivership that a court-appointed receiver is entitled to remuneration What has happened? The Supreme Court has ruled that payment of a receiver s fees from the assets under a receivership order that has been declared void can amount to a breach of rights under human rights legislation. However, the court went on to state that a complete failure to pay the receiver would also breach the receiver s rights. Payment from the CPS, the engaging entity, was ordered, despite contrary intentions in the engagement documentation. Who does this affect and how? The decision will be primarily of interest to insolvency practitioners appointed by the courts as it gives comfort that, in exercising a function requested by the courts, the receiver does not have to bear the risk that an order was made in error. Next steps? In making this decision, the Supreme Court acknowledged that receivers, when appointed by the courts, are carrying out a public service and should be duly remunerated for work done even if the order is later quashed. Whilst this case was in relation to a management receivership under the Proceeds of Crime Act 2002, it is also applicable to similar appointments made by the courts. Other statements by the court suggest that appointments of receivers may now take longer and be subject to additional scrutiny, and parties making the application should be prepared for additional scrutiny of their submissions. Relevant background The ruling was made following the confirmation by the Court of Appeal that the restraint and receivership orders made by the High Court over the assets of two companies, which related to the defendants in a criminal investigation into tax evasion, were invalid. In the engagement letter between the CPS and Mr Barnes, the management receiver, it was stated that payment should be taken from the assets of the companies; that Mr Barnes would have security over the assets; and that, in the event that the assets were insufficient to cover Mr Barnes costs, the CPS would not provide an indemnity for his costs. The companies had a right under the Human Rights Act 1998 not to be deprived of the use and enjoyment of their possessions, subject to certain conditions. This right would be breached if they had to pay for the services of the receiver, who had been unlawfully appointed. Similarly if no payment was made to Mr Barnes, there would be a breach of his rights. The court recognised that receivers play an important role in this part of the criminal process and that it would be unjust for no remuneration to be made. It was found that payment of Mr Barnes fees was central to the contract with the CPS and that the CPS should therefore pay the fees. The Supreme Court carefully distinguished this from a normal commercial allocation of risk, for example, in the event that the order had been valid and the assets of the companies did not cover all of Mr Barnes fees. In this instance, the provision stating that the CPS would not give an indemnity was not relevant because the circumstances meant that no security over the assets was possible, which could have amounted to a form of payment, and the CPS had benefitted from the services without any payment. The ruling was made to provide clarity to the parties involved, to prevent receivers being deterred when asked to act in these circumstances and to reach a balanced solution. 25

28 Court gives permission where consent was not forthcoming Rollings (as Joint Administrators of Musion Systems Ltd) v O Connell [2014] All ER (D) 210 This Court of Appeal decision focused on the sale of assets subject to fixed charge security. What has happened? The Court of Appeal has held that a judge was entitled to make an order granting administrators permission to sell a company s assets as if they were not subject to fixed charge security. Who does this affect and how? This case provides a useful guide to administrators in terms of how the court will approach a decision as to whether assets subject to fixed charge security can be sold where the fixed charge security holder does not consent to the sale. The court made clear that its approach to making such an order must always be to balance the prejudice that will be felt if the order is made by the secured creditor, against the prejudice that would be felt by those interested in the promotion of the purposes specified in the administration order if it is not. Clearly, granting administrators the permission to sell a company s assets as if they were not subject to a fixed charge security constitutes a significant interference with the rights of the fixed charge holder to realise his security at a time and in a manner of his own choosing. While the court acknowledged as much, it pointed out that it was an inevitable consequence of an order of this type. In carrying out its balancing exercise, the court placed great importance on the administrators achieving a proper price for the assets. The court examined in significant detail the marketing and bidding process and, in the event, it was satisfied that the administrators had properly ascertained and accepted an offer which reflected the market value of the assets. The strong inference from the court s comments in this regard is that it will not be prepared to grant an order of this type to the prejudice of a secured creditor, unless it is 26 absolutely satisfied that a proper price has been achieved and it would appear that the standard required in order to demonstrate that it has been is very high. Administrators should bear this point in mind when conducting the sales process, even where the circumstances mean that it is time-sensitive. Next steps? Administrators should be able to refer to this case as a reliable guide as to how the court will assess applications of this kind. Administrators will take comfort from the willingness of the court to defer to them in respect of commercial decisions that have been taken, as well as from the court s acknowledgement that administrators are better placed than the court to take such decisions. It is also worth noting that the court made clear that it is only the secured creditor s interest as secured creditor that is relevant to the balancing exercise. The court will not deny an application of this kind, for example, because the secured creditor is also a competitor as in this case or because he has some other interest in preventing the sale of assets without his consent. We should say that the overriding factor in this case is discretion. That means that, inevitably, cases with similar facts could have the opposite outcome. Indeed, the judge that heard the initial application was at pains to stress that the decision had been a very difficult one. Time was especially of the essence in this case, not only because of the possibility that the offer could fall through, but because the company in administration had very limited cash in it and it was due to incur significant liabilities very soon. Relevant background O Connell appealed against a decision granting the administrators permission to sell company assets. O Connell had been one of the company s directors. He and another director were chargeholders in respects of several debts allegedly owed to them by the company under a debenture. O Connell was removed as a director and later petitioned for the company s winding-up. The administrators decided that it was unlikely that they could rescue the company as a going concern, and therefore decided to continue to trade the company for a short period in order to sell its business and assets. They also initiated a sales process by advertising the business and assets. They asked O Connell and the other chargeholder to release their security under the debenture in order to complete such a sale; O Connell refused but the other chargeholder agreed. Faced with that refusal, the administrators applied under the Insolvency Act 1986 Schedule B1 paragraph 71 for permission to sell the company s assets as if they were not subject to O Connell s security. O Connell appeared in person at that hearing and applied for an adjournment to give him an opportunity to prepare his response properly and be represented, and so that the administrators application could be heard after an upcoming creditors meeting and a pending arbitration which would determine whether the company held the benefit of certain intellectual property licences. The judge granted the administrators application on the basis that, amongst other things, the bidding process for purchasing the business and assets was open and fair, the administrators needed an order under Schedule B1 paragraph 71 in order to allow them to complete the sale, and there was a risk of the administrators losing an offer to purchase if he did not make the order sought.

29 Peering into the shadows Smithton Ltd (formerly Hobart Capital Markets Ltd) v Naggar [2014] EWCA Civ 939 The Court of Appeal provided guidance on when a person may be a de facto or shadow director. What has happened? The Court of Appeal has provided practical guidance for establishing when someone can be classed as a de facto director or a shadow director. Applying and reaffirming the Supreme Court s reasoning in HMRC v Holland [2010] 1 WLR 2793, the court upheld an original decision that the defendant was not a shadow or de facto director of the claimant company. In reaching its decision, the court held that whether someone was a de facto or shadow director was a question of fact and degree. The court also provided a number of practical points to consider when deciphering if someone is a de facto director. Whilst the concepts of shadow directorship and de facto directorship are different, there is some overlap. It is essential to look objectively at what a person actually did (as opposed to their job title) e.g. whether: he assumed responsibility to act as a director; his acts were directorial in nature in the context of the company s business; he was part of the corporate governance system of the company; the company considered him to be a director and held him out as such; and third parties considered that he was a director. Good faith belief that you are not acting as a director is not a defence. It is important to look at the cumulative effect of the activities relied on. However, it is also important to look at acts in their context. A single act might lead to liability in an exceptional case. The fact that a person is consulted about directorial decisions or for his approval does not in general make him a director because he is not making the decision. Acts outside the period when a person is said to have been a de facto director may help to indicate whether he was a de facto director in the relevant period. Who does this affect and how? The case provides helpful clarification of pre-existing general principles, which will be welcomed by insolvency practitioners seeking to identify de facto directors of insolvent companies in order to bring claims for breaches of duty and achieve recoveries for the benefit of creditors. Conversely, it provides a stark warning to those in management who are not formally appointed directors, as both shadow directorship and de facto directorship can result in disqualification. Next steps? This is another reminder from the courts of the ease with which shadow and de facto directorships can arise, with the focus remaining on the nature of activities undertaken and not the labels attached to them. Relevant background Under Section 250 of the Companies Act 2006, a director includes any person occupying the position of director, regardless of whether he or she is officially named as one. The definition can include de facto directors. A shadow director in relation to a company means a person in accordance with whose directions or instructions the directors of the company are accustomed to act (section 251(1), Companies Act 2006). This definition is also followed in the Insolvency Act 1986 and the Company Directors Disqualification Act 1986 ( CDDA ). Previous case law has extended the application of the CDDA to de facto directors. The court upheld the earlier decision that Mr Naggar was not a de facto director of Smithton Ltd (formerly Hobart Capital Markets Ltd) (the Company ) on the basis that he had only been involved with the Company in his capacity as director of the Company s parent company and there was nothing to suggest his involvement went beyond that of someone combining the roles of major client and chairman of the majority shareholder. Similarly, the earlier decision that he was not a shadow director was also upheld, on the basis that there was no evidence that the majority of the Company s directors acted in accordance with his instructions. 27

30 No stand for a former liquidator Re Mama Milla Ltd (In Liquidation) [2014] EWCA Civ 761 The Court of Appeal applied the insolvency rules strictly in holding that a former liquidator had insufficient standing to challenge a consent order. What has happened? The Court of Appeal has held that the former liquidator of a company did not have sufficient standing to challenge a consent order which admitted two companies as creditors, who had subsequently initiated misfeasance proceedings against her. Who does this affect and how? The court s decision in this case was based upon the effect and meaning of a particular rule in insolvency legislation that governs challenges to, amongst other things, consent orders made during the winding up of a company admitting new creditors. The liquidator had consented to the admission of two companies as new creditors. Following their admission as new creditors, they initiated misfeasance proceedings against the liquidator. The liquidator was subsequently removed as liquidator. Information came to light suggesting that the new creditors had fraudulently misrepresented themselves as such. Since, if this were true, it would mean that the new creditors would no longer have standing to continue the misfeasance proceedings, the liquidator applied to the court to challenge the consent order which admitted the two companies as new creditors. The court took a straightforward approach: the former liquidator was no longer liquidator of the company and it was of no relevance that she had been. Nor was she a creditor of the company. The relevant insolvency rule was entirely clear in that only these two categories of persons are eligible to make such a claim. This case makes it clear that even where there was a real prospect that the two companies were not creditors, the court will interpret the insolvency rules strictly. Next steps? In this case, the court was bound to apply the law as it was; it simply did not have the jurisdiction to hear a claim from a third party, without sufficient interest. The court also pointed out that claims for misfeasance are claims for the benefit of the company. The question of whether the new companies were creditors was of no importance to the outcome of the misfeasance claim. Relevant background The former liquidator, Sharma, of the company Mama Milla Limited ( M ) appealed against a decision that she did not have standing to challenge a consent order that she had agreed with the respondent companies ( C ). C had claimed to be creditors of M and had sought an order that they be repaid a sum of 548,000 (allegedly paid away by Sharma as a result of misfeasance). C commenced their misfeasance claim against Sharma, who had been replaced with a new liquidator. The new liquidator s report showed that M s pattern of trade was characteristic of a carousel fraud, designed to defraud the Revenue of VAT. It did not determine whether C had been involved. Sharma sought an adjournment on the basis that the consent order had been procured by fraudulent misrepresentation and that C had been a party to the carousel so that they were not actually M s creditors. The judge made an order that Sharma had insufficient standing to make the application as she was no longer a liquidator and dismissed her application for an adjournment. 28

31 Tracing allowed even when no transaction link Relfo Limited (In Liquidation) v Varsani [2014] EWCA Civ 360 The Court of Appeal set out its broad approach to tracing claims What has happened? The Court of Appeal has affirmed the lower court s view that the liquidator of a company was entitled to trace a sum of money from the appellant, despite there being no transactional link between the parties. The court held that there was enough evidence to infer that a sum of money deposited with the appellant could be causally linked to the original sum and represented an equivalent value, notwithstanding the chronology of the exchange. The court confirmed that the focus should be on the underlying economic reality, rather than the legal form, in ascertaining whether a party has been unjustly enriched. Here, the fact that the money had been intended to be deposited with the appellant was enough to establish a sufficient link. Who does this affect and how? The outcome of this case may well stem from the judges decision to address the suspicious dealings that took place between a pair of friends that ultimately resulted in a sum of money leaving one account and, not so mysteriously, appearing in another. However, it does offer insolvency practitioners some comfort that, when attempting to trace the assets of an insolvent company, the evidential burden imposed will derive from what can be inferred from the circumstances rather than an unbroken chain of direct substitutions. Positively, the court seems to have acknowledged the seemingly obvious reality that a helpful trail of direct payments will not always be left in the path of a perpetrator when money is being laundered. Rather, it is necessary to examine matters such as the timing of the transactions, the value of the transactions, the consideration provided for the money and the intention of the parties, to establish whether an asset can be traced to another party. Next steps? It remains to be seen if Varsani will take this case to the Supreme Court. However, on the basis of the law as it stands, insolvency practitioners should keep in mind the significance of circumstantial evidence when recovering funds that seem to have been dissipated in dubious circumstances. Relevant background Mr Gorecia, a shareholder of Relfo Ltd ( Relfo ), wrongfully caused a sum of 500,000 to be paid into a third party company s bank account (the Mirren account ), which resulted in Relfo being declared insolvent. On the same day, a dollar equivalent sum of money entered the appellant, Mr Varsani s account from a separate company account (the Intertrade account ). Mr Gorecia and Mr Varsani had frequently done business together with Mr Varsani regularly investing in Mr Gorecia s businesses and Mr Gorecia making and managing investments on Mr Varsani s behalf. During the High Court case, a source in Ukraine produced documents evidencing that the payment to the Mirren account was intended be paid to Mr Varsani in settlement of an obligation from Mr Gorecia to Mr Varsani. Further, the Court of Appeal also examined the fact that the High Court had found that Mr Gorecia was dishonest and had been under pressure to rectify trading losses that he had caused to the Varsani family. Although Relfo accepted that it could not point to a specific transaction passing between Mirren s account and the Intertrade account to show how the payment translated to the payment to Mr Varsani, it was recognised that Mirren and Intertrade could have had other accounts. This was unanimously accepted despite the fact that the money may have passed to Mr Varsani before the deposit was made in the Mirren account. This was explained by the fact that the payment to Mr Varsani would have been made on the faith of the arrangement between the two parties and the reliance on Mirren providing reimbursement. Despite it not being required in this case, the court also examined whether this set of circumstances amounted to unjust enrichment and agreed that if you could establish a sufficiently close causal connection between the transactions when looking at the economic reality or the substance of the circumstances then, as was the case here, it would constitute unjust enrichment. 29

32 Liquidators protect your documents from disclosure Rawlinson & Hunter Trustees SA & others v Akers & another [2014] EWCA Civ 136 (20 February 2014) The Court of Appeal confirmed that, to claim litigation privilege successfully, the relevant documents must be produced for the dominant purpose of litigation. What has happened? The Court of Appeal has confirmed that where liquidators failed to show that reports were produced for the dominant purpose of litigation, they were not protected by litigation privilege. The ruling upheld a decision of the lower court. To successfully claim litigation privilege, the dominant purpose of the document must be in contemplation of litigation. Who does this affect and how? The decision will be primarily of interest to insolvency practitioners and their advisers. Additionally it gives important guidance to parties generally on the scope of litigation privilege. Liquidators cannot assume that advice or information obtained as part of the usual liquidation process will be protected from disclosure. Where liquidators are commissioning reports to perform exercises they are bound to carry out in any event, irrespective of whether litigation was contemplated, that purpose is independent of the possible need for litigation at the stage of creation of the report. Liquidators need to demonstrate the purposes are not independent and the dominant purpose is litigation. Next steps? To successfully claim litigation privilege, liquidators must be able to show that litigation is a real likelihood and not a possibility. Liquidators should seek to keep clear and precise evidence that at the time of creation of the document, litigation is intended for example in attendance notes or instruction letters. Additionally liquidators should, at the outset, identify the persons/ companies against whom they believe they have a cause of action against. Liquidators may want to consider obtaining specific advice for each potential claim instead of carrying out a broader analysis of the liquidation and the company s assets and liabilities as a part of the liquidation procedure overall. Relevant background The case was an appeal in a claim brought by the Tchenguiz brothers against the Serious Fraud Office ( SFO ) for damages for financial loss and reputational harm arising from their arrests and searches of their homes and business premises. The Tchenquizs applied for a third party disclosure order against the liquidators of Oscatello Investments Limited (a company controlled by the trustees of the Tchenguizs family trust). The Tchenguizs sought disclosure of five reports commissioned by the liquidators in respect of an SFO investigation into the collapse of Kaupthing Bank hf, all of which were in the liquidators possession. The SFO had relied on those reports in their applications for the search warrants against the Tchenguizs. In this case the liquidators appealed against an earlier order requiring them to disclose the documents, arguing that litigation privilege applied. They questioned the Judge s finding that if the purpose of commissioning a report was to conduct a general liquidation exercise, irrespective of whether litigation was contemplated, then that purpose would necessarily be independent of the possible need to take recovery proceedings in the liquidation. The Court of Appeal cautiously agreed that the two were not by definition independent, but it was the burden of the liquidators to establish they were not independent and therefore that litigation was the dominant purpose. 30

33 Horizon Watch Here are some recent and upcoming dates involving legal developments likely to be of interest to restructuring and insolvency professionals:* * Information and dates based on publicly available information at the time of going to press. You must take specific advice on deadlines and impact if you are affected by any of the issues raised. 31

34 Pinsent Masons Restructuring Business Autumn 2014 Here are some recent and upcoming dates involving legal developments likely to be of interest to restructuring and insolvency professionals:* Date Event Impact 16 June 2014 Teresa Graham s Review into Pre-pack Administrations was published 25 June Passage through Parliament of the Small Business, Enterprise and Employment Bill 1 July 2014 The US Foreign Account Tax Compliance Act ( FATCA ) withholding became effective 23 July HM Treasury published (on 23rd July) a draft form of the Banks and Building Societies (Depositor Preference and Priorities) Order 2014 for consultation 23 July The Law Commission launched (on 23rd July) its 12th Programme of law reform 29 July 2014 Practice Direction for Insolvency Proceedings came into effect The report provided recommendations for voluntary reform by the insolvency industry, together with strengthened regulatory guidance and a backstop power for the UK Government to legislate if necessary. See our feature article on Pre-Pack Administrations following the Graham Review. This Bill, introduced in the House of Commons on 25th June, introduces a variety of measures designed to support growth of, and improve access to finance for, SMEs. The Bill includes provisions relating to payment practices and general corporate law as well as a raft of insolvency related provisions. See our feature article The Small Business, Enterprise and Employment Bill all change for SMEs?. FATCA withholding on US-source interest, dividends, rents, royalties and compensation became effective as from 1 July 2014 (payments in respect of obligations outstanding on such date and not materially modified thereafter are grandfathered). This is part of a wider consultation on the transposition of the Bank Recovery and Resolution Directive (2014/59/EU). The draft order seeks to amend the Insolvency Act 1986 and Insolvent Partnerships Order 1994 to create a new category of preferential creditor ( secondary preferential creditors ), comprising depositors who fall outside the protection of the Financial Services Compensation Scheme. As part of this programme, the Law Commission will review whether greater consumer protection is necessary in retailer insolvency, including whether it is appropriate for customer prepayments to rank as unsecured claims. The report is not due to be published until This Practice Direction replaces that of February 2012 and is the primary source of requirements for proceedings under the Insolvency Act 1986 and Insolvency Rules Post June Post June 2014 End of 2014 April 2015 Passage through Parliament of the Deregulation Bill Third Parties (Rights Against Insurers) Act 2010 to come into force Final text of amendments to EC Regulation (No. 1346/2000) on Insolvency Proceedings anticipated Insolvency exemption to The Legal Aid Sentencing and Punishment of Offenders Act 2012 ( LASPO ) scheduled to expire The Deregulation Bill introduces various changes to the Insolvency Act 1986 relating to the partial licensing of insolvency practitioners as well as changes required to allow the revised Insolvency Rules 2015 to be implemented in full. This Act aims to simplify the process by which creditors of an insolvent debtor can stand in the shoes of the debtor as regards claiming under any applicable insurance policy. There is no indication yet when this Act will come into force. The European Commission s proposals to reform this Regulation are intended to strike a path towards harmonisation of insolvency regimes across the EU. The UK has opted in to the negotiations on the proposed amendments. A general approach and revised draft recitals have now been published by the Council of the EU. The Act prevents a losing party in litigation from being liable to pay the winning party the success fee element of any conditional fee agreement between the winning party and its legal advisers or any ATE insurance premiums paid by the winning party. The secondary legislation, setting out an insolvency exemption until April 2015 in favour of officeholder claims in administration, liquidation and bankruptcy, was enacted in January See our feature article Insolvency Litigation how will it be funded now? The Insolvency Rules 2015 to come into force The bankruptcy adjudication provisions of Enterprise Regulatory Reform Act 2013 to come into force Draft Insolvency Rules 2015, which aim to consolidate and modernise the secondary legislation relating to insolvency in Great Britain, were published in September It is anticipated that a final draft of the Rules will not be published before October These provisions include a new online debtor bankruptcy application process to be determined by adjudicators in place of the existing debtor petition process determined by judges. * Information and dates based on publicly available information at the time of going to press. You must take specific advice on deadlines and impact if you are affected by any of the issues raised. 32

35 Diary Room Our latest guest to get quizzed is London based restructuring solicitor Andrew Robertson. 33

36 Diary Room Andrew Robertson is next up to be quizzed in the Diary Room. Andrew Robertson Solicitor T: E: Pet hates? Lateness and mess. Apparently, I m the old nag in our household! Dinner party trick? The Pineapple game. Come round to dinner and I ll show you Favourite movie? This is a tough one but I will go for Gladiator. Total game changer in terms of Hollywood s attempts at creating an epic. Best lesson a client has taught you? Back yourself, as nobody else will. Most common item in the fridge? Diet Coke and cheese. The perfect combination, right? If the house is on fire, what would you save? I am recently married so after getting my wife out safely, I would have to save the wedding pictures otherwise my life would not be worth living anyway! If you could invite anyone to dinner? Churchill, Stephen Fry and the Queen. Perhaps they would be up for a Come Dine With Me? What would you be if you were not a restructuring lawyer? There s a life outside the world of restructuring?! Ok it would be a toss up between an F1 driver and a top level football manager. How do your friends describe you? Outgoing, ambitious and trustworthy (I was as surprised as you!) What is the one thing very few people know about you? I used to sing in the school choir and secretly dream of appearing in the West End! Three desert island items? A football (no, not so I can draw a face on it and talk to it); an ipod / stereo to play music; and Mila Kunis to dance with. 34

37 Team News Overview Despite the peak holiday season, our teams have had a busy summer working on a variety of projects large and small. Although market conditions remain challenging we continue to win new instructions across our restructuring and insolvency practice, and we are delighted to have been appointed to new client panels and to be advising clients in the development of new and diverse work streams. We continue to be involved in transactions involving financially distressed law firms, taking a number of new appointments and working with management teams to support turnaround alternatives to a formal process. In addition to more mainstream restructuring and insolvency work, we also continue to be actively engaged in the purchase and sale of a number of distressed loan portfolios acting for both US opportunity funds and the selling banks. We also look forward to welcoming many of you to our Autumn 2014 Restructuring and Insolvency Conference, which is the largest conference of its kind in Europe, on Tuesday 7 October 2014 at The Brewery in London. Manchester Louise Kappes remains involved in due diligence exercises in connection with various loan portfolio acquisitions, and also helped to secure (alongside London partner Steve Cottee), the solvent sale of Top Ten Bingo plc, one of the largest bingo operators in the UK, to Majestic, an operator owned by Luke Johnson. Top Ten Bingo was placed into liquidation shortly after the transaction completed. Louise also recently advised the administrators of a specialist cable producer on a trading administration and business sale to a previous director. James Cameron and Ged Kane advised the administrators of a group of specialist transportation and warehousing companies on three pre-pack sales and various contract assignments relating to the businesses and assets of the group, helping to safeguard over 110 jobs. James Cameron and Louise Kappes also advised an AIM-listed client on an accelerated options process. Pinsent Masons remains consistently at the top of the league tables of AIM advisers. Samatha Latham was welcomed as a newly qualified lawyer to the team in September. Leeds Our Leeds team continues to act on a number of solicitor practice insolvencies; most recently Dawn Allen has been working alongside London partner Steve Cottee on the administration of Davenport Lyons, acting both as advisers to the administrators and as solicitor manager. With the administration of Cobbetts LLP now moving into liquidation, the team has continued to be actively engaged in this matter, now working with PwC in their role as liquidators. The team has also been heavily involved in advising on a number of Company Voluntary Arrangements ( CVA s). Richard Tripp and Laurie Murphy acted on behalf of Deloitte in finalising the CVA proposals to exit three administrations involving complicated issues around the release of debt and contingent claims and most recently, Richard Tripp, Dawn Allen and Laurie Murphy have, alongside KPMG, been acting for Mamas & Papas on its proposed CVA of its leasehold portfolio. Emily Walker was also welcomed as a newly qualified lawyer to the team in May. 35

38 London Steve Cottee, Bhal Mander and Serena McAllister have acted for the administrators of the City law firm, Davenport Lyons, on the pre-pack sale to Gordon Dadds LLP. Steve has also been appointed, alongside Jonathan Jeffries, as solicitor manager in the administration. Nick Pike is advising the Interim Manager ( IM ) of The Dove Trust, appointed by the Charity Commission to take full control of the management of the trust in relation to various matters including the treatment of donations after the IM s appointment and the distribution of charitable funds. Tom Withyman, Tom Pringle and Richard Buckley advised the administrators of the Paul Simon retail chain, including advice on the sale of a number of stores, thereby rescuing part of the business. Tom Withyman and Tom Pringle also acted for the administrators of a vocation training provider, selling the business as a going concern and ensuring continuation of the studies of over 3,000 students. Steve Cottee, Nick Gavin-Brown, and Simon Gibbs, together with assistance from colleagues in the Scottish team, have completed the restructuring of the European Care care home group. The restructuring involved a complex structural reorganisation and the simultaneous appointment of officeholders in England and Guernsey. Gemma Kaplan joined the London team as a contentious restructuring and insolvency lawyer in May, and we are also pleased to welcome Lola Oni and James Armshaw as newly qualified solicitors joining the growing team. Carl Allen has returned from a secondment with one of our banking clients, with Andrew Robertson due to return from a spell with the real estate restructuring team in another bank shortly. Scotland Claire Massie and our Glasgow team, alongside members of the wider national team, have been acting for a number of opportunity funds on their bids to purchase significant portfolios of non-performing loans and, where our clients bids have been successful, the transfer of these loan and security portfolios. The team have also been instructed on a number of formal insolvencies, including acting for a major clearing bank and administrators on the administration of a trading hotel and restaurant business. Morvyn Radlow and Ainslie Benzie have been working closely with Leeds partner Richard Tripp and colleague Emily Walker in respect of a court application to appoint administrators to a company with a significant distressed property portfolio spanning the UK. The team has also been involved in interesting and varied restructuring work, including advising on the insolvency and restructuring aspects of a pension trustee s efforts to recover sums due under a pensions liberation scheme, and advising a professional services firm on its restructuring options. Natalie Colaluca has recently returned from a secondment to the restructuring team of a major clearing bank and Michael Thomson s part-time secondment to the legal team of another major clearing bank continues. 36

39 Key Contacts UK Offices James Cameron Partner Manchester T: M: E: Nick Gavin-Brown Partner London T: M: E: Nick Pike Partner London T: M: E: Richard Tripp Partner Leeds T: M: E: Richard Williams Partner London T: M: E: Steven Cottee Partner London T: M: E: Claire Massie Partner Glasgow T: M: E: Sharon Smith Senior Practice Development Lawyer Manchester T: M: E: Jamie White Partner Manchester T: M: E: Tom Withyman Partner London T: M: E: Non-UK Offices Pierre Forget Partner Paris T: M: E: pierre.forget@pinsentmasons.com Dr Bernd-Uwe Stucken Partner Shanghai T: M: E: bernd.stucken@pinsentmasons.com Restructuring helpline For urgent queries call our 24 hour helpline in order to speak to one of our partners: +44 (0) For more general or technical and legal queries us at: restructuring@pinsentmasons.com While we take every care to confirm the accuracy of the content in this edition, it is not legal advice. Specific legal advice should be taken before acting on any of the topics covered. 37