Liquidators’ appointment valid despite breach of deemed consent procedure

The Insolvency (England & Wales) Rules 2016 came into effect in April 2017 and were aimed at enhancing creditor participation in the insolvency process while also consolidating the rules.

One of the new provisions enables an insolvency practitioner (“IP”) to serve creditors with a notice of deemed consent; meaning if the IP does not receive any objections by a given date then, by deemed consent, that IP is appointed liquidator of the company in question. However, what happens if you are a creditor but do not receive a copy of the notice?  You may have burning issues or a preference on the IP who should be appointed.

These were some of the issues arising in the case of Cash Generator Ltd v Fortune and others [2018] EWHC 674 (Ch) which is understood to be the first case to challenge the new insolvency rules.

Background

The companies operated, as franchisees, in pawn-broking and ‘payday’ loans.

The first and second respondents were nominated by the companies as their joint liquidators and, when fewer than 10% of the creditors objected, they were duly appointed under the deemed consent procedure.

Before the liquidations began, the companies assigned their leasehold interests in their business premises to a third party.  Once appointed, the first and second respondents sold the stock and other assets.

The Companies Court decision was that non-compliance with the statutory provisions for the appointment of liquidators did not invalidate the first and second respondents’ appointments as joint liquidators of the three companies. There was also no cause for their removal to enable an independent investigation into the assignment of the companies’ leasehold interests in the business premises and the sale of the stock and assets.

The application

The applicant was a franchisor and claimed to be a creditor. They sought declarations from the court that:

  • the appointment of the first and second respondents as liquidators was invalid as the correct procedure had not been followed.
  • the first and second respondents should be removed from office.
  • the first and second respondents should be replaced by the Applicant’s own nominees or those appointed by the court.

What did the court decide?

The court determined there were two distinct issues to consider, namely the invalidity (or otherwise) of the appointment and whether the respondents ought to be removed from office.

Invalidity

The applicant argued that as they (and other creditors they were aware of) had not been given notice of the respondents’ nomination, the statutory requirements for nomination under the deemed consent procedure had not been complied with.  Consequently, the appointment was fatally flawed.

It was conceded by the Applicant that a company could nominate a person to be liquidator at a company meeting at which the liquidation commenced.  However, the insolvency rules require directors to seek nomination from the creditors whose choice of liquidator shall prevail. In those circumstances, the court had to intervene and either order removal or the appointment of new liquidators.

The judge considered these arguments in the light of section 100(1B) Insolvency Act 1986, which provides,

“The directors of the company must in accordance with the rules seek nomination of a person to be a liquidator from the company’s creditors”.

The court also reviewed the deemed consent provisions in the insolvency legislation and highlighted notice can be taken of the fact information made available to those assisting the directors frequently contained errors, such as a mistake, oversight, or a failure to keep proper books and records. It did not escape the court’s view that omissions may even be down to a deliberate decision not to provide correct information.

Notwithstanding the possibility for error or omissions the court felt the Government had intended for the new rules to achieve a speedy appointment of an insolvency practitioner nominated by creditors and not to cause uncertainty, delay or additional costs. It was also noted the deemed consent procedure was intended to encourage creditor involvement rather than to assure maximum number participation. The court further argued the Government would have anticipated there was a prospect of one or more creditors not being given notice from time to time. Accordingly, it was reasonable to conclude that, in the absence of an express provision, the Government did not intend invalidity in these circumstances, otherwise it opened every appointment up for challenge where creditors failed to receive notice, hence the loss of opportunity to vote.

It was also pointed out by the court the applicant had other remedies open to it. For instance, to requisition a meeting of creditors or even an application for directions under section 112. of the Insolvency Act 1986.

Removal

It was argued there was a need for an investigation into the conduct of the respondents, particularly the issues surrounding the pre-liquidation lease assignments and the post-liquidation sale of stock. As those investigations concerned the liquidators conduct, new office holders should be appointed in their place.

The court followed the approach set out by Warren J in Sisu Capital Fund Ltd v Tucker [2005] EWHC 2321 (Ch), [2006] 1 All ER 167, being:

  • removal should be ordered where an independent review cannot be carried out because of conflict
  • the court should consider the views and wishes of the majority of creditors
  • removal should not be ordered merely because conduct has fallen short of the ideal
  • the court should remember that removal can impact upon professional standing and reputation

The court found no evidence had been put forward to suggest the respondents would not carry out investigations that they considered appropriate. Indeed, it was observed the early sale of stock had been based upon expert valuation advice and, as there was no business to sell, a ‘fire sale’ had been justified. Furthermore, the respondents had been advised on both the validity of the assignments and value of the leases.

In noting the above, the court also mentioned HMRC had not supported the application and, presumably was content for the respondents to remain in office. Based upon the facts before the court, there was no cause to remove the respondents as liquidators.

What are the practical implications?

Gary Pettit said, “It was interesting to note the presiding judge issued a plea for the Rules Committee to consider whether the rules needed to be consolidated as those rules the judge had been referred to in this case were in a variety of places and featured numerous requirements. This echoes the common view of insolvency practitioners.”

Gary continued, “Ultimately, though, what this judgment means is company nominated liquidators need not worry about the validity of their appointment under the deemed consent procedure if a creditor is not sent notice of their nomination and a statement of affairs, in accordance with the rules.”

Comment

Creditors are often omitted from the initial notice of an insolvency, primarily due to the pace of information gathering causing an oversight in identifying all potential creditors. The Court appear to have acknowledged this practical difficulty when reaching their decision.

Unfortunately, while the new insolvency rules require for virtual meetings to be advertised in the London Gazette this is not a requirement for the deemed consent procedure. It remains to be seen whether this advertising requirement will be amended for proposed deemed consent appointments following this latest court decision.

A personal problem?

 

Invariably, when we talk about insolvency people start thinking of the likes of BHS, Toys “R” Us and other large corporate concerns. However, what about a problem that is closer to home?

The Insolvency Service recently released the statistics for Q2 of 2018. These show corporate insolvency numbers were down on the previous quarter (although still higher than the equivalent period of 2017) whereas personal insolvency reached its highest level since 2012.  In fact, in the 12 months ended 30 June 2018, 1 in every 433 adults in the UK entered some form of personal insolvency.

What is interesting is the number of individual voluntary arrangements (in short, a deal with your creditors) continue to exceed bankruptcies. The reason for this could be in 2015 the minimum debt for which you can petition for someone to be made bankrupt increased from £750 to £5,000.  Alternatively, it is more likely people are taking responsibility for addressing accrued personal debt and seek to enter into an IVA as a means of managing their affairs.  A recent profile case is that of Katie Price (aka Jordan) whose bankruptcy hearing was adjourned while her advisors look at the viability of her entering into an IVA.  You have to wonder how someone previously reported as being worth £45 million finds themselves in that position but it does demonstrate it can happen to anyone.

It is very simple to say people who fall into personal insolvency were reckless and spent beyond their means. However, examples I have handled include:

  • A solicitor who was hit with partnership liabilities two years after he had left the partnership.
  • Directors whose company fails resulting in personal guarantee liabilities arising.
  • The legacy of ill health or a divorce.
  • Redundancy causing a dramatic reduction in household income.

It seems, these days, people who end up falling into bankruptcy are either those who have simply nothing material to lose (or offer to creditors) or have buried their head and just let the level of creditor antagonism increase to the point of no return. Invariably, those who PBC have assisted find putting a proposal to creditors for an IVA far more likely to succeed than someone who has delayed, procrastinated or simply frustrated creditors to a point they lose any sympathy when it comes down to voting.  The message remains as always, the sooner you take advice the better the situation is likely to be.

Should you require any advice or assistance with your financial affairs then please contact either Gary Pettit or Gavin Bates at PBC Business Recovery & Insolvency 

Restoration of Company Results in Dividend to Creditors

PBC are pleased to report that a dividend of 66.40 pence in the pound was paid to unsecured creditors in a liquidation that, at first, appeared to have no distributable assets.

The company was placed into creditors’ voluntary liquidation in June 2012 and following closure of the liquidation the company was dissolved. PBC were subsequently approached to restore the company to the register and act as liquidators to realise a refund of fees from the company’s former bankers.

With the assistance of Katie Summers, a partner at Howes Percival LLP, a successful application was made to restore the company to enable the fees to be recovered and subsequently a payment to be made to creditors.

A Stark Lesson

How many readers find themselves looking at how much to pay in order to service personal debt every month after you have just been paid? In some cases that level reaches a point where it simply cannot be managed where you then start to notice those road-side signs that promise to write off 90% of your debt a little more.

Some will ignore those assurances and seek advice early. This could result in an application for your own bankruptcy where others will consult with an insolvency practitioner (“IP”) with a view to entering into an individual voluntary arrangement (“IVA”).  An IVA is, in laypersons’ terms, a deal with your creditors that is regulated and is a settlement in full and final satisfaction of your liabilities.  Indeed, over the past six years IVA have consistently outnumbered the number of bankruptcy orders, demonstrating more people are looking to resolve their debt burden.

However, a far greater majority of people look towards debt management plans (“DMP”) as their solution. While I have my own misgivings, for many people a DMP works and they get themselves back on a level footing.  Unfortunately, I have also seen many where it does not work and those people end up going bankrupt or, in some cases, enter into an IVA.

One issue that arises with companies who offer DMP is the lack of “Insolvency-like” regulation. Every IP has to be licensed through a professional body and are regulated by statute, their professional body and the Government through the Insolvency Service.  IPs also have professional guidelines to follow and are insured so there is recourse if things go wrong.  If you are wondering why you should take heed of this fundamental difference then you only have to look at the recently reported case of Gregson and Brooke Financial Services Limited and One Tick Limited.

Both Gregsons and One Tick offered a debt management service where clients would pay into a DMP. Clients complained to the Financial Conduct Authority (who governed both companies) that despite paying into their DMP their debt was increasing.  After some initial enquiries by the FCA both companies went into administration after which it was discovered the directors had withdrawn some £652,000 of client money for their own benefit.  While all four directors have been disqualified as directors, the true victims are the debt-ridden clients who now find they are in deeper financial trouble than before, despite making significant debt repayments; payments that would have been covered by IP insurance under a formal insolvency procedure.

The Association of Business Recovery Professionals have been so concerned with this (growing) problem they have published two guides:

“Don’t be misled by advice from an unlicensed advisor”

“My business is in financial difficulty”

These can be found on the Association’s website (www.r3.org.uk) or on our website at www.pbcbusinessrecovery.co.uk/Links/

In short, if you find yourself in a position where the ability to service your debt is getting to (or has reached) a point of no return seek professional advice from an IP. With most practices, the first consultation is free of charge and could save you a lot of stress, anguish and, like the poor victims of the above companies, expense.

Are Members’ Voluntary Liquidations (MVLs) under attack again?

A couple of years ago, the Finance Act 2016 introduced a new anti-avoidance rule which targeted MVLs to counter ‘phoenixism’ – starting a new business soon after winding up the previous one. This was to stop what was seen as an abuse of Entrepreneurs’ Relief.

More recently we have seen HMRC now demand statutory interest on tax liabilities from the date of the solvent liquidation even though, in the case of Corporation Tax, these tax liabilities are not technically due until 9 months later.

The latest attack is that HMRC are running a test case to challenge the approach of distributing overdrawn directors’ loan accounts in specie and reclassify the distribution as income, rather than capital, and therefore claim more tax.

It has been common practice to distribute overdrawn directors’ loan accounts in specie to save the directors having to repay the loans back to the liquidator and then wait for a distribution back to them as shareholders.  In the vast majority of cases the director and shareholder are the same person or husband and wife.

It is also our experience when the Company is brought to an end that directors will dip into Company funds before appointing a liquidator, thereby leading to an overdrawn director’s loan account.

We have spoken to both tax advisors and compliance firms within the insolvency world and currently what is certain is that there is uncertainty. However what is certain is that Schedule 11 of the Finance (No 2) Act 2017 seems to put an end to the approach going forward where the loan is not repaid before 5 April 2019.

As always as with any MVL it is now more important than ever to meet with your accountant and an insolvency practitioner before you bring the Company to a close to avoid any of the common pitfalls.

As always, PBC offers free initial meetings which are confidential and impartial.

The New Rules – 12 months on

The 6th April will mark the first anniversary of The Insolvency (England & Wales) Rules 2016, (commonly referred to as the “New Rules”). Doesn’t time fly?  So, we thought the anniversary was an opportunity to reflect and comment on the major changes introduced by the New Rules.

The right to opt out of receiving future correspondence – this has been used by about 5% of creditors, typically where there will be no return to creditors or where the creditor decides to write the debt off and does not want to keep being reminded of the bad debt every 12 months. This appears to be a well thought out change to the legislation and one which is well understood by creditors, particularly when you bear in mind that any notice of intended dividend must still be sent to these creditors, giving them the chance to opt back in when appropriate.

The right for an IP to post all documents online, having given notice to creditors they will do so – this rule change has not really been tested. The proof of how well creditors understand this change will come in the next few months as the second report since the New Rules is uploaded with no notice to creditors. The rule has been brought in to cut down on the copying and postage costs associated with each report to improve returns to creditors, but will that cost be replaced by phone calls with creditors asking for updates? Time will tell.

The abolition of physical meetings and the new decision procedures – this is probably the most fundamental change and is explained in detail in our blog here. Put simply, physical meetings can only be requisitioned by creditors (under a set criteria) and creditors’ views are now sought by virtual meetings, correspondence, electronic voting or deemed consent. We have had two instances where creditors have asked for physical meetings and, in both occasions, it was probably unnecessary (indeed in one the physical meeting was adjourned and nobody attended the adjourned meeting). Some good points of this rule change include the removal of final meetings (which nobody ever attended and were a waste of time and money) and the increased flexibility the New Rules now offer meaning two different cases, say a “Burial” liquidation of a company with minimal assets and a large complex company can be administered differently rather than applying a “one size fits all” approach which was excessive in many cases.

Standard Forms now longer exist – in their place have come a prescribed list of information in a set order (sounds like a form doesn’t it!) Despite the abolition of prescribed forms, Companies House have issued new forms for their purpose, which must be used when filing. The real purpose of this rule we suspect has not yet been met yet; at PBC we believe the purpose here is to allow online filing of the information at some point in the future.

The formation of creditors’ committee has changed – previously creditors had to vote for both the formation of a committee and its members at the same time. If the former happened but the minimum of three members were not forthcoming, then the committee was not formed. Now the New Rules mean that creditors can vote for the formation of a committee but not its members. If this happens, the IP then has to seek nominations for the minimum number of members and only then if there are insufficient members does the committee not form. At PBC we have seen this occur on several occasions, probably because of the creditors not understanding what a vote in favour of a committee means.

The New Rules have introduced many changes which are too numerous to list but these are, in our view, the major changes affecting creditors. It is also interesting to note The Association of Business Recovery Professionals, the industry’s trade body, took nearly ten months to update the standard terms it issues which form part of IVAs and are yet, at the time of writing, to update their Creditor Insolvency Guide website!

So in summary, are the New Rules good or bad? In theory our short experience is they are, in the main, a positive move forward.  However, it is a question that cannot be fully answered until they are tested in court over the next year or so.

Time to pay thanks to Carillion?

Following the demise of Carillion, HM Revenue & Customs have announced their Business Payments Support Services are open to approach by any company or business that has suffered a short-term cash flow problem as a result of the large scale failure.

The Support Service will consider:

  • Instalment arrangements of tax due that cannot be paid on time;
  • Suspension of recovery action/proceedings;
  • Review penalties for missing statutory deadlines;
  • Reduce any payments on account;
  • Agree to defer payments due to short term cash flow difficulties.

 

Should you find yourself facing difficulties to meet your tax liability as a direct result of the Carillion failure then you may apply to the Support Service on 0300 200 3835 or go on the website at www.gov.uk and search “Dealing with HMRC-payment problems.”

The obvious question this raises is, “Why is this offer being made for Carillion creditors?” At PBC we believe this could set a precedent for others who are caught under an insolvency process.  After all, what is different between a supplier losing (say) £5,000 in the Carillion liquidation to that under “Standard” UK liquidation?

At PBC we are often approached to assist companies with addressing tax issues whether in respect of trying to secure a time to pay agreement or by other formal means where appropriate. Should you require advice in this respect then contact PBC and speak to one of our insolvency practitioners on (01604) 212150 or email info@pbcbusinessrecovery.co.uk.

Second Edition of The Leaf Released

PBC are pleased to announce the release of the second edition of The Leaf Magazine, which can be read here.

Topics in this edition include:

  • Beware the Unregulated Insolvency Advisor
  • Focus on Mediation
  • Statutory Interest on Corporation tax in Solvent Liquidations
  • And Many More

A Round Up of Recent Insolvency Statistics and Perhaps More Trouble Ahead!

Last week The Insolvency Service released the insolvency statistics for the fourth quarter of 2017. Whenever these are published, the newspapers will always look for the story without going into the details.

So for example, the press reported that personal insolvencies in 2017 increased by 9% as compared to 2016, Of course that is correct, but they didn’t report that personal insolvencies fell by 11% in Q4 2017 as compared to Q3.

It is of course true that when inflation is higher than increases in wages then it will have an effect on individuals’ surplus income and in many cases (99,196 in 2017), will lead to personal insolvencies. In the short term this is expected to continue.

Another story that didn’t seem to hit the headlines was a 2.5% rise in corporate insolvencies in 2017 as compared to 2016. First this is a small increase in any event. However, it should also be noted that corporate insolvencies have been at a historically low number for a few years now, so a small increase on what is already a small number is not worth mentioning.

So this all seems like reasonably good news for the economy as a whole. On face value it does but at PBC we are starting to see growing signs of trouble ahead.  Over the last 3 months we have seen a growing number of enquiries and work.  It is fair to say that the retail sector (the high street in particular), is struggling, partially because of the reduction in personal incomes., and also businesses which deal with discretionary spend items (for example, new car sales are down).

At some stage we also expect fallout from the Carillion failure as subcontractors and those further down the chain come to terms with the lost income and future work.

It was also interesting to see that the FCA has started to address the issue of interest only mortgages. The FCA estimate there are 1.67 million full interest only and part capital repayment mortgages in the UK and the most of these will conclude in the next 10 to 14 years. Clearly as these come to a conclusion it will have an effect on those consumers and therefore the economy.  Only time will tell.

As always if you or your business is starting to struggle we would always recommend that you take advice at an early stage. Initial meetings with PBC are free and confidential.