The Preference Trap?

Jamie CochranePBC Logo

My most recent blog on the Chancellor’s support schemes  (available here) included comments on the Bounce Back Loan scheme.  One question I have received following that blog focussed on how using the funds from the loan to pay off debts personally guaranteed by the director would be treated (as the Bounce Back Loan scheme does not involve any personal guarantee) and I thought I would take the opportunity to explain the situation.

 

The Insolvency Act 1986 states “a company gives a preference to a person if that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or liabilities and the company does anything…..[which puts] that person which, in the event of the company going into insolvent liquidation, will be better than the position he would have been if that thing had not been done”.

 

So let’s unpick that legal jargon for a moment by revisiting the scenario.  The director was a guarantor for a company debt.  The company did something which put the director in a better position – by paying off the debt which had been guaranteed and removing the potential for the creditor to call on the guarantee.

 

However, that is not the whole situation.  The liquidator has to prove three things:

 

  1. The transaction took place at a relevant time. As the director is a connected party, the transaction must have taken place in the two years prior to the liquidation.

 

  1. The company must have had the desire to prefer the individual who received the preferential treatment. As the director is a connected party, this desire is presumed (but can be rebutted by the director).

 

  1. The company was insolvent at the time of the transaction or as a result of the transaction. Clearly, this fact is subjective on the facts of each individual case.

 

Let’s return to our scenario.  Could the company have taken out a bounce back loan to repay other business borrowing (whether or not guaranteed) to take advantage of the low interest rates on the Bounce Back Loan versus their existing borrowing?  Therefore, the director may argue that the desire was not there as they were seeking to improve the cash-flow of the business, but that argument would be stronger if contemporaneous notes (something I strongly advise) were made explaining the thinking behind the transactions, particularly as such transactions may be challenged several years later.

 

As previously stated, each scenario will depend on its own facts.  Should you be worried about your position or you have another insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to jamiecochrane@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

 

Will the government support schemes make things worse?

Whilst we all might have our views on how Boris Johnson, Matt Hancock et al have handled the health impacts of the Covid-19 pandemic, one politician who has emerged with his reputation enhanced is the Chancellor of the Exchequer, Rishi Sunak, and that’s not just because he has been nicknamed “Dishy Rishi”.

 

Whilst there is inevitably some people who have fallen through the cracks, the Chancellor’s support schemes have included the Coronavirus Job Retention Scheme (commonly known as the furlough scheme) – with 9.4million employees furloughed as at 5 July 2020, the Self-Employment Income Support scheme – with 3.5million people supported, and CBILS and Bounce Back Loans totalling £45billion as at 5 July 2020.

 

While this is a staggering amount of support that Mr Sunak has offered to UK businesses, there’s the potentially slightly controversial opinion that these schemes make things worse for the directors and their companies.

 

At PBC, we always raise awareness about seeking advice at the earliest possible opportunity as this gives the greatest chance of survival, the largest range of options available and minimises the risk of directors entering the “elephant traps” of antecedent transactions or breaches of their statutory duties.  But we are worried that some directors are believing that the government support schemes, combined with the suspension of wrongful trading provisions from 1 March – 30 September 2020, mean that their business will be fine once the Covid-19 restrictions are fully lifted and trading conditions return to business as normal.

 

However, while the furlough scheme helped towards wages and other schemes were designed to support business survival, liabilities such as utilities, rent, financial commitments etc will have continued to accrue.  In addition, it is unlikely that conditions will return to a “Pre Covid normal” for a significant period of time and businesses should be focussing on how they will adapt to the “new-normal” and ensure that they remain solvent and their cashflow is healthy.

 

Our concerns about the schemes making things worse are highlighted by a well published survey that reports just under half of Bounce Back Loans will not be repaid.  Are these loans being taken out purely to see the business survive for a few more months and enable the director to profit from the business before it fails?  Bounce Back Loans were publicised with no liability on the director or that no recovery action could be taken against a borrower’s main home.  However, while the loans were for business purposes only we have heard of scenarios where the loans have been taken into the company and then used to pay off the director’s personal debt.  This could lead to personal liability for the director and we urge all directors to seek independent advice on the use of the benefits received from the schemes

 

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to jamiecochrane@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

 

Jamie Cochrane

Seller beware? – The Corporate Insolvency and Governance Bill

CashflowAs a service provider or supplier, what is your first reaction when you hear your customer is entering into an insolvency process?  Anger, frustration, can I recover items supplied or, how do we make good the financial hole that bad debt will create?

It is an emotional event but, what if you were told your termination clause is no longer enforceable or you must continue to supply the insolvent customer?

On 4 June the Corporate Insolvency and Governance Bill (“The Bill”) received its second reading in Parliament and it is envisaged to become law by the end of June.  It will introduce some temporary provisions (to cover the COVID-19 lockdown) that will have retrospective effect and some permanent law, which is the focus of this editorial.

So, let us explore the four key provisions that are all aimed and restructuring and rescuing a company:

Restructuring scheme

This appears to modernise the current scheme of arrangement available under the Companies Act.  It is most likely a tool used for complex debt restructuring where there are several classes of creditors.  For example, a retail chain where there are suppliers, employees, landlords and financial institutions that are likely to be affected in differing ways.

The big reliance of this scheme is, what has been referred to as “Cross-class clam down”.  Try saying that quickly!  What this means is classes of creditors may out vote a dissenting class of creditor, provided the dissenting class of creditor will not be worse off than if an alternative insolvency procedure was used.  This does represent a shift in the balance of power in creditor voting

Moratorium

This is the largest part of the Bill and sets out a new provision designed to give an “Eligible company” the opportunity of a short holiday from creditors while it looks at ways to restructure its business.

Where a company is not subject to any insolvency proceedings the directors can file an application at court for a moratorium, without any notice to creditors.  The moratorium comes into force immediately upon the application being filed at court.

So, what does this mean?  A moratorium has very similar effects to administration whereby creditors cannot enforce any security held, landlords may not exercise their right of forfeiture or peaceable re-entry and any legal processes may not be commenced or continued.

The initial period will be 20 business days (this maybe increased to 30 business days for “Small companies”).  The directors may extend it for a further 20 business days, or with creditor consent it can be extended for up to 12 months.

While it needs an insolvency practitioner involved (to be called, “The Monitor”) their position is generally to monitor the company during this period, primarily based upon information provided by the directors.  It is envisaged a moratorium will be used as a form of protection while the company considers and/or proposes to enter into a company voluntary arrangement, although it could result in the outcome looking more terminal whereby liquidation may be the outcome.

Any supplier who supplies the company during the moratorium period must be paid (or payment provided for) otherwise the moratorium should be terminated.  Once terminated, any unpaid post moratorium creditors will enjoy a “Super priority” in the subsequent insolvency procedure.  However, that could be small consolation if there are no distributable assets!

Ipso facto clauses

Okay, most of us will ask what that means and does it apply to me?  In English, this is a clause within your terms and conditions of trade that state the contract shall terminate upon the customer entering into any form of insolvency.

A new section 233B is being inserted into the Insolvency Act whereby such termination clauses shall be considered void and no longer be enforceable.

Continuation of supply

The Insolvency (Protection of Essential Supplies) Order 2015 already prohibits suppliers from refusing to supply an insolvent company and/or seeking to vary the terms as a condition of continued supply.

However, the Bill takes this further and makes it clear it is unlawful to hold out for ransom payments (ie demanding pre-insolvency debts are paid as a condition of supply).  This could cause some practical difficulties, including if you have credit insurance, yet pre-insolvency you had reached the credit limit with the insolvent company.  The only protection it appears you have is being told your post insolvency debt shall be paid as an expense of the moratorium period or, failing that, holds “Super priority” in the subsequent insolvency.  Small comfort, I would suggest.

The key message for suppliers is to keep track of your customers (in terms of the warning signs leading to failure) and ensure they stay within credit limits you feel comfortable providing.

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

Recession or is it something else?

Cashflow

What is the outlook for the UK economy post lockdown?  That is a question I have been asked many times, while others tell me how busy my profession will be.

The truth is, nobody can accurately predict what will happen.  Personally, I have heard views from, “It is going to be a tough time, but we will get through it,” to others predicting 800,000 – 1 million businesses will fail over the next 12-18 months.

Before we look forward, let us look back.  I have worked through two major recessions, being 1990 and 2008.  The first of these saw UK officially enter recession at the end of the 4th quarter of 1990.  Corporate insolvencies were up 44% in 1990 (from 1989) with the level of failures increasing with 1991 being 60% higher than 1990.  A further increase was suffered with 1992 being 72% higher than 1991.  While numbers dropped in 1993 corporate failures still totalled 26,316 as compared to 18,720 in 1990.

You then compare that with the 2008 recession which was entered at the end of the 3rd quarter of 2008.  2007 had seen 15,774 corporate insolvencies, rising in 2008 to 21,082 (an increase of 34%). 2009 saw this figure further increase to 23,979.

What the 1990 and 2008 recessions told us is the peak of business failure may well arise a year or two after officially entering recession and levels remain high for a year or two after the peak.   However, this looming crisis is likely to be different to those past recessions.

While we may officially enter recession in the 3rd quarter, it is likely corporate failures will start to rise immediately as opposed to previous trends of corporate failures rising in the wake of a recovering economy.  The principal difficulty will be cash flow as most industries will find themselves back at pre-lockdown operational costs (including salaries as furlough ceases) but also, some will have the additional burden of servicing the bounce back and business interruption loans, as well as any deferred tax payments.  All this cost pressure will be challenging when it is anticipated “Normal” levels of turnover may not return for some time.

In saying the above, it would be remiss of me not to mention corporate insolvency numbers fell by 8.5% in the 1st quarter of 2020 (as compared to the corresponding quarter of 2019).  However, this maybe artificial as according to a well-known high court judge I spoke to recently, the working hours of the courts have been reduced with only 40% employment retained and winding up petitions have fallen by 85% principally as a result of HMRC ceasing enforcement action on standard unpaid tax matters.  Many other petitions have been adjourned under temporary COVID directives so there could be an explosion of activity once UK starts getting back to a semblance of normality.

This may all appear to come across as negative but overall the UK economy has the strength to recover and the services provided will continue to be in demand worldwide.  The key messages readers should take from this are:

  1. Continue to monitor your cash flow without a “Salesman” eye. Be critical and challenge the numbers.
  2. Review your overhead structure to see where reductions and removals are available.
  3. Take early advice from your accountant, solicitor and, where appropriate, an insolvency practitioner. Best anticipate a problem rather than have to deal with problem that has arisen.
  4. Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at pbcbusinessrecovery.co.uk

 

Legal Claims Against Directors following Liquidation – What you need to know. – Guest blog post from Steven Mather Solicitor

This is a guest blog post from Steven Mather Solicitor – The Right Lawyer for You and Your Business™

 

Firstly, thanks to Gary and Jamie and everyone at PBC for inviting me to guest blog on their website. I’ve worked with them a number of times and I’m impressed by how well they know their stuff, but also the commercial and pragmatic approach they take.

I’m a commercial solicitor based in Leicester and over the last 10+ years I’ve acted on both sides of insolvency disputes – acting for insolvency practitioners like PBC as well as acting for Directors personally trying to defend the claims.

When I talk about insolvency claims, the main ones that I see frequently are:

  • Misfeasance
  • Antecedent transactions
  • Directors Loan account recovery

Misfeasance claims are quite rare, but in them an Insolvency Practitioner (IP) will seek to recover funds from directors personally where they have committed some serious misfeasance which has harmed or damaged the business.

One thing I’ve realised in all the cases I’ve dealt with is that in many small businesses, the director is the shareholder and so they think they can do what they please when they please. I mean, that’s a benefit of being self-employed, right?! Anyway, what most directors do not realise is that the Company is its own living breathing (almost) legal entity and that as director they have duties (called ‘fiduciary’ duties) many of which are also set down in statute, which they owe to the Company. When a company goes into liquidation, it is the IP who then make the decisions on behalf of the Company, and so if the Company has suffered loss, the Company doesn’t care that you, the director, was “a good mate and we go back years”. The company is entitled to take action against the director to recover its loss.

Unlawful and Wrongful Trading are two other types of claims that can be brought against Directors and is aimed at pinning liability on directors where they ought to have known the business was insolvent.

Antecedent Transactions are very common.  These claims seek the reversal of payments made/received by the Company prior to the liquidation which were either:

  • At an undervalue – e.g. selling a Lorry for £1000 when it was worth £65,000
  • A Preference – paying a mate or director before making payments to other creditors.

Both types of claims are quite easy to succeed on acting for IP’s. All that needs to be showed is that the payments were made/received and there was a detriment to the Company/Creditors.

If you’re a director, knowing your back is against the wall, your best bet is not to try to bail out but speak to experts like PBC to get solid advice on the best steps for the Company.

 

Directors Loan Account claims

Most businesses operate directors loan accounts. If the director has to put some money in to support the business, their DLA will be in credit and that’s not a problem.

However, they are also used to extract money out of a business in a way which is not payroll/salary or dividends. Sometimes, it might even be unwittingly used, as accountants allocate certain expenditure of the business to the director’s loan account. Most of the time though, having an overdrawn loan account is because the directors kept taking money out of the business when there was not enough profit properly to declare a dividend at the end of the year.

The result is an overdrawn loan account. If you enter liquidation with an overdrawn loan account, you can rest assured that the IP will be asking you to repay it.

So what, as a director, should you do if you are faced with a claim in relation to your directors’ loan account? There’s actually very little you can do to dispute it. As they generally feature in the company’s accounts, which the directors sign, the Courts will say that “ignorance” of how its made up is not a defence. You might be able to argue that some of the debits against the DLA were not personal expenses and were legitimate business expenses or expenses incurred in your carrying out your role as director, but that requires a more forensic analysis of the account entries.

In short, your best option is to speak frankly with the IP and seek to reach an agreement on a repayment figure and potential repayment plan. Most IP’s are savvy enough to realise that many directors are broke by the time their company goes into liquidation, so doing what you can financially will usually make them go away.

Insolvency Claims are complex though and my best advice would be for any director facing any type of claim to speak to an independent and experienced insolvency litigation solicitor.

 

 

About the Author

Steven Mather is a Commercial & Business Solicitor based in Leicester. He has helped thousands of clients with legal issues worth millions of pounds. He is experienced, approachable and recommended. You can check out his website at https://www.stevenmather.co.uk

DIRECTORS DISQUALIFICATION – COMMON GROUNDS

The meaning of substantial

I am sure most directors are proud the first time you order business cards (with your title as director). Expanding as you employ staff. But do you know the duties and responsibilities of being a director? Do you consider you are a responsible director?

Hopefully, your answers are, “Yes” and “Yes, of course I am.” Unfortunately, there are a minority who see directorship as a means to personal financial gain at the expense of third parties.

The Insolvency Service has recently published their latest report on director disqualifications which cites 1,242 directors were disqualified in 2018/19. A director can be disqualified for a period between 2 and 15 years and during this time they are unable to act as a director (without permission of the court) or be involved in the management, promotion or formation of a company. Since 2014 the average disqualification is 5.7 years and breaching a disqualification can attract severe penalties, including up to 2 years imprisonment.

There are many grounds for a director to face disqualification but, in general, the common grounds include:

• Trading whilst insolvent to the detriment of creditors.
• Failure to maintain proper books and records.
• Transferring company assets to avoid creditors.
• Not properly accounting for tax/VAT.
• Multiple insolvencies.

The 2018/19 figures include 70 directors who were disqualified for 11 to 15 years, a period referred to as the “substantial disqualifications”. Looking at the substantial disqualifications it is notable the bulk of these disqualifications (66%) were directors aged in their 40-50s. However, two directors who received a substantial disqualification were over 70 years of age, proving the offence(s) prevails over the age of the culpable director.

So, what does it take to become subject to a substantial disqualification? Well, examples cited by Insolvency Service include:

• Being involved in a multi-million-pound VAT fraud.
• A husband and wife team duping businesses into sponsoring unnecessary educational materials.
• Transferring £2.5 million-worth of company assets to her father-in-law.

When comparing the number of corporate insolvencies to disqualifications the number facing this sanction is relatively low. However, I would suggest if you were a victim to one of these people then one incident is one too many, irrespective of whether it is in the minority or not!

A director (or the board of directors) should never be shy in taking advice, whether that is from the company accountant or solicitor, if there are concerns on whether they may be at risk of not meeting their statutory duties. An insolvency practitioner can add to that advice, based upon both current issues and experience. In short, I would advise directors never to assume but seek advice early.

Should you have an insolvency-related issue or a corporate dispute then please contact PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office).

How secure is your company?

How secure is your company?

A few years ago I asked an audience, “How many of you are self-employed?”  I followed that by then asking, “How many of you set up in business and planned to fail?”

The fact remains we do not set up a business with a view it will fail sometime in the future.  So, why is it we do not take steps to protect our company from any unfortunate incident that may fall upon its leaders?  Possibly because the UK business person is universally recognised as the poorest when it comes to discussing incapacity, or worse.

Perhaps 99.9% of companies that are incorporated adopt the standard articles of association (“Articles”) which governs the company in terms of directorships, voting and all other specific areas of corporate governance as laid down by the Companies Act.

Recently, I was asked to advise where the company operated with a sole director and shareholder.  Unfortunately, that director was injured in an accident, incurring a serious head injury.  As a result, personal injury claims were being prepared, which included a doctor providing a report stating the director was suffering from mental incapacity.  The problem is the Articles state:

“A person ceases to be a director as soon as—

(d) a registered medical practitioner who is treating that person gives a written opinion to the company stating that that person has become physically or mentally incapable of acting as a director and may remain so for more than three months;”

Taking the above into account that particular company now has nobody with authority to operate the business and without  applying to court for the appointment of a personal representative (which can take several months) it is rapidly descending into a financial chasm, leading to its eventual demise.

The above should be a telling tale, if not a warning, for all those small, single director companies.  You should ensure there is a second director registered at Companies House.  This could be your spouse, although couples do have a tendency of travelling together so, try to consider a different person.  Alternatively (or simultaneously) consider a power of attorney whereby someone has the power to protect the company’s interests by (say) appointing a replacement director or being able to ensure trading can be sustained, thus protecting the share value, being a legacy you may wish to leave for your surviving family members.  It is also worth considering appropriate insurance protection as key personnel invariably need to be replaced if the business is to remain viable.

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

HMRC to be a preferential creditor once again

 

The 2018 Budget has seen the announcement that HMRC will regain their preferential creditor status, a position which they lost in 2002 under the Enterprise Act. Since then they have ranked alongside unsecured creditors (such as suppliers, landlords etc).

Chancellor Philip Hammond, speaking in Parliament said, “We will make HMRC a preferred creditor in business insolvencies…to ensure that tax which has been collected on behalf of HMRC, is actually paid to HMRC”.

Further detail announced by HM Treasury states, “Taxes paid by employees and customers do not always go to funding public services if the business temporarily holding them goes into insolvency before passing them on to HMRC. Instead, they often go towards paying off the company’s debts to other creditors.  From 6 April 2020, the government will change the rules so that when a business enters insolvency, more of the taxes paid in good faith by its employees and customers but held in trust by the business go to fund public services as intended, rather than being distributed to other creditors such as financial institutions”.

It is understood HMRC will become a “secondary preferential creditor”, ranking after current preferential creditors, which includes the Redundancy Payments Service and employees for certain elements of their employment rights. HMRC will only become preferential for debts collected by the company on behalf of HMRC, such as VAT, PAYE and employee’s NI contributions but will remain unsecured for Corporation Tax and employers’ NI contributions.

The Government believe this measure will result in an extra £185 million in taxes being recovered each year. However the policy will have other consequences such as:

  • Banks and other lenders may be unwilling to support companies, or charge higher interest rates on lending, as their risk will increase.
  • Other unsecured creditors, including small businesses, landlords, pension funds, suppliers and employees will see the amount they receive reduced.

The full release from HM Treasury is available here:

The budget also included confirmation of proposals whereby directors could be held liable for debts due to HMRC where there is a risk that the company may deliberately enter insolvency. Following Royal Assent of the Finance Bill 2019-20, directors and other persons involved in tax avoidance, evasion or phoenixism could be jointly and severally liable for company tax liabilities in certain cases.

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.

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.