Re St Georges Property Services in CA: removal of administrators

Re St Georges Property Services in CA: removal of administrators Bulletin No 354

Case: Re St Georges Property Services (London) Ltd (In Administration); Finnerty and White v Clark and Whitehouse [2011] EWCA (CA (Civ Div)), 21 July 2011 (Mummery, Carnwath and Richards LJJ) Synopsis The CA upheld the Chancellor’s decision that the Administrators’ removal by the Registrar in exercise of her discretion under para 88 Sched B1 IA 1986 was not justified and he was correct to reinstate them. Topics Covered: Administration; Administrator’s powers and duties; Procedure; Removal; para 88 Sched B1 IA 1986

The Facts The facts of the case are set out in our bulletin 305 on the High Court decision.  To summarise briefly, St Georges Property Services Ltd had gone into administration after defaulting on a loan.  Two shareholder/directors (the “Guarantors”) had guaranteed the loan.  They contended that the default interest rate payable on the loan (3% per month) was extortionate within the meaning of s244 IA 1986.  They urged the Administrators to challenge it by application to court.  In support of their request, the Guarantors offered to pay for the application and to provide a full indemnity to the Administrators in relation to any adverse costs order they might suffer, and deposited some funds with their solicitor. However, the Administrators’ advisors were lukewarm about the prospects of success and declined to make the s244 application. The Guarantors then applied to court under para 88 Sched B1 IA 1986 to remove them and replace them with other insolvency practitioners who were apparently willing to bring the case to court. The Registrar’s decision At first instance, the Registrar granted the application to remove the administrators, but in terms that did not criticise the Administrators, finding that the Administrators were entitled to reach the conclusion that they were not prepared to bring the proceedings. She acknowledged that appointing a new administrator meant no more than that an independent mind would be brought to bear on the issue. It did not automatically mean that the s244 claim would be brought, let alone be brought to a successful conclusion. However, the Registrar considered that there were certain exceptional circumstances that persuaded her to grant the application, including (i) the fact that the Guarantors were the majority unsecured creditors; (ii) they were continuing to pay another secured creditor and had deposited a significant sum (£950,000) with their solicitors, which the Registrar records was to discharge costs and expenses of both the action and the administration; (iii) if the Administrators were not replaced, there would be no challenge to the default rate to the detriment of the Guarantors; and (iv) without a s244 application, the Company stood no chance of being rescued as a going concern. The First Appeal to the High Court On appeal, the Chancellor overturned the Registrar’s decision. Removal should only be ordered for good or sufficient cause, which should be ascertained by reference to the purposes of the office and the facts of the case.  Although the proposed s244 proceedings constituted a serious issue to be investigated, it did not follow that bringing the s244 application would achieve the statutory purpose of rescuing the Company as a going concern – the outcome desired by the Guarantors was too remote from the Administrator’s removal. In addition, the Chancellor considered that an application for directions to establish whether the Administrators should bring the claim to court was a good and acceptable alternative to removal of the Administrators.  The Chancellor therefore held that the Administrators’ removal was not justified on the facts. The Guarantors appealed to the CA.  The Issue on appeal The issues on appeal were: What are good and sufficient grounds for the court’s exercise of its discretion under the IA 1986 to remove administrators from office? In what circumstances should a court on appeal disturb a first instance decision to remove administrators? The Guarantors submitted that the Chancellor on the first appeal had no proper legal basis for interfering with the Registrar’s order, and that the CA should re-instate the Registrar’s order removing the Administrators.  On an appeal, the Registrar’s decision based on her wide discretion should only be overturned if the Chancellor found that it was one that no judge, properly instructed as to the law with regard to the relevant facts, could have reached (Re MTI Trading Systems [1998] BCC 400 at 404E-F), which they argued it was not. In addition, the Guarantors argued that the Chancellor’s suggestion that they should use an application for directions to resolve their differences with the Administrators was not an adequate alternative remedy because (a) creditors could not bring an application for directions (this option was reserved for the Administrators) and (b) even if there were a hearing for directions, the Guarantors would face the uphill struggle of persuading the court to require the Administrators to do something that the Registrar had already said they were entitled to refuse to do. The Decision The CA upheld the Chancellor’s decision.  Mummery LJ, giving the judgment, agreed with the Chancellor’s summary of the legal principles and their application to the facts.  He concluded that the Registrar’s order was plainly wrong on the evidence before her.  No good ground had been established for removing the Administrators from office. As the Chancellor had done, Mummery LJ also emphasised the independence of liquidators and administrators as officers of the court.  In the ordinary case, the decision whether or not to institute proceedings in relation to the company’s property is one for the office holder.  In the event of substantial disagreement amongst the creditors, the office-holder may, in the last resort, seek the directions of the court. If an administrator is unbiased and entitled on the material before him to reach a relevant decision, such as a decision not to bring legal proceedings, his decision should be respected until the court concluded otherwise, and the fact that another administrator might reach a different conclusion may be a reason to challenge the decision, but cannot be a reason to remove the administrator altogether. Finally, Mummery LJ expressed the obiter view that the Guarantors would be able to make an application to court, either under the IR 1986 or pursuant to the court’s general jurisdiction, for directions to challenge the Administrators’ decision not to bring s244 proceedings. Comment Once again, the Court has confirmed that absent any impropriety or unfair harm on the part of administrators, it will not interfere with their commercial decisions as independent officers of the court.  A decision whether or not to institute proceedings in relation the company’s property is reserved to the office holder, with the option of a directions application if any substantial dispute cannot be resolved. However, Mummery LJ’s obiter comment that it would have been open to the Guarantors in this case to apply to court to decide whether or not to direct the Administrators to bring the s244 action merits some thought.  Para 63 of Sched B1 enables the administrators to apply to court for directions. Para 74 of Sched B1 (challenge to administrator’s conduct of the company) and para 88 Sched B1 (removal of administrator from office) are the express provisions in IA 1986 giving a creditor wishing to challenge an administrator’s conduct power to apply to court for relief.  Para 74 was initially considered in this case and rejected, presumably because there was no suggestion of unfair harm or that the Administrators were not performing their functions quickly and efficiently.  Indeed, the Registrar was at pains to point out that the Administrators had not acted improperly in refusing to bring the s244 claim. Since para 74 was not available to the Guarantors here because they could not meet the high test of unfair harm, that left para 88, which does not require reliance upon unfair harm. However, the CA determined that para 88 did not apply in this case either because removal was not justified. It is settled that, under common law, the High Court has a jurisdiction to control its own officers and hence to control administrators (cases known to members as Atlantic Computers (1990) and Sibec (1992) were early examples of this). The jurisdiction is unbounded save that it must be judicially exercised. What is the position where statutory provisions such as paras 63, 68(2) and 74 of Sched B1 already prescribe who may apply for directions and the conditions for doing so?  How far is the inherent jurisdiction ousted by the express rules represented by the statutory provisions? To answer that question one must generally distinguish between affirmative and negative provisions: the common law can co-exist with a statutory provision with which it is not inconsistent. Thus whether there exists an inherent jurisdiction in the High Court such that it might direct its administrators as its officers as to what they should or should not do, a jurisdiction alongside the many statutory provisions on the same subject, cannot be answered without a careful look at what the legislature has prescribed and the manner – be it negative or positive – in which it has done so. On the first appeal in this case, the Chancellor seemed to suggest that the Guarantors could (and perhaps should) have applied under para 63 of Sched B1. Despite the fact that para 63 confers a power to apply for directions on administrators only, the court in Re Mirror Group (Holdings) (1993) held that its statutory predecessor should be read broadly so as to enable creditors to apply.  This is a neat solution - although it would be a rare case where the court would, at the instance of a creditor, direct an administrator to litigate after a reasoned decision has been made not to do so. Law Debenture sponsor of the Insolvency Lawyers Association

Administration Expenses - proposals for reform - an update

Administration Expenses - proposals for reform - an update

1 August 2011





Dear Member,

As you know the Insolvency Service has been consulting on the impact of the decision in Re Nortel and seeking suggestions for reform of the administration expenses regime. We have recently received a further request from the Insolvency Service for evidence to support the need for legislative change. To view the request you need to log on to the ILA members part of the website first and then click here.



We would encourage members to respond to the Insolvency Service directly with information on any practical experiences they have encountered arising from the uncertainties under the current regime. For lawyers, that experience may be particularly relevant to the questions raised by the second, fifth and sixth bullet points, but please do not feel constrained from responding to as many as you can.



Yours sincerely

Peter Cranston

Council Member

Insolvency Lawyers Association

Law Debenture sponsor of the Insolvency Lawyers Association


If you wish to be removed from the ILA mailing list and not receive any further updates please click here

Great North Run and Grace House

Bulman House, Regent Centre, Gosforth, Newcastle upon Tyne, NE3 3LS Tel: 0191 2850321 | Fax: 0191 2849117 | Web: www.taitwalker.co.uk

Helen and I are running(!) the Great North Run to support Grace House ( http://www.gracehouse.co.uk/ ). It has been some time since either of us have ran such a distance, Helen in 1998, and me in 1999. As you are no doubt aware, I am somewhat prone to injuries whatever sport I decide to do, and have a more impressive injury and side line record than Michael Owen and Kieron Dyer combined (in the last year I have torn a calf muscle, strained Achilles, broken big toe, got fluid on the knee) – so training and the race should be interesting. Grace House is a fantastic charity which is raising funds to build a dedicated children’s hospice in the North East. At present the North East has the lowest number of hospice beds for children in the whole country. We have been blessed with three fantastic children. However, not everybody will be as fortunate as us and many of you. As you read this, there are probably about 1,000 families in the North East coping with the most devastating news any parent can hear – that their much loved child will not live to be an adult. Whatever time left is precious and a children's hospice can help make the most of that time, providing expert medical help and professional care, and also giving emotional support and practical help, allowing the whole family to enjoy the good days and share the bad ones. We would be delighted if you could support us and Grace House by sponsoring our attempt at the Great North North  - any donation will be gratefully received and appreciated. Our just giving page is http://www.justgiving.com/helen-allan-kelly. Thanks for your support. Kind Regards AL Allan Kelly Partner - Advisory Tel: +44 (0) 191 285 0321 Fax: +44 (0) 191 284 9117 Email: allan.kelly@taitwalker.co.uk Mobile: +44 (0) 7921 921 400

Court's discretion to make no order despite transaction at undervalue (High Court)

On an application for relief on the basis of a transaction at an undervalue, the court may exercise its discretion to refuse to make an order, even if the statutory requirements of section 339 of the Insolvency Act 1986 have been met.

In Re the trustee in bankruptcy of Claridge [2011] EWHC 2047 (Ch), the court has found that a transfer of funds by an individual to his spouse was a transaction for consideration the value of which was significantly less than the value of the consideration provided, within the meaning of section 339(3)(c). However, in this case, it was just not to make an order for relief in favour of the trustee in bankruptcy.

This is an unusual decision, following a principle established in Singla v Brown [2007] EWHC 405 (Ch) (and, in the context of corporate insolvency, Re Paramount Airways Ltd (in administration) [1993] Ch 223)). (Re the trustee in bankruptcy of Claridge [2011] EWHC 2047 (Ch).

R3 & JIEB 2011 Alumni Networking Evening – Leeds

R3 & JIEB 2011 Alumni Networking Evening – Leeds

Tuesday 6 September 2011

We are delighted to invite you to attend an R3 & JIEB Alumni Networking evening in Leeds on the 6th September 2011.

This evening will acknowledge past JIEB graduates and will be an opportunity to network with colleagues in the region.

We hope you will be able to join us for canapés and cocktails at this memorable event.  The reception will take place at the Mint Hotel Leeds, 2 Wharf Approach, Granary Wharf, Leeds LS1 4BR and will start from 6:30pm.

The cost of attendance is £15.00 (£12.50 plus VAT) and members wishing to attend should complete the enclosed booking form and return to Katherine Bassett at R3, 8^th Floor, 120 Aldersgate Street, London, EC1A 4JQ or e-mail on kbassett@r3.org.uk.

We look forward to receiving confirmation of your attendance.

Yours sincerely

Frances Coulson

R3 President

Association of Business Recovery Professionals
8th Floor, 120 Aldersgate Street
London
EC1A 4JQ
t: 020 7566 4230
f: 020 7566 4224
e: association@r3.org.uk
www.r3.org.uk

News from IDS Brief - TUPE transfer of insolvent company: liability payable by transferee, not by the NI Fund

News from IDS Brief - TUPE transfer of insolvent company: liability payable by transferee, not by the NI Fund

In Pressure Coolers Ltd v Molloy and ors EAT 0272/10 the EAT held that liability for a basic award and notice pay owed to a transferring employee of an insolvent business did not pass to the Secretary of State under Reg 8(3) of the TUPE Regulations where the employee had been dismissed after the transfer. While Reg 8(3) provides that certain liabilities owed towards transferring employees pass to the Secretary of State rather than the purchaser on the transfer of an insolvent business, it only applies to liabilities incurred before the transfer. The EAT (presided over by Mrs Justice Cox) ruled that since the relevant liabilities had not arisen by the date of the transfer, they were not liabilities falling within the scope of the guarantee provided by S.184 ERA 1996, and so it was the transferee – not the Secretary of State – who was liable to meet them.

M had been employed by M Ltd as a bench fitter for 20 years. As a result of financial difficulties, that company was put into administration at 11 am on 13 January 2009. As a result of pre-negotiations with the administrator, M Ltd’s business was simultaneously transferred to PC Ltd – a transfer to which the TUPE Regulations 2006 applied. In consequence, M’s employment was transferred from M Ltd to PC Ltd. At 3pm on the same day the administrator dismissed M for redundancy without any prior warning or consultation.

M commenced employment tribunal proceedings for, among other things, unfair dismissal, notice pay, unpaid holiday entitlement and arrears of pay. The tribunal upheld these complaints and initially ruled that the Secretary of State was liable to make payment out of the NI Fund in respect of them, including the basic award for unfair dismissal. Following a review of its decision, however, the tribunal back-tracked: it accepted the argument, based on Reg 8(3) of the TUPE Regulations, that the Secretary of State was only liable to meet those claims that were specifically due on or before the date M was transferred to PC Ltd. As M Ltd’s liability for the pay arrears and unpaid holiday had crystallised by the date, those payments were payable out of the NI Fund – a finding that the Secretary of State accepted. However, the liabilities for notice pay and the basic unfair dismissal – being liabilities that arose on dismissal – had not so crystallised, and it followed that it was PC Ltd as the transferee, not the Secretary of State, that was liable for them.

PC Ltd’s contentions on appeal to the EAT focused on the proper interpretation of Reg 8(3) and S.182 ERA. Normally, outside a TUPE context, in order for an insolvent employer’s liability for a basic award and notice pay to be met by a payment out the NI Fund, the conditions set out in S.182 have to be satisfied, which include proof that that the employee’s employment has been terminated. However, in the context of a TUPE transfer of a company in administration, Reg 8(3) modifies S.182 by stipulating that ‘the relevant statutory scheme [i.e. the NI Fund] shall apply in the case of a relevant employee irrespective of the fact that the qualifying requirement that the employee’s employment has been terminated is not met and for those purposes the date of the transfer shall be treated as the date of the termination and the transferor shall be treated as the employer.’ PC Ltd contended that the effect of this was that all relevant liabilities belonging to the insolvent company – in so far as they are liabilities covered by the NI Fund guarantee – had to be met by the Secretary of State, whether or not they arose or ‘crystallised’ after the transfer had occurred.

Rejecting this contention, the EAT examined the relevant provisions in the EU Acquired Rights Directive 2001/23 and other recent case law to reach the clear conclusion that the relevant debts have to arise before the transfer to come within the State guarantee provided for by S.184 . Cox J reasoned that, without the modification to S.182 ERA made by Reg 8(3), transferring employees would be unable to avail themselves of the guarantee provided by that provision because, at the date of the transfer, there would have been no termination of their employment. This difficulty is resolved by means of Reg 8(3), which treats the date of transfer as the date of termination and treats the transferor as continuing to be employer notwithstanding the transfer. The effect of this deeming provision is – for this purpose only – to ensure that relevant liabilities crystallising on or before the time of the transfer do not get transferred to the transferee but rather are treated as continuing liabilities of the transferor in respect of which the Secretary of State picks up the tab. However, where, as in the instant case, the employee was unfairly dismissed by the transferee after the transfer, liability to pay the basic awarded and notice pay cannot sensibly be said to constitute a liability in respect of the transferring employee, since, at the time he is transferred, there is no such liability.

This case will be reported in full in a future edition of IDS Employment Law Brief.

Further information:

http://www.employmentappeals.gov.uk/Public/Upload/10_027204790480rjfhSBRN.doc

Source: EAT 10/06/2011

© Incomes Data Services Ltd, 2011

www.idsbrief.com 

Follow IDS on Twitter or visit our blog at www.idseye.com

Re Kimberly: no grounds for removing liquidators

Re Kimberly: no grounds for removing liquidators Bulletin No 351

Case: Beattie v Smailes & Anr, Re Kimberly Scott Services Ltd [2011] EWHC 1563 (Ch) (24 May 2011, Norris J) Synopsis The court refused to exercise its power under s108(2) IA 1986 to remove the Joint Liquidators of two related companies because the conflict of interests between the two companies was manageable by way of application to court for directions, and therefore removal was not warranted.  In addition, removing the Joint Liquidators would have significantly hindered the conduct of the substantial fraudulent trading claim that the Joint Liquidators had begun on the basis of CFAs, ATE insurance and an indemnity that was personal to them. Topics Covered: Liquidation Procedure; Liquidators’ Powers and Duties; removal (s108)(2) IA 1986)

The Facts Atrium and Kimberly were two companies from the same group, both in liquidation, and with common Joint Liquidators.  Atrium had operated in the field of recruitment and had provided services as a temporary employment agency in the construction and other fields.  Kimberly had provided payroll services both to recruitment agencies generally and to Atrium.  However, Kimberly had failed to operate its tax structure properly, it had also failed to account to HMRC for any VAT, NIC and PAYE deducted during the course of its payroll business, and it had failed to submit any corporation tax returns, giving rise to a substantial multi-million pound claim by HMRC against one or other, or both, of Kimberly and Atrium.  The nature of, and responsibility for, tax liabilities between Kimberly and Atrium were confused, and it had not yet been resolved what each of Kimberly and Atrium owed HMRC, or each other.  Kimberly had no assets except for a potential claim against Atrium and a fraudulent trading claim against its directors.  Atrium had cash at bank of £2.5m.  Other than Atrium and HMRC, Kimberly had one additional creditor: Mr Beattie, an IP, in respect of advice provided before Kimberly’s liquidation, for £5000. Mr Beattie had not previously proved his claim in Kimberly’s liquidation. Mr Beattie now brought this application to remove the Joint Liquidators of Kimberly and replace them with an independent IP on the grounds of the conflicting duties of the Joint Liquidators caused by the competing interests of Atrium and Kimberly. The Decision S108(2) IA 1986 provides that “The court may, on cause shown, remove a liquidator and appoint another.” The judge outlined the relevant principles for considering a removal application: 1.   As office holders, the Joint Liquidators are fiduciaries, charged with the duty of protecting, getting in, realising and ultimately passing on to others assets and property which belong to creditors or contributories. 2.   They must act impartially. 3.   The court has power to remove them under s108(2) IA 1986 “on cause shown”. 4.   The court’s power is to be exercised by reference to the general principle stated by Bowen LJ in Re Adam Eyton Ltd (1887) 36 Ch D 299 at 306 “…the due course is to be measured by reference to the real, substantial, honest interests of the liquidation, and to the purpose for which the liquidator is appointed.”   The primary purpose of the Joint Liquidators’ appointment was (in this case) to investigate why Kimberly had gone into liquidation without any assets, to identify the claims existing at the date of the liquidation, to recover such assets as exist and to distribute them. 5.   It is desirable that a conflict of interest on the part of a liquidator between his duties as liquidator and his interests in some other capacity should be avoided (Re Corbenstoke Ltd [1990] BCLC 60). 6.   Conflicts between competing duties are regularly encountered in liquidations of associated companies where there are intercompany dealings that have to be unscrambled.  Of itself, this does not disqualify a liquidator from acting, or properly found any application for his removal.  As Lord Hoffman observed in Parmalat Capital Finance Ltd [2009] 1 BCLC 274 at 279: “It is not unusual for the same liquidators to be appointed to related companies even though dealings between them may throw up a conflict of interest.  It avoids the expense of having different liquidators investigate the same transactions. The attitude of the court has been that any conflicts of interest can be dealt with by the court on the application of the liquidators when they arise.” The Judge considered that appointing the same liquidators to both Atrium and Kimberly made good sense because in investigating both sides of the transactions their resources could be pooled.  Any conflict could be addressed by application to court for directions (Parmalat and Re York Gas [2010] EWHC 2275). In addition the Judge was influenced by the fact that the Joint Liquidators had just commenced fraudulent trading proceedings against the directors of Atrium and Kimberly for an amount in the order of £50 million. The claim was Kimberly’s only asset and was only possible because the Joint Liquidators were prepared to assume the personal risk of conducting the litigation without any assets from which to seek reimbursement for costs incurred or awarded against them, having negotiated CFAs with a legal team, an ATE insurance policy and a personal indemnity from HRMC in relation to the proceedings.  If the Joint Liquidators were removed, none of these agreements would stand and all would have to have been renegotiated by a replacement liquidator.  Much of the conflict of interest would be dealt with by the court in the course of the fraudulent trading proceedings in any event. Removal of the Joint Liquidators was therefore not warranted, and would be detrimental to the conduct of Kimberly’s liquidation. Comment This application by a creditor with such a relatively small claim was unusual.  It is not clear on the face of the judgment why the applicant considered that his £5000 claim against Kimberly merited separate consideration by an independent liquidator, nor why any dividend that he might receive on his small claim from an almost asset-less company was worth the costs incurred in bringing the application.  The Judge described it as an “extravagant claim” and awarded costs against the applicant on an indemnity basis. It does, however, provide a helpful reminder of the principles involved in considering an application to remove a liquidator, and a costs warning that the court will give short shrift to an application if it considers that it is not justified. In this last respect, this warning is no more than a reflection of the special costs regime which r4.143 IR 1986 imposes on these cases: There is a statutory filter for weeding out frivolous etc applications at the outset (r4.143(2)). The court has a special power to direct the applicant to provide a deposit or security as a condition of allowing him to proceed (r4.143(3)). Unless the court otherwise directs, the costs of the application are not payable out of the assets (r4.143(4)). Law Debenture sponsor of the Insolvency Lawyers Association

VAT EXEMPTION FOR IVA SERVICES

22 July 2011 www.r3.org.uk Practitioners will no doubt be aware from various circulars of the recent decision in the case of Paymex Ltd v HMRC and the issues arising in respect of potential refund claims in IVA cases where VAT has been charged (perhaps wrongly, in the light of this decision) and paid over to HMRC. Questions have been posted to the regulators, R3 and those providing compliance services, about some of the points requiring clarification. HMRC has confirmed that it will not be appealing the decision. Whilst we are not in a position to issue definitive advice, we would remind practitioners of the following principles which should be taken into account when considering what action if any they may contemplate in respect of VAT previously charged and paid to HMRC: 1.    Practitioners acting as nominee and/or supervisor do so in accordance with basic trustee principles which should ensure that they act in the best interests of the beneficiaries of the estates over which they have been appointed. 2.    Where an estate has suffered a charge for VAT, practitioners should give very careful consideration to the identity of the appropriate recipient of any refund obtained, and ordinarily we would expect the estate to be the beneficiary of such a refund. 3.    Whether a practitioner (where still acting as supervisor) is able to draw the funds received (in whole or part) as remuneration will depend on the terms and conditions of each IVA, as modified and/or varied. Questions relating to the position on closed cases are less straightforward. Practitioners may wish to take advice on whether they have the locus to claim a refund in respect of such cases, having regard to the above principles. Practitioners may also wish to consider whether they should lodge with HMRC protective notice of their intention to claim refunds, with a view to fixing the claim period and potentially maximising recoveries. There may be some expectation amongst creditors and their representatives that practitioners should instigate claims, at least in open cases, irrespective of any personal or self-interest consequential issues that may arise for practitioners or their VAT-registered firms – consideration should be given to the extent to which there is an obligation to do this, subject of course to agreeing with relevant stakeholders an appropriate level of remuneration for carrying out the necessary work. Practitioners should consider whether there is a strong authority not to charge VAT on fees going forward. Were that stance to be adopted, and where nominees’ fees are approved by creditors on a VAT-inclusive basis, it might be prudent to provide for the potential VAT liability. This statement has been agreed and issued on 22nd July 2011 by the following: Association of Business Recovery Professionals Association of Chartered Certified Accountants Insolvency Practitioners Association Institute of Chartered Accountants in England & Wales A similarly-worded statement may be issued by other bodies in due course; The Insolvency Service will issue a statement next week in its ‘Dear IP 50’.

If you would like to unsubscribe and not receive email from us in the future then please send an email tounsubscribe@r3.org.uk. The information in this email is for information purposes only. It does not purport to constitute legal or professional advice and should not be taken as a definitive statement of the law. The Association of Business Recovery Professionals shall not be liable for any losses or damages whatsoever arising from reliance on information contained in this web site, or from any interruption or delay in access to the web site for whatever reason. 8th Floor, 120 Aldersgate Street , London, EC1A 4JQ | Tel: 020 7566 4200 | Fax 020 7566 4224 | E-mail: association@r3.org.uk

This message has been scanned for viruses by R3.

Pressure Coolers: TUPE and dismissals after a pre-pack

Pressure Coolers: TUPE and dismissals after a pre-pack Bulletin No 353

Case: Pressure Coolers Ltd v Malloy, Maestro International Ltd and SoS for Trade and Industry 2011 WL 203 9903 (Employment Appeal Tribunal, Cox J, 9 June 2011) Synopsis An Employment Appeal Tribunal (EAT) held that, under reg 8(3) of TUPE, it was the transferee purchaser, and not the Secretary of State (SoS), who was liable to pay the Claimant employee’s basic award and notice pay following his unfair and wrongful dismissal by the transferee after a “pre-pack” administration TUPE transfer. Topics Covered: TUPE, Administration, Pre-pack, Employment

The Facts Maestro sold its business as a going-concern using a pre-pack administration procedure. Although the Claimant had been identified for redundancy by the Buyer before administration, he was not actually dismissed until a few hours after the pre-pack sale had completed. The dismissal was effected by the Buyer. There was no consultation. He received no notice of dismissal and no pay in lieu. The issue on appeal was who should pay the Claimant’s basic award and notice pay where he had been unfairly and wrongfully dismissed by the Buyer after a “pre-pack” TUPE transfer of a business from a transferor in administration. Reg 8 of TUPE relaxes some of the usual effects of TUPE for relevant transfers by transferors who are subject to insolvency proceedings.  The reason for relaxing the effects of TUPE in insolvency is to incentivise purchasers to acquire businesses from insolvent transferors in order to promote business rescue. TUPE differentiates between two types of insolvency proceedings.  The first type is insolvency proceedings instigated with a view to the “liquidation” of the company’s assets (“liquidation proceedings”).  The second type is other (i.e. non-liquidation) proceedings referred to in TUPE as “relevant insolvency proceedings”.  Administration is a “relevant insolvency proceeding”. In a TUPE transfer by a transferor that is subject to “relevant insolvency proceedings”, all the relevant employees still automatically transfer to the transferee, but regs 8(1)-(6) of TUPE modify some of the other provisions of TUPE to mitigate the burden on the transferee.  Under reg 8(3), it is the SoS, rather than the transferee, who is liable for certain of the employee’s pre-transfer claims, up to statutory limits, by reference to s184 Employment Rights Act 1996 (“ERA”).  There is a deemed dismissal at the date of the transfer so as to engage the State Guarantee Scheme, which is the scheme set up to safeguard minimum rights of employees of insolvent employers.  Similarly, reg 8(5) has the effect of making the SoS rather than the transferee liable to meet any redundancy liabilities (again, up to statutory limits).  These will typically arise where there are dismissals for redundancy that are not for economic, technical or organisational reasons. Thus the transferee from a transferor in relevant insolvency proceedings acquires the employee, but without the baggage of past liabilities. The Decision This Judge looked at the detail of reg 8 of TUPE and s184 ERA to see exactly which liabilities count as “past”.  In particular it was the deemed termination provision of reg 8(3) that required interpretation. The Judge decided the issue by reference to the corresponding provisions of the EC Acquired Rights Directive 2001/23/EC. The effect of Art 5(2)(a) of the Acquired Rights Directive is that the debts of the transferor that are within the scope of the State Guarantee Scheme (i.e. those listed in s184 ERA) are frozen at the time of transfer, and paid by the SoS, and they do not pass to the transferee.  In order to fall within this State Guarantee Scheme, the debts have to arise before the transfer.  Any debt or liability arising after transfer is beyond the scope of the State Guarantee Scheme.  The deeming provision in reg 8(3) to provide a deemed dismissal for relevant employees whose employment have transferred (so as to engage the State Guarantee Scheme) should be interpreted accordingly. In the present case the Claimant’s employment was terminated only after the transfer, and so liabilities arising out of the termination did not arise before the transfer and were not payable by the SoS from under the State Guarantee Scheme. Comment This was not a case in which the Claimant was adversely affected by either outcome.  His rights, as an individual worker, had been safeguarded whether the transferee or the SoS were liable for the amounts claimed. Coming relatively soon after the TUPE case of OTG v Barke (see our bulletin 340) this case provides useful further clarification of how TUPE operates in the context of an insolvency.  In both cases the Judge deferred to the originating EC Directive to decide upon the correct interpretation of the English TUPE Regulations. The purpose of the Acquired Rights Directive is to protect employees’ rights in a business transfer scenario.  As we have noted before, this objective comes into direct conflict with the objective of promoting business rescue where the transferor is insolvent.  A balance needs to be struck.  If the employees’ rights are so heavily protected that a business purchaser is deterred from buying the business, then the business is unlikely to be rescued and the employees will lose their jobs. Such protection would be self-defeating.  And so reg 8 of TUPE (which is derived from Art 5 of the Acquired Rights Directive) attempts to mediate a compromise between the various levels of employee protection and the degree of insolvency facing the transferor.  But as the Judge in OTG v Barkeobserved (see our bulletin 340): “the effect of those provisions hardly leaps from the page”.  We understand that one of the conjoined cases in OTG v Barke is being appealed and will be heard by the CA in October.  It is therefore likely that we will soon have the benefit of further judicial scrutiny of the provisions of reg 8. Law Debenture sponsor of the Insolvency Lawyers Association If you wish to be removed from the ILA mailing list and not receive any further updates pleaseclick here

anti-deprivation: a question of substance not form

• Mayer Brown LLP
• Devi Shah, Ashley Katz, Kristy Zander, Alexandra Wood and Jennifer Fox
• United Kingdom
• July 29 2011
• 

Author page »Author page »Author page »Author page »Author page »

In the much anticipated decision of Belmont Park Investments PTY Limited v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc [2011] UKSC 38 the Supreme Court has unanimously dismissed the appeal of Lehman Brothers Special Financing Inc (“LBSF”) and in so doing provided clarification as to the scope and application of the anti-deprivation rule (the “Rule”).    

Significantly, the majority of the Court held that the Rule applies to invalidate arrangements which deliberately and intentionally seek to remove assets from an insolvent’s estate to the detriment of its creditors. Accordingly the Court stated that where sophisticated commercial parties had entered into an arrangement in good faith, the courts should be slow to invalidate the bargain which had been struck and should consider the application of the Rule on a case by case basis.  

Having concluded that the Rule was not breached by the contractual clauses under consideration, it was not necessary for the Court to determine whether the Rule operates where the alleged deprivation is triggered by the insolvency of a third party, as opposed to the party who is deprived. However, Lord Collins expressed the view that the Rule would have no application in such circumstances, as had been decided at both first instance and in the Court of Appeal.

The Facts

In October 2002 the Dante programme (the “Programme”) was established through a special purpose vehicle formed by Lehman Brothers International (Europe) (the “Issuer”). The Programme raised capital for investment by issuing credit-linked notes to investors (the “Noteholders”). The subscription monies received from the Noteholders were used to purchase securities as collateral, which were charged and then vested in a trust corporation (the “Trustee”). The various contracts comprising the Programme, with the exception of that for the purchase of collateral, were governed by English law.

In order to meet the interest payments due to Noteholders, the Issuer entered into an ISDA swap agreement with LBSF on terms that LBSF would receive the income received on the collateral, and in return would pay to the Issuer an amount equal to the interest due to Noteholders.

The swap provided that the proceeds from the collateral were to be applied first to satisfying the Issuer’s obligations to LBSF and only then to satisfying the Issuer’s obligations to the Noteholders. However, the swap agreement provided that if LBSF was in default under the swap it would rank after the Noteholders in respect of the collateral proceeds (the “Flip”). This contractual arrangement was also set out in the terms and conditions attached to the prospectus sent to the Noteholders.

On 15 September 2008 Lehman Brothers Holdings Inc (LBSF’s parent) entered Chapter 11 bankruptcy in the US, which triggered an event of default under the swap. The Trustee, pursuant to the direction of the Noteholders, caused the Issuer to terminate the swap with LBSF. Significantly, this event of default prompted the operation of the Flip within the swap agreement, such that the priority of claims to the collateral held by the Trustee was altered. LBSF challenged the validity of the Flip on the basis that it contravened the Rule and claimed that the Trustee should first apply the collateral proceeds for the benefit of LBSF.

The High Court, and latterly the Court of Appeal, upheld the terms of the swap agreement and found that the Flip provision did not breach the Rule, although for different reasons. LBSF appealed to the Supreme Court.

Decision of the Supreme Court

Lord Collins (with whom Lord Phillips, Lord Hope, Lord Walker, Lady Hale and Lord Clarke agreed) gave the leading judgment and dismissed the appeal of LBSF. Lord Mance also dismissed the appeal, but for different reasons.

1. A breach of the anti-deprivation rule?

Lord Collins sought to ascertain the limits of the anti-deprivation rule using the existing body of relevant case law and, in so doing, strike a balance between the need to prevent assets being withdrawn from an estate on insolvency to the detriment of creditors, as against the important principle of party autonomy on entering into agreements which “is at the heart of English commercial law” . Lord Collins upheld the anti-deprivation principle, but framed its application as a matter to be ascertained on a case by case basis, depending on the “commercial reality” of the transaction.  

The Court considered four main arguments in reaching its decision:

• First, that commercial sense and an absence of • intention to intentionally evade insolvency laws were found to be significant factors in previous decisions where the court has declined to find a breach of the Rule, and instead upheld the autonomy of the contracting parties. Lord Collins did not stipulate that a subjective intention to evade mandatory insolvency laws was necessary, but that the intention was to be inferred from the circumstances of each case. Lord Collins went on to say that “there is a particularly strong case for autonomy in cases of complex financial instruments” . Accordingly, His Lordship applied the Rule in a commercially sensitive manner, taking into account the policy of contractual autonomy and upholding proper bargains. In so doing, it was held that the Flip did not breach the anti-deprivation principle and that the swap formed part of “… a complex commercial transaction entered into in good faith” ; it is this reasoning which underpinned the majority decision of the Court.
• Secondly, Lord Collins clarified that the Rule does not apply where the deprivation in question takes place for reasons other than insolvency. This is consistent with the purpose of the Rule being to safeguard the estate of an insolvent for the benefit of its creditors, such that there is no call for its application in circumstances outside insolvency.
• Thirdly, an issue which emerged from the body of case law was the question as to whether there is a difference between (i) a flawed asset (one in which the interest was always subject to the condition of the counterparty not going into insolvency) and (ii) an interest which is granted outright and then forfeited due to the onset of insolvency. It was on this aspect that Lord Mance split from the majority of the Court. For the majority of the Court, the fact that the Flip was provided for in the Programme documentation at the outset was not determinative of the question whether the Flip provision contravened the Rule. While Lord Collins recognised that it remains unclear where the line between a flawed asset and an interest forfeited on insolvency is or ought to be drawn, his Lordship found that the concept of the flawed asset is too well established to be destabilised otherwise than by legislative intervention. Lord Mance took a different approach and found that prior to an event of default under the swap, neither the Noteholders nor LBSF had priority over the collateral proceeds. His Lordship found that it was only once there had been an event of default that the priority to the collateral proceeds would be determined pursuant to the terms of the swap, and that the Flip did not contravene the Rule. Given the differences in the Court’s reasoning in this respect, the scope of the flawed asset theory remains uncertain.
• Fourthly, under the Programme it was the Noteholders who had provided the funding for the collateral to be acquired and it was the Noteholders who were to have priority over the proceeds of that collateral pursuant to the Flip. Accordingly this raised the question as to whether the Rule applies if the assets being taken from an insolvent estate (the apparent deprivation) had come from the party who would receive the benefit of the deprivation. Lord Collins did not consider that it would be right for there to be a general exception to the Rule based on the source of the assets. However, his Lordship went on to say that it may well be “an important, and sometimes decisive, factor in a conclusion that a transaction was a commercial one entered into in good faith” .  

2. Timing of the deprivation

As the Court concluded that the Rule had not been contravened by the Flip, it was not necessary for the Court to resolve the question as to whether there could be a deprivation within the meaning of the Rule where the insolvency triggering the deprivation is of a third party, rather than the party deprived. Both the High Court and Court of Appeal accepted that in such circumstances the Rule would not be engaged. While Lord Mance preferred not to provide an opinion on the issue, Lord Collins expressed the view that both the judge at first instance and the Court of Appeal were correct in this regard.

Comments

The approach of the Supreme Court in this appeal reflects the desire of the courts, as far as possible, to give effect to contractual terms agreed between parties. In particular, the terms of Lord Collins’ judgment rests heavily on the commercial context and sophistication of the parties to the Programme. In this regard, there remains scope for argument that the application of the Rule may have a different outcome where the parties in question are not sophisticated financial investors or institutions. However, the will of the Court to give effect, where possible, to the terms of a commercial bargain is consistent with the purposive approach taken by the Court in connection with questions of contractual interpretation and construction, and one which promotes certainty of contract.

The approach taken by the Court means that it is a question of the substance of the transaction rather than its form which determines its susceptibility to the anti-deprivation principle. While breaches of the Rule will continue to develop on a case by case basis, the factors identified by Lord Collins as being relevant in determining a breach of the Rule provide long-awaited guidance on this topic.

In light of the views expressed by Lord Collins and the reasoning of Lord Mance, the continued uncertainty surrounding the validity of a flawed asset arrangement remains an important area for future legislative development and clarification.

From the perspective of corporate trustees operating in complex financial transactions, the decision provides more certainty for those entities administering trust assets in an enforcement or wind down scenario in accordance with the terms of transaction documents.

Disappointingly, the decision of the Supreme Court does not expressly address the question of the extent to which the Rule is applicable in circumstances where the insolvent company in question (LBSF) is not an English company or subject to English insolvency law. Accordingly, a significant element of uncertainty remains, both as to the practical effect of the decision in this particular matter (in light of a potentially contrary conclusion reached by the US Bankruptcy Court on the application of the equivalent of the Rule in the US Bankruptcy Code) and as to how similar situations will be dealt with by the courts in future. It seems probable that further litigation will ensue, and developments on this aspect of the case will continue to be monitored closely on both sides of the Atlantic.