Our dedicated Insolvency Litigation team bring you their monthly update on the cases and issues affecting the insolvency and fraud investigation industry.
Simply asserting that a debt is disputed is not enough to dismiss a winding-up petition
The High Court has confirmed that evidence is required that a debt is disputed on substantial grounds and a mere assertion that that is the case is not sufficient when opposing a winding-up petition.
In Winnington Networks Communications Ltd v Revenue & Customs Commissioners, the Revenue presented a winding-up petition against Winnington for £1.6 million in relation to VAT. The Revenue alleged VAT fraud arising out of fictitious supplies/trading between Winnington and an associated company and alleged payments for input and output tax purposes.
Winnington appealed the VAT assessment and applied to dismiss the petition because the debt was disputed in good faith on substantial grounds and such a disputed debt could not ordinarily form the basis of a winding-up order.
The High Court referred to the well settled rule of practice as per HMRC v Rochdale Drinks Distributors Ltd  that a debt that is wholly disputed on substantial grounds cannot ordinarily form the basis of a winding-up order.
The rule does not, however, entitle a company to do no more than assert that it disputes the debt and then expect the petition to be struck out or dismissed. It is not sufficient for the debtor to simply raise a cloud of objections. It has to properly particularise the basis of the claimed dispute and show that it is a substantial one.
If there is really no dispute, or only as to part, the petition will ordinarily be allowed to proceed (assuming it is over the threshold). If the dispute requires investigation, the petition is generally struck out or dismissed with the parties' differences being dealt with in a more appropriate forum.
In this case, the court found that the evidence put forward by Winnington (mainly invoices passing between Winnington and its associated company) was unconvincing and amounted to unsubstantiated assertions that purchases had been made. The evidence as to payments made lacked any proper corroboration and the reasons given for not being able to obtain relevant documentation (being that the associated company had gone into liquidation and the papers were in the premises Winnington shared with that company) were unconvincing. No corroboration from third parties (as to purchases) had been sought.
The evidence in relation to supply of services was equally unsubstantiated. Despite the statutory obligation on traders to maintain and keep records, none were produced to substantiate that supplies had been made. No primary or secondary evidence had been made available either.
The court held that Winnington's application to dismiss the petition was dismissed. It had not substantiated its case as to there being a genuine dispute and it had no real prospect of successfully appealing the VAT assessment.
This is a good illustration of the court adopting a robust approach to spurious "defences" raised against winding up petitions.
However, it is important to note that the hearing of the petition may be the first time the debtor raises a defence. The petitioning creditor therefore needs to be certain that, despite any cloud of objections raised by the debtor, there is, in reality, no legitimate defence. If there is, and the debtor can give sufficient and robust particulars of its defence, the petitioning creditor may be faced with an order that it pays the costs of the application to dismiss.
Supreme Court gives guidance on the meaning of economic activity and establishment under the EU Insolvency Regulation
In The Trustees of the Olympic Airlines SA Pension and Life Assurance Scheme v Olympic Airlines SA the Supreme Court was asked to consider what connection a foreign company must have with the UK to entitle the English court to wind it up, if its centre of main interest (COMI) is in another member state.
Where a company's COMI is in another member state of the EU, the English court's power to wind up the company is constrained by Article 3 of the EU Regulation 1346/200 on Insolvency Proceedings (the Regulations). Article 3 provides that "the courts of another Member State shall have jurisdiction to open insolvency proceedings only if [the debtor] possesses an establishment within the territory of that other Member State".
Article 3 provides that if insolvency proceedings are brought in the territory within which the company's COMI is situated, proceedings brought in another member state must be secondary proceedings. Jurisdiction to begin secondary insolvency proceedings depends on the existence of an 'establishment' within its territory. An establishment is defined in Article 2(h) of the Regulations as "any place of operations where the debtor carries out a non-transitory economic activity with human means and goods". The Supreme Court held that 'goods' in this context meant the same as 'assets'.
Olympic Airlines SA (Olympic) was wound up in October 2009 with the main liquidation proceedings being in Greece. Under the rules of Olympic's pension scheme, the scheme was to be wound up on Olympic's liquidation. The pension scheme had a deficit of £16 million which Olympic was bound to make good under section 75 of the Pensions Act 1995.
In July 2010 the trustees of the pension scheme (the Trustees) presented a winding up petition against OIympic in England which would qualify as an insolvency event - a necessary step at that stage to ensure the scheme could qualify for entry into the Pension Protection Fund under section 127 of the Pensions Act 2004. The question was whether Olympic had an 'establishment' in the UK within the meaning of Article 3 at the time the petition was presented to allow the petition to be heard here?
Olympic had ceased all commercial operations by September 2009 and by July 2010, had dismissed all but three employees. Those remaining employees were retained on short term contracts and assisted the liquidator in supervising the disposal of assets in England and dealing with general administrative functions such as paying council tax and electricity bills etc on the London premises.
First instance and Court of Appeal decisions
At first instance it was held that economic activity did not have to amount to an external market activity. The activities undertaken by the three employees constituted "non-transitory economic activities" for the purpose of the definition of 'establishment' and the winding up order was made.
That decision was overturned by the Court of Appeal which held "economic activity" had to consist of more than the activities of the three remaining employees in assisting with the winding up of Olympic.
The Supreme Court decision
The Supreme Court considered the authoritative commentary by Professors Virgos and Schmit on the European Convention on Insolvency Proceedings 1995 (the 'Report') which provided useful guidance on the issues in hand.
At paragraph 71 of the Report, the professors commented that "establishment is understood to mean a place of operations through which the debtor carries out an economic activity on a non-transitory basis, and where he uses human resources and goods. Place of operations means a place from which economic activities are exercised on the market...A purely occasional place of operations cannot be classified as an 'establishment'".
The limited case law in this area also suggested that economic activities must be sufficiently accessible to enable third parties, that is to say in particular the companies' creditors, to be aware of them".
The Supreme Court held that the definition in Article 2(h) must be read as a whole - not broken down into discrete elements. The relevant activities must be (i) economic, (ii) non-transitory, (iii) carried on from a 'place of operations' and (iv) using the debtor's assets and human agents, which suggest a business activity consisting in dealings with third parties, and not pure acts of internal administration. They must therefore be activities which "by their nature involve business dealings with third parties".
While some activities which a company in liquidation might carry on may satisfy the definition - for example where the liquidator carries on the business with a view to its disposal - where a company has no subsisting business the mere internal administration of its winding up will not qualify as such an economic activity. Such activities would not be "exercised on the market". The fact that the Regulations require 'economic activities' means it cannot be satisfied by a debtor who simply retains premises in the UK.
In this case no external business was carried on from Olympic's London premises from July 2010, so there was no economic activity from this time onwards. As such Olympic was not considered to have the required 'establishment' in the UK at the relevant time to warrant the winding up petition being heard in the courts there.
The law had actually changed between the Court of Appeal and the Supreme Court hearings. An 'additional insolvency event' was prescribed for the purpose of section 121 of the Pensions Act 2004, which covered the instant case.
However the Supreme Court was still asked to consider the issue because the ' additional insolvency event' in question is deemed to have occurred on the fifth anniversary of the commencement of the Greek proceedings i.e. October 2014, which is some four years after the winding-up order was originally made. The relevance of this is in relation to claw back of any overpaid benefits between the commencement of the Greek liquidation proceedings and the relevant "insolvency event" which would be a longer period if that event occurred in October 2014 rather than on the winding-up in May 2012.
The Regulations are also being reviewed in relation to the length of time a company will need to have been in the UK before it can be regarded as having an 'establishment' here. We will of course update you as and when progress with this review is made.
No win no fee conditional fee agreements in insolvency arrangements - exemption is not available to all administrators
The Companies Court held, in the case of In the matter of Hartmann Capital Limited (Hartmann Capital), that under existing legislation administrators appointed under the Investment Bank Special Administration Regulations 2011 cannot benefit from no win no fee conditional fee agreement (CFA) arrangements that continue to be available in respect of insolvency proceedings.
The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO Act 2012) reformed the operation of no win no fee conditional fee arrangements, bringing to an end the recovery of any CFA success fees and after the event insurance premiums from the losing party from April 2013.
Insolvency proceedings were initially exempt from the reforms (along with other very limited proceedings) and the government confirmed earlier this year [Details of the announcement can be seen here] that the exemption was to continue - giving insolvency professionals more time to adapt to changes to civil litigation funding and also ensuring access to justice for insolvent estates remains open for now.
In Hartmann Capital the joint administrators applied for a declaration that they were entitled to take advantage of the LASPO Act 2012 exemption which applies in relation to insolvency proceedings - referring to the government announcement (above) which confirmed the continuation of CFA arrangements in respect of insolvency proceedings generally.
The court confirmed that the relevant legislation was the LASPO Act 2012 (Commencement No 5 and Saving Provisions) Order 2013 (the Order), and the relevant sections were expressed in more specific terms.
Article 4 of the Order confirms that the exemption applies to, among other things, "proceedings brought by a person acting in the capacity of an administrator appointed pursuant to the provisions of Part II of the 1986 Act" or to "proceedings brought by a company which has entered administration under Part II of the 1986 [Insolvency] Act".
Part II of the Insolvency Act comprises section 8, which states that Schedule B1 is to have effect - Schedule B1 provides for the appointment of administrators. The problem in this case is that the joint administrators were appointed under the Investment Bank Special Administration Regulations 2011 (the Investment Bank Regulations) - one of the specific regimes which have been introduced over the last few years.
The court accepted that the Insolvency Bank Regulations cross referred to Schedule B1 to the Insolvency Act and, in a number of ways, the special administration regime corresponded to the general regime to which Schedule B1 applies. However it was clear that the administrators had not been appointed pursuant to Schedule B1 to the Insolvency Act.
The joint administrators argued that there could be no sensible reason for excluding the administrators of an investment bank, or administrators appointed pursuant to another specific regime, from the insolvency exclusion.
The court accepted the argument had considerable force, however, it was not consistent with the wording of the Order. Hartmann did not enter administration under Part II of the 1986 Insolvency Act and its joint administrators were not appointed pursuant to its provisions. It was clear they were appointed under the Investment Bank Regulations.
Absent legislative intervention the administrators of Hartmann had to be denied access to the funding possibilities available to other administrators through the use of no win no fee CFAs.
It is not clear whether the Government will look at this issue further, especially bearing in mind it was originally intended that insolvency proceedings would only benefit from the LASPO exemption for a limited period of time.
Unless and until any reforms are implemented which make clear the exemption applies to all administrators, only those appointed specifically pursuant to Part II of the 1986 Act can take advantage of the ability to enter into CFA arrangements that allow recovery of the success fee element (plus any after the event insurance premiums) from the losing party.