Insolvency litigation briefing - March 2015

31 March 2015


Wragge Lawrence Graham & Co's dedicated insolvency litigation team brings you its monthly update on the cases and issues affecting the insolvency and fraud investigation industry.

1. Clarification of the questions to be determined on an application to annul a bankruptcy order under S 282(1) of the Insolvency Act 1986

S 282(1) of the Insolvency Act 1986 (s282) provides that the court may annul a bankruptcy order if at any time it appears "… that, on any grounds existing at the time the order was made, the order ought not to have been made."

Background

In JSC Bank of Moscow v Kekhman and others, Kekhman was a Russian citizen and resident there. He had personally guaranteed a number of loans to his international businesses which subsequently ran into financial difficulties. The guarantees were called upon and Kekhman successfully petitioned for his own bankruptcy here in England on the basis of his temporary presence in England and Wales on the day of presentation of his petition (s 265 (1)(b) of the Insolvency Act 1986).

JSC Bank of Moscow (JSC) claimed to be one of Kekhman's creditors - to the tune of over $150 million. In its capacity as such a creditor, it applied for an order under s282 for an annulment of the bankruptcy order on the basis it should not have been made. JSC argued Kekhman did not have a sufficient connection with this jurisdiction; he would not benefit from the order as the majority of his debts were in Russia and would not be written off by the order (due to the non-recognition in Russia of an English bankruptcy order); and the order was unfair to creditors.

Decision

The High Court held that the questions the court had to determine on such an application were:

  • What were the grounds existing at the time the order was made?
  • Whether on those grounds the order ought not to have been made?
  • Whether it should then go on to exercise its discretion to annul the order if it found that the order ought not to have been made?

The court found Kekhman did have sufficient connection with the jurisdiction by reason of his liability under guarantees governed by English law for £86 million which would, following the bankruptcy, be discharged. This resulted in a benefit to Kekhman even though there would be other international debts which would remain outstanding.

The court also found that the order did not offend obligations of international comity. The English court could make orders which were effective in England and in other jurisdictions which chose to recognise it but which would be ineffective in jurisdictions which refused to do so. Where the parties to a contract had agreed that it should be governed by English law and that there should be an English jurisdiction clause, it was not contrary to the principles of comity for an English court to make an order discharging a debtor's liability under it.

The court had to consider the position of creditors as a whole. The order had not been opposed by the creditors generally and there was no unfairness caused to them by the making of the order.

The bankruptcy order ought to have been made and therefore, the court had no discretion to annul it under s282.

Comment

The issue of bankruptcy tourism remains a live issue that the courts continue to grapple with in circumstances where foreign nationals seek to take advantage of more lenient bankruptcy laws here and foreign creditors, who feel disadvantaged by the process, object.

The court will probably not exercise the discretion to wind up a foreign company or bankrupt a foreign individual where there are no assets, there is no connection to the jurisdiction and/or there is no purpose to be fulfilled i.e. it would be pointless. However, the court probably will do so if there is an obvious benefit, a strong connection and/or something to administer. There is necessarily a wide spectrum between those two positions which the court will consider in exercising its discretion.

What this case makes clear is that, notwithstanding the fact that an individual's presence in this jurisdiction is fleeting, if there are other factors that connect such a person to the English courts (such as contracts governed by English law), that fleeting presence in itself will not suffice to convince the court to annul the bankruptcy order.

2. Out of court appointment of administrators by the company's directors was valid even though no notice of intention to appoint was served

In re Eiffel Steel Works Limited the High Court confirmed that the out of court appointment of administrators by a company's directors was valid. No notice of intention to appoint was given to the company itself, but this was not sufficient to render the administrators' appointment a nullity.

Background

Eiffel Steel Works Limited (the Company) was engaged in the manufacture of structural steelwork for larger steel companies. Its immediate parent (the Parent) was Eiffel UK Limited, which in turn was a subsidiary of a French company (the French Parent). Concerns were raised in the summer of 2014 as to the financial viability of the Company and the Parent as, although the Company had no bank debt, it (and the Parent) was mainly funded by intercompany lending. By October 2014, the intercompany liabilities exceeded £2.7million to the Parent and £3.9 million to the French Parent. By that time, the Company had simply run out of money.

At a board meeting in November 2014, the directors of the Company appointed the joint administrators. Draft documents relating to the administration, and the proposed liquidation of the Parent, had been sent to the directors of the Company and the Parent - the directors of each company being one and the same. All relevant parties - the shareholders and the directors - were therefore aware of the proposed appointment of the joint administrators.

What did not happen, however, was formal notice of intention to appoint being served on the Company itself, in accordance with paragraph 26(2) of Schedule B1 of the Insolvency Act 1986 and rule 2.20(2) of the Insolvency Rules 1986.

The Insolvency Act and the Insolvency Rules make it clear that a company and, separately, its directors, have the ability to appoint an administrator. If the directors of the company appoint the administrators, notice of that appointment is then required to be given to the company itself.

The administrators therefore applied to the court seeking a declaration that the appointment of the joint administrators was valid, notwithstanding the fact that a notice or copy of a notice of intention to appoint administrators was not given to the Company. In the alternative, they also sought an order that the appointment of the joint administrators and all acts carried out pursuant to the appointment were regarded as valid, notwithstanding any defect in the appointment. In the further alternative, they sought an order confirming appointment of the joint administrators with retrospective effect.

Decision

The court held that there is a requirement to give notice of the appointment of administrators to the Company, however, not doing so is a defect which is capable of being remedied and does not amount to a nullity. Failing to give notice is simply a remediable defect. The court acknowledged the Parent was fully aware of and approved of the resolution to appoint the joint administrators and held that in such circumstances there was no ascertainable prejudice of any kind.

The appropriate order was a declaration that the appointment of the joint administrators was valid - despite the failure to give notice of the appointment to the Company. On that basis there was no need for the court to consider the appointment retrospectively of the joint administrators.

Comment

This case shows the court's more relaxed approach to minor defects in the appointment of administrators. Minor defects in an administrator's appointment may not necessarily result in a successful challenge to its validity. Such defects should not, however, be overlooked. Once a defect has come to light, an application to the court should be made to ensure the defect is remedied and the administrator's appointment is approved.

3. Administrators' remuneration could not be challenged where the administrators were entitled to conclude the company could be rescued as a going concern

A recent Chancery Court decision looks at whether administrators' fees and disbursements can be challenged where the administration can achieve its purpose.

In The Matter of BW Estates Limited, creditors of the company (the Company) applied to the court seeking an order that the administrators' remuneration in relation to their dealings with the Company should be disallowed, or reduced accordingly.

Background

The Company was involved in property investment, owning five properties, all of which were occupied by tenants and all of which were charged to the bank. The assets of the Company were affected by a freezing injunction obtained by the creditors in separate litigation against the sole director's father (who was said to be the controlling mind of the Company). As a result of the freezing injunction mortgage payments to the bank were missed. The bank did not appoint administrators - although it was unlikely to in circumstances where the rent was sufficient to cover the outgoings and the properties were ample security - however, LPA receivers were appointed.

The Company's director subsequently appointed administrators - the bank was given notice and did not object. It also did not take the opportunity to make its own appointment.

In their application to the court, the creditors contended that there had been no need for the Company to go into administration at all. There had been no reason for the Company to fail to make payments to the bank - it was the creditors' view that the defaults to the bank were engineered and the administrators were only appointed to delay or frustrate the efforts to secure assets in the separate litigation. They asserted that the administrators should have brought the administration to an end as soon as they were appointed, or continued with it only for the purpose of complying with their statutory obligations, such as making a report on the directors.

The creditors' position was that, because the administrators were never in a position to confirm one of the purposes of administration could be achieved, they should not be entitled to any remuneration. Furthermore, they argued that the administrators had also spent a significant amount of time and money in investigating a substantial liability (circa £550,000) owed to a separate company, which, again, the director's father was said to be behind.

Decision

The court held that the administrators were properly appointed (no argument was raised to the contrary) and they were entitled to conclude that the statutory purpose of rescuing the Company as a going concern could be achieved. The administrators had confirmed, in a report and proposals to creditors in November 2013, that the administration was likely to achieve a better overall result for creditors and that it may be possible to achieve a rescue of the company on a going concern basis.

There was a possibility the liability owed to the separate Company was not genuine and there was a reasonable prospect it might not be found to be valid - if that was the case the estimated outcome statement showed there would be a surplus of some £440,000.

Furthermore, even if the properties owned by the Company had to be sold off to discharge the debt owed to the bank, there were other properties apparently held on trust for the Company and the administrators had a role in preserving these for the benefit of the Company and, if appropriate, transfer them to it.

It was appropriate for the administrators to pursue a policy of ascertaining what the assets were and obtaining control of them, and seeking to explore whether the liability shown to be owed to the separate company was genuine - all with a view to taking a decision as to how to proceed when assets were available in their hands. The administrators were, therefore, entitled to be remunerated for their services, with the amount to be agreed between the parties.

Comment

While the facts of this case are unusual, the decision should give administrators comfort that even where there may be a question as to the motive behind their appointment, they will be entitled to look forward and conclude that the statutory purpose of the administration can be achieved - and if they can do that, they will be entitled to be remunerated accordingly.


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