Insolvency litigation update - January 2015

14 minute read
29 January 2015

Our dedicated insolvency litigation team bring you their monthly update on the cases and issues affecting the insolvency and fraud investigation industry.



1. Time costs of compliance with an order for delivery up under section 236 of the Insolvency Act 2006 - can you recover them?

Re Harvest Finance Ltd (In Liquidation); Jackson & another v Cannons Law Practice LLP and others [2014] involved an application by the liquidators of Harvest Finance Limited (the Company) under S.236 of the Insolvency Act 1986, seeking disclosure of files held by the respondent solicitors. The files were required by the liquidators to allow them to investigate whether a very large number of conveyancing transactions involving the Company were fraudulent.

The respondents were successors to a limited liability partnership of solicitors who acted in the conveyancing transactions. The liquidators believed they held documents either belonging to the Company or which would provide information concerning the Company relevant to its litigation.

At an earlier hearing, the respondent solicitors were ordered to deliver up the documents requested. They subsequently applied to the court seeking reimbursement of costs they had incurred as a result of their compliance with the order made. A total of £40,381 was claimed by the respondents in respect of the time they had spent identifying and transferring the files in question.

The liquidators argued that the court had no jurisdiction to order payment of the costs of compliance with a S.236 order. The respondents argued that they were an innocent party and they should be reimbursed their costs.

The court confirmed that the existence of the public duty - which arises in respect of information needed by the liquidators for the purpose of carrying out their statutory duties - creates a strong reason for not awarding costs of compliance.

The Registrar accepted the respondent solicitors were an innocent party but they had control of files relevant to the transactions that were in issue. Their public duty required them to provide the files and relevant information to the liquidators - subject to the issue of legal privilege.

The respondents were faced with difficulties in identifying and transferring the relevant files but the court did not accept this meant they should receive their costs of compliance. This was especially so as:

  • the public duty was of particular importance in the context of a suspicion of fraud;
  • payment would transform their public duty into a professional service;
  • the liquidators should not have to bear the financial burden resulting from the fact the records are not easy to access; and
  • if they had met with particular difficulties in identifying or transferring files they should have raised the difficulty/difficulties with the liquidators or the court before incurring the costs.

The Registrar acknowledged that there were conflicting authorities on the question of whether the liquidators should pay the respondents' costs. Reviewing the authorities and the Insolvency Rules in detail he concluded 'the statutory scheme includes a discretionary jurisdiction to award costs against the office holder in appropriate circumstances'. However, he found there was no cause to require the liquidators to pay the legal costs of the respondents in this case.

The Insolvency Rules (9.6(4) of S.51 of the Senior Courts Act 1981 provided a wide enough discretionary jurisdiction to allow the respondent's costs to be an expense of the liquidation, however he stressed that as an expense they would rank ahead of other expenses (including the liquidators remuneration). He further stressed that consideration should be given to the fact that this may have an adverse effect upon others.

In summary, the Registrar was not willing to award the respondent solicitors their 'time' costs incurred in complying with the S.236 order made.

Things to consider

This case supports the view that, usually, the courts will not order the costs of complying with a S.236 order to be met by the applicants or paid as a liquidation expense.

However, there is jurisdiction to make such an order in appropriate cases, and officeholders should be aware of that when making S.236 applications so that reasons are given to the court as to why a costs order would not be appropriate. This rationale is likely to apply equally to applications under S.366.

2. Income Payments Orders - Are pensions in or out?

The case of Horton v Henry [2014] concerned a discharged bankrupt's pension policy and considered the question of whether such a policy could be subject to an Income Payments Order (IPO) under section 310 of the Insolvency Act 1986 (the Act).

This case will be of significant interest to those who deal in personal insolvency as it contradicts the position that was reached back in 2012 in the first instance decision of Raithatha v Williamson.

Background

Readers will no doubt recall the decision of Raithatha v Williamson as it attracted both general commentary and criticism. The court in that case decided that pension policies which hadn't yet been drawn down could form the basis of an IPO if the bankrupt was entitled to ask for payments to be made under it.

This was considered to be a controversial decision in circumstances where it went against the grain of section 11 of the Welfare Reform and Pensions Act 1999. That Act sought to carve out certain pensions from a bankruptcy estate and therefore ring-fence them from creditors, with a view to ensuring that such monies would then be available for the bankrupt on retirement in circumstances where no other income would be forthcoming at that time.

Facts

Mr Houghton, a trustee in bankruptcy, made an application for an IPO under section 310 of the Act in respect of a Self-Invested Pension Policy (SIPP) and three personal pension policies. The trustee argued that it was possible to have an IPO in respect of such policies even where payments were not yet being made from them. The bankrupt obviously disagreed with this assertion.

As part of the application, the court had to consider two issues:

  1. Does the court have power under section 310 of the Act to make an IPO in respect of a pension which is not yet in payment; and
  2. If there is such a power, what amount, if any, out of sums to be drawn from Mr Henry's pensions should be retained by Mr Henry rather than paid to the trustee?

Mr Henry was 59 at the time of the trustee's application. The SIPP had a retirement age of 67 albeit the retirement date of October 2021 had no contractual force but was rather used simply for illustrative purposes. The SIPP allowed for crystallisation at any time after Mr Henry's 55th birthday. Turning to the personal pension policies, they each provided for an annuity payable on the pension date, being Mr Henry's 70th birthday. Again, the policies provided for the possibility of varying the date of crystallisation.

Mr Henry's evidence was that he did not want to crystallise his pensions in circumstances where he had sufficient funds to live on and therefore did not need the monies available from the policies. Further, his ultimate objective was to pass on the value of his SIPP to his children.

Although it was difficult to attribute a value to the SIPP in circumstances where it had not crystallised, as at March 2014, a valuation of the underlying fund was given as £929,818.23. Based on this figure, there could be a potential 25% tax free lump sum of about £232,454 available. A more recent valuation as at October 2014 had given a slightly lower valuation of £848,022.76. Either way, the amounts at stake were clearly significant.

Decision

Counsel for the trustee argued that not only was the trustee entitled to require Mr Henry to crystallise the pensions but he was also entitled to determine what election to make in relation to how the pensions were drawn. It was suggested that support for this proposition could be found in section 333(1) of the Act under which a bankrupt has a duty to do what a trustee may reasonably require for the purposes of carrying out the trustee's functions. Such functions would include getting in the bankruptcy estate.

On the facts, Mr Henry had not sought to argue that any reductions should be made before personal family allowances for the reasonable needs of himself or his family. In fact, he claimed that he did not need the pensions and was able to support himself through family and friends. Accordingly, it was argued on behalf of the trustee that an IPO should be made for the full amount of the policies.

The court considered that the essential question was whether, for the purposes of section 310(7), a bankrupt became "entitled" to a payment under an uncrystallised pension even though he would not be receiving any payments from the pension trustees and would have no enforceable claim for payment against them.

The court considered that the word "entitled" suggested a reference to a pension in payment under which definite amounts had become contractually payable. The court noted that there is no obvious wording in section 310 of the Act which would give the court power to decide how a bankrupt is to exercise the different elections open to him under an uncrystallised SIPP or personal pension.

Indeed, to say that a trustee in bankruptcy could decide how the bankrupt's contractual rights under an SIPP or personal pension were to be exercised was not easily reconcilable with the clear aim of the Welfare Reform and Pensions Act 1999. Seeking to argue that section 333(1) was sufficient authority to entitle the trustee to decide how such elections should be made was one step too far. The court therefore dismissed the Trustee's application.

Things to consider

As things stand, a Trustee in Bankruptcy cannot force a bankrupt to draw down a pension that is not currently "in payment". Permission to appeal has been granted so this case will now be considered by the Court of Appeal sometime in late spring / early summer. We will of course update you following the appeal decision when hopefully we will then have some clarity on the issue.

For the moment though, the case would appear to be that if a bankrupt's pension has been drawn, there is no reason why a Trustee in Bankruptcy cannot and should not seek an IPO (if appropriate) but this will not be the case where the bankrupt simply has the right to ask for the pension to be paid but has chosen not to do so.

The judge in this case noted that it is very unusual to have two different, conflicting, decisions from courts at the same level and it is a well-established principle that a judge at first instance should, in general, follow another decision at first instance, unless convinced that the decision was wrong. Clearly therefore, the judge in this case considered the earlier decision in Raithatha to be wrongly decided.

3. Increased bankruptcy threshold and enhanced court issue fees to be introduced

Increased bankruptcy threshold

The government has announced its plans to increase the minimum level of debt for which a creditor can force a person into bankruptcy from £750 to £5,000. This will be the first rise in the threshold for almost 30 years.

The government sought views from industry, debt charities and other interested parties and reported that many thought the current level of debt that can trigger bankruptcy through the courts was disproportionate. A debt of £750 was too low, particularly in light of the very serious consequences that come with a bankruptcy petition being issued.

Debtors will no doubt welcome the increase, although creditors may well become frustrated by the alternative - having to issue proceedings in the small claims court where a debt of less than £5,000 remains outstanding. This may need to be followed by enforcement action if a debtor will still not pay up, even where the creditor has succeeded with its claim.

The changes require approval from Parliament but are intended to come into force in October 2015.

Enhanced court issue fees to be introduced

The Ministry of Justice (MOJ) published a consultation in December 2013 on the reform of court fees, including enhanced court fees. On 16 January it confirmed that it intends to introduce enhanced issue fees for money claims in excess of £10,000. The issue fee for claims with a value of £10,000 or less will remain unchanged.

The MOJ intends to introduce fees of 5% of the value of the claim for those claims over £10,000, with a maximum fee of £10,000 payable on claims valued at £200,000 and over or where the value is not limited or where no value is specified. Currently the maximum issue fee is £1,920, where the value of the claim exceeds £300,000 or is not limited. The enhanced fees will therefore represent a very significant increase.

A statutory instrument (SI) setting out the changes has been drafted, although it has not yet been laid before Parliament. The draft SI does, however, state that the enhanced fees will come into force on 1 March 2015.

Any insolvency practitioners who have plans to make claims in the future, and are in a position to draft and issue those claims prior to 1 March 2015, should consider whether the value of the claim may mean it should be issued sooner than anticipated to take advantage of the lower fees while they last.


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