Insolvency update

Corporate insolvency has shown an annual increase of 17 per cent, with 3,439 liquidations in England and Wales in the first quarter of 2006, but the number of personal insolvencies almost seems to be spiralling out of control. The number of individuals who went into bankruptcy or an individual voluntary arrangement during the first quarter of 2006 was 23,351, according to recent figures issued by the DTI. Personal insolvencies have all sorts of causes, but invariably arise out of excessive consumer debt, typically on credit and store cards. Interestingly, the proportion of consumers versus self-employed people using insolvency legislation to resolve their debt problems has shifted substantially towards consumers.

Legislation update

TUPE to the rescue?

On 6 April 2006 the new rules of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) came into effect. The regulations are now the main piece of legislation governing the transfer of an undertaking, or part of one, to another. A criticism of the original TUPE Regulations was that in insolvency situations they prevented business rescue because of the requirement to transfer all employees. The new Regulations offer a more adaptable approach. Where the transferor is the subject of 'relevant insolvency proceedings', the employees will transfer to the transferee, but there will be greater scope to vary the employees' terms and the Secretary of State will be liable for certain debts to the employees that would otherwise have been payable by the transferee (the statutory payments) (regs 8(2) to 8(6)). However, R3, the Association of Business Recovery Professionals, warns that the regulations do not make it clear which type of procedure is covered by the new rules, but merely indicate in general terms how they are to apply. R3 still fears that this will result in businesses being shut down rather than them being sold on.

The Cross-Border Insolvency Regulations 2006 (SI no 1030), which give effect to the UNCITRAL Model Law in Great Britain, came into force on 4 April 2006. The aims of the Regulations are to:

(1) provide access to foreign representatives and creditors to courts in Great Britain;

(2) set out criteria for recognising foreign proceedings or not;

3) provide for the British courts and British insolvency officeholders to co-operate with foreign courts or foreign representatives;

(4) set out procedural matters in relation to proceedings under the Model Law in England, Wales and Scotland; and

(5) make provision in relation to notices delivered to the registrar of companies under the Regulations.

The Model Law has been adopted so far by a number of states including the British Virgin Islands, Japan, Mexico, Poland, Romania, South Africa, and the US. Exclusions include utilities, energy companies, financial services institutions and insurers.

Cross-border cooperation

Cross-border cooperation has been tested in two recent cases involving EU jurisdiction rules and Commonwealth cooperation.

On 2 May 2006, the ECJ gave an interminable preliminary ruling in Eurofood IFSC Ltd C-341/04, in which both the Italian and Irish courts had purported to take control within their own jurisdictions in placing the insolvent company into both Irish and Italian insolvencies.

The crux of the case turned on the question of parent company control. Where a debtor is a subsidiary company, with its registered office and that of its parent company in two different member states, the presumption laid down in Art 3(1) of the EC Insolvency Regulations, that the centre of main interests (COMI) of that subsidiary is situated in the member state where its registered office is situated, can be rebutted. This could be the case notably where a company was not carrying on business in the territory of a member state where it had its registered office. Conversely, if the subsidiary carries on business in the member state where it has its registered office, the mere fact that it can be controlled by a parent company in another member state does not rebut the presumption. The court therefore ruled that Eurofood was correctly liquidated in Ireland.

This decision will make it harder in future to rebut the presumption that COMI is in the jurisdiction of a company's registered office, and therefore could make it more difficult to centralise the COMIs of a number of companies incorporated in different jurisdictions in one EU jurisdiction.

From the EU to the commonwealth: what is the attitude of the English Courts to requests for orders in aid of Australian Insolvency proceedings? This was tested recently in Re HIH Casualty and General Insurance Ltd [2006] EWCA Civ 732. The English court was entitled to refuse a request to accede for the transfer of assets held by English liquidators in the liquidation of a foreign company where a transfer would prejudice non-insurance creditors proving in the English liquidation. Sir Andrew Morritt VC said that the issue was whether, and if so how, the High Court in England could and should comply with a letter of request from the Supreme Court of New South Wales. In both jurisdictions, special provision was made for distributions to creditors of insolvent insurance companies. The problems were created by
s 562A of the Corporations Act 2001 (Australia), which conferred on all creditors of an insurance company with insurance claims priority over other creditors in respect of reinsurance recoveries. The remission of the English assets to Australia would prejudice non-insurance creditors because it would diminish the assets available for distribution to them and they would lose their right to benefit from the insurance creditors' obligation in a winding-up in England to bring their s 562A dividends and other benefits into account.

Banker's duty

The duties of mortgagees to mortgagors are largely the product of equity rather than common law. The following decision slightly moves the balance away from lenders. In Barclays Bank v Kingston [2006] EWHC 533 (QB), a preliminary issue arose for determination in an action brought by the claimant Barclays (B) against the defendants (K), seeking to enforce K's liability under a guarantee. K were directors of a football club and each had personally guaranteed the club's liabilities to B. The club's borrowings were also secured by a legal charge over the club's football ground. After financial problems, the club went into administration. B served demands under the guarantee. The administrators sold the football ground for £445,000. The club was wound up with an unsatisfied indebtedness to B of £136,000. B thus invoked the guarantee. K raised just one defence, that the property was sold at an undervalue. The issue then was whether the express terms of the guarantee were effective to make K liable under the guarantee in any event. K submitted that B had caused or permitted the sale at an undervalue and in consequence there was a breach of the equitable duty of care, which had the effect of reducing the value of the guarantee by the same amount as the value wrongly lost from the property. K argued that the value lost in the sale of the property was greater than the value of the guarantee. B submitted that the express terms of the guarantee made it clear that K were liable to B, notwithstanding any careless realisation of a security given by the principal debtor.

It was held that a creditor owed a guarantor a duty of care when selling secured assets of the principal debtor, to do so at a proper price. The debtor would normally be expected to pursue a claim against the creditor in this respect. However, where a debtor had ceased to exist or for any other reason did not pursue his own remedies against the creditor, it was relevant that the creditor owed a similar duty to sureties as well.

Case round-up

Receiving orders under POCA 2002

Re Q3 Media Ltd [2006] All ER (D) 307 is worth mentioning due to the growth in the use of receiving orders under the Proceeds of Crime Act 2002 (POCA 2002). The company was subject to an interim receiving order under s 246, POCA 2002. The interim receiver had to decide whether the property to which the investigation related was recoverable. The creditors alleged that they had a claim in restitution against the company, entitling them to money that had been wrongly paid to it. The company disputed the amount and declined to pay. The creditors applied for an administration order against the company, arguing it was unable to pay its debts. That was disputed by the company. It was held that the court could not be satisfied under para 11(b), Sched 1 of the 1986 Act that the making of an administration order would be reasonably likely to achieve the purpose of administration, as if Q3's assets were recoverable property they would not be available to meet the creditors demands. As such, an administration order was not granted.

Readers will know that liquidators have a statutory right to compel disclosure of information under s 236 of the Insolvency Act 1986. Will delay in seeking that information prejudice this right? That question was answered in Green v BDO Stoy Hayward LLP (Re XL Communications Ltd) [2005] EWHC 2413 (Ch). Here, the company went into liquidation in April 1998. The original liquidator was replaced in 2004. In the same month, the new liquidator approached the former auditor, BDO Stoy Hayward, for access to its files. The auditors complained that the liquidator had not provided any reason for his need to review their papers almost seven years after the liquidation had commenced, particularly bearing in mind that the relevant limitation periods for bringing proceedings against third parties had all expired. The liquidator applied for the production of the documents under s 236, IA 1986. The district judge dismissed the liquidator's application in June 2005. The liquidator appealed. Mr Justice Kitchin dismissed the appeal. He found that the district judge had exercised his discretion in a reasonable way in the rather unusual circumstances of the case. The liquidator had failed to show a reasonable requirement for the information and documents sought.

Director's disqualification

When determining whether an individual is unfit to be concerned in the management of a company under the Company Directors Disqualification Act 1986, the court is not required to restrict its enquiry to the conduct of the individual in relation to the insolvent company that gave rise to the proceedings, but may also consider conduct relating to the management of any other company of which he is or was a director, provided it is relevant to the issue of fitness to be a director (Green v Secretary of State for Trade & Industry [2005] All ER (D) 255).

Unusually, Mrs Jonkler in Secretary of State for Trade & Industry v Jonkler [2006] EWHC 135 (Ch), succeeded in having her disqualification undertaking set aside when new facts emerged after it was given. On an application under s 8A of the Company Directors Disqualification Act 1986, the applicant contended that she was free to challenge the statement of facts agreed at the time of a disqualification undertaking as the basis on which the undertaking was given. The Secretary of State contended that the agreed schedule of facts had the status of a private law contract, with the consequence that the applicant should not be entitled to resile from it unless she was able to show conventional ground for impugning a contract. It was held that there was no good reason why the court should not, in the exercise of its jurisdiction under s 8A, treat the agreement as binding on the applicant unless either some ground of public interest was shown that would be sufficient to discharge a private law contract, or some ground of public interest was shown that outweighed the importance of holding a party to his agreement. In this case, there were special circumstances. The discovery that, in the light of evidence presented by the alleged perpetrator, the Secretary of State no longer believed that it was in the public interest for the perpetrator to be subject to a disqualification order was a new event that entitled the director to ask the court to consider whether she should remain subject to the undertaking she had given. Although that jurisdiction should be used sparingly, the only director who remained subject to disqualification was the one who had no active part in the insolvency of the company and there was no public interest in maintaining that disqualification. The undertaking against the director would therefore cease to be in force.