Update: insolvency

According to statistics published on 1 May by the Insolvency Service, there has been a marked rise in corporate insolvencies over the last year as the recession continues to squeeze. Data shows that there were 4,941 compulsory liquidations and creditors' voluntary liquidations in total in England and Wales in the first quarter of 2009. This represents an increase of 7.1 per cent on the previous quarter and an increase of 56 per cent on the same period a year ago. In the 12 months to the end of the first quarter of 2009, approximately one in 130 active companies went into liquidation.

The figures also confirm that an increasing number of individuals are suffering too, as 29,744 personal insolvencies were recorded in the first quarter of 2009. This represents an increase of 19 per cent on the same period last year. This was made up of 19,062 bankruptcies and 10,713 Individual Voluntary Arrangements (IVAs); increases of 23 per cent and 12 per cent on the previous year respectively.

Data from the Insolvency Service also shows that director disqualifications are at record levels, having risen by 9 per cent in the last financial year to a peak of 1,252.

Debt relief orders

As of 6 April 2009, borrowers who meet certain criteria can apply for a debt relief order (DRO) to have a debt of £15,000 or less written off by an official receiver. This would allow them to avoid full-blown bankruptcy. To apply for a DRO, a debtor must meet certain conditions which include the following:

• the debtor must be unable to pay his or her debts;
• they must owe less than £15,000;
• the total value of assets must not exceed £300 plus a car worth up to £1,000;
• after taking away tax, national insurance contributions and normal household expenses, disposable income must be no more than £50 a month;
• the debtor must be domiciled (living) in England or Wales, or at some time in the last three years have been living or carrying on business in England or Wales; and
• they must not have been subject to another DRO within the last six years.

These criteria may mean a DRO is not likely to be available to many debtors in financial trouble. However, it is hoped the introduction of the DRO will result in fewer individuals being forced into bankruptcy or an IVA.

Pre-pack judicial guidance

The term 'pre-pack' refers to a pre-arranged deal for the sale of an insolvent company's business and assets. It is prepared before the company goes into a formal insolvency process, usually administration. The deal is rapidly executed once the appointment is made, often on the same day. Businesses are sometimes sold with little or no open marketing and unsecured creditors are usually not informed of the sale until after it has been completed. As a result, many commentators have expressed their concerns that the process in general is insufficiently transparent and that creditors are left out in the cold.

Kayley Vending Ltd, Re [2009] EWHC 904 offers guidance as to the courts' approach to pre-pack administration applications in the light of Statement of Insolvency Practice 16 (SIP 16) (see 'Update: insolvency', Solicitors Journal, 153/6, 17 February 2009). Here, it was proposed that the company (K) should be subject to a pre-pack administration. It was held by the court that, in exercising their discretion in pre-pack cases, courts had to be alert to the possibility that the procedure was being abused. The court would be helped by the provision of information relating to the pre-pack transaction and its background when considering whether the process was flawed.

The provision of such information fell within Rule 2.4(2)(e) of the Insolvency Rules 1986, which states that it is for the applicant to identify what information is likely to assist the court. The court said that the matters required by SIP 16 would also fall within Rule 2.4(2)(e) and ought to be included in the application. Applicants should not wait until the application is opposed to give creditors the information they need to evaluate the pre-pack.

The court acknowledged that some of the information required by SIP 16 could be commercially sensitive. Any information which was sought to be protected by an order under Rule 7.31(5) should be set out in such a manner that it could be conveniently separated; for instance by being contained within an identified exhibit to an affidavit which could be excluded from inspection.

Madoff

A wave of litigation was anticipated when news broke of the $50bn investment scheme scandal orchestrated by Bernard Madoff. In Madoff Securities International, Re [2009] EWHC 442, the applicant joint provisional liquidators of an English company applied for directions relating to the transfer of data to the trustee in bankruptcy of its US parent company. The trustee in bankruptcy had been appointed by a New York court to deal with the US parent company's insolvency. The joint provisional liquidators sought: i) guidance on whether information relating to the US company, which was held by the liquidators and which might help the trustee in bankruptcy's investigation, could be sent to the trustee and whether such a transfer would breach the provisions of the Data Protection Act 1998; it was accepted that the United States did not ensure an adequate level of protection for the rights and freedoms of data subjects for the purposes of the Act; and ii) an order that they be at liberty to invite the trustee in bankruptcy to interviews initiated pursuant to s.235 Insolvency Act 1986.

Both parties stated their belief that this transfer of information was necessary to help unravel the alleged fraud. The court held that: i) it was in the public interest that complex fraud on this scale be investigated; therefore the exception contained within Sch.4 para.4(1) of the 1998 Act applied as the court agreed that the transfer of information was necessary to help the investigation; and ii) there was nothing in s.235 of the 1986 Act which placed a limit on the joint provisional liquidator's ability to interview whomever they wanted. However, an interviewee could only be required to answer questions about the company in which the liquidators were in office. Although the liquidators would be entitled to ask questions about the English company that might shed light on the dealings with its parent company, s.235 was not a short cut to an application by the US trustees for relief under the Cross-Border Insolvency Regulations 2006.

Flexible interpretation of CVA clause

In Gold Fields Mining LLC v Tucker (aka Re Energy Holdings (No.3) Limited) [2009] EWCA Civ 173 CA, the Court of Appeal demonstrated a flexible approach towards applying the terms of creditor voluntary arrangements (CVAs).

On 31 March 2005, the creditors of Energy Holdings approved a CVA proposal made under the Insolvency Act 1986. The terms of the CVA gave a deadline of 16 May 2005 for the submission of claims by the company's creditors.

Gold Fields Mining LLC (G) was an assignee of a creditor due $230m from the company. The assignor did not become aware of the CVA until the start of 2007.

G did not make a claim to the company's CVA supervisors until mid-July 2007 and its claim was rejected. The court of first instance accepted an application by G to overturn the decision of the supervisors. The supervisors then appealed. The Court of Appeal identified a clause in the CVA which dealt with situations of late submission of a claim. Late submission could not prevent a creditor from making a claim if:

i) the failure to lodge the claim in time was not a result of the creditor's lack of diligence;

ii) the creditor did not know of the CVA meeting and, within 28 days of learning of the CVA, lodged their claim. Clearly, G did not fall within this category.

The CVA supervisors tried to argue that ground i) could not be relied upon by parties because in any event G did not submit its claim within 28 days of becoming aware. After all, the supervisors said, a deadline is an important tool with which conclusiveness can be assured and so should be dealt with as being fixed and final. The Court of Appeal rejected this argument and allowed G to claim on the basis that their failure to beat the time limit was not a result of a lack of reasonable diligence.

Bankruptcy as a tool to frustrate a judgment creditor

In Tagore Investments SA v Official Receiver [2008] EWHC 3495 (Ch), the applicant company (T) applied pursuant to the Insolvency Act 1986 s.346(6) for relief from the consequences of s.346(1)(a), so that it could retain the benefit of a charging order over property vested in the name of a bankrupt (M). T was the beneficiary of a judgment obtained by another company and had subsequently obtained an interim charging order over M's property.

However, the charging order was not made absolute until one day after M procured his own bankruptcy on his own petition, the application for the charging order having been made in ignorance of M's bankruptcy. T argued that M's decision to petition for his own bankruptcy was a deliberate one that was not taken in the interests of his creditors, but to disadvantage T and to frustrate the charge. T relied on various pre-judgment events, M's conduct in the litigation and the judge's findings as to M's dishonesty.

The Court granted the application. It decided:

i) the court had discretion under s.346(6);

ii) upon the issue of fairness, the extent to which, and the reasons for which, the enforcement of the judgment had been frustrated had to be considered;

iii) emphasis had to be placed on post-judgment events; and

iv) it was open to the court to consider pre-judgment events to enable the court to draw an inference as to the motivation behind post-judgment events that might otherwise not be a proper inference to draw.

In the instant case, M's conduct underlying the claims and his conduct in the litigation led to the conclusion that M's decision to petition was a deliberate one, taken in order to disadvantage T. T had acted promptly and had pursued their charging order applications with appropriate diligence. M had not given any notice of his intention to present his own petition and he had no pressing creditors apart from T. It was highly unlikely that M's decision to petition for his bankruptcy was taken because it was the correct thing to do in the interests of his creditors, or to relieve him of a debt burden; it was likely that the petition for bankruptcy was another act of manipulation. The appropriate degree of unfairness had therefore been established in the case. Accordingly, it was appropriate for the court to exercise its discretion under s.346(6).