Insolvency Team – Recent Insolvency Case Update
These case summaries first appeared in LexisNexis’ Insolvency Case Alerter. They represent some of the more interesting insolvency decisions to have been published recently.
This summary covers:
- Brown (Liquidator of Shahi Tandoori Restaurant Ltd) v Bashir  EWHC 337 (Ch)
- Re Mederco (Cardiff) Ltd  EWHC 386 (Ch)
- Lyle v Bedborough  EWHC 220 (Ch)
- Re TXU Ltd, Insolvency and Companies Court, 2 March 2021
- Re Port Finance Investment Ltd  EWHC 378 (Ch)
Brown (Liquidator of Shahi Tandoori Restaurant Ltd) v Bashir  EWHC 337 (Ch)
Liquidator’s claim in misfeasance against former directors in relation to missing cash and underdeclared VAT required the taking of an account rather than assessment of damages based on HMRC’s findings.
Following an investigation by HMRC into discrepancies in the returns filed by a restaurant-owning company and its records of takings and expenditures, HMRC raised assessments for underdeclared VAT based on upscaling the turnover to account for the anomalies. After the company went into creditors voluntary liquidation, the liquidator concluded that the directors had diverted money belonging to the company to themselves and breached their duties with regard to filing truthful VAT returns. He therefore brought an application under s 212 of the Insolvency Act 1986 (IA 1986) against them for misfeasance.
ICCJ Prentis accepted that the evidence pointed to the directors having diverted monies belonging to the company and that, on the balance of probability, this had been the practice of Respondent 1 (R1) from the inception of trading down to 2013. It was inconceivable that R1 had not been involved in the diversion of cash takings and very likely he had benefitted personally from them. Respondent 2 had been appointed a director later, in 2008, but during his tenure of office, even if he had not also benefitted, he was liable for failing to control R1’s illicit activities. Nevertheless, contrary to the arguments advanced on behalf of the liquidator, it did not follow that the respondents were liable for the sums calculated by HMRC in scaling up the takings: the liquidator sought equitable compensation and there was evidence to suggest that the company might have benefitted from some of the missing cash; the appropriate remedy was an account on which all the factors could be brought into the reconning. In this case, however, the directors had failed to cooperate in producing the company’s books and records: if that lack of cooperation persisted, the court might be forced to fall
back on HMRC figures as being the best available evidence.
Re Mederco (Cardiff) Ltd  EWHC 386 (Ch)
Shortly after the EU/UK transitional period, a retrospective administration order was made. Proceedings were opened on the date of the order, not retrospectively. The order therefore required the recitals at Insolvency Rules 2016 (IR) r 3.13, as amended by the Insolvency (Amendment) (EU Exit) Regulations 2019 (the ‘Regulations’). Although full argument was not heard on the point, Mederco provides a strong practical indication for future practice.
The administrators’ term expired in January 2020 but had been extended for a year by a creditor consent. That consent was arguably invalid. Unaware of this, further extension to January 2022 was subsequently ordered. Now assuming that their appointment had ended in January 2020, the administrators sought retrospective extension of their office. The issues were whether it was possible either to extend the original administration with retrospective effect, or to make multiple administration orders with retrospective effect. If either was possible, which recitals were required?
The court is unable to extend an administration that had already expired, as was clear from the mandatory language of IA 1986, SchB1, Pt 009, para 77(1)(b). Applications to extend must be made by the administrator. After expiry of their term, former administrators do not have standing. The court’s limited jurisdiction in point could not be undermined by multiple retrospective orders [19-28, 29-30, 38-44]. However, the court did grant one prospective and retrospective administration order. The administrators – whose fees remained unpaid – were creditors with standing to seek the same [45-49]. As to recitals, the Regulations had amended IR 2016 and IA 1986 with regard to the 2015 EU Regulation. Such amendments did not apply to proceedings opened during the EU/UK transitional period (when the unamended IR 3.13 recitals applied). The court did not accept that the instant proceedings could be treated as opened on the date of their retrospective effect, within the EU/UK transitional period. Applying the EU interpretation of the EU Regulation, opening proceedings is distinguished from their effects. The proceedings had been opened after the transitional period, requiring the amended recitals [50-65].
Lyle v Bedborough  EWHC 220 (Ch)
Mr Bedborough’s trustees in bankruptcy applied for an order unders 339 of IA 1986 setting aside the transfer of the bankrupt’s interest in the matrimonial home to his wife. It having been found that the transfer was at an undervalue, the issue was, having regard to the discretion under s 339(2), what order the court should make? Mrs Bedborough sought an order that she be required to make good only the extent of any shortfall as at the date of the transfer on the basis that (i) the shortfall was modest and (ii) otherwise the estate would benefit from a windfall.
ICC Judge Mullen held:
- There was no windfall because, if the transfer had not occurred, the bankrupt’s share of the property (including any increase in its
value) would be at the disposal of his trustees.
- Allowing Mrs Bedborough to make good the undervalue by reference to the price in 2012 would not restore the position to what it would have been if the transfer had not been made and so was contrary to s 339(2).
- That the court should seek to reverse all the effects of the impugned transaction. The appropriate order was (i) a declaration that the property was held 50:50 by Mrs Bedborough and the trustees and (ii) a direction that the consideration for the transfer provided by Mrs Bedborough be paid out of the proceeds of sale.
- The judge noted, obiter, that had Mrs Bedborough proposed making good the undervalue by reference to the current value of the Property instead he would have considered it, but he did not have evidence of (i) the current value or (ii) the ability to make the necessary payment within a reasonable timescale.
Re TXU Ltd, Insolvency and Companies Court, 2 March 2021
On 2 March 2021, ICC Judge Prentis handed down judgment permitting company voluntary arrangement (CVA) supervisors to bring the CVA to an end after it had been in place for 16 years.
The company TXU UK Ltd (‘TXU’), was part of a group of companies. TXU had taken over the business of the Eastern Electricity Board in 2001. That takeover had given rise to liability for over 50 personal injury claims for mesothelioma by workers who had been exposed to asbestos during the time that the Eastern Electricity Board was in operation. There were a further three further mesothelioma claims with a value of up to £170,000, along with other contingent creditors by virtue of various other personal injury claims as well as unpaid pensions. The CVA supervisors sought permission to bring the CVA to an end.
Permitting the application, Judge Prentis relied on the Court of Appeal’s decision in Re Danka Business Systems Plc (In Liquidation)  EWCA Civ 92. In Danka Business Systems, the Court of Appeal had held that liquidators need not refrain from taking steps in a liquidation just so that they could wait for contingent claims to crystallise. Applying those principles to the current case, Judge Prentis held that the longer the CVA continued, the less money would be available to creditors. The supervisors were not precluded from completing steps in the CVA as soon as reasonably practicable
merely by the existence of contingent claims. In any event, there had been sufficient advertising for pension claims and the mesothelioma claims. Furthermore, insurance was in place to cover the vast majority of the sums claimed in the existing personal injury claims. Judge Prentis was of the view that it was unattractive to continue the CVA just to allow all claims which could be brought to be brought, and permitted the supervisors to bring the CVA to an end, with no need for a reserve fund for the potentially outstanding claims.
Re Port Finance Investment Ltd  EWHC 378 (Ch)
The court granted an application by Port Finance Investment Ltd (the ‘Scheme Company’) for an order convening a meeting of creditors in order to approve a scheme of arrangement under Part 26 of the CA 2006 (the ‘Scheme’). The debtor company was Global Port Holdings Plc a cruise port operator in a group of companies (the ‘Group’). Due to COVID-19, the Group was unable to repay existing notes on their maturity in November 2021 and by the Scheme sought to release the existing notes in return for offering creditors a right to participate in a new scheme with notes maturing in May 2024. The Scheme had the follow key features:
- Holders and beneficiaries of the existing notes to compromise claims against third parties, eg the original note issuer, who would have had a right of contribution from the Group if sued by creditors.
- Creditors could receive their new notes entitlement in cash, by participating in a reverse Dutch auction to participate in a cash option (the ‘Cash Option’).
- A consent fee of 1% of the aggregate principal amount of the existing notes held by the creditor was payable (the ‘Consent Fee’).
- The Scheme Company had also funded legal advice, including for a minority group of noteholders. The original notes were subject to the New York jurisdiction, so the court had to decide whether it was right to accept jurisdiction.
That the Scheme varied creditor’s rights against third parties was not a matter that prevented an approval hearing and was not an absolute
bar to the court accepting jurisdiction to consider the matter; it may be relevant to approval, and jurisdiction could be re-considered
then too: see Re: Lehman Brothers International (Europe) (In administration)  EWCA Civ 1161. Further, the court decided on the facts that there was no justification for treating creditors in different classes. The court directed a single creditors’ meeting. The provision of advice for one group of noteholders was not sufficiently significant create a class issue. Similarly, participation in the Cash Option was not a class issue since the reverse Dutch auction had yet to take place. The Consent Fee was not a material consideration given its relative size. Noteholders could raise concerns about the Scheme (class or fairness) at the approval hearing.
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