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:

1.Re PGH Investments Ltd [2021] EWHC 533 (Ch)

2.Re Mederco (Cardiff) Ltd [2021] EWHC 386 (Ch)

3.Lyle v Bedborough [2021] EWHC 220 (Ch)

4.Re TXU Ltd, Insolvency and Companies Court, 2 March 2021

5.Re Port Finance Investment Ltd [2021] EWHC 378 (Ch)

Re PGH Investments Ltd [2021] EWHC 533 (Ch) The judge, Deputy ICC Judge Passfield, heard an application by PGH Investments Ltd to dismiss the winding up petition presented by Mr Ewing (‘the Petitioner’), or alternatively to injunct the Petitioner from advertising the petition. The debt, which was the basis for the petition, was the sum of £825,000 said to be owing to the Petitioner under a share purchase and loan assignment agreement entered into in May 2020. PGH Investments Ltd is part of a group of companies (‘the Photon group’) whose business is the design and manufacture of lighting,
facilities and infrastructure for the purposes of cannabis growing. The Petitioner is an individual who invested in the Photon group by way of share purchases and a substantial loan to other group companies. Pursuant to the share purchase and loan assignment agreement, PGH Investments Ltd intended to purchase some of the Petitioner’s shares and the loan by an original deadline of 15 May 2020. In the event, the deadline passed and the purchase price was not paid. PGH Investments Ltd denied that the debt was due and contended that the original agreement had been terminated, with the parties then entering into a new agreement. Effectively, the dispute turned on the construction of the agreement(s).

Held
The judge, Deputy ICC Judge Passfield, granted the application and held that: (i) The application was not premature, as the Petitioner
argued, as a company is entitled to either wait until the listed preliminary hearing to dispute the debt, or to make an application before that where it has reason to do so; (ii) There were genuine and substantial grounds for disputing the alleged debt, as the judge
found PGH Investments Ltd was not liable to pay it on a proper interpretation of the agreement. PGH Investments Ltd also contended that the restriction under Sch 10 to the Corporate Insolvency and Governance Act 2020 should apply (applicable where a company establishes a prima facie case that it would have been able to pay its debts as they fell due but for its worse financial position caused by the pandemic), as the pandemic had had an indirect
effect on the company’s position prior to presentation of the petition. The judge found obiter that while PGH Investments Ltd had been unable to prove Coronavirus had the alleged financial effect (considering Re A Company (Application to Restrain Advertisement of a Winding Up Petition) [2020] EWHC 1551 (Ch)) such that the restriction did not apply, proof of indirect as well as direct effect would have satisfied the statutory requirement, since the definition of ‘financial effect’ in the Act is wide.

Wessely & Anor (Zoom UK Distribution Ltd) v Rubra & Ors
[2021] EWHC 800 (Ch) The Joint Administrators (‘JAs’) of Zoom UK Distribution Ltd (‘the Company’) applied for: (i) a declaration that their appointment on 5 May 2020 was valid, despite a procedural defect; and (ii) a declaration as to the validity of their acts since that date; or alternatively (iii) an indemnity from the directors in respect of any liability arising out of the defect. The directors applied for a retrospective administration order to take effect from 5 May 2020 in the event that the JAs’ primary application failed. The error arose because the directors had failed to give notice of intention to appoint administrators to a qualified floating charge holder under para 26(1)(b) of Sch B1.

Held
Stuart Isaacs QC concluded that the Administrators were entitled to declarations that their appointment on 5 May 2020 was valid and that their acts since that date were valid. He did not need to determine the remaining applications. In reaching his decision, the judge noted that the question of whether the failure to comply with the notice requirements in para 26 inevitably invalidates the appointment of an administrator remains the subject of controversy. In Re Skeggs Beef Ltd [2019] EWHC 2607 (Ch), Marcus Smith J identified three categories of case to be applied when deciding the consequences of a breach of the requirements for an out of court appointment of administrators, namely where the breach is (i) fundamental, (ii) not fundamental but has caused no injustice and (iii) not fundamental but has caused substantial injustice. In Re Tokenhouse VB Ltd [2021] BCC 107, ICC Judge Jones concluded that, a breach of para 26(1)(b) falls into the second category, and the failure is capable of being cured under r 12.64. The judge adopted ICC Judge Jones’ reasoning. A conclusion that the breach of para 26(1)(b) is a fundamental one such as to render the appointment a nullity would wrongly rank the importance of receiving a notice above the importance of there being an administration. Comment: Although the law remains uncertain, recent ICC decisions show a consistent approach, that a failure to comply with para 26(1)(b) can be cured and does not render the appointment void.

Stanford International Bank Ltd (In Liquidation) v HSBC Bank Plc [2021] EWCA Civ 535 HSBC appealed a decision of Nugee J not to strike out a claim brought against it by the claimant bank in liquidation (‘Stanford’) for losses concerning payments made to its creditors by the Defendant (‘HSBC’) in the discharge of certain debts.Stanford was the vehicle for a substantial Ponzi scheme fraud, which held accounts with HSBC. Stanford entered into insolvency in April 2009. Between August 2008 and April 2009 £116.1m was paid out of Stanford’s accounts at HSBC. The liquidator’s position was that
HSBC should have frozen the accounts prior to its insolvency: had they done so, it was said, those funds would have been available for the creditors on distribution. It was alleged that HSBC had breached the duty that banks owed their customers to refrain from executing an order where they had reasonable grounds to suspect that the order was an attempt to misappropriate customer funds (the so called ‘Quincecare’ duty; see Barclays Bank Plc Quincecare Ltd [1992] 4 All ER 363). Refusing to strike out the claim, Nugee J held that Stanford had suffered loss as a result of the £116.1m payments, since had those payments not been made, £116.1m of additional funds would have been available to Stanford’s creditors on distribution.

Held
HSBC’s appeal allowed. The bank owed no duty to Stanford’s creditors in the pre-insolvency period. The duty owed was to Stanford, its client, alone. Stanford has lost nothing as a result of the payments, since its net asset position on its balance sheet remained unchanged – cash (assets) went down as a result of the payments, but so too did the company’s liabilities. The judge had elided the position that Stanfordwas in before its insolvency with the position after its insolvency. Vos J (MR) noted that the result was not unjust to the creditors of Stanford, since it was brought about only as a result of the specific way that the claim had been framed. Stanford has not claimed either consequential loss, or the more general claim that, had HSBC complied with its Quincecare duty, Stanford’s winding up would have occurred sooner and/or its overall net asset position would have been better at an earlier time Re Arboretum Devon (RLH) Ltd [2021] EWHC 1047 (Ch) Saving Stream Security Holding Ltd (‘SSSHL’) and Shoby Investments Ltd (‘Shoby’) claimed to be secured creditors of Arboretum Devon (RLH) Ltd (‘Arboretum’). Arboretum entered into two loan agreements to secure funds through ‘Lendy’, a peer-topeer lending platform. Arboretum granted security to SSSHL as security trustee. Arboretum also obtained a loan from Shoby. Under an intercreditor deed it was agreed that SSSHL’s security ranked in priority to Shoby’s up to the sum of approximately £7.85m plus interest. Clause 2.9 of the intercreditor deed provided that ‘[None of Lendy, SSSHL or Shoby] shall challenge or question… the validity or enforceability of any Security constituted by a Security Document’. Administrators were appointed and Arboretum’s business was sold. A dispute arose as to how to distribute the sale proceeds. Shoby alleged that SSSHL’s claim for repayment could only be in restitution or on the basis of an implied loan. It therefore argued that cl 2.9 of the intercreditor agreement was not engaged because the reference to ‘the validity… of any Security’ was limited to matters such as whether the security had been executed and registered properly, rather than substantive disputes as to its value.

Held
HHJ David Cooke (sitting as a High Court judge) rejected Shoby’s argument. He held, inter alia, that cl 2.9 of the intercreditor deed was ‘unlikely to be intended to refer only to matters of formal validity as a legal security interest’ but included ‘the effectiveness of the security as a security for the acknowledged secured obligations on both sides’. The purpose of the provision was to avoid disputes between creditors by agreeing the ‘the monetary extent of the secured liabilities’ (at [41]). This broad construction is likely to preclude many technical challenges to intercreditor priority agreements. Re OT Computers Ltd (In Liquidation) [2021] EWCA Civ 501 OT Computers (‘OTC’) was involved in the assembly and sale of computers. It purchased components (particularly DRAM memory from Micron Europe Ltd and possibly Infineon Technologies AG). In May 2010 the European Commission decided that Micron and Infineon were involved in a price fixing cartel until 2002, leading to €331m of fines being imposed. Publicly available information on the cartel first emerged in June 2002 by which time OTC had been placed into administration and the business and assets sold. Further information came into the public domain as the investigation began and moved towards its conclusion in 2010. The liquidators of OTC issued proceedings against Infineon and Micron six years less one day after the European Commission decision was published. The primary limitation period expired around 2008 at the latest and the liquidators relied on ss 32(1)(a) and (b) Limitation Act 1980, being the sections suspending the usual limitation periods where the action is based on fraud or the relevant facts upon which the claim is based have been concealed by the defendant. The court had previously decided that the trade press coverage within the industry allowed other companies that continued to trade in the industry was sufficient to give them enough information to found their claims and therefore those claims were statute barred. The significant point for OTC was that it didn’t continue to trade in the industry because of its administration and subsequent liquidation and therefore it argued that it hadn’t been able to find out the information necessary to found a claim until such time as the Commission’s decision had been published. Infineon and Micron submitted that the approach to s 32 should  not be different for a trading company and a company in insolvency.

Held
The court concluded that there was nothing in the wording of the statute that required OTC to be treated not as a company in administration but as a trading company when the analysis of s 32 was conducted. Whilst the purpose of the statute was to ensure that claimants in a similar position should be treated consistently, it did not follow that all claimants should be treated in the same way.