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Insolvency Bulletin May 2010

Insolvency Bulletin

Three recent cases have dealt with provisions of the Insolvency Act and Insolvency Rules concerning the provisions of Section 239 Insolvency Act and the effect of Rules 2.12 and 6.13 Insolvency Rules which had not previously been considered by the Courts. 

In the matter of Parkside International Limited (In Administration) [2008] EWHC 3654 (Ch) the High Court considered the wording of section 239 Insolvency Act 1986 and the meaning of “suffers anything to be done” in respect of a preference claim.  The case concerned the administration of three group companies, Parkside International Limited (“International”), Parkside Films Limited (“Films”) and Parkside Flexibles Limited (“Flexibles”).  The group companies were engaged in the manufacture, supply and sale of packaging material. 

In October 2003 the group refinanced itself with Yorkshire Bank.  On 28 October 2003, International entered into a £5 million chattel mortgage facility with Yorkshire Bank under which it was to draw down £4.156 million.  This was used to pay off the previous finance of Films and Flexibles.  On 31 October 2003, Films and Flexibles executed chattel mortgages in favour of Yorkshire Bank and cross-guarantees were executed between Films, Flexibles and Parkside Flexible Packaging in favour of Yorkshire Bank.  In drawing down the facility, International made loans to and became a creditor of Films and Flexibles.

By November 2004, the group was under financial pressure and sought advice from solicitors as to the financial position of the group companies.  The finance director had prepared a forecast that the group would suffer a cash shortfall of £1 million by January 2005 and that it needed to obtain an additional £2 million of bank facilities.  On 15 November 2004 the finance director went to see Yorkshire Bank who recommended that the group take advice from an insolvency practitioner.  A meeting was arranged on 16 November 2004 at which the IP advised that the directors needed to sort out the inter-group balance.

There were a number of inter-group debts.  International was owed £4.228 million by Flexibles and £1.28 million by Films.  Films owed £3.652 million to Flexibles.  The group’s solicitors noted that the loan of £4.165 million to International had been guaranteed by Flexibles and Films.  The solicitors advised that if Films repaid the loan, it might be entitled to an indemnity from International and a contribution from Flexibles.  They suggested that Flexibles should assign £3 million of the debt of £3.652 owed by Films to International as this would enable International to be able to set off more than £4.165 million against a claim by Flexibles for an indemnity.  As a result, Flexibles assigned £3 million of its debt to International, in consideration for International reducing the debt due from Flexibles by £3 million.  The following week, Yorkshire Bank appointed administrators over Films.  One month later, International and Flexibles went into administration.

The administrators issued an application as to whether the assignment was valid or might be set aside on the grounds that it amounted to a preference or on other grounds.  The High Court considered the provisions of section 239 Insolvency Act 1986.  The Court noted that the effect of the assignment was to reduce the assets available to the creditors of Films.  However, Films had not done anything to put International in a better position than it would otherwise be in.  The administrators’ application asserted that Films had suffered the assignment to be made “by deliberately delaying its invitation to the bank to appoint an administrator until after and so as to allow the assignment to be entered into before the appointment”.

The administrators also asserted that the “the suffering of the assignment being entered into before the appointment of the administrators in respect of Films amounted to a preference of International by Films within the meaning of section 239.”

The High Court held that a company could not “suffer” anything to be done simply by being affected by that transaction.  The judge reviewed the text books and cases in other areas of the law.  He held that in order to suffer a transaction, the company had to have an element of control in relation to the transaction, and to have failed to take steps to prevent or obstruct the transaction.  The judge therefore held that Films had not deliberately delayed appointing an administrator and that as it was not a party to the assignment and had not had any control over it, Films had not suffered the assignment to be entered into.  It was also irrelevant that the company had common directors with the other parties to the transaction.
The case is useful as it is the first case to deal with the meaning of “suffers anything to be done” in section 239.  It has established that “suffer” has two elements being the element of control in relation to the transaction and the failure to exercise that control so as to prevent or obstruct the transaction.

In the case of The Trustee in Bankruptcy of Louise St John Poulton v Ministry of Justice [2010] EWCA Civ 392, the Court of Appeal considered the provisions of Rule 6.13 Insolvency Rules 1986 in the light of the failure of the County Court to notify the Chief Land Registrar of the presentation of the bankruptcy petition.  The Trustee in Bankruptcy issued a claim against the Ministry of Justice on the grounds that he had a private right of action for the failure to register the bankruptcy petition as a pending action.

A bankruptcy petition had been presented against Louise St John Poulton in the Guildford County Court on 21 January 2004 by Brighton and Hove District Council.   Under Rule 6.13 Insolvency Rules 1986, the court should have sent to the Chief Land Registrar as soon as reasonably practicable notice of the petition and a request that it be registered in the register of pending actions.  However, the Court failed to do so and so no notice was registered against the title of any property owned by the debtor.

The debtor was the sole registered owner of the land at 35 Woking Road, Guildford.  In March 2004, she sold the land for the net amount of £45,500.  The Ministry of Justice accepted that if the bankruptcy petition had been registered in the register of pending actions and against the registered title in respect of the land, the debtor would not have been able to sell the land.  After the sale had taken place, a bankruptcy order was made against the debtor.

As the debtor had sold the land which would have vested in the Trustee for the benefit of creditors, the bankruptcy estate had suffered loss.  The Trustee issued proceedings against the Ministry of Justice as vicariously responsible for Her Majesty’s Court Service for the breach of statutory duty or for breach of the common law duty of care.  The High Court held as a preliminary issue that the Trustee had an action for breach of statutory duty but not at common law.  The Ministry of Justice appealed.
The Court of Appeal reviewed the history of the Insolvency Rules and the Land Registry Rules.  The Court of Appeal found that the Chief Land Registrar had always enjoyed immunity from a civil action for damages in respect of claims under the land registration legislation.  The original rule regarding notification of the Land Registry of the presentation of a bankruptcy petition was contained in Rule 149A of the Bankruptcy Rules 1915.  The Court of Appeal considered whether the rule and its successors had been intended to give the Trustee a cause of action if loss was caused by a failure to comply with the duty imposed by the rule.

The Court of Appeal also reviewed the cases dealing with breach of statutory duty.  They noted that the House of Lords had held that the ordinary inference was that if there is a duty, breach of which is likely to cause loss to specific or ascertainable persons, and no penalty, sanction or alternative remedy is provided, the likely inference is that it was intended that a private action could be brought for loss caused by a breach of the duty.

The Court of Appeal noted that there was no sanction for failure to notify the Chief Land Registrar of the presentation of a bankruptcy petition.  They felt that the obligation on the court to do so was “no more than a pious aspiration” and also noted that the petitioning creditor could also request that the bankruptcy petition be registered as a pending action.  They therefore held that there was no breach of statutory duty and that there was no common law duty of care.

In the light of the Court of Appeal’s decision, a creditor who issues a bankruptcy petition may wish to carry out searches at the Land Registry to ensure that the Land Registry has registered the petition as a pending action against any property owned by the debtor.  Where an Insolvency Practitioner is approached about being appointed as Trustee in Bankruptcy, the IP may wish to check that the appropriate entries have been made against the debtor’s property before considering whether to act as Trustee.

The High Court has recently considered the provisions of Rule 2.12 as to whether the costs of a winding up petition can be paid by administrators.  In Irish Reel Productions Ltd v Capitol Films Ltd [2010] EWHC 180 a winding up petition was presented against Capitol Films on 21 August 2008.  Irish Reel was subsequently substituted as petitioning creditor.  On 2 February 2010 an administration order was made in respect of Capitol Films.  Irish Reel applied for its costs of the petition to be paid as an expense in the administration and that pursuant to Rule 2.67(3) its costs be paid out of the assets of Capitol Films in priority to the administrators’ expenses.

The judge held that it would be appropriate to interpret Rule 2.12 in a purposive way.  He noted that an administration application may be the last stage in a long process whereby the company comes to be subjected to an insolvency process in the interests of its creditors, the earlier stages of which may include the bringing of a winding up petition, and the prosecution of that petition in the face of dogged resistance by the company itself.

The judge held that the phrase “the costs… of any person whose costs are allowed by the court” in Rule 2.12(3) comprehended not only the person’s costs of appearing at the hearing of the administration application but also that person’s costs of any winding up petition which was dismissed at the same time.  The remaining words of Rule 2.12(3) then automatically provide for such costs to be payable as an expense of the administration, and fall within the words of Rule 2.67(1)(c) being “the costs of any person appearing on hearing of the application”.

The judgment confirms the practice of the High Court to make such orders and provides a useful interpretation of the provisions of Rules 2.12 and 2.67.