The government consultation Reform of the Process to Apply for Bankruptcy and Compulsory Winding Up, which proposes adjudication by Insolvency Service staff rather than a court hearing of most petitions for bankruptcy and companies winding-up, has begun to trigger debate.

The High Court's Chief Bankruptcy Registrar and the Insolvency Service's Director of Policy have recently exchanged views through Accountancy Age.

I confess to favouring the view of the learned judge. As I write, the consultation has 12 days left to run, closing on 31 January 2012. The government (through the Insolvency Service's Policy Unit) welcomes the views of all interested parties.

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The failure of directors to notify the company, in accordance with Paragraph 26, Schedule B1, Insolvency Act 1986, of their intention to appoint administrators does not necessarily render the administrators' appointment invalid.

In two carefully considered judgments in cases heard on consecutive days in November 2011, the most recent of which was handed down on 21 December:

Virtualpurple; and

Bezier:

Mr Justice Norris explains how he has been able to clarify the previously unsatisfactory state of the law.

We noted in May the surprising and unhelpful Minmar decision. Like me (but he expresses it far more eloquently in Virtualpurple), Norris J prefers the decision of HHJ McCahill QC in Hill v Stokes Plc [2010] EWHC 3726.

In Bezier, Norris J held that delivery of the notice of intention to appoint to the company's solicitors was adequate, notwithstanding the apparent requirement of the Insolvency Rules that service on the company be effected by delivering the notice to its registered office.

What a sensible way to end the year! Christmas greetings and best wishes for 2012 to all our readers.

Chris Laughton is a Restructuring & Insolvency partner at Mercer & Hole. The views given in this post are personal to the author. If you would like to discuss the contents of this post with Chris, you can call him on +44 20 7353 1597.

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In a statement on insolvency practitioner regulation today (20.12.11) The Minister for Employment Relations, Consumers and Postal Affairs [and Insolvency] recognised strong stakeholder support for an independent single regulator. Announcing the government's response to the consultation on insolvency practitioner regulation, which closed in May 2011, he said he could see the merits of a single independent regulator.

I thought 6 months ago that a single independent regulator was an unattainable ideal and I am delighted that the idea has gained traction. Many IPs support the concept individually and R3, the trade association, is now said to be looking forward to working on it with the Minister. 

Whilst the Insolvency Service will first: 

"work with the profession and interested parties to see if there is a way to reform the system so that it delivers better against our objectives without such significant change"

there is at least now a real prospect of achieving regulation that is and is seen to be effective and independent. Such an outcome is good for the profession as well as for all those who encounter it.

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In his quest for economic stimulus in the Autumn Statement, George Osborne failed to drive banks and borrowers to put the assets and resources of moribund businesses to good use.

For many months now observers have commented on the zombie companies that clog up our economy. Adam Posen of the Bank of England’s Monetary Policy Committee draws a parallel with Japan in the 1990s being stalled by unproductive borrowers on whose loans the banks could not afford to take losses. Although Posen’s observations were seeking to promote central bank monetary stimulus in continental Europe, the Bank of England has been expressing concerns about domestic bank forbearance since June 2011.

The many companies with low or no profitability or cash flow are adding nothing to the economy. Yet they tie up resources. Banks are increasingly concerned about zombie companies, but it is getting no easier for either the banks or their customers to generate positive growth. Without growth there will be no economic recovery.

The banks should stop holding on to this unproductive debt. The pretence that it is worthy of recognition in the banks’ capital ratios must be abandoned. The companies need freeing from the burdens of their creditors through an insolvency process, if they cannot be turned around

Although lending banks are feeling pretty bruised and the Bank of England is insisting they build up their financial buffers to withstand the current “extraordinarily serious and threatening situation”, tightening the definition of non performing loans so that loans to zombie companies are not counted towards the banks’ capital adequacy would have a number of benefits.

In the long term banks’ balance sheets would be strengthened. The business and resources that would be recycled through turnaround or insolvency would stimulate the economy, with entrepreneurs free from unpayable debt burdens once again being able to generate wealth.

Chris Laughton is a Restructuring & Insolvency partner at Mercer & Hole. The views given in this post  are personal to the author. If you would like to discuss the contents of this post with Chris you can call him on 020 7353 1597. 
 

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Restructuring & Insolvency is an integral part of Mercer & Hole’s business. A very busy period when our core skills of constructive use of insolvency procedures, stressed corporate advisory work and solvent restructuring have been in high demand, has prompted us to grow our Restructuring & Insolvency teams.

We are now looking to employ a senior administrator, to be based in our St Albans office.  The successful candidate is likely to have at least 4-5 years of insolvency administration experience and be able to administer a portfolio of cases. The role mainly involves corporate insolvency and candidates who have gained the CPI qualification or are part ACCA qualified would be desirable.  Good organisational and communication skills are essential.

Principally reporting to a manager, but also directly to a partner, the senior administrator's duties will involve the general daily conduct and progression of administrations, members and creditors voluntary liquidations, compulsory liquidations and company voluntary arrangements, together with some assistance with advisory cases.

To apply for the vacancy, please send your CV and covering letter, with current salary details to:  Kate Watt, HR Officer at recruit@mercerhole.co.uk.

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Preference law, rules on reorganisation or composition plans, claim validation rules and insolvency of groups of companies are included amongst the topics identified as apt for harmonisation in INSOL Europe's report to the European Parliament, Harmonisation of Insolvency Law at EU Level.

They are also the topics discussed in a paper by Roelf Jakob De Weijs in an Amsterdam Law School research paper, Harmonisation of European Insolvency Law and the Need to Tackle Two Common Problems: Common Pool & Anticommons.

Arguing for a European debate on bankruptcy theory, De Weijs explains creditors frustrating reorganisation or composition plans, creditors creating nuisance value by filing exorbitant claims and the problem of office-holders’ hold out in the case of the insolvency of a group of companies by reference to the tragedy of the anticommons (where multiple owners are each endowed with the right to exclude others from a scarce resource).

In practice, skilled practitioners are adept at circumventing or mitigating the effect of such blocking rights. Care should be taken on harmonisation to consider what affects parties' behaviour and to avoid unintended consequences. A European debate on bankruptcy theory is a good thing.

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Financial Support Directions and Contribution Notices issued by The Pensions Regulator after a target company has gone into administration give rise to liabilities that rank as administration expenses under Rule 2.67(1)(f) Insolvency Rules 1986.

So found the Court of Appeal as it dismissed the appeals in the Nortel and Lehman cases.

In a serious blow to the rescue culture, the court found that it could not under the relevant statutes classify such liabilities as provable debts and, since classifying them as debts payable only once other creditors had been paid in full (the "black hole" result) cannot have been the intention of Parliament, classifying them as administration expenses was the only option.

It seems likely that the decision will be appealed to the Supreme Court, but the Court of Appeal gave some indications that the underlying statute fails to achieve what perhaps it might:

30. Given the precedent set in relation to section 75 by the 1995 [Pensions] Act, and given the relationship between the obligation under a financial support direction and the liability under a contribution notice, on the one hand, and the section 75 debt on the other, it might not have been surprising to find that the 2004 [Pensions] Act provided that the liability under a contribution notice was a provable debt in the insolvency of the relevant target company. One looks in vain for any such express provision in the 2004 Act.  

111. This conclusion does lead to some curious consequences. Given the close relationship between the section 75 debt and the liability under a contribution notice, it is odd to find that while the section 75 debt is provable in the insolvency of the employer, the contribution notice liability is payable with much higher priority as an expense in the insolvency of the target. It is the more odd that, as is not disputed, the employer can itself be a target, so that, by service of a contribution notice, it appears that the Pensions Regulator can produce a situation under which the priority of the relevant part of the debt is enhanced (to the extent of the amount payable under the contribution notice) from being merely provable (and expressly not preferential) to being payable as an expense. (The point of allowing for service of a financial support direction on the employer is said to be that, in particular circumstances, there may not be a section 75 debt, for example if there is no question of insolvency, but this argument from anomaly can be made, even if less strikingly, by reference to how the liability would rank if there were such a debt.)

      

112. On the other hand it might be said to be at least as odd, and a good deal more so, if the liability under a contribution notice had a lower priority than that of the section 75 debt, being relegated to the black hole, and if a potential target company could avoid the effect of the financial support direction regime by putting itself, or being put, into administration before any decisive step could be taken by the Pensions Regulator to impose any liability under this regime. Even if the issue of the Warning Notice is the critical stage, the possible target company (or at least the group) would be likely to have plenty of notice before that stage that the Pensions Regulator was interested in it, not least because it will have been the subject of requests for information under section 72 of the Act.

      

113. There is force in the argument that the potentially very large liability under an eventual contribution notice, and the open-ended nature of the obligation under a financial support direction, could be a serious impediment to the rescue culture which underlies the administration regime.

The troubling part of this judgment, to my mind, is its consideration of the justification for Parliament not having specified that the liabilities arising from financial support directions and contribution notices would be provable debts:

In a situation in which the regime applies, because the employer was either a service company or insufficiently resourced, then even if the targets are themselves insolvent, they may still have more assets available than the employer does, despite the insolvency. We were told that this is the case in the Nortel insolvency, where, apart from the effect of an eventual financial support direction and contribution notice, creditors of the targets would be expected to receive a significantly higher level of dividend than those of the employer. The legislation has a valuable and realistic purpose if it enables some redistribution of assets in such a situation, where otherwise the creditors of the targets would be able to share in a greater volume of assets, partly as a result of having had the benefit of services (including employees) provided by the employer, but without having to pay in full for the provision of those services, in particular without having to contribute appropriately to the pension liabilities in respect of its employees.

The reality is that Parliament gave relatively little thought to the liabilities being administration expenses. Why should unconnected creditors suffer more than the pension scheme (or the PPF)? It is no less a disincentive to the moral hazard of group companies passing risk to the Pension Protection Fund in the event of an employer's insolvency if the group companies attract massive unsecured claims.

This is a case where the statute needs to be changed.

Chris Laughton is a Restructuring & Insolvency partner at Mercer & Hole. The views given in this blog are personal to the author. If you would like to discuss the contents of this post with Chris you can call him on 020 7353 1597. 

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A liquidator’s investigation into a family company resulted in the liquidator pursuing the directors (and other family members as de facto directors) for repayment of overdrawn loan accounts as well as compensation for misfeasance and breach of fiduciary duty.

The liquidator’s claim was based upon the incomplete books and records he had been able to obtain whilst the directors/family members relied upon oral evidence. The court considered the importance of written evidence not only for assessing credibility and supporting oral evidence, but also where it might be conspicuous by its absence and the inferences drawn.

The court considered that the liquidator had established a prima facie case and, given that the documents and records were under the control of the directors/family members, could presume that the claim would have been supported by documentation (that had gone missing).

Acting as liquidator we often face problems obtaining books and records which are necessary to carry out our investigation into the affairs of a company and the actions of directors. This case illustrates the importance of keeping full and proper records of account.

Caroline Stark is a Senior Manager at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Caroline you can call her on 01727 869141. Email Caroline Stark

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Luca Cordero di Montezemolo, Chairman of Ferrari, today graphically described the strengths of Italian industry in terms of its people and their passion. Likening a Ferrari to a beautiful woman, he also said that German cars are great - like a freezer - good, efficient engineering! In a keynote address celebrating INSOL Europe's 30th anniversary, he noted that Ferrari had undergone a variety of restructurings in the 60 years since it first won the British Grand Prix at Silverstone, as it did again in 2011. Clearly proud of his company's European Workplace of the Year award in 2007, he emphasised the need for innovation and communication in restructuring.

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