IPS AND INSOLVENCY MONTHLY UPDATE – AUGUST 2014
IPS and Insolvency Monthly update
IPS and Insolvency Monthly update
Within the ever changing Insolvency Market it is paramount that IP’s, their staff and providers of services and products to IP’s keep up to date with developments. To that end Turnkey are launching a monthly update. This update will detail both changes within the insolvency legislative framework and any topics that will affect IPS and its users.
Current IPS news
One of the major changes in reporting for insolvency and restructuring announced by the Government for some time and requiring amendment to IPS is Real Time Information (RTI). The requirements are in effect for the tax year 2014-2015. This requirement and the details have been taken up by R3 on behalf of the industry.
The requirement for IPS to be able to generate the required RTI information is being specified and will be available for the next release of IPS currently planned for early November 2014.
Much progress has been made to allow Gazette and newspaper notices to be generated and filed direct from IPS. This is now being rolled out to users. Please contact email@example.com quoting “Gazette Filing” in the subject line to request further information and a demonstration.
IPS Document Portal
Many users are now regularly filing documents with the IPS-Docs portal. To date over 2,000 cases and in excess of 3,500 documents have been uploaded. Users that have yet to try this simply need to follow the link for an overview. Having proved so popular we are now looking at extending the portal use into areas such as creditor claims and proxy lodging.
Insolvency and restructuring legal briefing
We would like to thank MacDonald Henderson solicitors for their efforts in making this possible.
INSOLVENCY AND RESTRUCTURING BRIEFING – AUGUST 2014
EU / UK
Jurisdiction – defenders domiciled outside of EU
Court action to set-aside a pre-insolvency transaction can be raised in the Courts of the EU Member State where the debtor’s insolvency proceedings are situated, even if the defender is resident/domiciled in another Member State or outside of the EU.
A liquidator had been appointed in Germany. Proceedings were raised in the German Courts to set aside a payment made by the debtor to an individual resident in Switzerland prior to the appointment of the liquidator. The European Court of Justice (ECJ) in Schmid v Hertel, C-328/12 ruled that regardless of the defenders’ domicile, the action could be raised in the Courts of Germany. EU Regulation on insolvency proceedings (1346/2000/EC) gives jurisdiction to the Courts of the EU Member State where the main insolvency proceedings originate even if the defender is not domiciled in the EU.
Pre-Packs – “clean-up” recommended
On 16 June 2014 the UK Government published the findings of an independent review of pre-pack administrations in terms of which a “clean-up” is recommended.
The review had been commissioned in response to continued discontent, particularly amongst unsecured creditors.
The review was undertaken by Teresa Graham.
While there have been calls for the option of a pre-pack to be abolished, Teresa Graham concluded that pre-packs definitely have a place in the insolvency arena and there should be a clean-up with major improvements as to how they are administered.
The report makes six recommendations, summarised as follows:-
1.Pre-Pack pool for connected party deals
A pool of experienced business people should be formed to enable independent scrutiny of a “connected party” pre-pack deal. Approach by the connected party would be voluntary. Background documents would be scrutinised by a member of the pool who would issue a positive or negative statement in respect of the deal. The statement would be attached to the SIP 16. The report notes that the general perception is that connected party deals are inherently less fair to creditors and aims to provide opportunity for independent review before the deal is concluded.
The report notes criticism that businesses with fundamentally unviable models are allowed back into the market post pre-pack, freed of old company debt, often to fail again, and that a new company in a connected party deal is more likely to fail. The report recommends that a connected party, again on a voluntary basis, prepare a viability review setting out how the company will survive for at least the first 12 months. The review would be attached to the SIP 16 and intimated to the creditors.
3.Revised SIP 16
A revised SIP 16 has been drafted as part of the report and it is recommended that the Joint Insolvency Committee consider the same as a matter of urgency. In addition to the intention that the documents produced further to the first two recommendations be attached to the SIP16, minor revisions have been made to the existing SIP 16 with a view to tightening up the language of the SIP 16 itself.
The report recommends that marketing of business that pre-pack comply with 6 principles, with a view to improving the quality of marketing. In short, the principles are: broadcast rather than narrowcast; justify the media used; ensure independence, the practitioner is independent of the company and, for example, marketing before appointment should not necessarily preclude further marketing; publicise rather than simply publish; include online communication alongside other media by default; and explain marketing strategy to creditors, particularly in connection with connected party deals.
Valuations must be carried out by valuers with professional indemnity insurance. Providers of PII carry out their own stringent checks on those who apply for cover and creditors should be better satisfied that a value executed by a person with PII will represents a fairer value.
Where no cover is held the practitioner should explain his/her choice of a valuer without such cover.
6.Monitoring of SIP16
It is recommended that the Insolvency Service withdraw from monitoring SIP 16 statements and that the Recognised Professional Bodies pick up the role. The report considers that the PRB is better placed with the right level of practical experience to monitor and further improve compliance rates.
It is hoped by the review that the recommendations will be implemented by the market and that legislation will not be required, but recommends that the government considers legislating if they are not.
England & Wales
CVAs and rates
The High Court in Kaye v South Oxfordshire District Council and another  EWHC 4165 (Ch) determined that the entire annual liability for business rates of a company, who entered a Company Voluntary Arrangement (CVA) which had been approved part of the way through rateable year, fell subject to the CVA.
A company agreed a CVA with its creditors in July 2013. The CVA bound all unsecured creditors provided their respective debts were encompassed by the terms of the CVA. The local authority claimed that only rates up to the date of approval of the CVA were included and compromised under the terms of the CVA. The local authority took enforcement action in respect of the balance of rates beyond the date of the CVA. However, the definition of debt in terms of the CVA included future and contingent debt and the Court held that the rates could be characterised as such debt and were therefore subject to the CVA.
Gratuitous alienation – the Letham Grange Golf Resort case
The Supreme Court has upheld the original judgment in this long-running case and ruled that an alienation of a property worth £1.8 million for £248,100.00 was not a gratuitous alienation on the basis that £1.85million of debt was also assumed by the purchasers as part of the consideration of sale.
Letham Grange Development Co Limited (“the Company”) had entered liquidation in 2002. The Company had acquired the Letham Grange Golf Resort in 1994 for around £2million. In 2001 the Company had sold the resort to Nova Scotia Limited (“the Purchasers”) for £248,100.00. The Purchasers granted a standard security in favour of Foxworth Investments Limited (“the Security Holders”) around a year after the Company entered liquidation. All of the companies shared a common director, who had been responsible for all of the relevant decisions.
The liquidator of the Company raised action and obtained a judgement, by default when the Purchasers were not represented at an evidential Hearing, reducing the sale to the Purchasers. The liquidator then proceeded to raise the present proceedings with a view to also reducing the security in favour of the Security Holders on the basis that it was claimed that they knew the sale was subject to challenge and had not obtained the security in good faith. The Security Holders defended the action on the basis that they maintained the sale had not been a gratuitous alienation. The Security Holders claimed that in addition to making payment of £248,100.00 the Purchasers had assumed £1.85million of debt owed by the Company to the common director and had given adequate consideration. The Security Holders maintained that they had received the standard security in good faith and for value.
In the first place, the Outer House of the Court of Session held that adequate consideration had been given by the Purchasers and the security had been obtained by the Security Holders in good faith. The Outer House rejected an allegation that documents relating to the Purchasers assumption of debts had been created after the event to support a false version of events and considered that the date on which the documents were created was not material.
On appeal, the Inner House held that the Outer House had erred in law. The Inner House were critical of the analysis of evidence and determined that in the absence of any evidence demonstrating that the Purchaser assumed responsibility for the debts of the Company at the time of the sale, it could not be found that there had been adequate consideration. The Inner House held that the sale to the Purchasers had been a gratuitous alienation and the Security Holders had not obtained their rights in security in good faith.
The Supreme Court noted that the key issue was whether the alienation had been made for adequate consideration. An obligation on the part of the Purchasers to assume responsibility for the debt could only form part of the consideration for the sale if it was undertaken in counterpart of the obligations undertaken by the Company in terms of the contract of sale. The Supreme Court essentially held that the Outer House had understood all of these points and had been entitled to accept the evidence of the common director that it had been decided before the completion of the sale that the Purchasers would assume the debt of the Company.
This briefing does not constitute legal advice. Separate legal advice should be taken as required.
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