Insolvency round-up

New Practice Direction from 25 April 2018

The new Practice Direction on Insolvency Proceedings was published on 25 April 2018 and came into force immediately.

It replaces all previous practice directions, practice statements and practice notes relating to insolvency proceedings, but it does not affect other Practice Directions in the Civil Procedure Rules (CPR), the Practice Direction for Insolvency Express Trials, and neither does it affect the Practice Direction for Directors Disqualification Proceedings.

As with previous insolvency proceedings practice directions, the new one contains procedural requirements for various aspects of proceedings under the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016 and the various European Union Regulations.

Insolvency Proceedings are defined as any proceedings under them:

The relevant European Union Regulations on Insolvency Proceedings are:

  • Council Regulation (EC) 1346/2000 on 29 May 2000 on Insolvency Proceedings.
  • Regulation (EU) 2015/848 of The European Parliament and of the Council of 20 May 2015 on Insolvency Proceedings (known as the “Recast” EU Insolvency Regulation).
  • Service Regulation means Council Regulation (EC) 1393/2007 (or any successor) concerning the service in the member states of judicial and extrajudicial documents in civil and commercial matters.

Provisions are made as to who should hear matters and the jurisdiction of various levels of the judiciary, including an “ICC Judge” which stands for an Insolvency and Companies Court Judge, (previously a Registrar in Bankruptcy) under section 89(1) of the Senior Courts Act 1981.

There are new provisions in relation to the service of bankruptcy petitions and new provisions on unfair prejudice petitions under the Companies Act 2006.

A revised Chancery Guide was published on 16 May 2018 and reflects these changes.

Instalment order does not stop bankruptcy petition

In Loson v Stack and another, the Court of Appeal considered the interplay between an order that a debtor pay a judgment creditor’s costs by instalment and bankruptcy proceedings against that debtor, and also the circumstances in which an instalment order should be made.

Here, the Court of Appeal upheld a High Court decision to set aside an instalment order as the debtor had not provided evidence of a realistic payment schedule and so the creditor could enforce the debt in any way it wanted.

The creditor had enforced the costs order by way of a statutory demand and a bankruptcy petition, and the debtor subsequently obtained an instalment order as the County Court took the view that that would not stop the creditor from continuing with the bankruptcy proceedings.

The debtor applied to set aside the instalment order on the ground that it rendered the bankruptcy petition debt no longer due and immediately payable, but the High Court set aside the instalment order and the debtor appealed.

The Court of Appeal held that the debtor did not have the ability to pay the costs order and had failed to provide any evidence of his ability to repay the debt; therefore, the High Court had been right to set aside the instalment order.

The Court of Appeal commented that, although the court has jurisdiction to make a bankruptcy order based on the position at the date that the bankruptcy petition was presented, it must, in the exercise of its discretion, consider the change of circumstances created by an instalment order.

The Court of Appeal considered, by analogy with Rule 10.24 of the Insolvency (England and Wales) Rules 2016, that there was significant doubt that a bankruptcy order could be made where the petition debt was no longer due and payable, and where any arrears were below the bankruptcy level of £5,000.

The decision is Court of Appeal authority for the proposition that a bankruptcy petition, based on a debt which is due and payable at the time that the petition was presented, may continue to be prosecuted by a creditor even where an instalment order is subsequently made, but it is unlikely that a bankruptcy order will be made if the petition debt is less than the bankruptcy level at the time of the hearing, even if the debt was originally above the bankruptcy level of £5,000.

It also demonstrates that, when applying for an instalment order under CPR 40.11 or CPR 40.9A, a debtor must provide evidence that he or she can pay the principal and interest within a reasonable time. If that is not the case, then the court should not interfere with the creditor’s right to enforce the judgment by whatever means available.

ATE insurance and security of costs re insolvent company

In Premier Motorauctions Ltd (in liquidation) (1) & Premier Motorauctions (2) v Pricewaterhousecoopers LLP & Lloyds Bank PLC (2), the Court of Appeal considered the extent to which the existence of after the event (ATE) insurance is relevant when the court is considering an application for security for costs sought by the defendants in a claim brought by an insolvent company in liquidation.

The Court of Appeal held that once a court is satisfied that a company is insolvent, then it has jurisdiction to order security for costs providing that ordering security does not stifle the claim; in those circumstances, it will normally be appropriate to order security for costs, whether or not there is ATE insurance in place.

Nevertheless, an appropriately framed ATE insurance policy “can in theory be an answer to an application for security.”

The Court of Appeal rejected the submissions on behalf of those seeking security to the effect that ATE insurance is not to be considered at all, and said that it was necessary to consider whether the particular ATE insurance in any given case gives the defendants sufficient protection.

On the facts of this case, the Court of Appeal held that the ATE policy did not give sufficient protection, and therefore ordered security for costs.

The judgment itself considers in detail the case law on the interplay between security for costs orders and ATE insurance, but holds that it will always be a fact sensitive issue, largely depending upon the terms of the particular ATE policy.

Costs on administrators’ application for directions

In Lehman Brothers International (Europe) (In Administration), Re, the Chancery Division of the High Court considered when creditors will be allowed to recover, as an administration expense, the costs of appearing at an application for directions by administrators.

The usual position was that those creditors whose arguments were successful should be awarded costs, and those creditors whose arguments were unsuccessful should not receive costs.

However, the court has a general discretion to vary that normal position. It had to determine whether the role of the unsuccessful creditors could properly be characterised as collaborative and representative of other creditors, and one that assisted the administrators to resolve the issues, or whether it was adversarial and self-interested.

It will be a question of fact in each case. Here, the court held that the unsuccessful creditors’ submissions were necessary to obtain directions and were in the interests of the general body of creditors.

Consequently the court allowed the unsuccessful creditors to recover the amount of costs that would have been incurred if they had only retained one firm of the solicitors, rather than several firms between them.

Factors influencing the court were:

  • The submissions were not frivolous and, once raised, required determination.
  • The creditors had worked with the administrators, and the administrators had canvassed all creditors, to frame their submissions in terms that facilitated the widest guidance that covered as many issues and as many creditor interests as possible.
  • The relevant documents, which were standard form derivatives contracts, gave rise to complex issues that required proper argument by parties with different perspectives and with market experience.
  • It was unclear to what extent the arguments presented by the unsuccessful creditors would have benefited them economically if successful.

The court declined to award the unsuccessful creditors’ costs concerning another issue where the administrators had had no input or involvement, and on which no matters requiring the court’s guidance had been identified.

Decisions on this issue are rare, and this case will assist creditors and administrators in large and medium insolvencies in considering whether to participate in applications for directions.

Underwoods Solicitors Kerry Underwood

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