No intention? No notice!

In a judgment that will undoubtedly impact what has become fairly common practice when filing notices of intention to appoint an administrator (“NOITA”), the Court of Appeal has held in JCAM Commercial Real Estate Property XV Ltd v Davis Haulage Ltd[1] that a company seeking to give notice of intention to appoint under paragraph 26 of Schedule B1 to the Insolvency Act 1986 (the “Act”), and to file a copy of it with the court, triggering the interim moratorium, must have a settled intention to appoint an administrator.

Background

JCAM Commercial Real Estate Property XV Limited (“JCAM”) was the owner of premises of which Davis Haulage Ltd (the “Company”) was the tenant.  In 2015 the Company was struggling to make the rental payments due and by early 2016 the rent was in arrears in excess of £200,000.  JCAM notified the Company that they would take steps to recover possession of the premises if the arrears were not settled in full within seven days.  On 28 January 2016, with no payment having been received, JCAM issued possession proceedings.  On 22 January 2016, and unknown to JCAM, the sole director of the Company had filed a NOITA.  The NOITA was served on the Company’s qualifying floating charge holder.  The NOITA was not sent to JCAM at that time.

The filing of the NOITA gave rise to an interim moratorium and during the course of the interim moratorium, the proposed administrators wrote to JCAM sending a copy of the first NOITA and advising that the proposed administrators’ firm was working with the Company “to find a feasible solution to secure the business going forward”.  Three subsequent NOITAs were filed upon the expiry of the first interim moratorium.  At no point during the course of the interim moratoriums were administrators appointed and the Court of Appeal noted “it seems clear that the notices were given and copies filed with the court in order to secure the automatic moratorium while consideration was given to the best means of securing the future of the company or its business”.

Prior to filing the final NOITA, the Company’s solicitors informed JCAM’s solicitors that the Company was in the course of preparing a proposal for a company voluntary arrangement (“CVA”), which was approved with modifications on 6 April 2016. The automatic moratorium in administration proceedings is unique and although there is provision for a moratorium during a CVA, this is only available in very limited circumstances and only for certain types of eligible companies.[2] The CVA subsequently failed in December 2016 and the Company entered administration.

JCAM issued proceedings on 11 March 2016 seeking an order that the fourth NOITA be vacated and removed from the court file on the grounds that it constituted an abuse of process. JCAM further sought an order allowing for retrospective commencement and continuation of proceedings against the Company.  The judge in the first instance granted the orders to commence/continue to proceedings and rejected JCAM’s argument in respect of the fourth NOITA.  In his decision the judge focussed on the use of the word ‘proposes’ in paragraph 26 (1) of Schedule B1 to the Act and said that the word ‘proposes’ could not be read as intends and a director of a company may propose to do something without “having any settled intention to do that thing”.

Court of Appeal decision

The Court of Appeal did not agree with the approach taken by the judge. In his decision Lord Justice David Richards concluded that in the context of paragraph 26 the words ‘proposes’ and ‘intends’ are synonyms and where paragraph 26(1) of Schedule B1 of the Act requires “a person who proposes making an appointment” to give written notice to certain persons that should be read as “a person who intends making an appointment”.

Further, Lord Justice David Richards noted that the purpose of a NOITA is both specific and limited and this notice is only given to persons who have a prior right to appoint an administrator. To the extent that there are no persons who have this right there is no need give and file a NOITA (obtaining the corresponding interim moratorium) nor would it be appropriate to do so.

Lord Justice David Richards further considered the question of how strong the possibility of a subsequent appointment should be for an NOITA to be filed, given the requirement to file a NOITA upon certain persons where there is the possibility of an administrator being appointed. Filing the NOITA where the intention to appoint an administrator was still questionable, could lead to companies entering administration needlessly where  a qualifying floating charge holder decided to exercise its right to appoint its own choice of administrator upon receiving the NOITA, thereby potentially derailing the restructuring that the directors and/or company are trying to put in place. The implication therefore appears to be that the possibility should in fact be a firm probability.

Finally, Lord Justice David Richards noted that a moratorium in a CVA is only available in very limited circumstances and by allowing the use of subsequent NOITAs in this manner the court would be allowing the Company an indirect means to obtaining a moratorium that is not otherwise directly available. He commented that a previous consultation had been carried out by the Insolvency Service in 2009 querying whether it would be appropriate to extend the CVA moratorium to medium and large companies. Following responses to the consultation, it was decided not to extend the moratorium provisions because there was insufficient support for a further support of the moratorium. It was not for the court to second guess policy on this point.

The appeal was allowed and it was ordered that the fourth (and final) NOITA be removed from the court file on the basis that the prerequisite of having a settled intention to appoint administrators was not met.

Impact of decision

It has become common practice to file a NOITA (and subsequent NOITAs) for a variety of reasons (e.g. where a buyer is sought for a prepack or to provide a breathing space where funding options are being explored). In an email provided to the Court of Appeal by a partner of the Company’s solicitors it was noted that “it was not uncommon in situations like this where the success of a CVA is uncertain to run a parallel process and seek protection in that period”.

An unforeseen consequence of this judgment combined with the advent of e-filing (in London at least) may be an increase of applications to court for the appointment of administrators as opposed to out of court filings. The the moratorium will commence from the moment the administration application is filed at court, but there is often a delay between the application and the actual hearing during which the company might seek to resolve its issues (and then seek the dismissal or withdrawal of the administration application in a relatively routine step).

While the judgment is helpful in clarifying the law it does in itself raise a number of questions and has the potential to put directors of distressed companies under pressure to make a decision on the appointment of administrators at an earlier stage than they would have necessarily done before. It will be interesting to see whether this judgment will put to an end or at the very least dampen the practice of filing successive NOITAs whilst discussions on future options are still ongoing – a point that Lord Justice David Richards notes “for the future, it will be clear, by reasons of this court’s decision, that a conditional proposal to appoint an administrator does not entitle or oblige a company or its directors to give a notice under paragraph 26 of Schedule B1”.

[1] [2017] EWCA Civ 267.

[2] Paragraphs 6 and 7 of Schedule A1 to the Act.

Insolvency Rules 2016: Decision Making

The Insolvency Rules 2016 (the 2016 Rules) have effect from 6 April 2016. A key change introduced by the 2016 Rules is a new approach to decision making, including a deemed consent procedure. The new approach is designed to ease the administrative and cost burden in insolvency proceedings, and is summarised here: Insolvency Rules 2016: Decision Making

We have also highlighted some of the changes to be aware of  here: Watch Out – Insolvency Rules 2016.

 

Can We Work It Out? : An Overview of the Pre-Action Protocol for Debt Claims

After much consultation and debate, the Ministry of Justice has published the final version of the Pre-Action Protocol for Debt Claims (the Protocol), which is due to come into force on 1 October 2017. The Protocol is available on the Ministry of Justice website.

Following the general trend of civil procedure in the UK, the Protocol aims to encourage early engagement, reasonableness and, where possible, resolution between individual debtors and their creditors. The intention is to render court proceedings an option of last resort. The Protocol applies to any business claiming payment of a debt from an individual (including a sole trader). It does not apply to business-to-business debts (unless the debtor is a sole trader). The remit of the Protocol as currently drafted also appears to extend to debts owed by an individual under a guarantee.

The Protocol is explicitly intended to complement, but not take precedence over, existing regulatory obligations (such as those contained in the FCA Handbook) and will not apply where the debt is covered by another Pre-Action Protocol.

The Protocol envisages a pre-action discourse between debtor and creditor. This will comprise a Letter of Claim, response, early disclosure and a consideration of alternatives to litigation.

Letter of Claim

As is common for any Pre-Action Protocol, the Protocol requires the creditor to send a Letter of Claim to the debtor before proceedings are commenced. Paragraphs 3.1 to 3.3 of the Protocol set out the required contents of such a letter (including, inter alia, full details of the amount and basis of the debt), certain enclosures and method of delivery. If the debtor fails to respond to the Letter of Claim within 30 days, the creditor may start court proceedings (subject to any regulatory obligations).

Response and Early Disclosure

A template Reply Form for use by the debtor is provided at Annex 1 of the Protocol along with guidance for completion. The creditor must pay due regard to the information included in the Reply Form as it may trigger obligations under paragraphs 4.1 to 4.5 of the Protocol. Obligations that may be triggered include (among others) a requirement that the creditor provides the debtor with:

  • a reasonable period in which to obtain debt advice;
  • written reasons for rejection of any proposed repayment plan; and/or
  • documents or information requested by the debtor.

Both the creditor and the debtor should exchange information and disclose documents relevant to their position as early as possible in order to facilitate resolution discussions.

In any event, the creditor should not start court proceedings less than 30 days from, the later of, receipt of the completed Reply Form or the provision of documents by the creditor. If the parties are unable to reach a resolution on the basis of the above steps (and any concurrent discussions), they should consider using an appropriate form of Alternative Dispute Resolution (ADR) such as negotiation or mediation.

Further Steps

If the parties are unable to reach a resolution on the basis of the above steps (and any concurrent discussions), they should consider using an appropriate form of Alternative Dispute Resolution (ADR) such as negotiation or mediation.

After observing the requirements of the Protocol, if a creditor has nonetheless decided to take legal action, it must provide the debtor with 14 days’ notice of its intention to do so, in addition to complying with the time limits detailed above.

Consequences of Non-Compliance

Creditors should note that if a matter does proceed to litigation, the court will take into account any non-compliance with the Protocol when giving directions for proceedings. This could therefore have an effect on (among other things) costs orders made.

Comment

Businesses which transact with individual debtors (including sole traders) should consider taking the following steps to align their internal procedures with the Protocol:

  • revising standard form letters of demand to assess whether these could be expanded to comply with the Protocol;
  • updating debt collection policies and providing internal training on the same;
  • tailoring litigation strategies to include a more conciliatory approach to the initial phases of handling debt actions; and
  • particularly for businesses which enter into agreements supported by personal guarantees, noting that actions to recover under the guarantee should be handled in accordance with the Protocol.

Rights of Third Parties Put on Notice of Freezing Orders – A Clarification from the Court

Reed Smith recently released a client alert regarding a decision this week, in which the English High Court has clarified the extent of a third party secured creditor’s duties, when put on notice of a freezing order, and suggested a more limited duty than that previously articulated by the court. Notwithstanding this, the position remains that when a third party is put on notice of a freezing order of the English High Court, it is not something that it should take lightly. To read the full client alert on our website, click here.

Disclaimers: paper shield or your best protection?

The UK Court of Appeal recently considered the liability of issuers to secondary market investors under the Misrepresentation Act 1967 (the “1967 Act”) in the case of Taberna Europe CDO II Plc v Selskabet (formerly Roskilde Bank A/S) (In bankruptcy) [2016] EWCA Civ 1262. The Court found that primary and secondary investors could potentially be entitled to rely on online content, such as product presentations, which have been published in a deliberate manner, particularly if the issuer directs investors to the content. However, liability for misrepresentation in these documents could be limited, or even excluded, with an appropriate disclaimer or by limiting third-party access to the materials.

In this case, Taberna alleged that it relied on an investor presentation produced by Roskilde, as issuer, which misrepresented its holdings of non-performing loans. The presentation was available on Roskilde’s website and contained a series of disclaimers which sought to restrict or limit liability for any errors or misstatements. The core disagreements focused on the scope of potential liability of Roskilde, as the producers of information under the 1967 Act, and the use of disclaimers to restrict any subsequent liability.

Prior case law such as Peek v Gurney (1873) LR 6 HL 377 already clarified placing material on a website alone does not create a relationship necessary to give rise to liability. In this case, however, the Court found that Roskilde was liable to the secondary investors because it actively encouraged investors to rely on the information in the presentation. Nevertheless, the relationship was mitigated with appropriate disclaimers.

Liability for inducing a party into a contract by a misrepresentation may only be mitigated by an agreement. As there was no formal agreement in this case, the page long disclaimer in the presentation could only act as a notice that the bank would not accept liability for the statements in the presentation. The lower court found that absent an agreement, the disclaimer was insufficient to reject liability for misrepresentation. However the Court of Appeals looked to the Unfair Contract Terms Act 1977 to find that, absent fraud and given a reasonableness test, Roskilde was entitled to give notice in the disclaimer that it would not accept liability for the statements in the presentation, even without a contract between the parties.

This case highlighted some considerations and potential pitfalls for both issuers and secondary market investors. Issuers could look to reduce their liability to primary and secondary investors by placing clear and prominent disclaimers within the face of documents stating that any such issuer makes no representations and accepts no responsibility for the accuracy of the document’s contents. Issuers could also reduce their risk by password protecting presentations and documents, and then removing the content from its website after the issuance is made. This case has also clarified that investors must be cautious and carefully read the fine print when looking to rely upon information produced by an issuer. Further, investors without a contract with the issuer cannot be certain that information provided by the issuer is reliable, particularly when disclaimers are used.

Take special care – amendments to the Special Administration Regime

On 6 April 2017, together with the new Insolvency Rules (England and Wales) 2016, the Investment Bank (Amendment of Definition) and Special Administration (Amendment) Regulations 2017 (the “Regulations”) will come into force.

These regulations follow an independent review of the special administration regime, undertaken by Peter Bloxham during 2013, assessing the success of the special administration regime and making recommendations of possible changes that may improve the operation and robustness of the regime.

The amendments made pursuant to the Regulations aim to extend and strengthen the existing regime, while also simplifying processes, in the following ways:

  • extending the definition of “investment bank” (as set out in the Banking Act 2009) to include institutions which are regulated to manage alternative investment funds (AIFs) or undertakings for collective investments in transferable securities (UCITS) and those acting as trustee or depository of an AIF or UCITS;
  • including provisions for dealing with client money (not just client assets as previously enacted);
  • introducing an additional duty for the administrator to co-operate with the scheme manager of the FSCS;
  • making it easier for an administrator to transfer client assets;
  • introducing a soft bar date mechanism which allows the administrators to distribute client assets and client monies without court approval and a hard bar date after which any client money claim received is to be treated as an unsecured claim;
  • removing the right of client money claimants to claim interest from the general estate (except in respect of any shortfall which they would have had if they had made a claim on the client money pool);
  • providing for contracts for services relating to the safe custody of client assets to continue despite the administration; and
  • giving administrators the power to move client money between accounts on a final reconciliation of the amount of client money which the bank is required to hold in accordance with rules with the amount of client money it holds in client money accounts.

It is worth noting that the ability to challenge the conduct of special administrators has been extended under paragraph 74 of Schedule B1 of the Insolvency Act 1986 to include challenges by the FSCS, the regulators and parties affected by a transfer of the client business. Further, in cases where costs have been incurred as a consequence of the investment bank’s failure to comply with client money rules, the administrator now has to obtain the agreement of the creditors or the court on the level of costs, which are to be met out of the investment bank’s own assets.

Finally, in addition to the Regulations, on 23 January 2017, the FCA published a consultation paper on Client Asset Source Book (CASS) Rule 7A and the special administration regime. The consultation seeks feedback on proposed changes to the CASS rules affecting the return of client assets in light of the Regulations.

The full Regulations can be found here.

Permission to continue proceedings during a statutory moratorium – South Coast Construction Ltd v Iverson Road Ltd [2017] EWHC 61

The recent case of South Coast Construction provides a helpful insight into the court’s treatment of applications for permission to continue proceedings during the administration moratorium.

Mr Justice Coulson heard the matter whilst acknowledging that, by the time judgment was handed down, the interim moratorium (which had arisen following the filing of a notice of intention to appoint an administrator (“NOI”)) would have expired. He did so on the basis that (i) his decision would be desirable, given its wide ramifications for other cases and (ii) it was relevant as to costs.

South Coast Construction, as claimant, made two applications. The first application was for summary judgment to enforce the decision of the construction adjudicator in other proceedings, and the second application was for permission to proceed with a related enforcement hearing despite the 10 day interim moratorium.

Mr Justice Coulson’s judgment outlined the factors relevant to the court when considering whether to grant permission to continue proceedings during a moratorium in the context of administration.

Continue Reading

Late payers beware? New obligation on large companies to report on payment practices

Under new regulations to be made under section 3 of the Small Business, Enterprise and Employment Act 2015 (the Payment Reporting Regulations), large UK companies will be required on a half-yearly basis to prepare and publish a report on their payment practices, policies and performance for financial years beginning on or after 6 April 2017. There will be a corresponding obligation on UK LLPs under the Limited Liability Partnerships Act 2000.

Read the full client alert.

What is half of nothing? Wrongful trading developments in the ‘Robin Hood’ case

Case law on wrongful trading has developed significantly over the past two years, with the cases of Ralls Builders and Brooks increasing judicial consideration of the conduct of directors in the period preceding an insolvency.

The judgment of the appeal and cross-appeal in Brooks was handed down in late 2016. It provides an essential update on the factors a court must assess in determining the basis on which directors may be compelled to personally contribute to the company for their own wrongful trading actions. It also serves as a warning to liquidators to ensure the basis of the compensation sought is very clearly and correctly prepared.

Read the full client alert.

Amendment of Core Payment Terms Only: Second Circuit Court of Appeals reverses the Marblegate challenge to Section 316(b) of Trust Indenture Act 1939

Restructuring lawyers and distressed companies alike were granted welcome relief by the US Second Circuit Court of Appeals when it overturned the decision of the District Court in the case of Marblegate Asset Management, LLC v Education Management Finance Corp.[1]

In 2014, Education Management Finance Corp. (“EDMC”) sought to restructure its debts outside of a formal bankruptcy process, through creditor consultation and cooperation, reducing the company’s debt burden by approximately $1.1 billion. EDMC put two options to its creditors, settling on the second, as a result of failure to obtain unanimous creditor consent to option one, which would constitute an “Intercompany Sale” of foreclosed assets to a newly incorporated subsidiary of EDMC, releasing EDMC from a guarantee it had provided in favour of the company’s unsecured noteholders. After the Intercompany Sale had taken place, the new EDMC subsidiary would distribute debt and equity only to those consenting creditors. While no term of the noteholders indenture had changed, non-consenting noteholders would not receive anything from the new company.

As a non-consenting noteholder, Marblegate brought proceedings against EDMC to block the Intercompany Sale on the grounds that it violated Section 316(b) of the US Trust Indenture Act 1939 (“TIA”). Marblegate argued that, while the contractual terms of the note had not changed, the foreclosure on substantially all of EDMC’s assets and subsequent sale back to its newly formed subsidiary stripped non-consenting noteholders of their practicable ability to receive payment on the notes.

The core disagreement in the case was whether the phrase “right…to receive payment” forecloses more than formal amendments to payment terms that eliminate the right to sue for payment. Marblegate argued that the right to receive payment is impaired “when the source of assets for that payment is deliberately place beyond the reach of non-consenting noteholders”, an argument the Court of Appeals rejected. After analysis into the legislative text and its history, the Court of Appeals found in favour of EDMC, ruling that the TIA only prohibits amendments to core payment terms without the consent of all noteholders. As the restructure did not formally amend the payment terms of the indenture that governed the notes, no such violation of the TIA had occurred – absent changes to the Indenture’s core payment terms…Marblegate cannot invoke Section 316(b) to retain an “absolute and unconditional” right to payment of its notes.

The 2014 decision of the District Court chilled out-of-court restructurings. However, the Court of Appeals affirmation of the ability of entities to carry out an out-of-court restructuring without unanimous consent of its creditors will allow the market to regain some stability and give distressed companies an alternative option to instigating formal, expensive and time consuming court–ordered bankruptcy proceedings. The decision may still be subject to an appeal.

[1] Marblegate Asset Management, LLC, Marblegate Special Opportunities Master Fund, LP., v. Education Management Finance Corp., Education Management, LLC (Docket No. 15-2124-cv(L), 15.2141-cv(CON))

LexBlog