Different rights require different classes – schemes of arrangement

Re Stronghold Insurance Company Limited [2018] EWHC 2909 (Ch)

Mr Justice Hildyard, who continues to amass expertise on schemes of arrangements, recently ruled against convening a single meeting of creditors on a scheme of arrangement proposed by Stronghold Insurance Company Limited (Stronghold) (the Scheme). Hildyard J found that where the appropriate comparator to the scheme was a solvent run-off of the company, creditors with incurred but not reported (IBNR) claims had rights which were so uncertain and contingent that they could not form a single class of voters alongside creditors whose claims had accrued. Accordingly, two classes of creditors were appropriate for voting purposes. In delivering his judgment, Hildyard J also expressed some concern on how creditors were adhering to the Practice Statement on Schemes of Arrangement. He reminded creditors that unless they had good reasons for doing so, creditors should raise and properly develop and argue any concerns on class composition at the first court hearing and should not be tempted to reserve their position on class issues until the sanction hearing.


Stronghold is an insurance company with a long-tail business exposure, particularly in asbestos pollution and health hazard liabilities. It has been in run-off since 1985. Stronghold’s regulators, the PRA and the FCA (the Regulators), ruled that it no longer met the minimum capital requirements imposed by Directive 2009/138/EC (Solvency II) and requested that Stronghold produce an exit plan to end its run-off. Stronghold proposed the Scheme because a capital injection, sale, transfer or liquidation were all not considered viable or reasonably practicable. The purpose of the Scheme was to settle or compromise all of Stronghold’s outstanding obligations, known as a cut-off and estimation scheme. Trade creditors and creditors whose claims had been previously agreed but had not been paid were not included in the Scheme.

Stronghold submitted that the Scheme would provide creditors with a number of benefits that might not be available to those creditors in a liquidation, namely that the Scheme would use a market-driven estimation methodology in calculating claims and there was no assurance that a liquidator would adopt such an approach in assessing the correct amount for any liquidation proof.

In considering the Scheme, Hildyard J applied a two-stage test. The first stage focuses on rights: if there is no difference in the respective rights of creditors, the fact that they may have opposing commercial interests is irrelevant. This test requires consideration of (i) the rights of creditors in the absence of the scheme and (ii) any new rights creditors obtain from the scheme. The second stage considers an assessment of whether the differences in the rights of groups of creditors and their treatment under the scheme are so different as to make it impossible for them to consult together with a view to their common interest. In his judgment, Hildyard J referred to Re British Aviation Insurance Co Ltd [2006] 1 BCLC 665 (the BAIC case) which also considered whether accrued claims should be in the same class as IBNR claimants. In the BAIC case, Lewison J considered that when assessing whether all the policyholders should form a single class, the starting point was to identify the appropriate comparator: that is, what would be the alternative if the scheme does not proceed. The court noted that should an insurance company face imminent liquidation if a scheme does not proceed, IBNR claims would be estimated in accordance with the Insolvency Rules. Liquidators may well be open to discussion about a market-driven estimation model and interest among creditors may accordingly be sufficiently close to allow them to be in the same class. However, where the company is solvent and likely to remain so, the IBNR creditors may benefit from its continuance that they cannot be realistically be expected to discuss with other scheme creditors a scheme which offers an immediate advantage to those creditors but virtually none to them.

While noting that the evidence in this matter was somewhat ambivalent on whether liquidation or continued solvent run-off should be the appropriate comparator, the court concluded that the most likely alternative to the Scheme in the near and mid-term was that Stronghold would continue in solvent run-off. This was the appropriate comparator, particularly given that the Regulators had failed to determine what regulatory enforcement it would take to enforce Solvency II.

In the context of this comparator it was considered that the rights of policyholders with notified but outstanding claims were not the same as policyholders with IBNR claims. Hildyard J considered that given the basic fact that an IBNR claim was inherently (a) uncertain even as to its occurrence, as to the range of events that may give rise to an insurance liability and also to the range of magnitude of any exposure and (b) therefore likely also to be subject to much greater ranges in any estimation process, signified that any outstanding claim gives a scheme creditor a qualitatively different right from an IBNR claim and that this should be the prima facie position unless there was evidence that liquidation was imminent and the alternative to the scheme.

The court acknowledged that while there were a number of factors which might allow IBNR creditors and other creditors to still have a sufficient common interest to be able to vote in the same class, the court reached its decision that absent further guidance from the Regulators as to what they would do if the Scheme failed, a separate class of Scheme creditors “with predominantly IBNR claims” would be required.

While Hildyard J acknowledged that the court would retain some flexibility in considering the jurisdiction of schemes at the convening stage of the court process, the “inaccurate perception” that all issues affecting the jurisdiction of the court would be dealt with at the first stage was incorrect, and the fact a skeleton argument for the first hearing mentioned a particular jurisdiction issue does not mean the court is satisfied on jurisdiction. Further, he stressed that consideration on the fairness of the proposed scheme should be the principal focus of the sanction hearing and not the convening hearing.

A Shift in Focus: Rescuing Viable Companies

Following consultations on insolvency and corporate governance in 2017 and 2018, the Government recently published its response setting out some notable proposed changes to the existing insolvency and corporate governance legislation. Following the high profile failures of Carillion and BHS, the Government’s response is largely aimed at encouraging the recovery of viable companies, improving transparency and promoting responsible directorship. This article will primarily look at the proposed changes focused on facilitating a rescue culture.

The response proposes the following changes to the insolvency legislation:

  1. The introduction of a pre-administration moratorium, throughout which the directors will remain in control of the company and a licensed insolvency practitioner (an “IP”) (referred to as a monitor) will support the integrity of the moratorium process and ensure creditors are protected.
  2. A prohibition on suppliers enforcing ipso facto clauses, which allow a contract to be terminated as a result of the company entering into a formal insolvency procedure, entering a moratorium or a restructuring plan.
  3. The availability of a new restructuring plan, which enables a company to bind all of its creditors with the approval of the court through a cross-cram down of creditors.
  4. The introduction of a new recovery power for an IP to undo a transaction, or series of transactions, which unfairly strip value from a company during the period leading up to insolvency.

Introduction of a restructuring moratorium

A key proposed change is the introduction of a pre-administration moratorium for financially distressed companies whilst they consider their options for restructuring. Unlike the CVA moratorium available to small companies, the moratorium would be available to nearly all companies that meet certain eligibility requirements and qualifying conditions, including that the company will become insolvent if no action is taken and that, on the balance of probabilities, rescue is more likely than not. A company, which is already insolvent, will not be eligible for the moratorium.

For a company to enter into the new moratorium, notice must be given to all creditors and necessary filings made at court. The consent of the monitor, who has objectively assessed that the eligibility test and qualifying conditions are met, must also be filed with the court.

The moratorium will initially last for a period of 28 days, which may be extended by the company for a further 28 days. The monitor must confirm that the qualifying conditions are still met prior to the company applying for an extension. Further, the Government believes that in certain circumstances it should be possible to extend the moratorium beyond 56 days, provided there remains a good prospect of achieving a better outcome for creditors than might otherwise be possible. The extension beyond 56 days will require the consent of more than 50% of value of both secured and unsecured creditors, except where seeking such consent is impracticable.

It is proposed that the directors of the company will remain in control during the moratorium; however, a monitor will be appointed to support the integrity of the moratorium process and ensure creditors are protected. The monitor will be responsible for approving any sale or disposal of assets outside the normal course of business as well as determining whether the eligibility and qualifying requirements are satisfied throughout the moratorium and terminating the moratorium if they are not satisfied. A monitor may provide additional services to the company during the moratorium period e.g. restructuring advice or being appointed as a CVA supervisor. However, a monitor cannot take an appointment as either an administrator or liquidator in the 12 months following the expiry of the moratorium.

At any time during the moratorium, creditors will have a right to challenge the moratorium on the basis that the qualifying criteria are no longer met or that the moratorium unfairly prejudices the creditor. The Government intends to take a similar approach as in administration and an application to court will need to be made to lift the moratorium. Generally, the court has been reluctant to interfere with the administration process and lift an administration moratorium, which suggests that it may also be reluctant to lift a pre-administration moratorium. Most significantly, secured creditors will be prevented from enforcing their security during the moratorium period and although, this is the same as in the current administration moratorium in that instance, the IP is generally receptive to requests from secured creditors to enforce their security. The question arises as to whether despite the ability to apply to court to lift the moratorium; a secured creditor will have any real ability to enforce its security during this pre-administration moratorium where the company is working towards rescue.

Costs incurred during the moratorium will be treated in the same way as an expenses in administration and super-priority status will be given to unpaid moratorium costs in any future administration, with highest priority being given to suppliers who are prevented from enforcing their termination clauses (as discussed further below), followed by other costs and the unpaid fees.

The rationale behind limiting the moratorium only to companies who are solvent is to encourage companies to deal with financial difficulties at an early stage however; in practice, it may be difficult to meet this criteria. Will a company be able to take advantage of this moratorium if it becomes unlikely that it will make certain payments during the moratorium period or will creditors be required to enter standstill arrangements during this period so that a company remains ‘solvent’?

Prohibition on enforcement of ipso facto clause

The Government have proposed a prohibition on suppliers enforcing a termination clause under a contract on the grounds that a counterparty has entered into a formal insolvency procedure, the new moratorium or a restructuring plan (referred to as an ipso facto clause). This prohibition will not apply to certain types of financial products and services, however it is intended that contractual licenses will be covered (other than those issued by public authorities).

Suppliers will, in exceptional cases, be allowed to exercise a right to rely on the termination clause on the grounds of undue financial hardship. To do so, they will need permission of the court, which will consider whether continuing the supply will more likely than not lead to the supplier’s insolvency and the reasonableness of the termination.

A new flexible restructuring plan

In addition to and independent of a moratorium, there is a proposal to introduce a new restructuring process which will allow a company to bind all creditors, including a junior class of creditors through a cross-class cram down provision. In order to protect minority creditor interests, a two-fold test requiring 75% in value, plus more than half the total value of unconnected creditors must vote in support. The restructuring plan legislation will further provide that a dissenting class of creditors must be satisfied in full before a junior class receive any distribution or keep any interest under the restructuring plan, however this can be departed from where it is vital to agree an effective and workable restructuring plan. Further, no cram down can occur unless at least one class of creditors who will not receive payment in full has voted in favour of the restructuring plan. The Government have proposed that the test for determining the fairness of a plan which is being crammed down will be whether the outcome is better than the outcome under the next best alternative, which could either be administration or liquidation and may ultimately be determined by the court.

The new restructuring process will be available to all companies (both solvent and insolvent) except those involved in specific financial market transactions or similar undertakings. The restructuring process closely resembles that for a scheme of arrangement, whereby a restructuring plan proposal will be sent to creditors and shareholders, as well as filed at court. The court will examine the classes of creditors and shareholders, who may challenge the formation of the classes. Upon satisfaction that the classes are appropriately constituted, the court will confirm that a vote on the proposal may be conducted ahead of a second hearing. Creditors and shareholders will then vote on the proposals and will be able to submit a counter-proposal or a challenge to the court. If no such challenge or counter-proposal is put forward, the court will decide whether to confirm the restructuring plan. Once confirmed, the restructuring plan is binding on all affected parties, although there will be a right to appeal. It is not clear from the Government’s response what the jurisdictional requirements will be for a company to apply for the new restructuring plan.

Value extraction schemes

In recent years, there have been certain high profile sophisticated schemes where companies extracted value from a company for the benefit of shareholders shortly before the insolvency of that company. The Government intends to enhance the recovery powers of IPs by allowing them to apply to the court to reverse a transaction (or series of transactions) which unfairly removed value from the company for the benefit of shareholders but to the detriment of creditors in the lead up to a company’s insolvency. The Government believes that such transactions will only occur with connected parties and proposes that this lookback period should mirror that which is in place for the existing recovery provisions in relation to transactions with connected parties, being 2 years.

Corporate Governance

The response paper also made a number of proposals in relation to the corporate governance of a company leading up to the insolvency of a company. For example, the Government proposes increasing enforcement powers against directors of dissolved companies. In addition, they are increasingly concerned with the sale of distressed subsidiaries and as such intend to develop guidance for considerations to be made prior to such sale. Finally, the Government highlighted the need to work with the investment community to strengthen and increase the efficiency of shareholder stewardship in large group companies.


The UK insolvency framework has traditionally been creditor friendly; however, the response paper paves the way for a shift in focus to a more debtor friendly framework. Overall, the proposed amendments are positive and highlight the Government’s goal of increasing the possibility of rescue of a distressed, but viable company. However, timing of the proposed amendments is unclear and although the response provides that legislation will be enacted as soon as parliamentary time allows, Brexit related legislation may slow it down by several years.

Will diplomatic immunity win – game, set and match?

Former world number one and three-time Wimbledon champion Boris Becker, who was declared bankrupt by an order dated 21 June 2017, is claiming diplomatic immunity against ongoing bankruptcy proceedings in the High Court. Mr Becker claims his role as sports attaché to the Central African Republic (CAR) makes him immune from further actions against his assets over debts owed to private bank Arbuthnot Latham and other creditors.

The trustees of Mr Becker’s estate applied on 31 May 2018 to have Mr Becker’s bankruptcy continue as they consider he has failed to comply with his obligations. The Insolvency Act 1986 provides for an automatic discharge from bankruptcy after 12 months from the bankruptcy commencement, subject to an order being made suspending the discharge. In June Mr Becker’s lawyers made submissions claiming diplomatic immunity based on Mr Becker’s purported appointment as the CAR sporting, cultural and humanitarian attaché to the European Union in April 2018. Mr Becker’s claim is that the appointment entitles him to immunity pursuant to the Diplomatic Privileges Act 1964 (DPA), which gives effect to the 1961 Vienna Convention on Diplomatic Relations (VCDR).  Specifically, Article 31 of the VCDR grants a “diplomatic agent” immunity from the criminal, civil and administrative jurisdiction of the receiving State, with limited exceptions. At a hearing in June, the parties agreed that the discharge from bankruptcy should be suspended, with the Individual Insolvency Register recording “discharge suspended indefinitely” subject to the fulfilment of conditions specified in the order made by the Court and effective from 18 June 2018.

Injunctive relief

The trustees in bankruptcy were due to hold an auction of Mr Becker’s trophies and memorabilia on 28 June 2018. Mr Becker’s legal team applied for an injunction to prevent the auction proceeding, with claims that the sale would strip their client of his personal dignity as it was deliberately timed to coincide with the start of Wimbledon. On 27 June 2018, the trustees in bankruptcy agreed to postpone the auction with an agreed order to that effect being approved by Deputy Insolvency and Companies Court Judge Catherine Addy QC. It is unclear when the auction will now take place.

Diplomatic immunity

The scope of state and diplomatic immunity has recently been considered by the UK Supreme Court in the context of employment claims brought in the English courts by members of the service staff of diplomatic missions (see Benkharbouche v. Secretary of State for Foreign & Commonwealth Affairs, Libya v. Janah [2017] UKSC 62 and Reyes v. Al-Malki & Anor [2017] UKSC 61). Diplomatic law, governed by international law, confers extensive privileges and immunities on the individual diplomat and the sending State in respect of its mission. These constitute an exception to the general rule that aliens resident in a State are subject to its jurisdiction. The principal codification of these privileges and immunities is contained in the VCDR, which is given effect in the UK by the DPA. Schedule 1 to the DPA details the articles of the VCDR having the force of law in the UK.

Diplomatic agents are inviolable. Article 29 of the VCDR provides that a diplomatic agent shall not be liable to any form of arrest or detention, and the UK shall treat them with due respect and take all appropriate steps to prevent any attack on their person, freedom or dignity. Relevantly, Article 31(1) of the VCDR grants diplomatic agents immunity from the criminal, civil and administrative jurisdictions of the receiving State. There are limited exceptions to that immunity in the case of:

  1. A real action relating to private immovable property situated in the territory of the receiving State, unless held by the diplomatic agent on behalf of the sending State for the purposes of the mission.
  2. An action relating to succession in which the diplomatic agent is involved as executor, administrator, heir or legatee as a private person, and not on behalf of the sending State.
  3. An action relating to any professional or commercial activity exercised by the diplomatic agent in the receiving State outside the agent’s official functions.

The last exception to diplomatic immunity may be the subject of submissions by the trustees in bankruptcy in the upcoming hearing against Mr Becker.

In addition, Article 31(3) of the VCDR provides that no measures of execution may be taken in respect of a “diplomatic agent” except in the limited circumstances referred to above, and provided the measures concerned can be taken without infringing the inviolability of the agent’s person or residence. The immunity from jurisdiction may, however, be expressly waived by the sending State pursuant to Article 32 of the VCDR. In the case at hand, assuming Mr Becker meets the definition of “diplomatic agent” and is entitled to diplomatic immunity, the CAR may waive his immunity from the civil jurisdiction, enabling the bankruptcy proceedings to proceed. If the High Court is satisfied that Mr Becker is entitled to diplomatic immunity (and the CAR does not waive any immunity), the bankruptcy proceedings will be dismissed. As stated by Lord Sumption in Reyes v. Al-Malki & Anor [2017] UKSC 61 at [49]:

“An action brought against persons entitled to diplomatic immunity is not a nullity. It is merely to be dismissed. There are therefore valid proceedings currently on foot. Diplomatic immunity is a procedural immunity. The procedural incidents of litigation normally fall to be determined by a court as at the time of the hearing. Thus a waiver of immunity after the commencement of proceedings would dispose of any diplomatic immunity which previously existed.”

Notably, on termination of a diplomat’s office, a diplomatic agent loses their personal immunity and can be sued for personal debts contracted, but retains immunity ratione materiae for any acts they performed on behalf of the State they represented (see Article 39 of the VCDR). For example, in Shaw v. Shaw [1979] 3 All ER 1, a wife filed a petition for a dissolution of her marriage to a diplomat attached to the U.S. embassy. At the time her husband was immune from suit, but the petition was allowed to proceed once the husband’s posting came to an end and he left the United Kingdom.

Diplomatic agent

Mr Becker’s case will arguably turn on whether he meets the definition of “diplomatic agent” (and does not fall foul of the limited exceptions) and, if so, whether any express waiver of immunity has been provided by the CAR. Relevantly, Article 1(e) of the VCDR provides that a “diplomatic agent” is the head of the mission (e.g. an ambassador or high commissioner) or a member of the diplomatic staff of the mission. “Members of the diplomatic staff” are separately defined as “members of the staff of the mission having diplomatic rank” (see Article 1(d)). Mr Becker claims his CAR passport is evidence of his diplomatic status. The validity of this claim was questioned by the CAR foreign minister, but the minister was subsequently contradicted by the CAR embassy in Brussels, which confirmed Mr Becker’s status as a diplomat and that he retains an office in Brussels to carry out his work. As noted earlier, if Mr Becker is recognised as a “diplomatic agent” by the Court and there has been no express waiver by the CAR, he would be immune from suit, and the bankruptcy proceedings would be dismissed. This will be the subject of a further hearing anticipated to be held after 5 October 2018.

The outcome of the October hearing will no doubt be eagerly awaited by Mr Becker and diplomats in the UK. The issue of diplomatic immunity in the context of bankruptcy proceedings has not been considered widely and is therefore of interest. The growing trend to assert diplomatic status to shield persons from proceedings has been the subject of criticism in recent years. An update on these proceedings will be provided following the hearing.

What do House of Fraser, Byron Burger, Carluccios, Mothercare, Prezzo and Carpetright have in common?

These are just a few of the big high street names which have sought to compromise their obligations to creditors in recent months via a company voluntary arrangement (CVA).

CVAs are designed as a flexible method by which companies can seek to contractually alter their position regarding different creditors – each CVA will be different, but it is typical, for example, for unsecured trade creditors to be treated differently to landlords. It’s worth noting that secured creditors are not bound by a CVA, unless they agree to this.

Following the upsurge in the use of CVAs for high profile companies in recent months, the Pension Protection Fund (PPF) has issued a guidance note (available here) on CVAs. This applies when one of the creditors is a defined benefit pension scheme.

The guidance note contains some useful insight into the PPF’s approach to CVAs, summarised briefly below:

  • The PPF’s approach will depend on the CVA itself and the facts at hand – given the flexibility of CVAs, this is a logical starting point.
  • Although the Pensions Regulator (tPR) is not a counterparty in a CVA proposal unless clearance is requested, the PPF will consult with tPR on all CVA cases. However, the PPF’s agreement to a CVA shall not imply clearance from tPR. This will put the particular proposed CVA on tPR’s radar. One of tPR’s key objectives is to act as the guardian of the PPF and the compensation it pays, so this could also be a trigger for further tPR information gathering and involvement.
  • A PPF Assessment Period will commence when an employer lodges a CVA proposal with the court. This is the formal process during which the PPF assesses the pension scheme for eligibility for compensation from the PPF. While the Assessment Period is ongoing, any rights or powers of the trustees of the pension scheme in relation to any debt due to them pass to the PPF. This means that the PPF will acquire the trustees’ voting rights in the CVA.
  • The guidance notes that, even where the pension scheme appears unaffected by a CVA, certain circumstances may give rise to concern in relation to the scheme. For example, the fact of the company’s insolvency in proposing a CVA suggests its covenant strength is weaker than its valuation. Equally, the pension liability may increase during the period of a proposed CVA, during which a company’s workforce will get closer to retirement age (known as ‘PPF drift’).
  • The PPF will consider the risk that the pension scheme presents to the PPF, as a separate consideration to the risks to the scheme members.
  • The PPF will normally vote in favour of, or against, a CVA proposal rather than abstain. In order to vote in favour, the PPF expects employers and those proposing a CVA to adhere to the PPF’s restructuring principles (available here). Broadly speaking, when taken with the list of considerations in the guidance note, the CVA proposals should:
    • Provide a significantly better outcome than administration or liquidation, and should be proportionate in relation to the section 75 debt that is being eliminated. Among other things, the PPF will consider the CVA’s prospect of success, current market practice and the viability of the business.
    • Include ‘anti embarrassment’ provisions, such that the pension scheme should receive 33 per cent or more of the equity in the employer (subject to increase).
    • Treat creditors fairly and should not disadvantage the pension scheme, with a particular focus on the treatment of intra-group and connected creditors. The independence of management from the wider group position will be considered, along with the funding and financing position of the company and the treatment of the banks under the proposed CVA.
    • Provide that the costs of the scheme in relation to the CVA will be met by the company.

As with any insolvency process, engaging with key stakeholders early on is of crucial importance. The guidance note provides an overview of the factors the PPF will consider when reviewing CVA proposals, which should provide a steer for those considering or proposing a CVA as to areas of concern to be addressed when formulating the CVA proposals where there is a defined benefit pension scheme involved.


Recovering Rent After A CVA

A new wave of CVAs?

A company voluntary arrangement (CVA) is, provided the voting thresholds are met, a binding agreement made between a company and its creditors, designed to compromise a company’s obligations to its creditors.

As retailers and restaurateurs across the UK continue to show signs of financial distress, interest in the use of CVAs has increased. A common facet of a CVA is a focus on reducing rents and offloading unprofitable leases.

Compromised or full rent?

The recent BHS CVA provided that certain landlords would receive less than the full amount of the rent falling due under their leases to BHS. However, the terms of the CVA also provided that, on termination of the CVA, the compromises and releases effected under the terms of the CVA would be deemed never to have happened.

BHS subsequently went into administration and is now in liquidation. The question that has recently arisen is, could affected landlords, whose properties continued to be used by administrators for the carrying on of the BHS business, go back to claiming full rents following the termination of the CVA or would their claims remain compromised by the CVA? If the answer to that question was yes, would the rent fall to be paid as an expense of the administration/liquidation?

In a case brought by one of the BHS landlords, the High Court has now given directions to the joint liquidators[1] that, following the termination of the CVA, the full amount of rental payments (rather than the amount as compromised under the CVA) was payable to the landlord as an expense of the administration in relation to the period during which the (then) administrators were in possession of the relevant premises for the purposes of the administration.

Clearly, this could be taken as confirmation for landlords of retained properties that, ironically, they will be better off in an insolvency process than in a CVA, at least in the short term. That of course does not acknowledge the purpose of the CVA, which is to try to rescue the business and avoid an insolvent situation altogether.

Each case will turn on its own facts. Ultimately, CVAs are contractual agreements and each one is different. What is interesting for landlords, however, is that the Court also commented that provisions in a CVA, being a contract, which seek to vary the position under an underlying deed may be subject to challenge for want of the amendment or variation being made by deed. If this point was pursued further, it could change the way in which CVA proposals are packaged, requiring landlords to enter into deeds of variation at the outset. That would be a much bigger issue for the future of the CVA as a tool for business recovery.


It is not uncommon for a CVA to fail and for the company to subsequently enter administration or liquidation, so the author of the CVA and any landlords of property that continue to be traded should be mindful of the consequences of termination of the CVA. A potential liability to pay full rent as an expense of an insolvency should be considered a very important element of the CVA proposal when assessing the implications of the proposal for both the company and its landlords.

[1] Wright (and another) (as joint liquidators of SHB Realisations Ltd (formerly BHS Ltd) (in liquidation)) v. Prudential Assurance Company Ltd, [2018] EWHC 402 (Ch)

Step Aside, Payday Loans: There’s an Old Kid in Town

You could be forgiven for thinking that the Bills of Sale Acts of 1878 and 1882 would have been repealed by now, or could never apply to you, over 130 years after they were drafted. But if you’ve ever purchased a second-hand car (or, if you’re lucky enough to be purchasing works of art or borrowing against your gold coins), you could be wrong.

Bills of sale may be granted by individuals or unincorporated businesses (such as partnerships) as a form of security in relation to moveable goods which the individual or unincorporated business sells, while retaining possession. This is a conditional bill of sale, whereby the borrower may continue to use the sold goods, unlike pawnbroking or pledging where the lender would take possession of the item in question. Hotels use bills of sale to secure financing against their furniture, and individuals or unincorporated businesses can use them to register a general assignment of their book debts.

Originating hundreds of years ago, and becoming popular when the Victorian middle class sought a means to raise funds on the basis of non-land collateral, bills of sale used to be a common form of security granted by individuals and sole traders. Since then, because of their shortcomings, they have not been heavily used until recently (with some exceptions in the case of fine wine, art, gemstones and gold ingots) to secure financing. In the past few years, there has been a marked increase in the use of bills of sale, specifically to gain finance against the security of a vehicle (popularly known as a ‘logbook loan’).

According to the Law Commission’s consultation paper no. 225 (Consultation Paper), 2,840 bills of sale were registered in 2001, rising to 52,483 in 2014. Of these, 47,723 were in relation to logbook loans. Although general assignments of the book debts of an individual or an unincorporated business are also required to be registered as though they were bills of sale, there were only 97 such registrations in the same period. Given the exponential growth in this area, this piece focuses on logbook loans.

You will have seen the adverts, or heard the jingles on the radio. No credit checks! Apply online! Any roadworthy vehicle considered! The part they don’t tend to shout about is the APR, which is often 300 per cent or more. Welcome to the world of the logbook loan.

Borrowers looking to raise funds in this way often do so because they are considered to be a poor credit risk and are unable to obtain finance from other sources. The Consultation Paper reveals that many such borrowers do not have enough savings to enable them to maintain repayments if they run into financial difficulties.

How do logbook loans work?

Logbook loans allow borrowers to take out loans, usually secured against a vehicle that they already own (although they can also be used to finance the acquisition of a vehicle, without the legal protections of a hire purchase agreement or a PCP).

What is the problem?

Simply put, there are concerns that the language and practices of the Bills of Sale Acts are out of date and cumbersome and that people don’t understand them.

The language of the Acts is archaic and the registration and enforcement processes required for the security created are expensive and no longer fit for purpose. The expense of these requirements is often passed on to borrowers and, unlike the cap of £15 fixed charges which would apply to a payday loan, there is no such cap for logbook loans. The typical costs cited in the Consultation Paper are £300, which are usually added to the borrower’s account.

Many of the current problems arise from the outdated registration system, including:

  • A bill of sale must satisfy a list of 12 separate requirements in a standard form set out in the Bills of Sale Act 1882, which must be witnessed and accompanied by a statement (which will later need to be supported by an affidavit) by the witness that the bill of sale has been correctly signed. Failure to comply with these requirements means the lender loses the right to sue the borrower for repayment. Challenges to bills of sale on the grounds of defective paperwork have led many lenders to adhere to the antiquated standard form document, which can be confusing for borrowers.
  • Bills of sale must set out the exact amount to be repaid and break down the repayments due. A further issue therefore arises in relation to, for example, revolving credit facilities supported by a general assignment of book debts – it is simply impossible to state with certainty what the loan amount or repayments will be. Therefore, these borrowers will be precluded from using their goods as security for loans. Given that they are unable to grant floating charges, the problem of raising finance is compounded.
  • Bills of sale must be registered at the High Court, notionally to allow potential purchasers of the asset in question to check whether it is subject to security. The registration fee for a security bill of sale is £25, but the additional cost of having the affidavit of the witness signed in front of a solicitor can exceed that amount. The bill of sale must be registered within seven days of its signature. This deadline is often missed, leading to an additional £50 court fee. Registration must be renewed every five years to maintain protection for the lender. The cost of registering a bill of sale in relation to a general assignment of book debts is much higher, ranging between £480 and £1,735.
  • The industry appears to be in agreement that the register itself is not user-friendly. A bill of sale is registered against the name and postcode of the borrower, not against the asset – and therefore it is difficult (or impossible, if all you have is the details of the number plate) to search the register. The fee to search the register in relation to a vehicle is £45. Perhaps unsurprisingly, the High Court has confirmed searches are rarely carried out in practice.
  • Defaulting on logbook loan repayments entitles a lender to take steps to seize the vehicle in question. Following default, a lender may issue a default notice and must then wait 14 days before starting enforcement action (typically, seizure of the vehicle). Many lenders use enforcement agents to repossess the vehicle, which can be traumatic for all concerned. The lender must wait five days before selling the vehicle, during which time the borrower may apply to court for an order preventing the sale. However, anyone with experience of the court system will appreciate that five days is an insufficient period of time. Assuming the vehicle is then sold, the borrower will remain liable to the lender (and may be sued) for any shortfall in the logbook loan, plus costs and charges.

The Acts do not allow the borrower to surrender the vehicle to the lender in full and final satisfaction of the loan, if they become unable to repay it. However, although this is not a legal right, members of the Consumer Credit Trade Association have agreed to permit borrowers to do this.

Purchasers of vehicles also lack protection. If the borrower sells the vehicle to an unwitting third party (who has either not searched the register or has searched and not found the applicable bill of sale) and then fails to maintain repayments on the loan, the lender can seize the vehicle from the third party. Unappealing remedies for the third party include paying off the logbook loan or purchasing the vehicle from the logbook lender at a discount. This differs from the position under a hire purchase contract, where the law protects innocent third parties.

These concerns, coupled with the boom in logbook loans, led HM Treasury to engage the Law Commission to consider bills of sale, resulting in the Consultation Paper and various proposals for reform.

What are the proposals for reform?

The Law Commission recommends an overhaul of the Bills of Sale Acts. They propose the introduction of the terms ‘goods mortgage’ (which would apply generally to a security interest over moveable tangible goods) and, in the specific case of a goods mortgage secured on a vehicle, ‘vehicle mortgage’.

The key proposals for reform are summarised below:

  • Documentation: the documentation requirements would be streamlined and modernised. Failure to comply with these requirements would mean that lenders would lose any rights to the secured assets (both against the borrower and third parties), but they would remain entitled to repayment of the underlying loan (i.e., they would lose their security). For example, it is suggested that the bill of sale (i.e. the document) would:
    • need to be in plain, modern English and, in the case of a logbook loan or vehicle mortgage, would need to make clear to the borrower that the lender would own the vehicle until the loan was repaid in full and could repossess the vehicle if payments were not maintained;
    • no longer need to set out a fixed amount to be repaid, or the instalments schedule, which would allow better access to finance for unincorporated businesses and individuals in connection with revolving credit facilities, overdrafts and guarantees; and still need to be witnessed, but not require a sworn affidavit from the witness.
  • Registration:
    • In relation to logbook loans, the requirement to register at the High Court would be replaced with a requirement to register the vehicle mortgage at a designated asset finance registry, as is the case for hire purchase agreements (and aircraft). It is proposed that failure to register would mean that the lender could not enforce the vehicle mortgage against a third party purchaser, but would remain entitled to enforce against a borrower. Of course, if the borrower were to disappear, having sold the vehicle to a good faith purchaser, the lender would be left with little recourse.
    • In relation to other goods mortgages where there is no asset registry (for example, fine wine and art), the proposal is to retain the requirement to register at the High Court, but to streamline the process (including electronic filing and searching by email and removing the requirement for an affidavit). Precisely how the streamlined filing system would work is not yet clear, although problems may remain if, for example, there is no centralised register and if the addresses and names of individuals are required to conduct a search.
  • Protection for borrowers: for logbook and other regulated credit loans, another proposal is to require the lender to obtain a court order to allow the lender to enforce its bill of sale, after the borrower has repaid at least one third of the total amount of the loan (including interest and arrangement fees). Certain logbook lenders have objected to this, citing the cost and delay involved in obtaining a court order. The Law Commission’s comment regarding cost is that the court fee of £155 (which has been separately consulted upon and is proposed to increase to £255) could be passed on to borrowers if the lender is successful (although note this would not extend to the lender’s legal costs), but argue that this cost would be offset by the removal of the general requirement to register all such loans at the High Court.
  • Voluntary termination: another proposal is that borrowers with no realistic prospect of repaying the loan could surrender the goods to the lender at any time and in any condition (save in the case of malicious damage or significant lack of care), in full and final discharge of their loan. This right would be lost from the point at which the lender begins to incur repossession costs.
  • Protection for private purchasers: lenders under goods mortgages would not be able to recover the goods from third party purchasers (with the exception of trade or finance purchasers) unless the lender could prove that the purchaser had acted in bad faith or had notice of the goods mortgage.
  • Proposals to enhance use of vehicle checks: the Law Commission concluded that it was not realistic to expect private purchasers to carry out vehicle provenance and title checks, but recommends that if these became cheaper and more widely known, it could become a requirement that a private purchaser checks with a registry in order to obtain legal protection when acquiring a vehicle.


The proposed reforms are long overdue. They contain a mixture of provisions and while some benefit lenders, like the removal of the high court registration and associated fee, the focus is understandably on enhancing protections for consumers and third party buyers. It remains to be seen to what extent, and when, the proposals will be implemented.

Recast Insolvency Regulation: 26 June 2017

The Recast Insolvency Regulation (Regulation 2015/848) (“Recast Regulation”) will apply to all member states of the EU (with the exception of Denmark) in relation to insolvency proceedings opened on or after 26 June 2017. The Recast Regulation takes a similar approach to that of the prior EU Insolvency Regulation (Regulation 1346/2000), which came into force in 2002. The Recast Regulation seeks to create a uniform code for insolvency jurisdiction, and cross-border recognition (within the acceding Member States).

Some of the key changes under the Recast Regulation include:

  • The Recast Regulation applies to proceedings which provide for the restructuring of a debtor at a stage where there is only a likelihood of insolvency, as well as to proceedings which leave a debtor fully or partially in control of its assets and affairs (see recital 10).
  • The Recast Regulation is clear that the list of proceedings in Annex A is exhaustive (see article 1(1) and 2(4)). Any types of proceeding which are not listed in Annex A will not fall within the Recast Regulation. Notably, this approach means that schemes of arrangement under the Companies Act 2006 remain excluded from the Recast Regulation.
  • The rules on the centre of main interests (or “COMI”, i.e. the jurisdiction in which it may open “main” or primary insolvency proceedings) have been amended. There are also significant clarifications on how to rebut the presumed COMI and a focus on avoiding insolvency forum shopping in cases where this detriments creditors (see recitals 28-33).
  • For corporate entities, COMI is presumed to be the place in which the debtor conducts regularly its administration, in a way which is ascertainable by third parties – typically, the starting point is a corporate entity’s registered address. Under the Recast Regulation, this presumption has been limited and now only applies to companies if the registered office has not moved to another Member State within the three months prior to the request for the opening of insolvency proceedings.
  • Under the Recast Regulation, as similar presumption has been applied for individual debtors (the prior regulation contained no such presumption), whereby the debtor’s COMI is presumed to be their COMI is their usual residence, unless this has moved within six months prior to the request for the opening of insolvency proceedings. If an individual operates a business or professional activity, their COMI will be presumed to be that individual’s principal place of business (again, unless it has moved in the three months prior to the request for the opening of proceedings).
  • The Recast Regulation provides additional guidance and clarity on the interplay between primary and secondary insolvency proceedings (see articles 41-44) and indicates a preference to co-ordinate the use of secondary proceedings where possible.
  • The Recast Regulation also makes changes in the case of the insolvencies of groups of companies, focusing on the co-operation of courts and office holders across the group, and provides for a new concept of group co-ordination proceedings, whereby a group coordinator may be appointed to propose a coordination plan and conduct proceedings across the group. An application may be made by the holder of an insolvency appointment of any member of the relevant group – and where more than one such application is made, the court to which the first is made will take jurisdiction.
  • The Recast Regulation also calls for the European Commission to establish a system to connect national insolvency registers and the European e-Justice Portal into a decentralised searchable system. The Recast Regulation provides for this to be implemented by 26 June 2019 – although in light of Brexit, it remains to be seen whether the English national register will therefore be required to be included in such register.


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.


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.


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.