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.

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.

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