Case law update

An insolvency case law update prepared by Graham Briggs of Manolete Partners PLC.

Manolete Partners Plc v Hayward and Barrett Holdings Ltd

Neutral Citation Number [2021] EWHC 1481 (Ch)

Since October 2015 when s.246ZD Insolvency Act 1986 enabled assignment of office holder claims, it has been established practice to bring those assigned office holder claims, together with the related assigned company claims by way of Insolvency Act 1986 application notice in the Insolvency and Companies Court (ICC) list. The same practice has been followed by office holders themselves when issuing connected claims.

Typically, an antecedent transaction claim, such a transaction at under value within the meaning of s.238 Insolvency Act 1986, will also give rise to a corresponding breach of duty claim against the director of the company under the provisions of the Companies Act 2006 and at common law. Both claims arise from the same factual matrix and from the same insolvency and are clearly within the sphere of ICC business.

The practice was however challenged by the Respondents in the above case.

Judgment was handed down by Chief ICC Judge Briggs on 2 June 2021. With some reluctance, the judge held that the company claims should have been brought by way of a Civil Procedure Rules Part 7 claim. The judge ordered that the application notice continue (to include the assigned company claims in addition to the assigned office holder claims), subject to payment of an additional court fee of £10,000. The amount of £10,000 is the court fee payable upon the issue of a Part 7 claim for an amount more than £200,000.

The result of this judgment is that any party now wishing to bring a company claim (whether that party is the office holder or an assignee) will have to issue a Part 7 claim even in circumstances where there are related office holder claims in the same insolvency; in which case two sets of proceedings are required.

The penultimate paragraph of the judgment is notable:

I reach these conclusions with regret. The criticisms of the procedure are well made by Mr Curl. They do not promote a convenient or sensible or economical use of court resource. In modern parlance the result fails to ensure that claims of this nature are dealt with expeditiously, allotting an appropriate share of the court’s resources. An office-holder and assignee of claims will be forced to issue claims arising from an insolvency using different procedures, in different lists within the Business and Property Courts, with a risk that without a transfer they will be case managed, at least, by different judges although the claims arise out of the same facts.”

Change is needed to the Insolvency Rules 2016 to cure this procedural anomaly and allow company claims in an insolvency to be brought by way of Insolvency Act 1986 application notice. This is in the interest of the insolvency profession as a whole and in the interests of creditors as returns are maximised when the claims are brought by one set of proceedings and by way of application notice. A consultation is in progress:

It would seem that a way to achieve a more desirable uniformity (and to achieve the effect plainly thought desirable by Chief ICC Judge Briggs) would be to amend r. 1.35 to provide an additional rule (1.35(4)) to the effect that an application may be used to claim additional defined relief (misfeasance/breach of duty brought other than under s 212 IA; or “any other relief arising out of or in connection with the administration or winding up of a company or the bankruptcy of an individual”); or, less ambitiously, something to the effect that such relief may be included in an insolvency application made seeking relief under Parts 1-11 IA. A further alternative would be to

(re)define “insolvency proceedings” and allow any such proceedings to be brought by application notice. (This could equally take in a claim under s. 423 IA in an insolvency.)

Insolvency Practitioners may themselves wish to respond to the consultation towards bringing about this rule change.

In the meantime, and only where needed, claimants can issue both a Part 7 claim and an Insolvency Act application notice and then apply for transfer of the Part 7 claim to the ICC list and consolidation with the application notice proceedings. Chancery Masters and ICC Judges have already been receptive to such transfers and the prevailing trend has been to treat the transferred Part 7 claim for procedural purposes as if commenced by way of application notice. So ultimately the claims are brought together in one set of proceedings, but only after unnecessary expense has been incurred by the duplicated commencement process.

Re Hyde and others (joint administrators of BetIndex Ltd) [2021] EWHC 1542 (Ch)

Office holders are sometimes required to administer assets which the company in administration/liquidation hold on trust for third party beneficiaries. This might be a trust established in the ordinary course of business, for instance to receive customer deposits; or it might be a trust established by the directors to ‘ring fence’ certain customer monies specifically in the event of the company’s insolvency. Such trusts are sometimes set up following advice that the directors might otherwise risk facing sanction for wrongful/fraudulent trading.

Administering and unwinding the trust inevitably falls to the office holder given that he/she has control of the company which remains the trustee of the trust. Typically there are no other trustees other than the company itself.

Often, questions can be encountered that require directions from the Court, for instance the interpretation of the trust deed, the identity of beneficiaries, the amount to which individual beneficiaries might be entitled, how to deal with a surplus/shortfall of assets, the costs of administration – the list goes on.

A number of such questions fell to be determined in the case of BetIndex Ltd (BetIndex) and helpfully that case addressed the questions of how the administrators’ costs and expenses in both making the application to Court for directions, and in more widely administering the trust assets, ought to be dealt with.

BetIndex was a Jersey betting company.

In March 2021, following a letter of request from the Royal Court in Jersey, a judge made an administration order, appointing the applicants as joint administrators of BetIndex.

In order to safeguard funds belonging to its customers, BetIndex maintained a separate client money bank account which was held for the benefit of its customers, some 280,000 in number. The bank account held circa £4.5m.

The administrators applied, under para 63 of Sch B1 to the Insolvency Act 1986 for certain directions in relation to the distribution of the funds held subject to the trust. The directions asked for included two questions specifically directed towards costs.

First, whether the administrators should be granted an order that the costs of the court application itself, both in relation to the administrators and the representative Respondent appointed by the court, should be paid out of the trust assets.

In the context of trusts, the normal practice in non-adversarial proceedings was for costs to be paid out of the trust assets whether the proceedings were brought by the trustee or by some other party (in the present case, the administrators). Applying settled principles, it was found that the application was necessary in order to determine who was entitled to the trust assets and how those entitlements should be calculated. The application was, therefore, necessary for the administration of the trust and the costs of all parties were necessarily incurred for the benefit of the trust as a whole. Accordingly, the Judge directed that the application costs of both the administrators and of the representative Respondent should be paid out of trust assets on an indemnity basis.

Secondly, whether the administrators were entitled to an order that any fees they had incurred more generally in relation to the administration of the trust assets should be paid out of the trust assets, and not out of the company’s own assets (which inevitably would deplete the insolvency estate).

Previous authorities established a general principle that, where a person sought to enforce a claim to an equitable interest in property, the court had a discretion to require that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property. In a similar way, although the beneficiaries were not, in the present case, seeking to enforce their beneficial interests in the sense that no beneficiary had made a claim (it was a directions application with a representative Respondent appointed by the Court), the purpose of the work done by the administrators in relation to the trust was undoubtedly intended to give effect to the equitable interests of the beneficiaries. Although previous cases had dealt with the remuneration of the trustee of the trust, it was hard to see why the same principles should not apply where the work was done by someone other than the trustee. The Judge therefore made a declaration that the administrators (as persons other than the trustee of the trust) were entitled to be paid their fees and expenses for dealing with the trust assets and administering the trust.

This decision is helpful as direct authority on a question that is sometimes posed for office holders. It reaches a fair conclusion that the administrators’ proper fees and expenses in dealing with the trust are to be borne out of the trust. Otherwise those fees and expenses would deplete the insolvency estate, ultimately at the expense of the non-trust creditors. From a practical perspective, office holders should ensure that they are able to clearly differentiate the costs and expenses they incur in connection with the trust, as distinct from costs and expenses they incur in the course of the administration more generally.

Content courtesy of IPA corporate partner Manolete Partners PLC.