Welcome to the first issue of Insolvency Matters, our round-up of recent legal developments affecting insolvency and restructuring.
Case round-up
The first half of the year saw a succession of notable judgments dealing with Restructuring Plans, starting with the Court of Appeal's landmark decision in Adler (Re AGPS Bondco Plc [2024] EWCA Civ 24), closely followed by McDermott, Aggregate, Superdry, and Consort Healthcare. Nick Payne reviews the key take-aways from these cases in his recent article: Restructuring Plans Under Review: AGPS Bondco and Beyond
Directors' duties cases have also been keeping the courts busy in 2024. In Wright & Rowley v Chappell and ors. [2024] EWHC 1417, Mr Justice Leech held that former directors of BHS (in liquidation) were liable for wrongful trading and misfeasance. Of particular note in this comprehensive 533 page judgment was the court's finding that the directors had been guilty of a breach of their duty to take into account the interests of creditors and had they done so they would not have continued to trade (misfeasant trading). This breach occurred several months before the point at which the directors could be said to have committed wrongful trading under the Insolvency Act. This is thought to be the first time under English law that directors have been held liable for misfeasant trading and it raises a question mark over the utility of the wrongful trading provisions. Directors duties were also considered in Kendall v Ball [2024] EWHC 746 (a case in which the directors had used company funds to purchase a piece of land in their own name, in breach of duty, and were found to hold that land on trust for the company); Manolete Partners v Bell [2024] EWHC 1636 (in which a director was held liable to pay compensation in respect of various payments and transactions at an undervalue entered into in breach of the director's duty to creditors); and Mitchell and Krys v Al Jaber [2024] EWCA Civ 423 (in which the Court of Appeal confirmed that a director of a BVI company who caused the transfer of shares owned by the company after it had gone into liquidation could in principle be liable as an "intermeddler").
Other notable judgments so far in 2024 include….
Sian Participation Corp (in liquidation) v Halimeda International Ltd [2024] UKPC 16: the Privy Council overturned the Court of Appeal decision in Salford Estates (No.2) Ltd v Altomart Ltd (No.2) [2014] EWCA Civ 1575. As a result of this decision, it is now clear that a winding-up petition based on a debt arising out of a contract which contains an arbitration agreement will no longer be stayed as a matter of course if the debt is not admitted: it will be necessary first for the debtor to show (as in any other case) that the debt is disputed on genuine and substantial grounds.
Ackerman v Leeds [2024] EWHC 1215: the High Court held (obiter) that a challenge under s.303 of the Insolvency Act 1986 can still be made even after a Trustee in Bankruptcy (TiB)has been released. However, in the circumstances of this case, an application by the bankrupt to set aside an assignment of a fraud claim against the bankrupt by the TiB was dismissed as it had no real prospect of success. Deputy ICC Judge Passfield held: "It is well established that the court will only interfere with the decision of the trustee under s.303 IA 1986 if it can be shown that he has acted in bad faith or so perversely that no trustee properly advised or properly instructing himself could so have acted, alternatively if he has acted fraudulently or in a manner so unreasonable and absurd that no reasonable person would have acted in that way". He noted that the TiBs (who were operating under considerable time pressure) had invited offers from all relevant parties, taken independent legal advice and consulted with creditors.
Perhar v Freestone & ors [2024] EWHC 945: in the latest in a long line of cases dealing with defects in the appointment of administrators, the High Court upheld the decision of Deputy ICC Judge Baister ([2023] EWHC 2065) that certain defects in the appointment of administrators by the holder of a qualifying floating charge were procedural and did not invalidate the appointment. One such defect was that the notice of appointment was filed before the letter of demand was deemed served under the terms of the debenture. The court found that the company would have been unable to satisfy the demand in any event.
Manning and ors. v 2 Four 6 Marketing Limited [2024] EWHC 1554: the High Court held that the proceeds of pre-administration ticket sales by Festicket Ltd (in administration), acting as agent, were not held on trust for the principal. Having reviewed the authorities, Deputy ICC Judge Agnello held that there was no basis to imply a trust under the wording of the relevant agreement. Critically, there was no requirement for the sale proceeds to be held separately from the company's ordinary working capital and no restrictions on the use of such proceeds by the company over potentially a lengthy period of time.
Policy and legislation
Policy makers have been active in relation to the directors' disqualification regime, digital assets, special administration regimes and litigation funding.
- In January, the Government updated the special administration regime for water companies, broadening out the statutory objectives to include corporate rescue and permitting a hive-down sale structure.
- In February, the Finance Act 2024 introduced a new disqualification regime for directors enabling HMRC to seek disqualification orders in respect of directors of companies involved in promoting tax avoidance schemes.
- Also in February, the Law Commission launched a consultation exercise on draft legislation designating digital assets as a separate class of personal property with a view to allowing the common law to develop a distinct set of rules to fit this unique asset class.
- In March, the Government published a Bill to reverse the effect of the Supreme Court's 2023 decision in PACCAR. Following the election of the new government, it is not yet clear if and when this Bill, or a similar one, will be introduced in Parliament. In an article first published in the Q1 2024 edition of INSOL World, Jessica Williams and Radford Goodman reviewed how funders and the courts have been addressing the PACCAR decision whilst the market awaits statutory intervention.
- Also in March, further changes to the directors' disqualification regime were introduced by the Economic Crime and Corporate Transparency Act 2023. These changes provided for disqualification in respect of breaches of the sanctions regime.
- In May, the UK Jurisdiction Taskforce (UKJT) published a "Legal Statement on Digital Assets and English Insolvency Law" which concluded that the current insolvency regime "is entirely capable of convenient and sensible application to disputes concerning digital assets." Notably, the UKJT concluded that, under English law:
- digital assets are "not yet" treated as money and therefore an obligation denominated in a cryptocurrency does not create a debt for the purposes of a statutory demand and subsequent winding-up petition;
- digital assets are not a foreign currency and so do not fall to be converted to pounds sterling under the Insolvency Rules;
- office-holders may choose to sell digital assets and distribute the proceeds or, in their discretion, they may decide to distribute digital assets in specie;
- clawback provisions in the Insolvency Act do apply to transactions involving digital assets. Even though it may be technically impossible to reverse the transaction on the blockchain, other forms of relief can bring about the same result;
- where digital assets have been pooled and there is a shortfall, the existing rules on tracing and mixed accounts are flexible enough to be applied, noting that the rules in the FCA's Client Assets Sourcebook are unlikely to apply because digital assets are not (yet) treated as being money.
Cross-border
Following Brexit and the UK's withdrawal from the EU Regulation on Insolvency Proceedings, the Cross-Border Insolvency Regulations 2006 (CBIR) has become the centrepiece of the UK's approach to recognition and co-operation in cross-border cases. The CBIR is based on the 1997 UNCITRAL Model Law on Cross-Border Insolvency, but gaps in that original Model Law have been identified over the years and UNCITRAL has published, or is in the process of developing, additional Model Laws to address these deficiencies. Such Model Laws do not have direct effect and it is up to individual states to decide whether to incorporate them into national law.
- In 2023, the UK Government announced that it intended to adopt the UNCITRAL Model Law on Enterprise Group Insolvency at the earliest opportunity. This Model Law is designed to reduce friction and promote co-operation in cases involving the collapse of interlinked corporate groups. It remains to be seen whether the incoming government will follow up on this pledge.
- Following a consultation process, adoption of the UNCITRAL Model Law on Recognition and Enforcement of Insolvency Related Judgments has been paused by the UK for further consideration after concerns were raised over its potential impact on the Rule in Gibbs. This is the rule of English law that a contractual obligation can only be varied or discharged under the law applicable to the contract (see for example this paper by the Financial Markets Law Committee).
- UNCITRAL's insolvency law working group is currently developing two further texts, one on applicable law in insolvency proceedings and a second on asset tracing and recovery in insolvency proceedings. It remains to be seen whether these will be adopted as Model Laws in due course.
We hope you have found this update useful. We wish all our readers a very enjoyable summer and we'll be back with Issue 2 of Insolvency Matters in January.