Insolvency legal news and updates—July 2023

Russell-Cooke’s restructuring and insolvency team present a round-up of recent insolvency news and updates, they look at how these will impact the insolvency industry.

Bankruptcy: suspension of discharge

In a highly anticipated decision in the long running insolvency of Pramod Mittal, Trower J’s recent decision in Allen v Mittal [2023] EWHC 920 (Ch) overturns an Insolvency and Companies Court (ICC) Judge’s dismissal of an application by Mr Mittal’s Trustee in Bankruptcy (TiB) to suspend the bankrupt’s discharge from bankruptcy.

The first instance decision to refuse the TiB’s suspension application was based largely on technical service points raised by Mr Mittal, including a point related to service of the application papers by email on Mr Mittal’s solicitors. The ICC judge had concluded that Mr Mittal’s solicitor’s confirmation that he will accept service indicated only a prospective willingness to accept service, meaning the TiB’s solicitors would have had to re-serve documents that they had already sent by email.

Trower J disagreed with that approach and held that use of the word "will" in the context of accepting service demonstrated that Mr Mittal’s solicitor was content that what had already been sent was properly served.

Trower J also disagreed with the ICC judge’s view that the bankrupt’s conduct should not be taken into account when exercising discretion as to whether to entertain a late application for suspension of the bankrupt’s discharge. In this case, Trower J held, inter alia, that there were compelling reasons why the suspension application should succeed, including the bankrupt’s failure to cooperate with his Trustee, and the prejudice to creditors if the suspension application was dismissed.

This decision will be welcomed by office holders who take bankruptcy appointments.

Bankruptcy: annulment

In Dusoruth v Orca Finance UK Ltd (In Liquidation) [2023] EWHC 1050 (Ch) the High Court dismissed an appeal by a bankrupt against a decision of an ICC judge who refused to annul the bankruptcy. The bankrupt’s argument in both Courts was that the petition debt that resulted in the Bankruptcy Order was not liquidated, and therefore did not qualify as a petition debt under the IA 1986, and therefore the Bankruptcy Order should not have been made.

The first instance ICC judge disagreed, and that decision was upheld by the High Court. As Miles J stated at [28]:

“... whatever may be said at the time of the hearing of the bankruptcy petition concerning the court’s jurisdiction to make an order on a petition which does not comply with 267(2)(b) of the 1986 Act, if a bankruptcy order is actually made on such a petition, when it comes to a subsequent application to annul, the court retains a full discretion to decide whether or not to do so. The court may for instance refuse to do so because of the position of other creditors. Section 282 [IA 1986] gives the court a full discretion not to annul the order even where the necessary preconditions for presentation of a petition have been held not to have existed at the time the order was made...”

This is a helpful reminder to practitioners that arguments regarding the Court’s jurisdiction and power to make the Bankruptcy Order may not necessarily lead to the Bankruptcy Order being annulled.

Liquidation: TUVs and the ‘pari passu’ principle

In the case of Bonney v Barker (Re Fastfit Station Ltd) [2023] EWHC 496 (Ch) the liquidators brought an application against the liquidated company’s former director and another company (F) which he controlled, alleging that payments due to the company (and instead paid to F) had been transactions at an undervalue within s.238 IA1986, and that the director had breached his duties to the company by causing or allowing the payments to be made.

The Court held that the pari passu principle (that all unsecured creditors are required to share alike in the common pool of assets and realisations) “is one of the most fundamental principles of corporate insolvency law” and held that the result of the director’s actions was to “subvert the insolvency regime”.

Accordingly F was directed to repay the monies received, with the director liable to reconstitute the fund if F did not do so within a reasonable period. This case reinforces the principle that companies cannot pick and choose which creditors to pay when insolvency is in prospect, even if the company’s balance sheet is not altered.

Breathing space

In Kaye v Lees [2023] EWHC 758 (KB) the debtor had obtained a breathing space moratorium and subsequent mental health crisis moratorium (MHCM) under the 2020 Debt Respite Scheme Regulations (the Regulations). A creditor with a significant debt succeeded in having the last MHCM cancelled for material irregularity and unfair prejudice, and obtained an injunction restraining the debtor from obtaining a further moratorium for two months. The creditor sought to extend the injunction to enable it to complete a sale of a property, possession of which it had obtained from the debtor to satisfy the debt.

The High Court refused to extend the injunction, holding that, among other things:

• an injunction would constrain the rights of the debtor in a way that was not permitted by the Regulations
• it would be wrong to prohibit the debtor from taking perfectly lawful action to seek a moratorium.

The Court noted that any future attempted moratorium might perhaps be best challenged by judicial review (as to whether the relevant conditions for a moratorium had been met). The Court’s views on the limits of the circumstances in which a moratorium might be prevented by injunction are noteworthy.

Liquidation: fraudulent trading and limitation

Tradition Financial Services Ltd v Bilta (UK) Ltd [2023] EWCA Civ 112 saw the Court of Appeal consider whether:

• s.213 IA 1986 (fraudulent trading) was limited only to persons involved in the management or control of a company
• time continues to run where there had been a period during which a claimant company had been struck off the register.

The Court held that s.213 was not restricted to a person with a controlling or managerial function within the company; liability could extend to those who were party to the fraudulent trading activity. In relation to the limitation question, if the company could show that it was probable that, but for the dissolution, they would have begun proceedings in time, then limitation could be extended accordingly.

Transactions defrauding creditors

In Integral Petroleum SA v Pretrogat FZE [2023] EWHC 44 (Comm) the High Court considered issues arising from a claim under s.423 IA 1986.

The Court held that s.423 is not restricted to persons or property in England & Wales. However, the (English) Court will refuse to exercise its discretion to make an order unless satisfied that there is a sufficient connection with the jurisdiction.

The relevant connection was present here, in light of the underlying contract being governed by English law, an English arbitration award ultimately reflected in an English judgment, and the fact that an English receivership order had been made.

Bankruptcy: three year ‘use it or lose it’ rule

In the case of Mehers v Khilji [2023] EWHC 298 (Ch) the Court considered the level of knowledge of the bankrupt’s home required by the Trustee in Bankruptcy (TiB) or Official Receiver before time starts running on the three year ‘use it or lose it’ period under s.283A IA 1986.

The judge in this case considered that, for a TiB to become aware of the interest, something more than notice of a potential claim is required: the TiB must have some sort of knowledge of the interest.

As he saw it, the Court would only find that the TiB had become aware or been informed through “inference from equivocal facts” where the bankrupt had not told the TiB in clear terms about the Bankrupt’s interest in his home.

In this case the TiB had not “become aware” of the relevant interest under s.283A(1) until service of the bankrupt’s defence & counterclaim in a claim for possession & sale made by the administrator of the bankrupt’s deceased mother’s estate.

TiBs will take comfort from this case as “awareness” of a bankrupt’s interest will only come through clear statements given by the bankrupt.

Judgment debts and pensions

In Manolete Partners Plc v White [2023] EWHC 567 (Ch) the High Court granted an application to require a judgment debtor to request that his remaining pension fund be designated as a drawdown pension fund to satisfy a judgment debt arising from a claim for breach of director’s duties.

The Court held it had the power under s.37(1) Senior Courts Act 1981, to grant an injunction requiring the respondent to use his pension pot to satisfy the judgment debt.

This continues the recent, and growing, line of cases where judgment creditors have been able to require a judgment debtor to draw down their pension to satisfy a judgment debt. These decisions are an interesting contrast to the position of TiBs, who are still unable to require a bankrupt to draw down their pension to contribute to their bankruptcy debts.

Dissolved companies: subrogation of rights

In Leon v Kensington Mortgage Company Ltd [2023] EWHC 121 (Ch), a company (F) had granted a mortgage to a creditor in connection with a loan advanced by the creditor to F and its shareholder (L).

L was also party to the mortgage and assumed repayment obligations under it and the loan agreement, but had no ownership rights over the mortgaged property, which was a long leasehold interest in a West London flat. F was struck off the register and dissolved.

The charged leasehold interest vested in the Crown as bona vacantia upon F’s dissolution, and was disclaimed by the Crown. F therefore had no interest in the lease, but the creditor’s security interest remained. L asked the Court to determine if his rights and entitlements could be subrogated to those of F.

The Court found that if L repaid the loan, the security would be subrogated to him. The security created for the loan survived the dissolution and ensuing disclaimer of the lease by the Crown. Accordingly, a secured party would only want rights of subrogation to apply once the secured debt has been repaid in full.

This case and the principles derived from it may be useful to liquidators of companies which have guaranteed the obligations of group companies.

Liquidation: settlement agreements

In Newbattle Pension Fund, Trustees v Beechmount Ltd (In Liquidation) [2023] CSIH 10 the First Division of the Court of Session in Scotland ruled that the appointment of a liquidator to a company which was a party to a settlement agreement did not frustrate the settlement where performance of the parties' obligations thereunder was not rendered impossible.

The Court held that liquidation did not, without express provision, terminate or invalidate a contract; a liquidator could choose to adopt the agreement and to perform accordingly, or repudiate it. The agreement nevertheless remained binding, and performance thereunder was not rendered impossible by the liquidator's appointment.

Administration: adjudication enforcement

In JA Ball Ltd (in administration) v St Philips Homes (Courthaulds) Ltd (unreported), 3 February 2023 (TCC) the Technology & Construction Court gave helpful guidance regarding the circumstances in which companies that are insolvent will be permitted to enforce an adjudicator's decision.

A company in insolvent liquidation facing cross-claims or claims of set-off will generally not be entitled to enforce an adjudicator's decision, because all claims and cross-claims should be resolved in the liquidation.

An equivalent legislative provision does not apply to a company in administration unless and until the company gives a “notice of distribution” declaring payment of a distribution or dividend to creditors.

The Court here agreed with the claimant that an inability to give notice of distribution meant there could be no doubt as to the company's insolvency and, consequently, it should not be entitled to enforce the adjudicator's decision.

This decision restates established principles derived from previous cases grappling with this issue, including Straw Realisations (No 1) Ltd v Shaftsbury House (Developments) Ltd [2010] EWHC 2597 (TCC) through to John Doyle Construction Ltd v Erith Contractors Ltd [2020] EWHC 2451 (TCC).

Company strike-off: online objection service

Companies House has introduced a new online service for objecting to the removal of a company from the register. The streamlined process is designed to make submitting objections with supporting evidence easier.