Kerry Underwood

INSOLVENCY ROUND UP

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Insolvency Proceedings and Lawsuits under Insolvency Regulation 2000

In Tarrago da Silveira v Massa Insolvente da Espirito Santo Financial Group SA ([2018] EUECJ C 250/17 (6 June 2018)

the European Court of Justice has issued a preliminary ruling on the operation of Article 15 of Council Regulation (European Community) 1346/2000 on insolvency proceedings (Insolvency Regulation 2000).

Article 15 provides an exception to the general rule that the laws of the member state where insolvency proceedings are commenced govern the conduct of the insolvency.

Article 15 provides that the effects of insolvency proceedings in a member state on a lawsuit pending in another member state, where the lawsuit concerns an asset or a right of which the debtor has been divested, are governed by the laws of the member state where the lawsuit is pending.

In this case, an individual brought a claim for contractual damages in Portugal against a debtor.

When the debtor went into Luxembourg insolvency proceedings the Portuguese court stayed the individual’s claim as, under Portuguese law, the Luxembourg insolvency proceedings rendered the Portuguese proceedings otiose and entitled the court to refuse to hear the claim, even though under Luxembourg law such a claim could have continued notwithstanding the insolvency proceedings.

The matter was put to the European Court of Justice for a preliminary ruling and the European Court of Justice ruled that article 15 is wide enough to apply to claims for damages in respect of contractual claims, though not enforcement proceedings in relation to such a claim.

The ruling therefore accorded with the stance taken by the Portuguese court.

 

Setting Aside a Statutory Demand

In Black v Sale Service & Maintenance Limited [2018] EWHC 1344 (Ch)

the High Court overturned a District Judge’s decision to dismiss an application to set aside a statutory demand.

The High Court held that the decision was unjust and involved a serious procedural irregularity in that the District Judge dismissed the application at a 15-minute hearing that all parties had expected to be a directions hearing only.

15 minutes was not long enough for the District Judge to be taken through the evidence and decide that there was no triable issue.

The High Court ordered a re-hearing with a time estimate of two and a half hours.

Debtors seeking to set aside a statutory demand should expect directions from the court at a first hearing, provided that the applicant has established a triable issue.

The High Court also held that the decision was wrong in any event as the District Judge had held that the debtor’s liability for part of the sum in the demand had been established as the debtor’s company, whose debts the debtor had guaranteed, had unsuccessfully tried to pay the creditor £60,000.

This was merely prima facie evidence that the debtor owed £60,000, and there was known to be other, unconsidered by the judge, evidence that might establish a counterclaim by the debtor.

That evidence should be considered even if it might seem unlikely that ultimately it would assist the debtor.

 

Administration Order Made On Basis of A Disputed Debt When Debtor Otherwise Solvent

 

In Berkshire Homes (Northern) Ltd v Newbury Venture Capital Ltd [2018] EWHC 938 (Ch) (14 February 2018)

 

the High Court granted a creditor’s application for an administration order, although the creditor’s debt was disputed as the debtor company was claiming credits, cross-claims and set-off and the debtor was solvent apart from the debt.

 

The court held that the disputed debt rendered the claimant a creditor who could to apply for an order, and the existence of the debt, and the failure to pay it, meant that the company was unable to pay its debts, entitling the court to make an administration order.

 

Where the disputed debt was not only the basis of the creditor’s standing to apply for the administration order, but also formed the evidence of insolvency necessary to satisfy the administration condition of the company being, or being likely to become, unable to pay its debts, the debt had to be proved on the balance of probabilities.

 

After making allowance for the credits, cross-claims and set-offs, there was a balance rendering the company insolvent on a net assets basis.

 

There was a real prospect of the administration achieving its purpose, justifying the court placing the company into administration.

 

The decision affirms Hammonds (a firm) v Pro-Fit USA Ltd [2007] EWHC 1998 (Ch) and Fieldfisher LLP v Pennyfeathers Ltd [2016] EWHC 566 (Ch).

 

 

Bankruptcy Order Annulled Following Appeal against Dismissal of Application and Refusal to Adjourn Hearing on Uncontested Medical Grounds

In Rafferty v Sealants International Ltd and another [2018] EWHC 1380 (Ch) (2 May 2018)

 

the High Court has annulled a bankruptcy order where it was clear that, at the time it was made, evidence existed, which had not been put before the court, of the bankrupt’s ability to pay the petition debt.

 

The annulment order was made conditional on paying the creditor’s debt and costs.

 

The bankrupt was also ordered to pay the costs of the Official Receiver (OR).

 

During protracted bankruptcy proceedings in the county court, the bankrupt had applied to annul his bankruptcy order.

He subsequently requested an adjournment of the hearing of his application on medical grounds.

 

It was refused in his absence despite the OR consenting. His request was not raised with the petitioner who had unexpectedly attended.

 

The court went on to dismiss the annulment application as it was not satisfied that appropriate grounds had been made out.

 

The bankrupt appealed to the High Court, and the OR remained neutral on the bankrupt’s appeal as did the petitioner, providing that no costs were sought against them.

 

The High Court held that while adjournments are generally case management decisions, the court must consider procedural fairness, and sometimes the material before the appeal court indicates that there had been “some mistake or fundamental error” in the process.

 

Medical evidence may not justify a request for an adjournment if it is contested (Simou v Salliss [2017] EWCA Civ 312) but in this case it was not.

 

As the bankrupt’s request for an adjournment had not been raised with the petitioner at the hearing, something had clearly gone wrong.

 

Permission to appeal the refusal to adjourn was, therefore, allowed.

 

The High Court then considered the bankrupt’s substantive application, brought on grounds existing at the time of the bankruptcy order that it ought not to have been made – section 282(1)(a) of the Insolvency Act 1986.

 

It held that there was a reasonable prospect that the petitioner would be paid within a reasonable time, and where such evidence existed but was not put before the court, as in this case, the High Court considered there were grounds to annul and that the proper application of principles justified a conditional annulment order (Sekhon v Edginton [2015] EWCA Civ 816 and 1st Credit (Finance) Ltd v Carr [2013] EWHC 2318 (Ch)).

 

 

Joint Creditors Must Both Petition For Bankruptcy

In Aabar Block S.a.r.l. and another v Maud [2018] EWHC 1414 (Ch), 11 June 2018

 

two petitioning creditors were relying on a joint debt, one creditor was not entitled to seek a bankruptcy order without the agreement of the other.

 

In this case, the petitioning creditors were joint owners of a debt and both issued the bankruptcy petition. One of the creditors no longer wished to proceed and was not willing to proceed with the petition.

 

On a hearing of the petition the court held that the creditor who wished to proceed could not do so unless it could show that the other creditor was acting in breach of its duty as trustee of the jointly owned debt.

 

The court also decided that it would consider whether the petition constituted an abuse of process, notwithstanding that it had previously considered the issue at the stage when the statutory demand was issued.

 

This was because there had been a change of circumstances and the abuse of process point was being taken by the petitioning creditor who wished the petition to be adjourned rather than by the debtor.

 

The court considered that the same principle would apply to a winding up petition in a corporate context.

 

Security for Costs Application Dismissed Against a Company in Liquidation

In  Absolute Living Developments Ltd v DS7 Ltd and others [2018] EWHC 1432 (Ch) (24 May 2018)
the High Court dismissed a defendant’s application for security for costs against a company in insolvent liquidation following a consideration of the two-stage test under CPR 25.13(1) and (2)(c).

 

It held there was a clear risk that an order would stifle a bona fide and genuine claim by the liquidator.

 

The test is firstly, is there reason to believe that the claimant would be unable to meet the defendant’s costs and if so, secondly, is it just, in all the circumstances, to make an order? – criteria for the exercise of discretion set out in Sir Lindsay Parkinson and Co v Triplan [1973] QB 609.

 

The first stage was conceded by the liquidator: the company was in insolvent liquidation and the proceedings were brought on a no win-no fee basis.

 

The Triplan guidance was applied to the second stage. The claim was properly brought and defended and the risk of an adverse costs order against the company was real.

 

There was insufficient certainty that the claimant’s inability to pay was attributable to the defendant.

 

The application for security appeared appropriate but the critical factor in deciding whether to make an order was one of principle: would it stifle a serious or genuine claim?

 

Weighing the competing interests of the company and the defendants, the balance clearly favoured the liquidator bringing claims for the benefit of the creditors and there was no source of funding available to the claimant that would enable it to pay a security for costs order.

 

If the court were to order security, in reality that would be provided by the liquidator, creating a situation entirely contrary to the public interest in the insolvency regime.

 

It was critical and in the public interest that liquidators may proceed in a manner that is uninhibited in terms of deciding how to bring actions, including how those actions are framed and funded.

 

This shows that security for costs will not always be ordered against an insolvent entity that appears unable to pay any costs order made against it.

 

It is welcome news to office-holders who may be unable to obtain after the event insurance, especially given the expensive premium cannot be claimed from the losing party in the event that the claim succeeds.

 

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Written by kerryunderwood

June 29, 2018 at 8:25 am

Posted in Uncategorized

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