Source: https://www.globalrestructuringwatch.com/
Timestamp: 2019-04-26 02:16:05+00:00

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Mr Justice Hildyard, who continues to amass expertise on schemes of arrangements, recently ruled against convening a single meeting of creditors on a scheme of arrangement proposed by Stronghold Insurance Company Limited (Stronghold) (the Scheme). Hildyard J found that where the appropriate comparator to the scheme was a solvent run-off of the company, creditors with incurred but not reported (IBNR) claims had rights which were so uncertain and contingent that they could not form a single class of voters alongside creditors whose claims had accrued. Accordingly, two classes of creditors were appropriate for voting purposes. In delivering his judgment, Hildyard J also expressed some concern on how creditors were adhering to the Practice Statement on Schemes of Arrangement. He reminded creditors that unless they had good reasons for doing so, creditors should raise and properly develop and argue any concerns on class composition at the first court hearing and should not be tempted to reserve their position on class issues until the sanction hearing.
Stronghold is an insurance company with a long-tail business exposure, particularly in asbestos pollution and health hazard liabilities. It has been in run-off since 1985. Stronghold’s regulators, the PRA and the FCA (the Regulators), ruled that it no longer met the minimum capital requirements imposed by Directive 2009/138/EC (Solvency II) and requested that Stronghold produce an exit plan to end its run-off. Stronghold proposed the Scheme because a capital injection, sale, transfer or liquidation were all not considered viable or reasonably practicable. The purpose of the Scheme was to settle or compromise all of Stronghold’s outstanding obligations, known as a cut-off and estimation scheme. Trade creditors and creditors whose claims had been previously agreed but had not been paid were not included in the Scheme.
Stronghold submitted that the Scheme would provide creditors with a number of benefits that might not be available to those creditors in a liquidation, namely that the Scheme would use a market-driven estimation methodology in calculating claims and there was no assurance that a liquidator would adopt such an approach in assessing the correct amount for any liquidation proof.
In considering the Scheme, Hildyard J applied a two-stage test. The first stage focuses on rights: if there is no difference in the respective rights of creditors, the fact that they may have opposing commercial interests is irrelevant. This test requires consideration of (i) the rights of creditors in the absence of the scheme and (ii) any new rights creditors obtain from the scheme. The second stage considers an assessment of whether the differences in the rights of groups of creditors and their treatment under the scheme are so different as to make it impossible for them to consult together with a view to their common interest. In his judgment, Hildyard J referred to Re British Aviation Insurance Co Ltd  1 BCLC 665 (the BAIC case) which also considered whether accrued claims should be in the same class as IBNR claimants. In the BAIC case, Lewison J considered that when assessing whether all the policyholders should form a single class, the starting point was to identify the appropriate comparator: that is, what would be the alternative if the scheme does not proceed. The court noted that should an insurance company face imminent liquidation if a scheme does not proceed, IBNR claims would be estimated in accordance with the Insolvency Rules. Liquidators may well be open to discussion about a market-driven estimation model and interest among creditors may accordingly be sufficiently close to allow them to be in the same class. However, where the company is solvent and likely to remain so, the IBNR creditors may benefit from its continuance that they cannot be realistically be expected to discuss with other scheme creditors a scheme which offers an immediate advantage to those creditors but virtually none to them.
While noting that the evidence in this matter was somewhat ambivalent on whether liquidation or continued solvent run-off should be the appropriate comparator, the court concluded that the most likely alternative to the Scheme in the near and mid-term was that Stronghold would continue in solvent run-off. This was the appropriate comparator, particularly given that the Regulators had failed to determine what regulatory enforcement it would take to enforce Solvency II.
In the context of this comparator it was considered that the rights of policyholders with notified but outstanding claims were not the same as policyholders with IBNR claims. Hildyard J considered that given the basic fact that an IBNR claim was inherently (a) uncertain even as to its occurrence, as to the range of events that may give rise to an insurance liability and also to the range of magnitude of any exposure and (b) therefore likely also to be subject to much greater ranges in any estimation process, signified that any outstanding claim gives a scheme creditor a qualitatively different right from an IBNR claim and that this should be the prima facie position unless there was evidence that liquidation was imminent and the alternative to the scheme.
The court acknowledged that while there were a number of factors which might allow IBNR creditors and other creditors to still have a sufficient common interest to be able to vote in the same class, the court reached its decision that absent further guidance from the Regulators as to what they would do if the Scheme failed, a separate class of Scheme creditors “with predominantly IBNR claims” would be required.
While Hildyard J acknowledged that the court would retain some flexibility in considering the jurisdiction of schemes at the convening stage of the court process, the “inaccurate perception” that all issues affecting the jurisdiction of the court would be dealt with at the first stage was incorrect, and the fact a skeleton argument for the first hearing mentioned a particular jurisdiction issue does not mean the court is satisfied on jurisdiction. Further, he stressed that consideration on the fairness of the proposed scheme should be the principal focus of the sanction hearing and not the convening hearing.
Following consultations on insolvency and corporate governance in 2017 and 2018, the Government recently published its response setting out some notable proposed changes to the existing insolvency and corporate governance legislation. Following the high profile failures of Carillion and BHS, the Government’s response is largely aimed at encouraging the recovery of viable companies, improving transparency and promoting responsible directorship. This article will primarily look at the proposed changes focused on facilitating a rescue culture.
The introduction of a pre-administration moratorium, throughout which the directors will remain in control of the company and a licensed insolvency practitioner (an “IP”) (referred to as a monitor) will support the integrity of the moratorium process and ensure creditors are protected.
A prohibition on suppliers enforcing ipso facto clauses, which allow a contract to be terminated as a result of the company entering into a formal insolvency procedure, entering a moratorium or a restructuring plan.
The availability of a new restructuring plan, which enables a company to bind all of its creditors with the approval of the court through a cross-cram down of creditors.
The introduction of a new recovery power for an IP to undo a transaction, or series of transactions, which unfairly strip value from a company during the period leading up to insolvency.
A key proposed change is the introduction of a pre-administration moratorium for financially distressed companies whilst they consider their options for restructuring. Unlike the CVA moratorium available to small companies, the moratorium would be available to nearly all companies that meet certain eligibility requirements and qualifying conditions, including that the company will become insolvent if no action is taken and that, on the balance of probabilities, rescue is more likely than not. A company, which is already insolvent, will not be eligible for the moratorium.
For a company to enter into the new moratorium, notice must be given to all creditors and necessary filings made at court. The consent of the monitor, who has objectively assessed that the eligibility test and qualifying conditions are met, must also be filed with the court.
The moratorium will initially last for a period of 28 days, which may be extended by the company for a further 28 days. The monitor must confirm that the qualifying conditions are still met prior to the company applying for an extension. Further, the Government believes that in certain circumstances it should be possible to extend the moratorium beyond 56 days, provided there remains a good prospect of achieving a better outcome for creditors than might otherwise be possible. The extension beyond 56 days will require the consent of more than 50% of value of both secured and unsecured creditors, except where seeking such consent is impracticable.
It is proposed that the directors of the company will remain in control during the moratorium; however, a monitor will be appointed to support the integrity of the moratorium process and ensure creditors are protected. The monitor will be responsible for approving any sale or disposal of assets outside the normal course of business as well as determining whether the eligibility and qualifying requirements are satisfied throughout the moratorium and terminating the moratorium if they are not satisfied. A monitor may provide additional services to the company during the moratorium period e.g. restructuring advice or being appointed as a CVA supervisor. However, a monitor cannot take an appointment as either an administrator or liquidator in the 12 months following the expiry of the moratorium.
At any time during the moratorium, creditors will have a right to challenge the moratorium on the basis that the qualifying criteria are no longer met or that the moratorium unfairly prejudices the creditor. The Government intends to take a similar approach as in administration and an application to court will need to be made to lift the moratorium. Generally, the court has been reluctant to interfere with the administration process and lift an administration moratorium, which suggests that it may also be reluctant to lift a pre-administration moratorium. Most significantly, secured creditors will be prevented from enforcing their security during the moratorium period and although, this is the same as in the current administration moratorium in that instance, the IP is generally receptive to requests from secured creditors to enforce their security. The question arises as to whether despite the ability to apply to court to lift the moratorium; a secured creditor will have any real ability to enforce its security during this pre-administration moratorium where the company is working towards rescue.
Costs incurred during the moratorium will be treated in the same way as an expenses in administration and super-priority status will be given to unpaid moratorium costs in any future administration, with highest priority being given to suppliers who are prevented from enforcing their termination clauses (as discussed further below), followed by other costs and the unpaid fees.
The rationale behind limiting the moratorium only to companies who are solvent is to encourage companies to deal with financial difficulties at an early stage however; in practice, it may be difficult to meet this criteria. Will a company be able to take advantage of this moratorium if it becomes unlikely that it will make certain payments during the moratorium period or will creditors be required to enter standstill arrangements during this period so that a company remains ‘solvent’?
The Government have proposed a prohibition on suppliers enforcing a termination clause under a contract on the grounds that a counterparty has entered into a formal insolvency procedure, the new moratorium or a restructuring plan (referred to as an ipso facto clause). This prohibition will not apply to certain types of financial products and services, however it is intended that contractual licenses will be covered (other than those issued by public authorities).
Suppliers will, in exceptional cases, be allowed to exercise a right to rely on the termination clause on the grounds of undue financial hardship. To do so, they will need permission of the court, which will consider whether continuing the supply will more likely than not lead to the supplier’s insolvency and the reasonableness of the termination.
In addition to and independent of a moratorium, there is a proposal to introduce a new restructuring process which will allow a company to bind all creditors, including a junior class of creditors through a cross-class cram down provision. In order to protect minority creditor interests, a two-fold test requiring 75% in value, plus more than half the total value of unconnected creditors must vote in support. The restructuring plan legislation will further provide that a dissenting class of creditors must be satisfied in full before a junior class receive any distribution or keep any interest under the restructuring plan, however this can be departed from where it is vital to agree an effective and workable restructuring plan. Further, no cram down can occur unless at least one class of creditors who will not receive payment in full has voted in favour of the restructuring plan. The Government have proposed that the test for determining the fairness of a plan which is being crammed down will be whether the outcome is better than the outcome under the next best alternative, which could either be administration or liquidation and may ultimately be determined by the court.
The new restructuring process will be available to all companies (both solvent and insolvent) except those involved in specific financial market transactions or similar undertakings. The restructuring process closely resembles that for a scheme of arrangement, whereby a restructuring plan proposal will be sent to creditors and shareholders, as well as filed at court. The court will examine the classes of creditors and shareholders, who may challenge the formation of the classes. Upon satisfaction that the classes are appropriately constituted, the court will confirm that a vote on the proposal may be conducted ahead of a second hearing. Creditors and shareholders will then vote on the proposals and will be able to submit a counter-proposal or a challenge to the court. If no such challenge or counter-proposal is put forward, the court will decide whether to confirm the restructuring plan. Once confirmed, the restructuring plan is binding on all affected parties, although there will be a right to appeal. It is not clear from the Government’s response what the jurisdictional requirements will be for a company to apply for the new restructuring plan.
In recent years, there have been certain high profile sophisticated schemes where companies extracted value from a company for the benefit of shareholders shortly before the insolvency of that company. The Government intends to enhance the recovery powers of IPs by allowing them to apply to the court to reverse a transaction (or series of transactions) which unfairly removed value from the company for the benefit of shareholders but to the detriment of creditors in the lead up to a company’s insolvency. The Government believes that such transactions will only occur with connected parties and proposes that this lookback period should mirror that which is in place for the existing recovery provisions in relation to transactions with connected parties, being 2 years.
The response paper also made a number of proposals in relation to the corporate governance of a company leading up to the insolvency of a company. For example, the Government proposes increasing enforcement powers against directors of dissolved companies. In addition, they are increasingly concerned with the sale of distressed subsidiaries and as such intend to develop guidance for considerations to be made prior to such sale. Finally, the Government highlighted the need to work with the investment community to strengthen and increase the efficiency of shareholder stewardship in large group companies.
The UK insolvency framework has traditionally been creditor friendly; however, the response paper paves the way for a shift in focus to a more debtor friendly framework. Overall, the proposed amendments are positive and highlight the Government’s goal of increasing the possibility of rescue of a distressed, but viable company. However, timing of the proposed amendments is unclear and although the response provides that legislation will be enacted as soon as parliamentary time allows, Brexit related legislation may slow it down by several years.
Former world number one and three-time Wimbledon champion Boris Becker, who was declared bankrupt by an order dated 21 June 2017, is claiming diplomatic immunity against ongoing bankruptcy proceedings in the High Court. Mr Becker claims his role as sports attaché to the Central African Republic (CAR) makes him immune from further actions against his assets over debts owed to private bank Arbuthnot Latham and other creditors.
The trustees of Mr Becker’s estate applied on 31 May 2018 to have Mr Becker’s bankruptcy continue as they consider he has failed to comply with his obligations. The Insolvency Act 1986 provides for an automatic discharge from bankruptcy after 12 months from the bankruptcy commencement, subject to an order being made suspending the discharge. In June Mr Becker’s lawyers made submissions claiming diplomatic immunity based on Mr Becker’s purported appointment as the CAR sporting, cultural and humanitarian attaché to the European Union in April 2018. Mr Becker’s claim is that the appointment entitles him to immunity pursuant to the Diplomatic Privileges Act 1964 (DPA), which gives effect to the 1961 Vienna Convention on Diplomatic Relations (VCDR). Specifically, Article 31 of the VCDR grants a “diplomatic agent” immunity from the criminal, civil and administrative jurisdiction of the receiving State, with limited exceptions. At a hearing in June, the parties agreed that the discharge from bankruptcy should be suspended, with the Individual Insolvency Register recording “discharge suspended indefinitely” subject to the fulfilment of conditions specified in the order made by the Court and effective from 18 June 2018.
The trustees in bankruptcy were due to hold an auction of Mr Becker’s trophies and memorabilia on 28 June 2018. Mr Becker’s legal team applied for an injunction to prevent the auction proceeding, with claims that the sale would strip their client of his personal dignity as it was deliberately timed to coincide with the start of Wimbledon. On 27 June 2018, the trustees in bankruptcy agreed to postpone the auction with an agreed order to that effect being approved by Deputy Insolvency and Companies Court Judge Catherine Addy QC. It is unclear when the auction will now take place.
The scope of state and diplomatic immunity has recently been considered by the UK Supreme Court in the context of employment claims brought in the English courts by members of the service staff of diplomatic missions (see Benkharbouche v. Secretary of State for Foreign & Commonwealth Affairs, Libya v. Janah  UKSC 62 and Reyes v. Al-Malki & Anor  UKSC 61). Diplomatic law, governed by international law, confers extensive privileges and immunities on the individual diplomat and the sending State in respect of its mission. These constitute an exception to the general rule that aliens resident in a State are subject to its jurisdiction. The principal codification of these privileges and immunities is contained in the VCDR, which is given effect in the UK by the DPA. Schedule 1 to the DPA details the articles of the VCDR having the force of law in the UK.
A real action relating to private immovable property situated in the territory of the receiving State, unless held by the diplomatic agent on behalf of the sending State for the purposes of the mission.
An action relating to succession in which the diplomatic agent is involved as executor, administrator, heir or legatee as a private person, and not on behalf of the sending State.
An action relating to any professional or commercial activity exercised by the diplomatic agent in the receiving State outside the agent’s official functions.
The last exception to diplomatic immunity may be the subject of submissions by the trustees in bankruptcy in the upcoming hearing against Mr Becker.
Notably, on termination of a diplomat’s office, a diplomatic agent loses their personal immunity and can be sued for personal debts contracted, but retains immunity ratione materiae for any acts they performed on behalf of the State they represented (see Article 39 of the VCDR). For example, in Shaw v. Shaw  3 All ER 1, a wife filed a petition for a dissolution of her marriage to a diplomat attached to the U.S. embassy. At the time her husband was immune from suit, but the petition was allowed to proceed once the husband’s posting came to an end and he left the United Kingdom.
Mr Becker’s case will arguably turn on whether he meets the definition of “diplomatic agent” (and does not fall foul of the limited exceptions) and, if so, whether any express waiver of immunity has been provided by the CAR. Relevantly, Article 1(e) of the VCDR provides that a “diplomatic agent” is the head of the mission (e.g. an ambassador or high commissioner) or a member of the diplomatic staff of the mission. “Members of the diplomatic staff” are separately defined as “members of the staff of the mission having diplomatic rank” (see Article 1(d)). Mr Becker claims his CAR passport is evidence of his diplomatic status. The validity of this claim was questioned by the CAR foreign minister, but the minister was subsequently contradicted by the CAR embassy in Brussels, which confirmed Mr Becker’s status as a diplomat and that he retains an office in Brussels to carry out his work. As noted earlier, if Mr Becker is recognised as a “diplomatic agent” by the Court and there has been no express waiver by the CAR, he would be immune from suit, and the bankruptcy proceedings would be dismissed. This will be the subject of a further hearing anticipated to be held after 5 October 2018.
The outcome of the October hearing will no doubt be eagerly awaited by Mr Becker and diplomats in the UK. The issue of diplomatic immunity in the context of bankruptcy proceedings has not been considered widely and is therefore of interest. The growing trend to assert diplomatic status to shield persons from proceedings has been the subject of criticism in recent years. An update on these proceedings will be provided following the hearing.
These are just a few of the big high street names which have sought to compromise their obligations to creditors in recent months via a company voluntary arrangement (CVA).
CVAs are designed as a flexible method by which companies can seek to contractually alter their position regarding different creditors – each CVA will be different, but it is typical, for example, for unsecured trade creditors to be treated differently to landlords. It’s worth noting that secured creditors are not bound by a CVA, unless they agree to this.
Following the upsurge in the use of CVAs for high profile companies in recent months, the Pension Protection Fund (PPF) has issued a guidance note (available here) on CVAs. This applies when one of the creditors is a defined benefit pension scheme.
The PPF’s approach will depend on the CVA itself and the facts at hand – given the flexibility of CVAs, this is a logical starting point.
Although the Pensions Regulator (tPR) is not a counterparty in a CVA proposal unless clearance is requested, the PPF will consult with tPR on all CVA cases. However, the PPF’s agreement to a CVA shall not imply clearance from tPR. This will put the particular proposed CVA on tPR’s radar. One of tPR’s key objectives is to act as the guardian of the PPF and the compensation it pays, so this could also be a trigger for further tPR information gathering and involvement.
A PPF Assessment Period will commence when an employer lodges a CVA proposal with the court. This is the formal process during which the PPF assesses the pension scheme for eligibility for compensation from the PPF. While the Assessment Period is ongoing, any rights or powers of the trustees of the pension scheme in relation to any debt due to them pass to the PPF. This means that the PPF will acquire the trustees’ voting rights in the CVA.
The guidance notes that, even where the pension scheme appears unaffected by a CVA, certain circumstances may give rise to concern in relation to the scheme. For example, the fact of the company’s insolvency in proposing a CVA suggests its covenant strength is weaker than its valuation. Equally, the pension liability may increase during the period of a proposed CVA, during which a company’s workforce will get closer to retirement age (known as ‘PPF drift’).
The PPF will consider the risk that the pension scheme presents to the PPF, as a separate consideration to the risks to the scheme members.
Provide a significantly better outcome than administration or liquidation, and should be proportionate in relation to the section 75 debt that is being eliminated. Among other things, the PPF will consider the CVA’s prospect of success, current market practice and the viability of the business.
Include ‘anti embarrassment’ provisions, such that the pension scheme should receive 33 per cent or more of the equity in the employer (subject to increase).
Treat creditors fairly and should not disadvantage the pension scheme, with a particular focus on the treatment of intra-group and connected creditors. The independence of management from the wider group position will be considered, along with the funding and financing position of the company and the treatment of the banks under the proposed CVA.
Provide that the costs of the scheme in relation to the CVA will be met by the company.
As with any insolvency process, engaging with key stakeholders early on is of crucial importance. The guidance note provides an overview of the factors the PPF will consider when reviewing CVA proposals, which should provide a steer for those considering or proposing a CVA as to areas of concern to be addressed when formulating the CVA proposals where there is a defined benefit pension scheme involved.
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.
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 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.
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).
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.
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 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. 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”.
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.
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”.
 Paragraphs 6 and 7 of Schedule A1 to the Act.

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