Welcome to the second edition of the Digest

for 2012. It comes at a time when, as

predicted by some, the country has

apparently entered a second, or double-dip,

recession. Whilst this is perhaps not a total

disaster (the drop in growth was pretty

small), it is fair to say that it does not feel as

if it has been a particularly good three

months for the country. The weather has

been foul (almost permanently grey, lots of

rain, floods again, etc). We have hosepipe

bans. Food and energy prices seem to be on

a one-way escalator which is going to bring

trouble in the future. The Budget was not

widely applauded (tax cuts for the rich,

granny tax, etc). Heathrow descended into a

total shambles – for my part I struggle to see

how one could even contemplate there

being a third runway at an airport that

cannot cope with the number of passengers

delivered via two runways. The government

appears mired in negative publicity. And

more well-known outfits have gone into

administration, for example, Rangers FC and

Game.

But, let’s look at the positive side too:

England have a new football manager (the

right one?), Boris got re-elected in London,

the Queen is about to have her Diamond

Jubilee (which means we get another double

bank holiday and there is going to be a

flotilla of boats on the Thames), Euro 2012 is

almost upon us, we have a summer where

our cricket visitors include the West Indies,

Australia and South Africa, and the country

now is gearing up for what seems to being

billed as the greatest show on earth - the

London Olympics. It could all be a lot worse.

And I guess if millions of people really do

turn up for the Olympics and many of us

don’t stay at home as requested it will be

with gridlock on the roads and the rail

transport systems grinding to a halt under

the strain.

So what do we bring you in this edition of

the Digest? Well, we have three articles for

you this time. The first by Daniel Bayfield on

Rent as an Administration Expense. The

second by Joanna Perkins on Unregulated

Collective Investment Schemes. And the

third by Glen Davis on the new Insolvency

Practice Direction. Of course, we also have

the usual Case Digests prepared under the

guidance of Hilary Stonefrost. And we have

news-in-brief, diary dates and a fresh South

Square Challenge, this time set by Martin

Pascoe QC.

We hope that you enjoy the latest edition

of the Digest. As always, if you find yourself

reading someone else’s copy and want to be

added to the list (or if your contact details

have changed and you want to make sure

you get the next issue), please just email

kirstendent@southsquare.com and we will

do our best to make sure that you receive it.

David Alexander QC, editor.

Double-Diprecession...

IN THIS ISSUE

FEATURE ARTICLE

Rent as an administration expense: things go from bad to worse p2

CASE DIGESTS

Banking and Financial Services p5

Civil Procedure p7

Commercial cases p8

Company Law p9

Corporate Insolvency p11

Personal Insolvency p14

FEATURE ARTICLE

Unregulated Collective Investment Schemes: Establishing a case p15

FEATURE ARTICLE

The New Insolvency Practice Direction - Modernisation and Modest Reforms p21

NEWS IN BRIEF p22

SOUTH SQUARE CHALLENGE p26

MAY 2012 A REGULAR REVIEW OF RELEVANT NEWS, CASES AND ARTICLES FROM SOUTH SQUARE BARRISTERS

SOUTH SQUARE DIGEST IS PUBLISHED BY SOUTH SQUARE BARRISTERS,AT 3-4 SOUTH SQUARE GRAY’S INN, LONDON WC1R 5HP. TEL 020 7696 9900. PUBLICATION PRINT AND PRODUCTION BY WENDOVER PUBLISHING. TEL 01428 658697.

2

The law now stands as follows:

Scenario 1:

A retailer goes into administration on

Boxing Day, the day after the 25 December

quarter day. The rent on its premises is

payable quarterly in advance, and the rent

for the 25 December quarter day has not

been paid. Its administrators are entitled

(subject to the Court lifting the statutory

stay to enable the landlord to take

possession) to retain the whole of its

premises to continue the company’s

business until the next quarter day without

having to pay a penny in rent as an

expense of the administration.

Scenario 2:

Another retailer goes into administration

on Christmas Eve, the day before the 25

December quarter day. The rent on its

premises is also payable quarterly in

advance. Its administrators wish to retain

part of its premises but only until the end

of the first week of January, to take

advantage of the post-Christmas sales

period. They will have to pay the full

quarter’s rent as an expense of the

administration to do so.

This summary of the position is based on

the decisions of HHJ Purle QC in Goldacre

(Offices) Ltd v Nortel Networks UK Ltd

[2010] Ch 455 and HHJ Pelling QC in Leisure

(Norwich) II Ltd v Luminar Lava Ignite Ltd

[2012] EWHC 951 (Ch) which are explored

below.

Unless and until the Court of Appeal

considers the issue of when rent is payable

as an administration expense, we are likely

to see retailers, manufacturers and other

companies with substantial rental

obligations timing their entry into

administration so that they can take

advantage of Scenario 1. Whether for that

reason, or by sheer coincidence, the

computer games retailer, The Game Group

plc, went into administration on 26 March

this year, the day after the 25 March

quarter day, it left a large number of

landlords in an unfortunate position – at

least in the short term.

When the Goldacre decision was handed

down, it was met with consternation by

many and was subjected to widespread

criticism. Nevertheless, it has been followed

by other first instance Judges, in Scotland

as well as in England and Wales, and it was

common ground in Luminar that Goldacre

was correctly decided, and the Judge

appeared to have been in no doubt about

it.

In Goldacre, the company in

administration was part of the Nortel

group of companies. The Nortel Group

provides hi-tech telecommunications

equipment and services to

telecommunications carriers and large

enterprise customers in Europe, the Middle

East and Africa, North America, the

Caribbean, Latin America and Asia Pacific.

On 14 January 2009, the company and 18

other Nortel Group companies were placed

into administration. Following their

appointment, the administrators set about

trying to achieve a sale of the company’s

ongoing business and assets and they

Rent as an administrationexpense: things go frombad to worseDaniel Bayfield revisits the decision in Goldacre in light of its recent application inLuminar.

needed to continue occupying part of a

site in Harlow to seek to achieve that

objective. The site was a large commercial

site comprising a number of single storey

and multi-storey buildings. The rent

payable under the company’s leases was in

excess of £6 million p.a.

The administrators caused the company

to reduce the floor area which it occupied

for the purpose of the administration so

that it was in occupation of only 13% of

the total floor area.

The landlord took no steps to lift the

statutory stay to seek to take possession

back of the premises. Instead, it made an

application for a direction that the

administrators were obliged to pay all

future rent falling due under the leases as

an expense of the administration under IR

2.67(1)(a) or (f).

HHJ Purle QC decided that the

administrators were liable to pay rent as an

administration expense where they made

use of or retained, for the benefit of the

administration, possession of the leasehold

premises. He held that future rental

payments, even if they did not fall within

IR 2.67(1)(a), were necessary disbursements

within the meaning of IR 2.67(1)(f) and

that any liability incurred while the lease

was being enjoyed or retained for the

benefit of the administration was payable

in full as an administration expense.

Further, he decided that the court had no

discretion to determine whether a claim

was an administration expense or not and

that, accordingly, the whole rent due under

3

MAY 2012

the terms of the leases would continue to

be payable as an administration expense

quarterly in advance so long as the

administrators retained or used any part of

the premises for the benefit of the

administration.

Unless the Supreme Court takes an

unexpected course in the Nortel/Lehman

pensions appeal in 2013, there is little

mileage in taking issue with a number of

the steps in the Judge’s analysis.

First, because the wording of IR 2.67 is

plainly based on IR 4.218, the liquidation

expense rule, it is right that the flexible

“administration expenses principle” (as to

which see In re Atlantic Computer Systems

plc [1992] Ch 505) which applied prior to

the coming into force of the Enterprise Act

2002 has no role to play in (now not so)

new style administrations. This was

established in Exeter City Council v

Bairstow [2007] 4 All ER 437 and seems to

be correct.

Secondly, the Lundy Granite principle,

which was carefully considered by the

House of Lords in Re Toshoku Finance UK

plc [2002] 1 WLR 671 in the context of

liquidation expenses, permits - on

equitable grounds - the concept of an

administration or liquidation expense to be

expanded to include liabilities incurred

before the administration or liquidation in

respect of property afterwards retained by

the administrator or liquidator for the

benefit of the insolvent estate. The

insolvent tenant’s liability in respect of

future rent arises out of an obligation

incurred prior to the administration or

liquidation and the landlord’s claim in

respect of it is provable. What renders it an

expense is the retention of the property by

the office-holder for the benefit of the

insolvent estate – usually to trade the

company’s business pending a sale. In the

circumstances, it is appropriate to treat the

rent liability as if it were an expense of the

winding up and to accord it the same

priority (see Re Toshoku at paragraph 27).

Accordingly, thirdly, where the office-

holder retains someone else’s property for

the benefit of the insolvent estate, the

Court has no discretion as to whether the

rent should be payable as an expense. It is

so payable.

The real question, and where it is

suggested that HHJ Purle QC went wrong,

is what part of the rent is payable as an

expense. He dealt with this critical question

rather briefly (at paragraph 20).

It had been established in Shackell & Co v

Chorlton & Sons [1895] 1 Ch 378 that rent

was only payable as an expense for the

period in which the company in liquidation

was in beneficial occupation and it was to

be apportioned accordingly. In that case,

under an agreement in 1892, the landlord

had let a shop to a limited company for

three years at a yearly rent payable

quarterly, two quarters’ rent to be payable

in advance if required. On 20 December

1894, the company went into voluntary

liquidation but the liquidator continued to

occupy the shop for the purposes of the

winding-up. The quarter's rent due on the

25 December not being paid, the landlord,

on 28 December, demanded payment of

that quarter’s rent and also the next two

quarters' rent in advance, and, on payment

being refused, proceeded to distrain.

Kekewich J held that the rent for the

December quarter must be apportioned

and that the landlord only had the right to

prove in the winding-up for the rent

accruing up to 20 December, when the

winding-up commenced. However he was

entitled to be paid in full, as a liquidation

expense, for the rest of the December

quarter, and also for so much of the next

two quarters as the liquidator should

continue in beneficial occupation. For the

balance of rent for those two quarters the

landlord could only prove in the winding-

up.

Shackellwas followed in Re ABC Coupler

& Engineering Co. Ltd (No. 3) [1970] 1 WLR

702 (which was referred to with apparent

approval by Lord Hoffmann in Re Toshoku

at paragraph 28 in the context of his

consideration of the Lundy Granite

principle) and by Ferris J in Re Atlantic

Computer Systems plc [1990] BCLC 729.

Nevertheless, HHJ Purle QC rejected that

line of authority with reference to the

DANIEL BAYFIELD

4

Apportionment Act 1870. At paragraph 20

he held that: “…as the rent falling due on

the next quarter day is a payment in

advance, it is not subject to the

Apportionment Act 1870 (see Ellis v.

Rowbotham [1900] 1QB 740) from which it

follows… that the quarter's rent becomes

payable in full from that date as one of the

costs and expenses of the administration

and would not fall to be apportioned

should the administrators vacate the

premises during that quarter.”

With respect, the analysis is flawed. The

Apportionment Act is not relevant to the

question of what rent is payable as an

expense under the Lundy Granite principle.

The Lundy Granite principle is an equitable

principle. On grounds of fairness, it

requires something which would otherwise

be merely provable to be treated as if it

were an expense and to be paid as such.

HHJ Purle’s reliance on Re Levi & Co Ltd

[1919] 1 Ch 416, a dilapidations case which

he preferred to Shackell, was also

misplaced. That case involved voluntary

liquidators retaining leased premises until

the expiry of the lease and making a profit

by collecting rent from underlessees which

was in excess of the rent payable by the

company. The full amount of the rent

payable by the company was paid as an

expense but, on the expiry of the lease, the

landlord additionally sought payment as an

expense of the amount due from the

company for breaching its covenant to

deliver up the premises in good repair at

the end of the term of the lease. The court

ordered that sum to be paid as an expense

on the basis that would be highly

inequitable to allow it to enjoy the benefit

and disregard the covenants of the lease. It

was true that some of the disrepair

occurred during a period before the

liquidator took possession, but in

circumstances where the liability arose on

the delivery up of the premises at the end

of the term of the lease, the Court

considered (on the rather extreme facts)

that the full amount of the dilapidations

claim should be paid as an expense. It is

suggested that Re Levi & Co is reconcilable

with Shackell and is a further illustration of

the Lundy Granite principle being built on

equitable foundations. The Lundy Granite

principle does not focus on strict

contractual rights but on the inequity

which would result from a person only

having a provable claim where the estate

has had the beneficial use of his property.

More difficult to deal with is the dictum

of Lord Browne-Wilkinson in Powdrill v

Watson [1995] 2 AC 394 where he stated

that: “…on the salvage principle all

liabilities under a contract incurred after

the time of adoption of the contract by a

liquidator are entitled to priority”. The

House of Lords was considering the

adoption of contracts by administrators

within the meaning of section 19 of the

original Part 2 of 1986 Act, however, not

the use by them of another’s property. The

Lundy Granite principle is not based on the

adoption of a contract but on the

beneficial use of property and the two

concepts should not be blurred.

Returning to Luminar, in that case, it was

held that the administrators were under no

obligation to pay as an administration

expense rent which had already fallen due

for payment prior to the administration,

notwithstanding that the rent (being

payable in advance) was referable to the

period in which the company remained in

beneficial occupation of the premises in

administration.

The case proceeded on the basis that

Goldacrewas correctly decided and, on

that basis, the result is not surprising. It is

the logical extension of Goldacre.

At paragraph 17d, the Judge summarised

as one of the principles to be derived from

Lord Hoffmann’s speech in Re Toshoku the

principle that: “Exceptionally, a liquidator

or administrator who retains property by

refusing permission to forfeit for the

purpose of the liquidation or the

administration concerned will become

liable to pay rent which becomes payable

in priority to all other creditors as a

liquidation or administration expense.”

The Judge then limited that principle to

rent which fell due only after the

commencement of the administration such

that the administrators were not required

to pay, as an expense, any rent for the

period between the administration date

and the next quarter day.

All rent under a lease, whether overdue

or due in the future, arises by reason of an

obligation incurred prior to the

administration or liquidation and is, on

that basis, prima facie provable. It is only

payable as an expense where, applying

Lundy Granite, the company’s beneficial

occupation of the property in the

insolvency renders it inequitable that the

landlord should be limited to proving his

debt and receiving a dividend. If so, it is

hard to see why there should be any

difference in the treatment of rent which

had already fallen due and rent which had

not yet fallen due.

Accordingly, it is suggested that what

should be paid as an expense is the rent

referable to the period of beneficial

occupation, whether it had fallen due

prior to the appointment of the

administrators or not.

Such a conclusion would mean that the

disparity in outcome between the two

scenarios considered at the beginning of

this article would fall away and

administrators would pay for what they

use. It would also mean that administration

applications and filings would not be timed

with reference to quarter days but would

be timed to occur when it was clear that

the appointment of administrators was

necessary.

LANDLORDS HAVE BEEN LEFT WITH NUMEROUS VACANT PREMISES AS A RESULT OF THE ADMINISTRATIONS OF RETAILERS,MANUFACTURERS AND OTHERS.

5

MAY 2012

CASE DIGESTS Edited by HILARY STONEFROST

BANKING AND FINANCIAL SERVICES Digested by CHARLOTTE COOKE

HILARY STONEFROST

As usual, in this issue of the Digestthere are cases on many areas includ-ing commercial, company and corpo-rate insolvency. But perhaps thehighlight on this occasion (see theBanking and Financial Services sec-tion) is an important judgment on theinterpretation and effect of the ISDAMaster Agreement which was handeddown by the Court of Appeal on 3April 2012. Ten members of South Square(William Trower QC, Mark Phillips QC,Robin Dicker QC, Antony Zacaroli QC,Felicity Toube QC, Jeremy Goldring,Daniel Bayfield, Richard Fisher,Stephen Robins and Joanna Perkins)were involved in the combined appealfrom four first instance decisions inthe Commercial Court and the

Chancery Division where, betweenthem, they represented six differentparties, including ISDA itself which in-tervened in the appeals. The judgment has great significance

for out of the money parties, whosecounterparty is subject to an Event ofDefault, as it concludes that they re-main potentially liable if the Event ofDefault is cured even after the matu-rity of the transaction. The judgmentwill be of significant importance inter-nationally, given the extensive usemade of the ISDA Master Agreementin a great number of markets and thebillions of dollars traded in reliance onit each year. The case underlinesChambers’ expertise in the bankingand financial sector beyond its core in-solvency expertise.

WILLIAM TROWER QC

FELICITY TOUBE QC MARK PHILLIPS QC ANTONY ZACAROLI QC

ROBIN DICKER QC

T was the trustee of 25 issues of bonds

issued by a special purpose vehicle (L)

incorporated in Luxembourg. The bonds

were held by the Financial Services

Compensation Scheme and an English

building society. The business model

underpinning the bonds did not work, and

provisional administrators had been

appointed by the Luxembourg court to

investigate whether there could be an

effective restructuring to overcome cash-

flow problems. As L's authority to operate

as a regulated securitisation undertaking

was withdrawn, L faced the possibility of

imminent judicial liquidation. If that were

to go ahead, bondholders could expect a

return within the range of 8 per cent to 28

per cent. In order to avoid that

consequence, T, under the terms of a draft

protocol agreed with the Luxembourg

liquidators, sought a controlled liquidation,

which would offer a substantially

enhanced return of around 43 per cent.

However, there was no express power

which allowed T to enter into the draft

protocol.

The question for the court was whether

the proposed amendment to confer power

on T to enter into the draft protocol, and

to adjust the provisions dealing with T's

application of monies received from L to

provide for the payment of liquidation

Re SMP Trustees Ltd [2012] EWHC 772 (Ch) (Norris J), 27 March

2012

expenses and for the repayment of any

facility made available to fund the

operation of L in liquidation, fell within T's

power to amend under cl.13.1. It was held

that the trustee had authority under the

terms of a trust deed to modify the deed

where the modification was not materially

prejudicial to the interest of bondholders.

The court affirmed that the trustee had

authority to enter into a draft protocol

with the Luxembourg liquidator effective

in England and Wales, where the proposed

controlled liquidation allowed for a

significantly increased return over that

which would be achieved under a judicial

liquidation

CHARLOTTE COOKE

6

CASE DIGESTS

In four conjoined appeals, the Court of

Appeal was required to determine

questions of construction in relation to

derivatives in the form of interest-rate

swaps and forward-freight agreements

which were subject to the ISDA 1992

Master Agreement ("the Master

Agreement"). The Court held, amongst

other things as follows:

(1) Section 2(a)(iii) of the Master

Agreement does not extinguish the

obligation of the non-defaulting party

to make payment or delivery under

Section 2(a)(i), but merely suspends its

coming into existence until the Event of

Default is cured.

(2) A term should not be implied to the

effect that the suspension imposed by

non-fulfilment of the condition

precedent in Section 2(a)(iii) lasted only

for a reasonable time (i.e. a time

sufficient to enable the non-defaulting

party to elect whether to exercise its

rights under Section 6 in relation to Early

Termination) or, alternatively, until such

time as the transaction or all

transactions between the parties

governed by the Master Agreement had

run their course.

(3) Gloster J. had been correct to hold in

Pioneer Freight Futures Co Ltd (In

Liquidation) v TMT Asia Ltd [2011] 2

Lloyd's Rep. 565 that for the purposes

of determining what was due and

payable on any particular settlement

date, Section 2(c) of the Master

Agreement imposed an automatic

netting process which set off the

aggregate or gross amounts that were

due from each party to the other in

respect of settlement sums payable in

the same currency on the same date in

respect of all transactions across the

board, without regard to whether one

or other party had complied with the

conditions precedent specified in

section 2(a)(iii).

(4) It could not said that the suspensory

effect of Section 2(a)(iii) engaged the

anti-deprivation principle. Neither did

Lomas & Ors v JFB Frith Rixson Inc & Ors; Lehman Brothers

Special Financing Inc v Carlton Communications; Pioneer Freight

Futures Co Ltd (in liquidation) v Cosco Bulk Carrier Co Ltd;

Britannia Bulk Plc (in liquidations) v Bulk Tracing SA [2012] EWCA

Civ 419, Court of Appeal Civil Division (Longmore, Patten,

Tomlinson LJJ), 3 April 2012

that Section 2(a)(iii) offended the pari

passu principle of distribution in

insolvency.

(5) Obligations which had arisen or

would but for Section 2(a)(iii) have

arisen under individual transactions

whose natural term had expired before

the occurrence of automatic early

termination affecting the single

agreement as a whole were subject to

"close-out netting" under the Master

Agreement.

(6) Where “Second Method” and

“Loss” applied a non-defaulting party

was obliged to calculate its Loss by

reference to sums which would have

become due to the defaulting party if

the defaulting party had not remained

subject to an Event of Default after

Automatic Early Termination.

[William Trower QC; Mark Phillips QC;

Robin Dicker QC; Antony Zacaroli QC;

Felicity Toube QC; Jeremy Goldring;

Daniel Bayfield; Richard Fisher; Stephen

Robins; Joanna Perkins]

JEREMY GOLDRINGRICHARD FISHER

The appellant bank (W) appealed to the

Court of Appeal against a decision that

the value of a fund, comprising a

portfolio of stocks and shares, at 30

September 2008 was nil.

The stocks and shares in the fund were

mainly those of private overseas

companies, not quoted or traded on

any established market. The stocks and

shares were themselves represented by

share units in the fund itself. The first

respondent (B) issued variable

redemption notes which represented

the fund. The second respondent (N)

was the calculation agent for the notes.

W was the holder of the notes at

maturity and B intended to deliver the

underlying shares to it. B missed the

date for such delivery and so had to pay

W an amount which represented the

value of the shares. B's notice to deliver

the shares indicated that it would

deliver a number of shares equating to

a redemption amount of over $22

million. W relied on that as a binding

valuation of the shares in the fund.

Alternatively W contended that a

rational valuation exercise at the

relevant time would have produced a

similar valuation. The judge found that

the fund would have been valued at 30

September 2008 at nil, or less than the

Westlb AG v (1) Nomura Bank International Plc; (2) Nomura

International Plc [2012] EWCA Civ 49 (Rix, Etherton, Patten LJJ),

24 April 2012

funding fee of $1.7 million due to the

respondents.

W submitted that (i) the valuation in B's

physical delivery notice was a

determination which B was entitled and

bound to make in the absence of a

valuation by N; (ii) the judge had erred

in law in refusing to find some

discounted figure for the value of the

fund assets. The Court of Appeal held

that the judge had been entitled to find

that a rational determination of the

value of shares in a fund at or as at 30

September, 2008 would not have

produced more than a nominal hope

value.

7

MAY 2012

CIVIL PROCEDURE Digested by WILLIAM WILLSON

WILLIAM WILLSON

In March 2011 a District Judge had

ordered that the Claimants’ solicitors

take all necessary steps to complete and

finalise the sale of certain shares which

formed the subject matter of a charging

order in favour of the Claimants as part

of the enforcement of a judgment. The

order had also discharged a third party

debt order in relation to the right of the

defendant to draw down 25% of a

pension. On appeal, disapproving Field v

Field [2003] 1 FLR 376, applying Tasarruf

Mevduati Sigorta Fonu v Merrill Lynch

Bank and Trust Co (Cayman) Ltd [2011]

Blight & Ors v Brewster [2012] EWHC 165 (Ch) (G Moss QC sitting

as a Deputy High Court Judge), 9 February 2012

All ER (D) 163 (Jun) and considering

Masri v Consolidated Contractors

International SAL [2008] All ER (D) 69

(Apr), the Court reversed the orders

made by the District Judge so as to

allow the judgment to be properly

enforced.

GABRIEL MOSS QC

The applicant company (“A”) applied

for a costs order on the dismissal of a

petition presented by the respondent

petitioner (“P”), together with the costs

of an application to restrain

advertisement and to strike out. P had

presented a petition on the basis of a

relatively small undisputed debt. That

debt was paid two days after the

presentation of the petition, but before

an application by A to restrain

advertisement and to strike out. The

petition was subsequently dismissed as

the remaining debt under the petition

had given rise to a bone fide substantial

dispute. Held, that there was

considerable merit in sticking to the

principle that save in exceptional

circumstances, a petitioner whose

petition failed on the basis that the

debt was genuinely disputed on

substantial grounds should pay the costs

of that failure. However, in determining

whether there were exceptional

circumstances to justify departure from

the general rule, the court was entitled

to take into account the parties’

communications prior to the

presentation of the petition (Re

Fernforest Ltd [1991] BCC 680

considered). The fact that A had not

given any meaningful account of its

Sykes & Son v Teamforce Labour Ltd [2012] EWHC 1005 (Civ) ChD

(Richard Snowden QC), 18 April 2012

defence prior to the presentation of the

petition, and belatedly produced

documents which could, if authentic,

support its case, amounted to

exceptional circumstances to justify

departure from the general rule. The

most appropriate course was to adjourn

the question of costs until the outcome

of other proceedings in which disclosure

and cross-examination could take place,

and the authenticity of the valuations

could be addressed. A was ordered to

pay P's costs up until the date A paid

the undisputed debt, with the costs of

the application and of the petition after

that date adjourned.

The court determined the costs of a

dismissed administration application by

the applicant (“A”) in relation to the

respondent company (“R”). A had been

a shareholder and company director

with another party (“X”) of a restaurants

business that became insolvent. Two

days before the hearing, X, as guarantor

of the bank’s debt, took an assignment

of the charge and appointed

administrators (so that A could not

pursue his own application). A then

applied to be paid his costs of the

application as an expense of the

administration. A submitted that the

ambit of paragraph 13(1)(f), Schedule B1

of IA86 was wide enough to give the

court jurisdiction to make the order

sought, that anomalies would arise if he

was not found to be entitled to his costs

and that the application was in the

interests of R's creditors as a whole.

Held, that the wording of paragraph

13(1)(f) was indeed wide and that,

despite rule 2.67 of IR86 being a

complete code, there remained an

avenue whereby other items could be

considered “as if” they were expenses,

Rohl v Bickland Limted (in administration) [2012] EWHC 706 (Ch)

ChD (Mann J), 22 March 2012

Re Toshoku Finance UK PLC [2002] UKHL

6 applied. Although the fruits of the

discretion under paragraph 13(1)(f)

could not be an expense of the

administration, they could be payable

“as if” they were. Without X’s

appointment, it was likely that A's

application would have succeeded and

he would have had his costs as an

expense of the administration. It was

difficult to avoid the conclusion that the

creditors were not materially better off

under the administration than under A’s

proposed pre-pack.

8

CASE DIGESTS

COMMERCIAL CASES Digested by ADAM AL-ATTAR

The claimant alleged that an aircraft did

not correspond with description, was not

of satisfactory quality and was unfit for

purpose within the meaning of ss 13 and

14 of the Sale of Goods Act 1979 as

amended. The defendant relied on the

terms of the agreement (“the APA”) as

excluding such liability under statute

and replacing it with warranties set out

in the APA, and denied it had breached

any of the latter. The claimant

contended that the relevant parts of the

APA were in breach of the Unfair

Contract Terms Act 1977.

The Judge held the clause at issue could

only be read as saying that the

defendant's obligations were to be found

exclusively in the APA and its appendix. It

made clear that resort was not to be had

to any other obligation or liability of any

kind which arose in law. The instant case

was one in which the words used did

encompass contractual conditions implied

by law.In so holding, the Judge reviewed

the earlier authorities which established

that liability could not be excluded for a

Air Transworld Ltd v Bombardier Inc [2012] EWHC 243 (Comm),

Cooke J, 20 February 2012

breach of a condition implied by the 1979

Act by exclusions which referred merely to

'warranty' or 'guarantee', even if those

words were cross-referenced to statutes or

rules of law, which would otherwise give

rise to an implication of such terms. Those

authorities required any term excluding a

condition implied by the 1979 Act to be in

'apt and precise words', if it was to be

effective, for the clause 'expressly or by

necessary inference' to negative such a

condition and for sufficiently clear words

to be used to achieve that result.

ADAM AL-ATTAR

Clause 5.1 of the heads of terms for the

reverse take-over provided as follows:

“Subject to any rights either party may

have for breach of paras 2 or 3 above and

paragraph 5.2 below, Worldlink shall bear

all ParOS' costs and its advisers' agreed

fees and costs on a schedule to be agreed

between the Parties. For the period

between signing this Agreement and the

re-registering of Worldlink as a Private

company, if discussions and negotiations

end due to Worldlink refusing for any

reason to proceed with the Acquisition, a

Break Fee shall be payable to ParOS of

£12,500 for each week elapsed since

signing this Agreement with a cap of

£150,000. After Worldlink is re-registered

as a Private company Worldlink will pay

ParOS’s agreed fees and costs incurred in

connection with the Acquisition monthly.

The questions were whether cl 5.1

constituted financial assistance contrary

to s 151 of the Companies Act 1985 in

whole, or at least insofar as it provided

for payment of a break fee; and, if so,

what were the consequences?”

The Judge held that the break fee did

amount to the giving of unlawful

financial assistance. ParOS was proposing

to buy the issued shares in Worldlink.

The break fee was only payable in the

event that the acquisition fell through

and the fee of £12,500 per week was

clearly based on a broad estimate of the

ParOS plc v Worldlink Group plc [2012] EWHC 394 (Comm),

Jonathan Hirst QC (sitting as a deputy judge of the High Court),

1 March 2012

costs likely to be incurred by ParOS in

connection with the acquisition. It was

plainly intended to ensure that, if

Worldlink withdrew from the

negotiations before it was re-registered

as a private company, ParOS was certain

to recover a minimum contribution

towards its expenses. As such the fee

was “smoothing the path to the

acquisition of the shares” because it

enabled ParOS to incur up to £150,000

of expenditure in progressing the

proposed acquisition secure that it

would be reimbursed to that extent if

the transaction failed. The break fee

was not a mere inducement to enter

into the transaction.

The claimant companies and the

defendant company were parties to

arrangements first made in 1998 about

the financing of train vehicles. The

parties’ agreement provided that if no

arrangement to extend the leasing of

the vehicles was put in place with the

Strategic Rail Authority by 30 March

2004 then the parties and a third party

would establish a joint venture. If a joint

venture could not be established, the

parties agreed to negotiate in good

faith to achieve such objectives through

other means. Any dispute relating to the

Lombard North Central plc v GATX Corporation [2012] All ER (D)

130, Andrew Smith J, 25 April 2012

creation of the joint venture that could

not be resolved by the good faith

efforts of the parties would be referred

to and finally resolved by arbitration in

London.

No arrangement with the Strategic Rail

Authority was put in place and no joint

9

MAY 2012

venture was established by 30 June

2011. The claimants commenced

proceedings pursuant to CPR Pt 8 for a

declaration, amongst other things, that

they were not subject to any legally

enforceable obligation for want of legal

content. The defendant applied for a

stay of the proceedings under s 9 of the

Arbitration Act 1996.

The Judge held that the proceedings

were not within s 9(1) of the Act on the

sole basis that the proceedings had

raised a dispute between the parties

about the scope of the arbitration

agreement. The fact that as a result of

proceedings a dispute about a referred

matter had emerged between the

parties did not necessarily mean that the

court would be asked to determine it in

the proceedings. That was no less so

where the referred matters included

disputes about the scope of the

arbitration clause, and so disputes about

the arbitrators' jurisdiction.

However, the question whether the

agreement to negotiate was

enforceable would involve consideration

of whether the arbitration agreement

covered the subject matter of the

contemplated negations. Therefore,

unless it was stayed, the claim for the

first declaration would draw a referred

matter into the legal proceedings.

Accordingly, the defendant was entitled

to a stay of the proceedings to that

extent.

COMPANY LAW Digested by STEPHEN ROBINS

The Court considered an application to

convene scheme meetings of the

financial creditors of a company with its

COMI in Germany to consider and, if

thought fit, approve a scheme of

arrangement.

A group of creditors who held a blocking

stake sought an adjournment of the

hearing on the grounds that: (i) there was

no point to be served by convening the

scheme meetings as they did not support

the proposed scheme; (ii) there had been

insufficient notice of the hearing; and (iii)

they wanted further time so as to enable

a new deal to be negotiated between the

company and the scheme creditors. The

Judge refused the request for an

adjournment as the evidence established

that the company would be forced to

commence an insolvency proceeding in

Germany if such an adjournment were to

be granted by the Court.

As regards the power of modification, the

Judge noted at least three boundaries to

such power: (i) the Court would be

anxious to ensure that the scheme was

not so different from the scheme which

was before the scheme creditors at the

class meetings that their votes would

really not be on that scheme at all; (ii) the

Re PrimaCom Holding GmbH [2011] EWHC 3746 (Ch) (Hildyard J),

20 December 2011

Court would be against modification if it

would alter the class compositions; and

(iii) the Court would be against

modification if, thereby, the explanatory

statement would be falsified or proven

irrelevant.

As regards classes, the Judge found that (i)

cross-holdings did not give rise to a class

issue; (ii) the different interest rates and

maturity dates did not, on the facts, give

rise to a class issue; and (iii) the entry into

a lock-up agreement with a relatively

small consent fee did not, on the facts,

give rise to a class issue.

[Adam Goodison; David Allison]

STEPHEN ROBINS

The Court considered an application to

sanction a scheme of arrangement in

respect of a company registered in

Germany with its COMI in Germany.

None of the scheme creditors were

located in the United Kingdom. This

meant that the Judge had to consider the

conundrum identified in Rodenstock

GmbH [2011] EWHC 1104 Ch as to

whether the Court would have jurisdiction

under the Judgments Regulation to

sanction a scheme in such circumstances.

The Judge found that the Court did have

jurisdiction to sanction the scheme under

the Judgments Regulation on three

alternative grounds: (i) Chapter 2 (in

particular Article 2) of the Judgments

Regulation has no application in the

context of a scheme as no one is being

sued; (ii) the English jurisdiction clauses in

Re PrimaCom Holding GmbH [2012] EWHC 164 (Ch) (Hildyard J),

20 January 2012

the finance agreements conferred

jurisdiction on the Court under Article 23

of the Judgments Regulations; or (iii) the

participation of at least a majority of the

scheme creditors at the convening hearing

meant that the scheme creditors had

submitted to the jurisdiction, thereby

conferring jurisdiction on the Court under

Article 24 of the Judgments Regulation.

[David Allison]

DAVID ALLISON

10

CASE DIGESTS

S held 68.8 per cent of the shares in a

company (C) and was the chairman. B

held 31.2 per cent and was the

managing director. S had expressed

dissatisfaction about the way B was

running the company and indicated

that he intended to use his powers as

majority shareholder to appoint

another person as chief executive

officer. B claimed that S had been

involved in the diversion of funds to

himself by a cheque fraud and that S

had used his company credit card for

the payment of expenses to which he

was not entitled. B purported to

suspend S as chairman and excluded

him from the company premises. There

was no board authority for the

suspension. S denied wrongdoing and

requisitioned a meeting to consider

resolutions for the removal of B as a

director. However, B indicated that he

would not attend such a meeting which

would therefore be inquorate. S

applied to the court for a declaration

that B's action in suspending him was

outside his powers as managing

director and for an order under the

Companies Act 2006 s.303 convening a

meeting of the company at which one

member, namely S, would be a quorum

to consider a resolution to remove B.

The judge granted S's applications and

ordered B to indemnify the company for

its costs of opposing the applications. B

appealed. The appeal was dismissed.

The Court of Appeal held that there was

no express delegation of powers by the

board to B, who merely had a contract

of employment appointing him as

managing director. The implied

delegation of powers to B did not have

the effect of excluding the powers of

the board. In the circumstances B's

appointment did not supplant the role

of the board and B had to operate

within the strategy set by the board.

That strategy was that S should be

executive chairman. Therefore his

suspension was a matter for the board

and not for B acting alone. B had no

implied authority as managing director

to suspend S from his role as executive

chairman of the company. Mitchell &

Hobbs (UK) Ltd v Mill [1996] 2 B.C.L.C.

102 and Fusion Interactive

Communication Solutions Ltd v Venture

Investment Placement Ltd (No.2) [2005]

EWHC 736 (Ch), [2006] B.C.C. 187

considered.

Smith v Butler [2012] EWCA Civ 314, Court of Appeal (Arden LJ,

Rimer LJ, Ryder J) 15 March 2012

C and N each owned one share in a

company. They fell out and it was

ordered that C should buy N's share at a

fair value. The parties were unable to

agree the value of the share and a trial

took place to determine that. The judge

held that (i) the share was to be valued

on the basis of its value to the co-owner

of the company, (ii) the share was worth

one half of the value of the company;

(iii) the company should be valued at a

figure equal to the product of an

appropriate P/E multiplier and its annual

sustainable earnings. The main issue

between the parties was over the level

of the company's maintainable earnings

and whether the company should be

treated as having to pay interest on a

debt which it owed to its principal

supplier (Z). The judge held that there

was no evidence that the company was

obliged to pay interest on the amounts

Crabtree v Ng [2012] EWCA Civ 333, Court of Appeal (Lord

Neuberger, Hallett LJ, Stanley Burnton LJ), 21 March 2012

due to Z and therefore the maintainable

earnings figure would not be reduced. C

appealed. The appeal was dismissed. The

Court of Appeal held: (1) There was no

evidence that the company was obliged

to pay interest on the debt which it

owed to its principal supplier. (2)

Therefore the judge had been entitled

to conclude that the company's

maintainable earnings did not have to

be reduced to take account of interest.

S and G were shareholders and directors

of a company, C. S attacked G with a

hammer. S was arrested and charged

with GBH, but acquitted. G presented

an unfair prejudice petition, seeking a

buy-out order. S responded by

contending that it was in fact G who

had attacked him with a hammer. S also

complained that G had wrongly

prevented C from paying S’s salary. The

Judge held that: (1) G’s contentions

were correct: it was S who had attacked

G with a hammer, not the other way

around. (2) An employee could not

recover his salary if he had failed to do

the work for which he was employed,

and in any event S’s actions constituted

a repudiatory breach of his contractual

Re Home & Office Fire Extinguishers Ltd; Rodliffe v Rodliffe

[2012] EWHC 917 (Ch) (Companies Court), (Mr N Strauss QC

sitting as a deputy judge of the High Court) 4 April 2012

duty to act faithfully in C’s interests: it

was an attack carried out on C’s

premises on a fellow director and

employee, with whom he had to work

closely if he was to carry out his duties.

G had authority, on C’s behalf, to accept

the repudiation and terminate S’s

contract. (3) S’s conduct related to C’s

affairs and breached the implied

11

MAY 2012

understanding that he and G would act

properly and in good faith towards

each other, and it was also a single

event which made it impossible for

them to continue their association as

directors and shareholders; O'Neill v

Phillips [1999] 1 WLR 1092 considered. In

the circumstances it was appropriate for

S to be ordered to sell his shares to G.

A Manx bank advanced a loan to the

first defendant company, which was a

wholly-owned nominee of the Second

Defendant, Miss Macpherson. The

purpose of the loan was to allow the

nominee company to purchase a

property for Miss Macpherson, the

property to be held by the company as

nominee and bare trustee for Miss

Macpherson. The loan was secured by,

inter alia, the guarantee of Miss

Macpherson, and her liability under the

guarantee was further secured over US$

deposits made by her with the bank.

On a winding-up order being made

against the bank, Miss Macpherson and

the nominee company claimed that the

debt due from the bank to Miss

Macpherson in respect of the US$

deposits had been set off against the

loan due from the nominee company,

incurred as bare trustee for Miss

Macpherson, under the Manx

equivalent of rule 4.90 of the Insolvency

Rules 1986. At first instance, the

Deemster found that the sums had

been set off. Allowing the bank’s

appeal, the Staff of Government

Division held that Miss Macpherson’s

liability under the guarantee was

purely contingent, the bank having

made no demand under it. In so far as

the nominee company had incurred the

liability on the loan as bare trustee, the

nominee company alone was liable to

repay that liability and hence there was

(1) Simpson and Spratt; (2) Kaupthing Singer & Friedlander (Isle

of Man) Ltd v (1) Light House Living Limited; (2) Elle Macpherson

(High Court of Justice, Isle of Man, Staff of Government

Division), 31 October 2011

no mutuality between the debt owed

by the nominee company to the bank

and the debt owed by the bank to Miss

Macpherson (Ingram v IRC [2000] 1 AC

293 (HL); Re BCCI (No 8) [1998] AC 214

(HL) applied; ex parte Morier (1879) 12

ChD 491 (CA) dist.). Further, on an

objective interpretation of the parties’

dealings there was no basis for

concluding that Miss Macpherson had

constituted the company as her agent

for the purpose of lending the money,

and if there were, no basis for

concluding that any such authority had

been exercised (Trident Holdings Ltd v

Danand Investments (1988) 49 DLR

(4th) 1 (Ontario CA) dist.).

[Lloyd Tamlyn]

CORPORATE INSOLVENCY Digested by MARCUS HAYWOOD

MARCUS HAYWOOD

The rule in Said v Butt whereby an agent

is not liable for the tort of inducing a

breach of contract by his principal applies

to administrators who induce a breach of

contract by the company in respect of

which they are appointed. The same rule

will apply where a claim for unlawful

means conspiracy to induce a breach of

contract is made against the

administrators and the company: O’Brien

v Dawson (1942) 66 CLR 18 (High Court of

Australia) followed. There is considerable

force in the contention that a third party

who purchases an asset from a company

Lictor Anstalt v Mir Steel UK Limited [2012] 1 All ER 592 Chancery

Division (David Richards J), 13 December 2011

in administration, which asset is subject

to contractual restrictions, thereby

inducing a breach of contract by the

company, has a defence to any claim

against him for the tort of inducing

breach on the ground of justification.

[Lloyd Tamlyn]

LLOYD TAMLYN

Once a foreign officeholder has been

recognised in England under the

common law, the English courts have

the power under general common law

principles to authorise the same foreign

officeholder to use, in particular, section

423 of the Insolvency Act 1986, against

individuals resident and located in

England.

The principal basis for this is that the

English court has the power to assist a

foreign officeholder by doing whatever

Re Phoenix Kapitaldeinst GmbH sub nom Frank Schmitt v

Dichmann & others [2012] EWHC 62 (Ch) Chancery Division

(Proudman J), 23 January 2012

the English court could have done in a

case of a domestic insolvency and that

section 423 is part of the collective

enforcement regime relating to

insolvency proceedings.

[David Marks QC]

DAVID MARKS QC

12

CASE DIGESTS

This case concerned the interpretation of

paragraphs 83(4) and 83(6) of Schedule

B1 of the Insolvency Act 1986. These

provisions deal with the consequences of

an administrator sending a Form 2.34B

(Notice of Move from Administration to

Creditors Voluntary Liquidation) to the

Registrar of Companies. Briggs J held

Re Globespan Airways Limited [2012] EWHC 359 (Ch) Chancery

Division, Briggs J, 24 February 2012

1986 take effect from the date of

receipt. A notice has been issued by the

Registrar of Companies setting out his

approach to the registration of Forms

2.34B in the light of this decision. This

copy of this notice is available on the

Companies House website.

[Adam Goodison]

that although there may be a time delay

between the Registrar of Companies

receiving a Form 2.34B and his

processing and placing it on the Register,

the date of registration should be given

as the date of receipt, so that the legal

consequences set out at paragraph 83(6)

of Schedule B1 of the Insolvency Act

ADAM GOODISON

The liquidators of Snelling House Limited

sought relief for the misapplication of

the company’s monies. In the case of

dividends paid out, the Court held that,

since the first respondent as sole director

of the company had to be taken to have

known of the lack of distributable profits

and since no attempt had been made to

comply with the statutory requirements

designed to protect creditors, the first

respondent had to be taken as knowing

of the contraventions and that the

payments were misfeasances: Re

Kingston Cotton Mill [1896] 1 Ch 331. In

addition the court held that the sums

were repayable under Section 277 of the

Companies Act 1985: It’s aWrap Ltd v

Gula [2006] 2 BCLC 634 (CA). As regards

other payments, the Court held that

where directors of a company cause that

company to dispose of assets e.g. by

paying out sums of cash, the onus was on

them as trustees of the company’s assets

to justify those payments: GHLM Trading

Ltd v Maroo & Ors [2012] EWHC 61,

Burke v Morrison [2011] BPIR 957, Re

Mumtaz Properties Ltd [2011] EWCA Civ

610, Gilman & Soame Ltd v Young [2007]

Re Snelling House Limited [2012] EWHC 440 (Ch) (G Moss QC

sitting as a Deputy High Court Judge), 6 March 2012

EWHC 1245 (Ch), Sinclair Investments

(UK) Limited v Versailles Trade Finance

Ltd [2011] 3 WLR 1153 and that this was

particularly so where directors caused

payments to be made to themselves or

family members or otherwise for their

benefit. The Court also held that a

further payment was an unlawful return

of capital. The Judge concluded by saying

that this case showed how easy it was for

a de facto director who was a convicted

criminal to fob off a pressing creditor

and loot his company of money needed

to pay creditors.

In considering an application against the

joint liquidators for disclosure of

documents, the Court held that the right

of a creditor or contributory in a

voluntary winding up to inspect a proof

of debt under rule 4.79 of the Insolvency

Rules 1986 does not extend to the

documents submitted to substantiate what

is claimed in the proof of debt. This was

because (i) the Rules distinguish between

the proof and the documents

substantiating or supporting it; and (ii) a

creditor who provides documentation to

substantiate his proof will often do so in

MG Rover Dealer Properties Limited and another v Hunt and

Lomas (Joint Liquidators of MG Rover Group Limited) Chancery

Division (Chief Registrar Baister), 12 March 2012

the expectation of confidentiality and the

use of the documents for the limited

purpose of deciding whether or not to

admit or reject the proof. The Court also

rejected the application for disclosure

made under ss.112 and 155 of the

Insolvency Act 1986. [Ben Valentin]

BEN VALENTIN

13

MAY 2012

Landlords of premises occupied by

tenants in administration applied to the

Court for directions requiring the

tenants’ administrators to pay in full, as

expenses of the tenants’

administrations, rents which had fallen

due prior to the appointment of the

administrators. The rents under the

leases were payable quarterly in

advance.

Therefore, although the rents had fallen

due prior to the appointment of the

administrators, the period to which

those rents related included a period of

approximately 2 months in which the

properties had been occupied by the

administrators for the purpose of the

administration. Rejecting the landlords’

arguments, HHJ Pelling QC held: (1)

Where rent is payable in advance and

falls due for payment prior to the

commencement of the liquidation or

administration, then it is provable but

not payable as a liquidation or

administration expense even though

the liquidator or administrator retains

the property for the purposes of the

liquidation or administration for the

whole or part of the period for which

the payment in advance was payable; (2)

Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd [2012] EWHC

951 (Ch) Chancery Division (HHJ Pelling QC), 28 March 2012

Where rent payable in advance becomes

due during a period when the

liquidator or administrator is retaining

the property for the purposes of the

liquidation or administration, then the

whole sum is payable as a liquidation

or administration expense even though

the liquidator or administrator gives

permission to forfeit or vacates before

expiry of the period for which the

payment in advance is due. Re Oak Pits

Colliery Co [1882] 21 Ch D 322 and

Goldacre (Offices) Ltd v Nortel Networks

UK Ltd [2010] Ch 455 applied.

[Antony Zacaroli QC; Stephen Robins]

The Court had sanctioned a scheme of

arrangement between the Company and

creditors, which had not been fully

implemented. The Administrators’

Proposals had stated that if a scheme or

arrangement was sanctioned by the

Court, the administration would be

brought to an end either (a) when the

scheme of arrangement was brought to

an end, or (b) by notice to the Registrar of

Companies on completion of the

administration under paragraph 80

(termination where objective achieved) or

paragraph 84 (moving from

administration to dissolution) of Schedule

B1 of the Insolvency Act 1986. The

Company was insolvent and could not

therefore be returned to its directors,

and held assets for distribution in the

scheme and could not therefore be

dissolved. The Administrators therefore

wished the Company to exit

administration through a CVL. The

Proposals did not clearly contemplate this

exit route, nor did they include the details

of the proposed liquidators and other

information required by rule 2.33(2C) of

the Insolvency Rules 1986. The

Administrators notified creditors of their

intention to move the Company into CVL

Re Highlands Insurance Company Ltd (in administration)

Chancery Division (Arnold J), 3 April 2012

and of their proposed appointment as

liquidators. No creditors objected. The

Court granted the Administrators

permission to send a notice to the

Registrar of Companies that paragraph 83

of Schedule B1 applies, upon registration

of which their appointment would cease

to have effect and the Company would

be wound up as if a resolution for

winding up under section 84 of the

Insolvency Act 1986 were passed; and the

Court directed that the liquidators for the

purposes of the ensuing CVL would be

the Administrators.

[Barry Isaacs QC]

BARRY ISAACS QC

PERSONAL INSOLVENCY Digested by HENRY PHILLIPS

HENRYPHILLIPS

Mr Situl Devji Raithatha v Mr Michael Roy Williamson [2012]

EWHC 909 (Ch), (Bernard Liversey QC sitting as a deputy judge of

the Chancery Division), 4 April 2012 CHRISTOPHERBROUGHAM QC

The bankrupt’s trustee in bankruptcy

applied for an income payments order

(“IPO”) pursuant to section 310 of the

Insolvency Act 1986 in circumstances

where the bankrupt had an entitlement

to elect to draw his pension but had not,

at the time of the application, exercised it.

The Court had to determine whether, in

such circumstances, an IPO could be made.

The bankrupt, in his Bankruptcy

Questionnaire, disclosed various pension

policies and other pension entitlements

amounting to a fund estimated at that

time at between £900,000 and £990,000.

The rules of the pension scheme provided

that the minimum age at which the

pension could be taken was 55. At the

time of the application, the bankrupt was

14

CASE DIGESTS

59. Upon enquiries being made, the

trustee of the pension fund provided the

information that the bankrupt’s fund

might provide a tax free lump sum of

£248,708 plus an annuity in a range from

£23,000 to £43,000.

The bankrupt had not exercised his right

to elect to take a pension and argued that

he had no obligation to take it and ought

not be compelled to do so.

Section 310(7) of the Insolvency Act 1986

expressly provides that the income of a

bankrupt includes “any entitlement under

a pension scheme”. Where a bankrupt

has, prior to the bankruptcy order, given

notice to the pension fund of his election

to take up his rights under the pension

scheme, the operation of s.310 will

present no problem. On an application,

before making an IPO, the court will

evaluate what is fair and just between the

competing interests of the bankrupt and

his creditor and make an order which is

appropriate in the circumstances of the

case.

The Court held that, where the bankrupt

had not made an election prior to his

bankruptcy, the principle question was

whether such unelected entitlements

constituted a “payment in the nature of

income which is from time to time made

to him or to which he from time to time

become entitled” within the meaning of

section 310(7) Insolvency Act 1986. The

bankrupt argued inter alia that (1) one of

the bundle of rights conferred on him

under the pension was an option as to

whether to draw-down from the pension

and that option did not vest in the

Trustee; (2) “income” within the meaning

of section 310 referred to payments which

the bankrupt had actually received or at

least was entitled to receive during the

course of his bankruptcy and (3) that he

did not have any entitlement to receive a

payment until he has made his election.

The Trustee contended that the bankrupt

was properly to be regarded as having an

entitlement to payment under the

pension scheme when, according to the

rules of the scheme, he qualified to draw

payment and was entitled to receive it on

demand, that is by simply asking for

payment to be made to him.

The Court accepted that the bankrupt’s

bundle of contractual rights under his

pension included the right to make an

election and that such right remained

vested in the bankrupt but held that the

Court was not precluded on those

grounds alone from making an IPO. While

finding the submission that there was no

entitlement to payment, and therefore

no income, an initially attractive

argument, the Judge held that the issue

ultimately turned on whether the

intention of the legislature was to

preserve the technical difference so that a

person whose election had preceded his

bankruptcy would be brought into the s.

310 regime, whereas the person who

had not yet elected to take his pension,

would not. The judge held that such a

distinction “would provide an anomaly

which is difficult to justify” on the basis

that the distinction would discriminate

in favour of a class of bankrupts who

happened not to have made an election.

Accordingly, the court held that the

bankrupt did have an entitlement to

receive a payment under a pension

scheme where he had an option to elect

for the same.

[Christopher Brougham QC]

The Appellant bankrupt applied for an

extension of time and permission to

appeal against the dismissal of his

application for the annulment and

rescission of a bankruptcy order.

The Appellant was indebted to a

Building Society under a loan agreement

entered into in 1989 and which was

secured against a property that was

subsequently sold for only £121,000. In

March 1991, the Appellant had IVA

proposals approved. The Society

subsequently recovered £300,000 in

damages in an action against the

surveyors who had negligently valued

the property.

The Society presented a statutory

demand in December 2001. The

Appellant successfully applied to have

the statutory demand set aside on the

grounds that the debt was time-barred.

That order was subject to a successful

appeal as the Court of Appeal had

subsequently held (in Bristol & West Plc v

Bartlett [2002] EWCA Civ 1181) that,

while the limitation period in respect of

interest was 6 years, it was 12 years in

respect of capital.

On the hearing of the petition, in April

2003, the bankrupt argued that the debt

was still time-barred, that there were

various formal defects in the petition

and that the Society was bound by the

terms of the IVA. Each of these

arguments was considered and rejected.

In 2010 the Appellant applied to have

the bankruptcy order annulled, raising

substantially the same arguments as

Yehuda Gerson Crammer v West Bromwich Building Society

[2012] EWCA Civ 517 (Rimer and Patten LJJ), 25 April 2012

were deployed at the hearing of the

petition. The application was

unsuccessful and the Appellant was

refused permission to appeal on paper.

He then renewed the application to the

Court of Appeal orally.

The Court of Appeal reaffirmed the

principle that section 282(1)(a) IA 1986

enables the court to annul a bankruptcy

order on any grounds existing when the

order was made, but that this does not

extend to any points which were raised

in response to the statutory demand or

at the hearing of the petition and were

rejected. Only in exceptional

circumstances will the court allow such

points to be re-litigated on an

application under s.282(1): see Turner v

Royal Bank of Scotland [2000] BPIR 683.

15

MAY 2012

Unregulated CollectiveInvestment Schemes:establishing a case Joanna Perkins discusses the statutory definition of a collectiveinvestment scheme and the challenges facing claimants who mustshow that the unregulated arrangments in which they invested arepart of a scheme.

The statutory definition of a collective

investment scheme in section 235 of the

Financial Services and Markets Act 2000 is

notoriously and frustratingly vague.

Those lawyers who are regularly called

upon to penetrate its labyrinthine

intricacies well know that the definition

engenders feelings of bewilderment and

perplexity on the part of businesses and

investors alike. It may safely be supposed,

however, that the wide scope of the

concept and even wider penumbra of

uncertainty is intentional. There is, after

all, a strong consumer protectionist

thread in the legislative regime and the

lack of pinpoint precision may be

understood as a means of casting a

regulatory net over as many market

activities as possible, depriving potential

malefactors of a clearly delineated

regulation-free zone within which to

transact toxic schemes and market them

to consumers. The net is not flawless,

though: malefactors will sometimes slip

through and, wherever they do, the

ordinary consumers whom they menace

will be cast into the role of unlucky

victims and, eventually, of litigants. This is

the point at which the ambiguity and

disheartening opacity of the statutory

definition tends to harm the interests of

those it is designed to protect.

A claimant who has lost money as a

result of participation in an unregulated

collective investment scheme is almost

certainly well-advised to consider

whether he or she has a remedy under

the Financial Services and Markets Act

2000. In some cases, the investment will

have been sold to the claimant by an

authorised person and will have been

marketed up front as a unit in an

unregulated collective investment

scheme. Here, the dispute is likely to take

shape around the issue of whether the

defendant has the benefit of an

exemption from the restrictions (in

section 238) on promoting a scheme.

However, in other cases, particularly those

involving products sold or marketed by

unauthorised persons, the defendant -

who potentially faces criminal sanctions

for acting in breach of the general

prohibition - will deny that the

arrangements in which the claimant has

been invited to participate amount to a

collective investment scheme at all. In

these cases, the claimant must establish

his or her case on every element of the

statutory definition and, given the lack of

clarity about what it all means, is likely to

experience an uphill battle in doing so.

That battle is likely to be all the more

challenging because the corpus of judicial

precedent on the meaning and effect of

the statutory definition is very small

indeed, almost non-existent, after more

than two decades. The reason for this is

that the threat of criminal sanctions (in

1/. Some of the themes in this article are discussed in a jointly-authored paper available at (2012) 4 Journal of International Banking and Financial Law 219.

� �

16

the case of unauthorised persons) and

regulatory sanctions and reputational

damage (in the case of authorised firms)

acts as an almost irresistible incentive to

settle in most cases, depriving investors of

valuable judicial reasoning which would

allow for a better understanding of the

statutory provisions. Thus the sharpest

blades in the statutory arsenal are, in fact,

double-edged swords. The threat of

criminal or regulatory sanctions creates a

very clear incentive to settle: redressing in

some cases the imbalance of economic

power between a poverty-stricken

investor and a large financial business but

simultaneously depriving the investor of

reliable precedent on which to establish

an efficient and compelling case.

The three reported cases in which the

statutory definition have been considered

are: The Russell-Cooke Trust Company v

Elliott [2001] All ER (D) 197 (Jul); FSA v

Fradley and Woodward [2005] EWCA Civ

1183; and Broderick and Broderick v

Centaur Tipping Services Ltd [2006] EWHC

323 (Ch). Elliott involved certain

investment structures established by a

solicitor to provide short term loans,

which were operated from a pooled

account containing client monies. The

court had to decide whether any of the

schemes involved amounted to a

collective investment scheme within the

statutory definition. In Fradley,

subscribers were invited to pay a sum of

money into a pooled account in exchange

for inside information on horses. This

information was then used by another

company to place bets on horses. The

court was tasked with identifying

whether this crossed the statutory

threshold. Broderick and Broderick

involved a horse-betting scheme similar

to that in Fradley. However, subscribers

were, in practice, better able to discuss

and influence selection decisions with the

analysts placing bets.

These cases have highlighted problems

of statutory interpretation with the

concepts: “arrangements”, “operator”,

“participant” and “day to day control”.

The main elements of the definition are:

n Any arrangements with respect to

property of any description, including

money, the purpose or effect of which is

to enable persons taking part in the

arrangements (whether by becoming

owners of the property or any part of it

or otherwise) to participate in or receive

profits or income arising from the

acquisition, holding, management or

disposal of the property or sums paid out

of such profits for income.

n The arrangements must be such that

the persons who are to participate

(“participants”) do not have day-to-day

control over the management of the

property, whether or not they have the

right to be consulted or to give

directions.

n The arrangements must also have

either or both of the following

characteristics: i) the contributions of the

participants and the profits or income out

of which payments are to be made to

them are pooled; and ii) the property is

managed as a whole by or on behalf of

the operator of the scheme.

Thus, a structure will not be a scheme

unless it comprises “arrangements” and,

in any event, it will not be a scheme by

virtue of subsection 235(2) if the

participants (otherwise referred to as

“persons taking part in the

arrangements”) remain in “day to day

control”. In addition, there is a further

requirement in subsection 235(3) that the

scheme has either one of two

characteristics: the first is pooling of both

contributions and profits or income; the

second (“the property is managed as a

whole by or on behalf of the operator of

the scheme”) is premised on the concept

of an “operator”, which is undefined.

Arrangements It is plain from the statutory definition

that the term “arrangements” is extremely

broad. The alleged scheme may comprise a

series of bolt-on services provided to

investors by different actors, with little

more than a series of mutual referrals and

recommendations to link them. The

question then arises whether this amounts

to systematised “arrangements” or merely

a series of ad hoc unrelated services.

In Fradley Arden LJ explained that,

where two services are offered together, it

is not necessarily true that they are to be

classed as a single set of arrangements.

The consequence of this approach is that

the determination of whether there exists

a single set of arrangements will turn

upon the facts of the case.

The broadly inclusive definition of a

scheme as “arrangements” is not

significantly narrowed by the

requirement that the arrangements must

relate to “property of any description,

including money”, where “property” is

quite clearly drawn more widely than

“investments” within the meaning of the

RAO and, indeed, has been found to

include ostriches: Re Pinstripe Farming Co

Ltd [1996] 2 BCLC 295. The fact that

participants need not receive the profits

or income directly, or in fact have any

interest in the property, widens the

regulatory net considerably, with the

consequence that the statutory regime

relies heavily on exemptions to promote

useful economic activity and protect

legitimate business interests.

ParticipantsInvestors in the scheme are identified in

subsection 235(1) by the reference to

“persons taking part in the

arrangements” and in subsection 253(3)(a)

as “participants”. It is unclear whether

anything is intended by the use of the

divergent terms. In any event, the statute

does not give any further guidance on

In Fradley Arden LJ explained that,where two services are offered together, it is not necessarily true thatthey are to be classed as a single set ofarrangements

17

MAY 2012

BEWILDERED?

participation or “taking part” and it is

unclear whether the person participating

in the profits and income must also be the

person who subscribes to the

arrangements. As a result, the

classification of arrangements where the

class of subscribers is exclusively confined

to intermediaries or trusts which simply

channel the profits or income to other

beneficiaries is uncertain. Equally it is

unclear whether “taking part” and

“participate” are intended to import a

flavour of active investment such that

arrangements where the operator is active

but the subscribers are wholly passive

qualify as schemes. In view of the fact that

the policy behind the regime is one of

consumer protection, it may be assumed

that “participant” includes both anyone

who may benefit from the arrangements

as a result of the participation of a

trustee, intermediary or agent and also

any passive investors. However, the lack of

guidance on this matter, and generally

throughout the statute, means that it is

largely impossible to say for certain which

arrangements will amount to a scheme

and which will not.

Day-to-Day ControlArrangements where the participants do

not have “day-to-day control” over the

property will not amount to a scheme.

Once again, the statute is largely silent

on the meaning and effect of the term.

Subsection 235(2) provides, in a curious

final clause, that the question of

participants’ control is independent of

“whether or not they have the right to be

consulted or to give directions” but this

arguably obfuscates matters further: the

power to give directions normally

indicates an element of legal control. The

FSA’s Perimeter Guidance Manual

(“PERG”) attempts to shed light (at 11.2,

Q.6) by specifying that control is “the

power, from day-to-day, to decide how

the property is managed” but does so in a

wholly question-begging way. Businesses,

service providers and market participants

continue to confront very significant legal

uncertainty in this area. Questions that

commonly arise are: first, whether the fact

a participant gives directions on a daily

basis always entails that s/he has “day-to-

day” control in practice, despite the

curious final clause of subsection 235(2)

(“whether or not they have the right to

be consulted or to give directions”); and,

secondly, whether a power can still be

said to vest in the participants when it is

exercised by an agent associated with the

operator (and, if so, what degree of

association is permissible).

Faced with this lack of clarity the courts

have struggled to delimit the concept.

Laddie J likened the term to “minding the

shop” which, perhaps, does little to

clarify. It does, however, bring to mind a

control which is practical rather than legal

and lend some support to the suggestion

that the curious phrasing of subsection

235(2), with its final counterintuitive

clause, reflects a statutory intention to

distinguish between the right or power to

exercise control and the actual exercise of

such rights. If so, then PERG’s emphasis on

“the power… to decide” must be wrong

and it must be the case that, whilst the

power to give directions is no guarantee

of “day-to-day” control, the actual giving

of directions will qualify as such.

Nonetheless, this is merely a supposition

and the picture as a whole remains

obstinately blurred.

In addition to this general uncertainty

about the kind of control which is

required, the specific question arises

whether control can be delegated and, if

so, to whom. Arden LJ made it clear in

Fradley that “it would not matter” (i.e. the

safe-harbour would still apply) if the

participants appointed their own agent to

18

exercise the control but, she stipulated,

the agent could not be an operator of the

scheme, for that would not amount to

control by the participant(s) and would

bring the arrangements back within the

statutory definition. The question of how

much of the control may be delegated to

an agent remains. PERG points out (11.2,

Q.9) that it is not essential that “each

participant would themselves need to be

involved in each and every decision taken,

so long as they retain day-to-day control

over the management”, thereby raising

more questions than it answers. Must the

participants retain practical day-to-day

involvement notwithstanding the

delegation in order to benefit from the

safe-harbour? If the answer is “yes”, then

the delegation is likely to be superfluous

and inefficient: the burden of day-to-day

control still largely rests with the

participant. If the answer is “no”, then the

meaning of the phrase underlined above is

unclear, particularly in view of the

likelihood, discussed above, that “day-to-

day control” comprises practical

involvement. It is unfortunate that PERG

provides no further guidance or examples.

Also of limited help, is the case of

Broderick and Broderick v Centaur Tipping

Services Ltd [2006] EWHC 323. Master

Teverson found that the ability of

subscribers to discuss selection decisions

with the analysts placing bets, the power

to ask them to refrain from betting, and

even the decision to suspend their

accounts fell squarely within the “right to

be consulted or to give directions”. In

summary, none of these factors, either

alone or cumulatively, were determinative

as to who retained day-to-day control. The

fact the defendants decided which bets

were to be placed and would deal with

money in the pooled account accordingly,

convinced the judge that they had no

realistic prospect of demonstrating at trial

that the subscribers exercised day-to-day

control. On this basis he was prepared to

grant summary judgment on a claim for

compensation under section 26 of FSMA

(which concerns agreements made by

unauthorised persons in the course of

carrying on a regulated activity).

A final point of confusion arises as a

result of a passing comment by Arden LJ in

Fradley which appeared to say that the

very same arrangements may amount to a

scheme for some participants and not for

others (“it does not matter that the

scheme was not a CIS as regards any

participant who retained day-to-day

control of the management of his

scheme”; at [46]). In view of the regulatory

consequences and obligations stemming

from the statutory classification, it is

difficult to see how a participant-by-

participant approach could work in

practice and the comment leaves the law

in a state of uncertainty.

OperatorThere can only be a collective investment

scheme where “the property is managed

as a whole by or on behalf of the operator

of the scheme”. This raises the question of

who may be the “operator” of the

scheme, a concept which is not further

defined but which has a logical connection

to the activity of “operating” (also

undefined) a collective investment scheme

under paragraph 51 of the RAO.

Although it is often clear exactly which

person is the operator, in other cases it

may be difficult to identify the correct

party. In Fradley, Arden LJ developed the

idea that two “operators” can manage a

scheme together by acting jointly. She

explained that:

1. The expression “operator” includes

two or more operators acting as operators

of a single scheme (at [37]).

2. It is enough if joint operators each

are responsible for separate parts of the

entire scheme (at [37]).

3. There does not need to be any cross-

ownership or common control between

joint operators - the operators of a single

scheme can be independent entities (at

[41]).

The concept of “joint operators” is

probably essential to the proper

functioning of the regulatory regime. It is

hard to see how any more restrictive

conclusion could sensibly have been drawn

that would not allow the managers of

schemes to avoid the regulatory regime

simply by parcelling out the different

functions that a single operator would

otherwise have. Nonetheless, these

statements make it difficult to draw a

distinction, as indeed the Court clearly

realised in Fradley, between a third party

providing a service to the scheme and a

joint operator with a narrow area of

responsibility. For example, the court may

find it difficult to identify whether an

accountant, whose reports are

instrumental in attracting subscriptions to

the scheme, is merely a service provider or

has been instrumental in “establishing”

and/or “operating” the scheme. In Fradley,

which was an appeal against summary

judgment, the court held that it was not in

a position to determine whether the

respondents were the operators of a joint

scheme until all the facts as to the nature

of the arrangements were fully

investigated.

Concluding RemarksThe considerable uncertainty surrounding

the definitional elements of section 235 of

the Financial Services and Markets Act

(“FSMA”) remains largely unresolved,

more than 25 years after predecessor

provisions appeared on the statute books

in the Financial Services Act 1986. Much of

this uncertainty may be intentional

vagueness, designed to prevent evasion by

malefactors and ultimately to protect

consumers. Unfortunately, once

consumers are transformed into litigants,

legal uncertainty gives rise to unnecessary

legal costs and may even prevent a

claimant from establishing a solid case. It

is important to be aware from the outset

of the pitfalls described above, which are

latent within the statutory concept of a

collective investment scheme, in order to

consider whether an arguable case on

each and every element of the definition

can be established.

The concept of “joint operators” is probably essential to the proper functioning of the regulatory regime

19

MAY 2012

Time flies, and before you know it 13

years have passed since the last

Insolvency Practice Direction came into

effect at the end of the last millennium.

In the intervening years, there have been

numerous changes to the Insolvency

Rules (most notably the procedural

reforms introduced in 2010) and to the

Civil Procedure Rules, and various cross-

references had inevitably become out of

date.

It was certainly time for that Practice

Direction to be updated, and the new

Practice Direction: Insolvency Proceedings

(PDIP) came into force with immediate

effect on 23 February of this year. The

new PDIP replaces all previous Practice

Directions (PD), Practice Statements and

Practice Notes relating to insolvency

proceedings, so we are no longer

concerned with the separate provisions

of the Practice Note: The Hearing of

Insolvency Proceedings, the Practice Note:

Validation Orders, or the Practice

Statement: The Fixing and Approval of

the Remuneration of Appointees.

The general approach that has been

taken is to bring all this material

together in one place, to reorganise it to

give a coherent shape, and to update the

definitions, the language and the cross-

references. Much of the content of the

previous PD is carried across in familiar

terms if different paragraph numbering,

but at the same time the opportunity has

been taken to introduce some modest

procedural reforms.

It is worth noting that the new PDIP

technically has a different status from the

previous one, and from the Practice

Statements that it supersedes.

As David Richards J (sitting in the Court

of Appeal) explained in Brook v Reed1,

the courts formerly made practice

directions and practice statements under

an inherent power, and a practice

statement was merely a convenient

means of gathering principles together in

one place, which then acquired authority

as a statement of guiding principles if

and when it was expressly approved and

applied as such in judgements of an

appropriate level.

The new InsolvencyPractice Direction -modernisation andmodest reformsGlen Davis QC introduces the new Practice Direction: InsolvencyProceedings and discusses some of the salient changes.

The opportunity has been taken to introduce some modest procedural reforms

� �

1/. [2012] 1 WLR 419

20

The new PDIP is instead understood to

have been made under the power in s5(1)

of the Civil Procedure Act 1997, and in

accordance with Schedule 2 of the

Constitutional Reform Act 2005 para 1 of

which allocates the power to make

“designated” directions (ie made under a

power in another Act) to the Lord Chief

Justice or to a judicial office holder

nominated by him, and para 3(1) of which

requires such directions to have the

agreement of the Lord Chancellor. Power

to make the PDIP has been delegated to

the Chancellor, and it has been made

with the Lord Chancellor’s necessary

approval. Although it has been made

under a statutory power, of its nature it

cannot cut down the effect of the

Insolvency Act or Rules. Its role is to fill in

and supplement procedural lacunae and

indicate the approach which is expected

to be taken across all courts to practical

points which are commonly encountered.

Where detailed provisions nowadays

appear in the Insolvency Rules, there is no

need to reproduce them (or worse,

attempt to paraphrase them) in the PDIP.

One example is that, unlike the former

Insolvency PD, the new PDIP no longer

contains provisions to deal with bulk

transfers of appointments, because there

is nowadays a specific regime for such

applications set out in Rules 7.10A-7.10D.

The general organisation of the new PDIP

is that it is now arranged in five parts:

n Part One: General Provisions

n Part Two: Company Insolvency

n Part Three: Personal Insolvency

n Part Four: Appeals

n Part Five: Applications Relating to the

Remuneration of Appointees

There is not the space in this article for a

comprehensive review of all the

provisions of the PDIP, but I will cherry-

pick some of the general provisions in

Part One for comment.

Part One begins with the definitions in

§1, adding definitions for the EC

Regulation on Insolvency Proceedings

(“ECIR”), the EC Service Regulation

(“Service Regulation”), and the Cross

Border Insolvency Regulations 2006

(“CBIR”). The definition of “insolvency

proceedings” in the PDIP is extended

GLEN DAVIS QC

beyond its meaning in Rule 13.7 to

include proceedings under the

Administration of Insolvent Estates of

Deceased Persons Order 1986, the

Insolvent Partnerships Order 1994, the

Limited Liability Partnership Regulations

2001, and to proceedings under the ECIR

and the CBIR. There is no explicit

reference to proceedings in Special

Administrations, but it is thought the

PDIP would where relevant be applied, at

least by analogy. References to a

“company” include references to an LLP.

And the definition of “Royal Courts of

Justice” extends to another place in

London where the Registrars sit, which is

helpful because they now sit in the Rolls

Building.

§3 deals with distribution of business.

As before, the general rule is that most

applications are required to be listed for

first hearing before a Registrar, but there

are special cases (most notably

applications for administration orders and

the appointment of provisional

liquidators) which are to be listed before

a judge. Registrars and District Judges

have the power to make coercive orders

under powers in the Insolvency Act and

Rules, but not to grant injunctions, so

applications for an injunction always

need to be listed before a Judge. When

deciding whether a Registrar will hear a

matter or adjourn it to the Judge, the

Registrar is no longer required to consider

the availability in the court which is likely

21

MAY 2012

to hear the proceedings of relevant

specialist expertise. Instead there are now

four criteria:

n the complexity of the proceedings;

n whether the proceedings raise new

or controversial points of law;

n the likely date and length of the

hearing

n public interest in the proceedings.

The familiar insolvency headings (“IN

THE MATTER OF….”) were formerly

prescribed by the Rules but disappeared

in 2010. They are often helpful in practice

to enable Registrars and Judges to

identify the insolvency case to which

particular proceedings relate, and they

now reappear as a requirement of the

PDIP in §4.2-4.4.

A new provision in §5 makes clear that

evidence in insolvency proceedings is to

be given by witness statement. This is

subject to the provisions of rule 7.9 or

other provisions or directions as to the

form in which evidence should be given.

Rule 7.9 permits a report instead of a

witness statement to be used by the OR

or by an office-holder making an

application not involving other parties

(unless the court directs otherwise).

§6 deals with service, and clarifies the

position following the changes to the

Insolvency Rules in 2010. The new Rule

12A.20 (which it should be noted applies

to court documents and so not, for

example, to a statutory demand) provides

for a number of things, which are

discussed below.

CPR Part 6 applies to the service of court

documents outside the jurisdiction with

such modifications as the court may direct

had caused some uncertainty as to how

the CPR regime for service out was

intended to apply in the context of

insolvency2, not least because it was not

entirely clear which ground in paragraph

3.1 of the Part 6 Practice Direction could

be relied on or how the requirements of

CPR Rule 6.37 were to be satisfied in

insolvency proceedings.

Fortunately, the words with such

modifications as the court may direct in

Rule 12A.20 are wide enough for

directions to be given either specifically,

for an individual case, or generally, by

practice direction. And we now have some

general directions in the new PDIP. The

position we now have is that CPR Rules

6.36, and 6.37(1) and (2) do not apply in

insolvency. Instead we have the regime set

out in the PDIP.

The general position is that service of an

application which is to be treated as a

claim form (sensibly to be understood as

an application initiating proceedings

against one or more respondents) will

require permission, except in two special

cases.

Permission to serve out will not be

required if the application is by an office-

holder appointed in insolvency

proceedings in respect of a company with

its centre of main interests within the

jurisdiction exercising a statutory power

under the Act, and the person to be served

is to be served within the EU (§6.5(1) PDIP).

This is entirely consistent with the

approach under the ECIR which allocates

jurisdiction to open main proceedings to

the courts of the Member State where a

company has its COMI, with those

proceedings then being given effect

throughout the EU3. This is a small but

significant reform which should result in a

saving of time and costs in European cross-

border cases. Similarly, there is no need to

seek permission where what is to be

served is a copy of an application, being

served on a member State liquidator. But

these provisions do only apply in the

corporate context; a trustee in bankruptcy

still needs permission to serve out.

§6.6 PDIP clarifies what will be required on

an application for permission to serve out

of the jurisdiction. The application must be

supported by a witness statement setting

out:

(1) the nature of the claim or

application and the relief sought;

(2) that the applicant believes that

the claim has a reasonable

prospect of success; and

(3) the address of the person to be

served or, if not known, in what

place or country that person is, or

is likely, to be found.

The PDIP does not specify what level of

detail is required, but in general the court

will no doubt expect the evidence to be

reasonable and proportionate. As no other

person will be present at the application,

there will also be the usual duty to be full

and frank with the court.

One question which is not answered by

the PDIP is whether the Service Regulation

applies to insolvency proceedings. Most

practitioners sensibly err on the side of

caution and operate on the assumption

that it does apply4.

It should be noted that permission is not

required to serve a statutory demand out

of the jurisdiction. There are detailed

provisions in §13.2 of the PDIP dealing

with service of a statutory demand out of

the jurisdiction in a bankruptcy case.

§9 of the PDIP highlights the possibility

of obtaining an urgent appointment

before a Registrar in the RCJ or a District

Judge in other courts, and sets out the

certificate which must be completed in

such cases. This is the approach which has

been in place for some time in the RCJ,

and includes a warning of possible

sanctions if the Registrar or District Judge

takes the view that the application is not

in fact urgent.

Perhaps unsurprisingly, publication of

the new PDIP has almost immediately

prompted questions, comments and

suggestions from practitioners, so it is

probably unlikely that we will be waiting

another 13 years before we see any

further changes.

Glen Davis QC is a member of the

Bankruptcy and Companies Courts Users

Committee and served on the sub-

committee which assisted the Chancellor

with the drafting of the new Insolvency

Proceedings Practice Direction.

The court will no doubt expect the evidence to be reasonable and proportionate

� �

2/. some of which I discussed in an article in Insolvency Intelligence, Service of Insolvency Process out of the Jurisdiction 23 Insolv Int 145; the position will be brought up to date in an article in a future

edition of Insolvency Intelligence

3/. except Denmark, which has opted out

4/. and HHJ Purle QC recently said as much (but technically obiter) in Re Baillies Limited (in Liquidation), Hornan v Baillie [2012] EWHC 285 (Ch)

22

NEWS in brief

Following the sanction by the English High

Court of schemes of arrangement in

relation to a number of overseas companies

(including Tele Columbus, Rodenstock and

Primacom), there has been considerable

interest in this subject both here and

abroad. On 13 April 2012, Barry Isaacs QC

delivered a presentation on schemes of

arrangement at a conference held by INSOL

Europe and the Association Internationale

des Jeune Avocats in Prague. The

conference, on the subject of “Sale of a

Business during the Great Financial Crisis:

Transactional and Contentious Aspects”,

was attended by 70 judges and prosecutors

from over 20 countries. Barry also gave a

presentation and took part in a panel

discussion on schemes of arrangement at

the annual conference of the Insolvency

Lawyers Association held in March 2012 at

Luton Hoo.

INSOL Europe/AIJA conference

BARRY ISAACS QC

EC seeks feedback oninsolvency law update

The introduction of a formal appraisal

system for senior judges has been put

forward as one of several

recommendations in a House of Lords

report on judicial appointments

published in March this year.

The suggestion for a judge-led appraisal

system is one of a number of measures

intended to boost public confidence in the

judiciary contained in the report, which is

primarily aimed at increasing diversity.

There is currently no appraisal scheme in

place for salaried court judges, although

there are schemes operating within some

tribunals, with previous proposals that

would have seen top judges appraised by

court users rejected in 2008. Proposals

intended to boost diversity could see

female and minority applicants to the

judiciary appointed ahead of white men

with equal skills.

The report suggests positive action

could be used for judicial appointments,

which would mean that, while

appointments must be based on merit, if

everything else is equal, the desire to

encourage diversity should be taken into

account.

LUTON HOO

Lords call for judicial appraisals andpositive action to increase diversity…

The European Commission is seeking

views on whether its insolvency laws

need to be modernised in order to

best promote economic recovery. In a

new consultation which will run until

June, the Commission is asking for

feedback on the existing rules. The

Insolvency Regulation, which sets out

how corporate and individual

insolvencies should be coordinated in

cross-border cases, came into force in

2000 and applies whenever a debtor

has assets or creditors in more than

one member state.

23

MAY 2012

DIARY DATES16-18 May 2012.

Barcelona.

R3 Annual Conference.

20-22 May 2012.

Miami, USA.

INSOL International Annual Conference,

Miami.

24-25 May 2012.

Poznan.

INSOL Europe Eastern European

Countries Committee Conference.

7-8 June 2012.

Madrid.

TMA Europe Annual Conference.

28-29 June 2012.

Nottingham.

INSOL Europe Academic Forum.

5-7 September 2012.

Sydney.

TMA Asia Pacific Annual Conference.

11-14 October 2012.

Brussels, Belgium.

INSOL Europe Annual Conference.

1-3 November 2012.

Boston, MA.

TMA Annual Convention.

15 November 2012.

London.

TMA(UK) Annual Conference.

2013

19-22 May 2013.

The Hague, The Netherlands.

INSOL World Congress.

Consumer spending powerplummets to lowest level in a yearConsumer spending power has fallen to

its lowest level in more than a year,

according to a report released on 23 April

2012. The Lloyds TSB Spending Power

Report found levels dropped by 1.1% in

March compared to a year earlier – equal

to a £113 drop on income available for

non-essential items. Spending on

essentials also grew by 6.2% as consumers

battled against the rising cost of food

and drink, gas and electricity bills, as well

as debt payments.

UK retailers will have to refinance £7.1bn

of bank and bond debt by the end of the

year, a study has found. The embattled

sector will have a further £38.3bn due by

2018 with debts peaking at a forecast

£10.4bn in 2015, according to law firm

Freshfields Bruckhaus Deringer.

UK retailers facing £7.1bndebt refinancing challenge

Over 5,000 firms failedso far this year

SPENDING DOWN

Germany: change forGerman restructuringsOn March 1 2012, the "Act Concerning

the Improvement of Restructurings under

German Insolvency Law" (ESUG) came

into effect in Germany. It is understood

that the new act will substantially change

the landscape for restructurings in

Germany in that: (i) it will materially

increase creditors' influence, (ii)

insolvency plan proceedings will be

strengthened and shortened, and (iii) the

frequency of debtor-in-possession

proceedings will dramatically rise.

More than 5,000 companies have gone bustthis year so far, according to figuresreleased recently by the Insolvency Service.

Some 4,303 compulsory liquidations andcreditors’ voluntary liquidations took placeplace during Q1 2012 – up 4.3% on thesame period last year.

Other corporate insolvencies – whichconsist of receiverships, administrations andcompany voluntary arrangements – also hit1,290 – a 1.8% rise on Q1 2011.

Despite the upward trend Ian Gould, headof Corporate Recovery and Insolvency atPKF, insisted it remains the “calm before thestorm”.

He said: “Although the figures makeuncomfortable reading, my concern is thatthe situation will get worse before it startsimproving.

“The statistics don’t currently reflect thedifficulties facing the corporate sector, and

I’d expect to see a significant increase inbusiness failures at some point during thenext 12 months or so.”

Steven Law, restructuring and recoverypartner at Baker Tilly, explained lenders andHMRC may soon toughen their stance on‘zombie’ companies.

He said: “There is undoubtedly a highnumber of ‘zombie’ companies which arebeing propped up by creditors.

“As the balance sheets of lendersimprove, there may well be casualties.Anecdotal evidence suggests HMRC is takinga tougher line on ‘time to pay’arrangements. Any increase in creditorpressure may force businesses over theedge.”

Meanwhile, Bev Budsworth, managingdirector of The Debt Advisor, said the“relatively flat” statistics mask the “huge”number of companies struggling with debt.

24

The new Insolvency Proceedings Practice

Direction came into force on 23 February

2012, replacing all previous Insolvency

Practice Directions, Practice Statements and

Practice Notes relating to insolvency

proceedings.

Glen Davis QC was involved in its

drafting. On Friday 2 March and Friday 9

March, South Square hosted two

breakfast seminars in Chambers to

introduce and discuss the new Insolvency

PD.

The seminars were led by Glen Davis QC,

supported by Felicity Toube QC, John

Briggs, Hilary Stonefrost, Joanna Perkins,

William Willson and Henry Phillips at the

first seminar, and by Felicity Toube QC,

Daniel Bayfield and Charlotte Cooke at the

second.

On Tuesday 24 April, Glen Davis QC and

Charlotte Cooke led a similar seminar at the

offices of Morrison & Foerster LLP. Glen has

also written an article on the Insolvency PD

for this issue of the Digest (see page 19).

Insolvency practice direction

GLEN DAVIS QC JOHN BRIGGS

WILLIAM WILLSONHENRY PHILLIPS

R3 SPG Technical ReviewOn1 May 2012 Charlotte Cooke spokeat the R3 SPG Technical Review at theHilton Tower Bridge, giving a legalupdate focusing on current issuesaffecting the smaller practice.

Dewey & Le Boeuf TalksOn 25 April 2012, Felicity Toube QC,Hannah Thornley and Adam Al-Attargave talks to the London office ofDewey & LeBoeuf LLP on anti-deprivation, directors duties and themeaning of insolvency.

Butterworths Lexis NexisOn 30 May 2012, Barry Isaacs QC willbe chairing the ButterworthsLexisNexis conference entitled“Directors and Insolvency” withspeakers from South Squareincluding: Mark Arnold, Lloyd Tamlynand Hannah Thornley.

Insolvency Law HandbookThe 14th edition of the InsolvencyLaw Handbook will be published byButterworths LexisNexis in June 2012.The handbook is edited by Glen DavisQC and Marcus Haywood.

On 16 March 2012 and 23 March 2012Chambers hosted breakfast seminarsto discuss the decision of theSupreme Court in the Lehman moneycase. The speakers at the seminarswere Robin Knowles CBE QC, AntonyZacaroli QC, Felicity Toube QC, DavidAllison and Adam Al Attar.

CHARLOTTE COOKE

FELICITY TOUBE QC ADAM AL-ATTAR HANNAH THORNLEY

MARK ARNOLD LLOYD TAMLYN

MARCUS HAYWOOD

ROBIN KNOWLES QC DAVID ALLISON ANTONY ZACAROLI QC

There needs to be a greater commitment

on the part of the government, the

judiciary and the legal professions to

encourage applications for the judiciary

from lawyers other than barristers.

The constitution committee said that

“being a good barrister is not necessarily

the same thing as being a good judge”

and that there should be no sense that

not having been a member of the Bar

makes an individual unworthy of

appointment or less meritorious.

Peers call for more workon non-barrister judges…

25

MAY 2012

GEORGINA PETERS

Other talksOn Wednesday 14 March, Glen Davis

QC and Charlotte Cooke presented a

seminar on Officeholders'

Remuneration for clients of Farrar &

Co. On Thursday 15 March, Glen Davis

QC and Georgina Peters gave a talk

at Ashurst LLP on the new

Investment Bank Special

Administration regime. On Thursday

29 March, Glen Davis QC gave a talk

to the Professional Negligence

Lawyers Association conference on

Professional Negligence and Liability

at the Kingsway Hall in London,

titled, ‘What a professional

negligence lawyer needs to know

about insolvency’.

n On 24 April 2012 David Alexander QC of

South Square and Stephen Hunt of Griffins

conducted a seminar for guests of forensic

accounting firm Crowe Clark Whitehill

entitled “Attacking Administrations and

Administrators”. The seminar focused on

pre-pack abuse. It covered how aggrieved

creditors can seek to end administrations

(via the court and meetings of creditors) as

well as how creditors can seek to prevent

pre-packs and seek redress in respect of

abusive pre-packs (including by the

removal of administrators, challenges to

administrators and the use of directions

applications).

DAVID ALEXANDER QCSTEPHEN HUNT

Double dip recessionThe Office of National Statistics has

confirmed analyst predictions that the UK

has returned to recession, making it an

official ‘double dip’. The economy

contracted by 0.2 per cent for the first

three months of 2012, the second

quarterly decrease in a row (following the

0.3 per cent decline in the last quarter of

2011). The construction sector in particular

has been hit. Output in that sector

decreased by 3 per cent in the first quarter

of the year after a drop of 0.2 per cent in

the previous quarter. By contrast, output

of the service industries increased by 0.1

per cent in Q1 2012, following a decrease

of 0.1 per cent in the previous quarter.

Insolvency profession to uniteon disciplinary measuresA draft "Common Sanctions Guidance"

prepared by the Insolvency

Practitioners Association to reinforce

consistency of disciplinary actions

against insolvency practitioners has

been passed to the Joint Insolvency

Committee.

Currently there are several licensing

bodies and the way they sanction

practitioners can differ widely. The

hope is a common sanctions guidance

would bring greater clarity and

transparency to disciplinary measures

and could increase confidence from the

creditor community.

However, it is expected a public

consultation or roll out will not take

place until much later this year.

Retailers take a batteringThe high street has taken another

battering, according to recent statistics

released by the Insolvency Service.

The retail trade sector suffered an

180% rise in administration

appointments with 67 businesses

collapsing during Q1 2012 compared to

24 in Q4 2011.

Overall retail figures – which include

automotive sales and wholesale –

recorded a 70% rise in administrations

with 135 appointments during Q1 2012.

This was also up 9% on Q1 2011.

Among the high-profile retail

administrations so far this year have

been Blacks, La Senza, Game Group and

Peacocks.

Richard Fleming, UK head of

restructuring at KPMG, said the high

street is “running out of options” with

administration now “inevitable” for

some retailers.

2626

South Square ChallengeWelcome to the May 2012 Insolvency Challenge. A now-familiar format. All you have to do is look at the pictures and work out

what they represent and what the connection is. Good luck. And for the winner (drawn from the wig tin if there is more than one

correct entry) a magnum of champagne. Please send your answers by e-mail to kirstendent@southsquare.com or to Kirsten at the

address on the back page. Entries by 1st July 2012 please. Martin Pascoe QC.

1

2

3

4

27

MAY 2012

March 2012 South Square ChallengeThe correct answers to the March 2012 South Square Challenge were (1) The Wagon Mound (2) Spring v Guardian Assurance (3) Smith v Bush (4)Hedley Byrne v Heller (5) Home Office v Dorset Yacht Co (6) Mitchell v Glasgow City Council (7) White v Jones (8) Donaghue v Stevenson. And theconnection is, if course, that they are all tort (negligence) cases. Many congratulations and a Magnum of Champagne goes to Matthew Crawfordof Maples and Calder, Cayman Islands who is the winner of the March 2012 South Square Challenge.

5

6

7

8

9 And the connection is?

Michael Crystal QC

Christopher Brougham QC

Gabriel Moss QC

Simon Mortimore QC

Richard Adkins QC

Richard Sheldon QC

Richard Hacker QC

Robin Knowles CBE QC

Mark Phillips QC

Robin Dicker QC

William Trower QC

Martin Pascoe QC

Fidelis Oditah QC

David Alexander QC

Antony Zacaroli QC

David Marks QC

Glen Davis QC

Barry Isaacs QC

Felicity Toube QC

John Briggs

Mark Arnold

Adam Goodison

Hilary Stonefrost

Lloyd Tamlyn

Ben Valentin

Jeremy Goldring

Lucy Frazer

David Allison

Daniel Bayfield

Tom Smith

Richard Fisher

Stephen Robins

Joanna Perkins

Marcus Haywood

Hannah Thornley

William Willson

Georgina Peters

Adam Al-Attar

Henry Phillips

Charlotte Cooke

“FINE ADVOCATES, WHO QUIETLY BUTPROFICIENTLY GO ABOUT THEIR BUSINESS ANDPROVE DEADLY EFFECTIVE IN COURT”.

South Square Gray’s Inn London WC1R 5HP. UK.

Tel. +44 (0)20 7696 9900. Fax +44 (0)20 7696 9911. LDE 338 Chancery Lane. Email practicemanagers@southsquare.com

CHAMBERS & PARTNERS 2012

SOUTH SQUAREBarristers