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Supreme Court rules on anti-deprivation principle

The Supreme Court has considered the scope of the "anti-deprivation" principle: the rule which prohibits the removal on insolvency of an asset from the insolvent estate, thus diminishing the assets available to creditors.

Belmont Park Investments Pty Limited v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc [2011] UKSC 38 involved consideration of a "flip clause" contained in a supplemental trust deed which underlay an investment product offered by companies in the Lehman Brothers group. The Supreme Court's discussion of the law was lengthy, but the following key points may be noted in summary:

The anti-deprivation rule will only apply if the contractual documentation provides for the deprivation to take place as a result of the insolvency itself. If a deprivation arises as a consequence of some other event (such as, in this case, the earlier bankruptcy of a related party), the anti-deprivation principle is not engaged.

A deliberate intention to evade the insolvency laws is required - albeit that it may be inferred in certain cases. Thus, Lord Collins (giving the lead judgment) stated that "[i]n borderline cases a commercially sensible transaction entered into in good faith should not be held to infringe the anti-deprivation rule".

Liability for basic award and notice pay does not pass to the Secretary
of State under TUPE where employee dismissed after the transfer

In the recent EAT decision of Pressure Coolers Ltd v Molloy and Ors 2011 IRLR 630, it was held that liability for a basic award and notice pay owed to a transferring employee of an insolvent business did not pass to the Secretary of State under the TUPE Regulations where the employee had been dismissed by the transferee after the transfer. While Regulation 8 provides that certain liabilities owed to transferring employees pass to the Secretary of State rather than the transferee on the transfer of an insolvent business, it only applies to liabilities that have crystallised by the transfer date, such as pay arrears and unpaid holiday. The transferee picks up the tab for notice pay and the basic award. Interestingly in this case the dismissals took place just 4 hours after the acquisition of the business by the transferee under a 'pre-pack' sale agreement.

COMI of Isle of Man registered companies found to be in England

MMS recently acted for a syndicate of banks who were lenders to a group of Isle of Man registered and incorporated companies in an application to place the holding company and its property holding subsidiaries into administration in England. The success of the applications depended on being able to demonstrate that, contrary to the legislative presumption in favour of the place in which the companies had their registered office, the COMI of the companies was in fact England. The main assets of the companies were properties located in England and evidence was led to show that creditors dealing with the companies would be under the impression that they were dealing with companies managed in England by virtue of a management agreement.

Newey J said in his Judgment that third parties dealing with the company will "have found that the interests of the company were being administered on a regular basis in this jurisdiction". The Court also said that it could be inferred that the companies were incorporated in the Isle of Man for fiscal reasons rather than because that was to be their COMI.

He granted Administration Orders in respect of each of the Isle of Man companies. Once granted these Administration Orders were registered at Companies House on the relatively new ECLAIR Registry which can be viewed by writing to Companies House.

There is no administration regime in the Isle of Man and this case highlights the fact that the COMI rules may provide a route to formal insolvency onshore where, as is often the case, debtor companies are registered offshore.

New pre-pack legislation delayed until 2012

The Insolvency Service has confirmed that the enactment of the draft Insolvency (Amendment) (No 2) Rules 2011, designed to introduce increased regulation of pre-pack sales by liquidators and administrators, has been delayed.

Originally supposed to come into force in October 2011, the draft Rules are now in the process of revision to take into account criticism from insolvency practitioners, lawyers, creditor representatives and others. Implementation is not now expected before April 2012.

Series of cases question established
practice on administrator appointments

A series of cases over the summer months have challenged established practices in respect of administrator appointments. These cases highlight the importance of following the terms of a company's articles of association when appointing administrators and, in the event an error in appointment is identified, acting quickly to seek a retrospective appointment.

In Minmar (929) Limited v Khalastchi [2011] EWHC 1159 (Ch), the Chancellor of the High Court held that the appointment of administrators to a company using the out of Court procedure provided by paragraph 22(2) of Schedule B1 was invalid because the company's articles had not been properly observed in making the purported appointment. Specifically, the meeting at which the directors had resolved to put the company into administration was not quorate and notice had not been given to several of the company's creditors.

This case marked the start of a trend which continued over the summer months and by which the Courts have begun to look much more closely at whether directors have complied with the formal requirements imposed upon them by the company's articles and the Insolvency Act itself when placing companies into administration.

Further examples of this trend came in the case of Re Derfshaw Limited [2011] EWHC 1565 (Ch) (failure to serve notice of intention to appoint administrators on the company itself) and Frontsouth (Witham) Limited (in Administration) and Bridge Hospital (Witham) Limited (in Administration) [2011] EWHC 1668 (Ch) (failure to obtain consent of secured creditors before using out of Court extension procedure under paragraph 76(2)(b) of Schedule B1).

Where procedural irregularities have been identified, however, the Courts have shown some willingness to assist administrators in rectifying the position. In particular, in both the Derfshaw and Frontsouth cases, the Courts made use of paragraph 13(2) of Schedule B1 - which provides that the appointment of an administrator by the Court takes effect "at a time appointed by the order" - to make a retrospective appointment with the effect of validating all historic steps taken by the relevant administrators.

Contact us

For more information, please contact:

Michael Hughes
Partner
0141 271 5705
michael.hughes@mms.co.uk

Simon Colledge
Partner
020 7002 8536
simon.colledge@mms.co.uk

Shirley Li-Ting
Director
0141 271 5711
shirley.li-ting@mms.co.uk

Craig Neilson
Associate
020 7634 8804
craig.neilson@mms.co.uk 

This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.