June 2012
Legal update on Insolvency Law.
IN THIS ISSUE
· Subordinated securities: who rules the roost – the deal or the PPSR?
· FSA consent to administrate – better late than never
· The receivers who never received: service by email and the Electronic Transactions Act 2002
· Claim rejected by liquidators, but a creditor nonetheless
· A bumper harvest - setting off post liquidation debts
· Skeletons in Halliwells LLP's closet: secret meetings, fraud and siphoned funds
· Tracing assets hidden in a new company
· Can the Official Assignee pocket pensions?
· Repayment of "on demand" facility
· Football creditors rule upheld by English High Court
· Court permits the appointment of liquidators who would otherwise be disqualified
|
Subordinated securities: who rules the roost – the deal or the PPSR? |
|
Secured Party A conceded priority of its first ranking security interest to Secured Party B. A financing change statement confirming subordination of Secured Party A's security interest was registered on the PPSR noting the "date of subordination" as 28 November 2006 and the "expiry date" as 31 March 2010. Secured Party B's financing statement was renewed for another five years but the financing change statement retained the subordination agreement expiry date as 31 March 2010. The key issue was the duration of the subordination of the security interest.
Under section 70 of the PPSA the subordination was effective between the two Secured Parties and their assigns. An expiry date for the subordination was not specified in the arrangements between the parties. Secured Party B had no reason to limit the duration of its priority as the commercial reality was that it might not be repaid on due date or its advance might be rolled over. As between the parties the agreement to subordinate the security interests remained operative until Secured Party B's security interest was satisfied or otherwise discharged. The registration of the subordination on the PPSR was not a term of the agreement to subordinate and did not undo or alter the agreement.
In addition, the Court affirmed the view in Sperry Inc v Canadian Imperial Bank of Commerce and Thorne Riddell Inc (1985) 17 DLR (4th) 236 that priorities are to be determined at the date they come into conflict. Appointment of the receivers to the debtor gave rise to a conflict about which security interest should prevail because there was insufficient collateral to satisfy both claims. The subordination agreement was still in force when the receivers were appointed and therefore Secured Party B's interest prevailed.
See court decision here |
|
This case considered the validity of the appointment of administrators in circumstances in which the administrators had not received consent from the Financial Services Authority (the FSA) to act. That consent was required by statute, but was not obtained and filed in Court until a few weeks after the administrators were appointed. In this context the Court considered, among other things, how to interpret mandatory statutory provisions that do not provide a consequence for non-compliance.
In this case, section 362A of the Financial Services and Markets Act 2000 stated that an administrator "may not be appointed...without the consent of the Authority". The Court held that the correct approach to take in deciding whether failure to comply invalidated appointment was a) discern the purpose of the section; b) determine the consequences of non-compliance; c) consider the wording and other provisions related to the provision; and d) given these factors, could Parliament have intended that failure to comply would invalidate otherwise valid appointments of administrators. Following that analysis the Court found that the administrators had been validly appointed at the date consent was filed. The affirmation of these principles will likely be useful for statutory interpretation in New Zealand, especially in the rigidly procedural insolvency context.
See court decision here |
|
The receivers who never received: service by email and the Electronic Transactions Act 2002 |
|
In Re Hurlstone Earthmoving Limited (in receivership and liquidation): Petterson v Gothard (No 3) [2012] NZHC 666, the liquidator of Hurlstone Earthmoving Limited sought orders under section 37 of the Receiverships Act 1993 compelling the receivers to provide company documents and information about the company's affairs after they had failed to comply with a notice under section 261 of the Companies Act 1993.
The Court had to consider whether the notice of failure to comply with the liquidator's request had been validly served on the receivers. The liquidator sent the notice to the receivers by email, however, the receivers did not receive the notice until after the date for compliance expired due to technical problems with their email filter. The Court applied the Electronic Transactions Act 2002 and held that the notice had been validly served, therefore the notice had expired and it was open to the liquidator to apply to the Court to compel the receivers to provide documents.
The receivers also argued that the liquidator's request was oppressive as it was made under section 261 of the Companies Act 1993 which they claimed was not the appropriate method of seeking information about receivers' costs and expenses. The Court rejected this argument and held there was no oppression or unfairness as it is well established that a liquidator is entitled to documents regarding receivers' costs and expenses.
Despite the fact the request was not oppressive and the notice had been validly served, the Court still has wide powers regarding relief where there has been a failure to comply with a section 37 notice. Therefore, in the circumstances, the Court found it preferable to extend the time period for the receivers to comply with the notice.
See court decision here |
|
In the case of In Re Silverdale Developments (2007) Ltd (In Liq): Bunting v Buchanan [2012] NZHC 766, the shareholders of Silver Developments (2007) Limited (in liquidation) unsuccessfully applied to the Court to terminate the liquidation under section 250 of the Companies Act 1993.
The company was incorporated to develop a commercial warehouse and was placed into liquidation by the shareholders after the development was completed. However, the floor slab of the warehouse units developed cracks and the unit owners claimed against the company for the cost of replacement. The liquidator rejected the unit owner's claims for a replacement slab, but did not deny they had a claim for repair against the company. The shareholders then applied to terminate the liquidation on the basis that the company was solvent, so that they could conduct a defence to the unit owners' claim. This application was opposed by the liquidator and the unit holders.
The Court had to decide whether the unit owners could be deemed creditors even though the liquidator had rejected their claim. In finding that the unit owners were creditors whose interests must be taken into account, the Court found that they had a contingent claim based on contractual obligations incurred before the liquidation commenced.
The essential question for the Court to determine was whether it was just and equitable to exercise its discretion to terminate the liquidation. In dismissing the shareholders' application, the Court focused on the fact that the liquidator had a real concern about the solvency of the company. It was appropriate that all the assets of the company should be retained until the claims are determined to protect the creditors from a real risk of prejudice.
See court decision here |
|
In Grapecorp Management Pty Ltd (in liq) v Grape Exchange Management Euston Pty Ltd [2012] VSC 112, Grape Exchange Management Euston Pty Ltd (Grape Exchange) managed a vineyard for Grapecorp Management Pty Ltd (Grapecorp). During the 2009 harvest Grapecorp was placed into liquidation. The liquidators then demanded payment from Grape Exchange of the proceeds of the 2009 harvest. Grape Exchange claimed it was entitled to set-off $2,356,483 of the harvest proceeds against the costs and expenses it had incurred in furtherance of the management agreement before and after the appointment of the Grapecorp liquidators.
The case demonstrates the position that receipts, payments and debts can continue to be set off post liquidation, provided that the obligation under which the expenses were incurred was entered into before the commencement of liquidation. The position is the same in New Zealand. Grape Exchange was obliged to carry out the management duties from the date of the management agreement. Grapecorp's obligation to pay Grape Exchange's expenses was contingent on that management agreement and not new obligations arising each time Grape Exchange performed its management obligations.
See court decision here |
|
Skeletons in Halliwells LLP's closet: secret meetings, fraud and siphoned funds |
|
As noted in our July 2010 newsletter, lawyers are not immune from the recession. The fight over the meagre remains of the once well-respected British law firm, Halliwells LLP, has recently reached scandalous heights with allegations of fraud being made against the firm's partners.
The English High Court is currently hearing the case of Michael Burns, a former Halliwells partner (and now a partner at DLA Piper). Burns left just before Halliwells' demise and he claims that his retirement deed severs all ties between him and the firm. But the liquidators are not convinced. They, together with some other ex-Halliwells partners, argue that the retirement deed cannot absolve Burns of liability because the manner of the firm's demise was allegedly suspicious, to say the least.
In support, the liquidators have referred to minutes of a meeting covering up a £24.5m reverse premium that was secretly funnelled out of the firm by its senior equity partners. Correspondence from the firm's senior management asking for the reverse premium payments to be covered up was read aloud in open court. While talk of altered minutes had been doing the rounds for some time, this was the first time such allegations were aired publicly.
It also seems that liquidation of American law firm, the Dewey & Le Boeuf, may be headed in the same, nasty direction. Citibank is one of a number of major banks now attempting to claw back loans made in respect of partner appointments at Dewey to fund their capital contributions to the firm. Capital contributions were calculated based on each partner's annual target compensation, with those joining required to pay in 36% of this annual target. Rumour has it that a deal was reached during a conference call last Tuesday whereby the 300 ex-partners will be required to stump up a total of $315m in settlement of all existing and future claims that the creditors may have against the partners.
However this will not save Dewey's former chairman Steven Davis who is battling fraud accusations after allegedly lying about the true state of the now-bankrupt firm's finances. A 14 page lawsuit filed in the San Francisco Superior Court likens the firm's practices to "running a Ponzi scheme." So now it also seems, in the wake of a liquidation lawyers are no more immune from sinister criminal allegations than the directors of failed finance companies. |
|
Albacore Fisheries Ltd (Albacore), a former creditor of Sunsai Ltd (Sunsai), applied to have Sunsai restored to the register of companies so that it could put Sunsai into liquidation and trace Sunsai's pre removal assets.
Albacore had bought squid from Sea Resources Co Ltd in February 2005 on the basis that it was fit for human consumption. It was not, and a large proportion of the squid was condemned and destroyed. Albacore's lawyers wrote two letters of demand to Sea Resources Co in July 2007 and received no reply. In March 2008, the name of Sea Resources Co was changed to Sunsai, and in that same month a new company (with the same shareholders as Sunsai) was registered as Sea Resources Ltd. Upon sending a third letter of demand in November 2009, Albacore was told that it was too late: Sunsai had been removed from the register a month earlier.
Albacore faced two issues in bringing their claim: · The six year time limit to bring a monetary claim under section 11 the Limitation Act had expired in February 2011 and · Albacore intended to recover its funds by reopening the sale of Sunsai's assets to Sea Resources Ltd – which can generally only be done if a liquidator is appointed within two years of the transaction (for insolvent or undervalue transactions under sections 292 or 297 of the Companies Act); or within three years (for related party transactions under section 298 of the Companies Act).
Williams J found that it was within his discretion both in respect of the Limitation Act and of the Companies Act to stop time running during the period that Sunsai was deleted from the register, and did so in this instance. The case offers hope for creditors when debtor companies flick assets to a new company and close down the former in order to evade debts.
See court decision here |
|
In Raithatha v Williamson [2012] EWHC 090 Ch, the English High Court was asked to decide whether a bankrupt’s entitlement to a pension, which he had not yet elected to receive, should be subject to an order for income payment. This would have the effect of forcing a bankrupt to begin receiving his pension, and then have those payments deducted to benefit his creditors, where the bankrupt had not been receiving the pension prior to his bankruptcy. The High Court found that the intention of the legislature could only be that a bankrupt in this position would be in the same as a bankrupt already receiving their pension. The pension therefore qualified as a sum over which an order for income payment could be made.
In New Zealand the position is different, as section 84(1) of the Social Security Act 1964 provides that no benefit, including New Zealand Superannuation, will be passed to the Official Assignee. However, payments under private superannuation schemes may pass to the Assignee, depending on the construction of the scheme’s trust deed.
See case summary here |
|
The High Court has recently indicated that in appropriate circumstances it will be reasonable for a lender to appoint receivers less than 24 hours after making demand for repayment of an "on demand" loan.
The issue arose in an application by a borrower for an injunction preventing receivers from selling the business and assets of the borrower. In refusing to grant the injunction the Court held that the borrower's claim that the Bank's conduct was oppressive (in making demand and appointing receivers) did not amount to a serious question to be tired. The Court's reasoning was based on the fact that the Bank had been working with the borrower for the preceding two months to try and resolve their solvency issues.
See court decision here |
|
In the English High Court case of Revenue and Customs Commissioners v Football League Ltd (Football Association Premier League Ltd intervening) [2012] EWHC 1372 (Ch); [2012] WLR (D) 163, HM Revenue and Customs (HMRC) brought a general challenge to the "football creditors rule".
The "football creditors rule" applies when a Football League (soccer) club (being a limited liability company) falls insolvent and goes into administration. The rule arises under the articles of association of the Football League and requires that in order for a club to be eligible to compete again in the league, usually via new owners, it must pay in full its "football creditors", being other clubs owed transfer fees and players wages.
The rule has been criticised as producing a result by which "millionaire" footballers have their wages paid in full as a special class of preferred creditors whilst service providers and HRMC receive only "pence in the pound" from an insolvent club.
In the High Court HRMC argued that the rule breached fundamental principles of insolvency law, including the pari passu rule and the anti-deprivation rule.
Mr Justice Richards concluded that, although each club insolvency was unique, based on the way in which the football creditors rule is applied in most circumstances, it would not be rendered void by application of either the pari passu rule or the anti-deprivation rule. Broadening the principles to outlaw the rule as HMRC argued would, the judge said, "require statutory intervention".
See court decision here |
|
In this case Westpac sought to have joint debtors Thomas and Sheena Fuller adjudicated bankrupt. Following a failed attempt to have Westpac's bankruptcy notices set aside, the Fullers appealed to the High Court's discretion under section 37 of the Insolvency Act 2006 to refuse adjudication.
In evidence the Fullers deposed as to having a modest amount of assets to the extent that they had no means to settle their debt and that adjudication would result in both of them losing their respective jobs.
In assessing the Fullers' financial position the Court noted the omission of information about the formation of the trust that owns the Fullers' family home and their interest in three companies. The Fullers also failed to provide evidence that their jobs would be in jeopardy if the orders were given. Overall, the Court was left in doubt about whether orders for adjudication would be a futile exercise and accordingly, granted the orders.
This case is notable for the Court requiring full disclosure of assets that judgment creditors have an interest in, but may not necessarily own, when assessing whether it should exercise its discretion under section 37 to refuse adjudication.
See court decision here |
|
Court permits the appointment of liquidators who would otherwise be disqualified |
|
In the case of Southbury Insurance Ltd v Black, Messrs Downey and Black, the receivers of South Canterbury Finance (SCF) successfully sought permission from the Court to be appointed liquidators of Southbury Insurance Limited (Southbury) despite being disqualified under section 280(1) of the Companies Act 1993 (the Act).
Southbury had provided insurance policies for SCF consumer finance agreements and was a related company of SCF. As a result, Messrs Downey and Black were initially disqualified from being appointed liquidators under section 280(1)(c), (ca) and (cb) of the Act.
In determining whether to grant the application for leave under section 280, the Court found that the main question at issue was whether there was a risk that, in allowing the appointment, the proposed liquidators' independence and ability to carry out their task professionally and effectively could be compromised. The Court found that such a risk was minimal in these circumstances as: · It was reasonable to assume that the proposed liquidators, as experienced insolvency practitioners, would act with integrity · There was less ground for concern in cases of a solvent liquidation · There was a degree of supervision over Southbury by the Reserve Bank and the bank and had already indicated its approval of the proposed appointment · The only preferential creditor had already been paid.
Based on these reasons, the Court held that the risks to policy-holders and trade creditors arising out of the appointment were so remote that they should not stand in the way of the appointment.
This case is a useful reminder to insolvency practitioners that an initial disqualification under the Act may not always be a bar to their appointment as a liquidator.
See court decision here |