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The latest news onRestructuring,recovery andinsolvencyRecovery, restructuring & insolvency Autumn 2010. © 2010 Lawrence Graham LLP. All Rights Reserved. ISSN 1477-531XTHE LATEST DEVELOPMENTS INAdministrationChargesCompany voluntaryarrangementsDefinition of insolvencyDirectors’ dutiesEmploymentLiquidationPartnership insolvencyRetention of titleSection 236ALSO IN THIS ISSUEPersonal insolvencyMeet the teamNewsletter Issue Number 35 Autumn 2010

EditorialNicholas PikeT/ +44 20 7759 6721E/ nicholas.pike@lg-legal.comRestructuring, recovery and insolvencyWelcome to the autumn issue of The Angle on Restructuringand Recovery, Lawrence Graham’s market leading insolvencyand restructuring newsletter.I write this on the eve of the UK Government’s ComprehensiveSpending Review, billed as heralding the largest cutback in publicspending in modern times. No one yet knows the effect this willhave on the restructuring professional, although it is difficult tosee how it can mean anything other than an increased workload.Fewer (and cheaper) contracts with the private sector and areduction in public sector staff headcount militates towardsa slower economy. Even for those not directly affected, theprevailing economic climate influences consumer spending as,despite continued cheap credit, the British public are temptedto reign things in. We wait to see what is in store.We are now finalising the planning for our 13th Lawrence GrahamInsolvency and Restructuring Conference. With places sellingout faster than ever, we are looking forward to welcomingover 550 insolvency practitioners and their staff to London’sBrewery on Monday 8 November. We may have a few lastminute cancellations, so please contact Naomi McGeough atnaomi.mcgeough@lg-legal.com to be added to the waiting list.2 the angle Restructuring, recovery and insolvency

AdministrationGareth ShackletonT/ +44 20 7759 6940E/ gareth.shackleton@lg-legal.comAway winRevenue and Customs Commissionersv Portsmouth City Football Club Ltd(in administration) and others[2010] EWHC 2013 (Ch)It first became apparent that PortsmouthCity Football Club (Portsmouth FC) was infinancial trouble on 1 October 2009 whenHMRC brought a winding up petition inrespect of unpaid tax liabilities. This petitionwas dismissed in November after an agree -ment was reached between the parties, buta second petition quickly followed from HMRCon 23 December 2009 for debts totalling£11.7 million in respect of unpaid PAYE,national insurance contributions and VAT.The court adjourned HMRC’s petition on10 February 2010 so that a statementof affairs could be produced, but on 26February 2010 Portsmouth FC found itselfin an administration process at the directionof its owner. HMRC submitted a proof ofdebt in the administration for £17 million,which they later revised to £35 million toinclude tax arising under avoidance strategies,in which it claimed the club had engaged.A CVA proposal was put forward by the ad -minis trators on 28 May 2010 and approvedby more than 75% of the creditors at a meetingon 17 June 2010. HMRC was one of theonly creditors to vote against the CVA, partlybecause it is HMRC’s standard position tovote against them and partly because of theFA Premier League’s ‘football creditors’ rule.The ‘football creditors’ rule is part of thePremier League’s regulations with which allteams playing in that league must comply. Itstates that if a Premier League club goes intoadministration, its membership of the leagueis suspended and will only be renewed if itexits by way of a CVA and the club’s debts to‘football creditors’ are paid in full. ‘Footballcreditors’ comprise other clubs, players andvarious football organisations. During the periodof suspension the Premier League can with -hold payments to the club in respect of TVrevenue received and instead pay it to theclub’s football creditors. As TV revenue is, formost clubs, their primary source of income,this places football creditors in an advanta -geous position at the expense of unsecuredcreditors, such as HMRC, and will oftenresult in the football creditors’ debts beingfully repaid leaving unsecured creditors withnext to nothing.HMRC brought an application challenging thevalidity of the CVA under section 6 of theInsolvency Act 1986 (the Act) and Rule 1.17of the Insolvency Rules 1986 on the groundsof unfair prejudice and material irregularityfor the following reasons:the CVA unfairly prejudiced HMRC as itprevented a liquidator from bringing aclaim under section 127 of the Act inrespect of the payments made to footballcreditors;there had been a material irregularity ascreditors had been misled by the CVA as tothe amount of assets that would be madeavailable on liquidation as no mention hadbeen made of section 127 recoveries;there had been a material irregularity atthe creditors’ meeting approving the CVAby allowing the football creditors to vote onthe CVA proposal. If these creditors hadnot been allowed, HMRC would have beenable to block the CVA as it had more than25% of the vote; andthe chairman was wrong to refuse to allowHMRC to vote for its full claimed debt.Before considering each of the above pointsMr Justice Mann made it clear that this hearingwas not the appropriate forum to consider thevalidity of the Premier League’s football creditorrule. In such circumstances the Premier Leaguewould need to be joined to the litigation anda lot more time would need to be given toallow the parties to collate evidence. Additi -onally, a separate action has been commencedagainst the Premier League, which Mr JusticeMann considered would be more suitableto consider such an issue. He moved on toconsider each point in turn, discussed onthe following pages.3 the angle Autumn 2010

of assets which would otherwise fall into theCVA. If there were no CVA, the unsecuredcreditors were likely to be worse off as a con -tinued administration, or liquidation, wouldresult in Portsmouth FC being expelled fromthe Premier League which would then eitherretain the TV revenues or disburse them toPortsmouth FC’s football creditors in anyevent. In light of this, and until a successfulattack is made on the Premier League’srules, the CVA did not deprive HMRC of moneywhich would otherwise flow in their direction.Allowing football creditors to vote and theChairman’s refusal to acknowledge HMRC’sfull proof of £35 millionLoss of S127 claimsMr Justice Mann considered that the CVAproposal did not bar a winding up order onHMRC’s petition, once the suspension of thepetition has been lifted. There is no expressprovision in the CVA that the only form ofwinding up is to be a voluntary winding up.Additionally, the fact that the CVA causesa potential nine month delay (as this is howlong the CVA was expected to last) to anyapplication for the compulsory winding upof the company, does not amount to a lossof section 127 claims. As stated above, mostof the club’s money derives from the PremierLeague’s TV payments and these monies areunlikely to have been dissipated in that time.Non-disclosure in the CVAMr Justice Mann ruled that the non-disclosureof the section 127 claims and the availabilityof ‘parachute’ payments on the liquidation ofPortsmouth FC in the CVA was not a materialirregularity. This was because it was difficultto determine whether a successful section127 claim would make any positivedifference to the net distributions to unsecu -red creditors. Additionally, liquidation wouldbe likely to result in Portsmouth FC beingexpelled from the Premier League, whichwould mean the latter would take the viewthat any ‘parachute’ payments are no longerpayable. The availability of such ‘parachute’payments would therefore depend on therebeing success in an uncertain and costlysection 127 claim against the Premier League.Unfairly prejudicial treatment of footballcreditors by approving both previous andfuture payments to them in fullAgain Mr Justice Mann found against HMRCin this respect. He considered that the CVAdid not approve past or future payments tofootball creditors as the monies being usedto pay those creditors are not being paid outHMRC argued that, as football creditors werebeing paid off with money which did not fallwithin the CVA, football creditors should nothave been permitted to vote on the CVAproposal. Mr Justice Mann found this aninteresting point but considered that the realquestion was whether or not the footballcreditors had a real interest in the CVA. Inthis instance they did. As many of the footballcreditors were employee players, a liquidationwould result in them losing their contracts ofemployment with no guarantee they would getother contracts on as favourable terms. Additi -onally, and although only a technical possibility,the football creditors may not be paid thePremier League monies should PortsmouthFC fall into a liquidation process. The judgetherefore found against HMRC on thesegrounds and said that the CVA would putHMRC, and other unsecured creditors, in abetter position than they would be shouldPortsmouth FC be wound up.Finally, Mr Justice Mann ordered that thechairman was correct to refuse to allow over£13 million of the HMRC’s approved debt andinstead place a value of £1 on it. Although itwas found that the debt was ‘ascertained’,as it only depended on an inquiry within thecontext of a piece of litigation, it was ‘unliqui -dated’ for the purposes of Rule 1.17(3) ofthe Insolvency Rules 1986 as it was a debtwhich the creditor could not fairly quantify.CommentAlthough Mr Justice Mann made it clear thathe was uncomfortable with this judgment, andthat his hands were effectively tied until thehearing of the forthcoming challenge againstthe Premier League’s rules, it still raisessome interesting issues which apply morebroadly than on football club insolven cies.Of particular note is the finding that a debtowed to a creditor is not the only questionthat should be con sidered when determiningif they have a right to vote in a CVA. Theobligation to consider a creditors’ interest ina CVA is very wide and presents a challengefor those insolvency practitioners responsiblefor such decisions.4 the angle Restructuring, recovery and insolvency

Alex JayT/ +44 20 7759 6632E/ alex.jay@lg-legal.comNo room at the innThe New Northumbria Hotel Limitedv Maymask (148) LLP[2010] EWHC 1273 (Ch)A creditor, Maymask (148) LLP (Maymask),appointed administrators over The NewNorthumbria Hotel Limited (the Company),which was a hotel operator. The case con -cerned actions taken in relation to theCompany prior to the administrators’appointment whereby an agreement wasformalised between the administrators andMaymask in a consent order and sealed atcourt immediately after their appointment.The administrators had agreed with Maymaskthat it could repossess the hotel premisesleased by the Company. In addition, theadministrators agreed to sell all fixtures andfittings in the hotel. In accordance with theconsent order, Maymask began making useof these fixtures and fittings, which includedcertain assets that belonged to a third party.As a result of Maymask’s actions, the thirdparty brought an action against it for con -version and the High Court granted an interimorder for the delivery up of some of the thirdparty’s property by Maymask.administrators failed to notify the Companyof their appointment before agreeing a saleof its assets. Finally, the court was alsocritical of the fact that the administratorshad not properly investigated to whom theassets belonged before agreeing the sale.CommentAlthough this case did not deal directly withthe issue of pre-packs, the judge in this casewas critical of the administrators’ conductprior to their appointment. It has thereforebeen suggested that the comments can beapplied to the position of administrators inrelation to pre-packs and in particular whereadministrators enter into agreements priorto their appointment.Whilst this case is plainly fact-specific, prac -titioners are warned against the principle ofentering into agreements with third parties inrelation to assets of a company over whichthey have yet to be appointed. The situationis most likely to arise in respect of pre-packs,although is clearly not limited to that situation.In giving judgment, the judge passed certainremarks about the administrators’ conductwhich indicated that he was of the view thatthe administrators had acted improperly.The court criticised the fact that theadministrators had agreed that Maymaskcould repossess the premises prior to theirappointment. The court’s view was that thisaction destroyed the Company’s negotiatingposition in relation to ongoing court pro ceed -ings over disputed rent arrears. Further, the5 the angle Autumn 2010

ChargesRobert PatersonT / +44 20 7759 6674E / robert.paterson@lg-legal.comLegal charge versus trusteeindemnity – which prevails?Dominion Corporate Trustees Limited andDominion Trust Limited v Capmark BankEurope Plc[2010] EWHC 1605 (Ch)Cantabria Investments Limited was aspecial purpose vehicle which, in March2006, purchased a unit trust which owneda commercial property in Hemel Hempstead.The purchase price was £28.1 million. Thepurchase was funded in part by CapmarkBank Europe Plc (Capmark) by a term loan of£21 million secured by a first legal charge onthe property. The loan was not repaid on thedue date and Capmark appointed fixedcharge receivers to sell the property.The unit trust was established under Jerseylaw for tax reasons. It was structured suchthat legal ownership of the property was heldby the claimants, who were professionaltrustees based in Jersey (the Trustees).At the time of the purchase, the property waslet to a commercial tenant until November2007, but for the most part the property wasnot re-let. Meanwhile, a change of rating lawcame into force on 1 April 2008 which meantthat property rates became payable if thepre mises were unoccupied for six months.A liability to pay rates in excess of £1 milliontherefore fell on the Trustees as the legalowners.The Trustees were entitled to be indemnifiedout of the property proceeds for expensesreasonably incurred by them and they arguedthat rates fell within that category. However, inthe wake of the property slump, the receiver -ship sale fetched only £14.63 million, whichwas considerably less than Capmark’s loan,as secured by the legal mortgage. The issueat trial was whether the Trustees’ right ofindemnity ranked in priority to, or behind, thebank’s legal charge. The Trustees acceptedthat their indemnity could not have priorityover the legal charge unless the relevantdebenture said so, but maintained that thedebenture had an express (or alternatively animplied) term to that effect. The judge analysedthe wording of the debenture closely, butconcluded that the indemnity clause didnot stand up to the Trustees’ argument thatit should prevail over Capmark’s legal charge.In the alternative, the Trustees said that thecourt must imply a term that the indemnityshould prevail, on the basis that the Capmarkgroup also held some of the beneficial interestin the property, and that the Trustees would notusually be on the hook for such large sums.The court held that it could imply terms togive effect to documents so that their naturalmeaning would be conveyed to a reasonableperson having all the background knowledgereasonably available to the parties involved.An implied term was not an addition to alegal document but spells out what it means.Therefore, an implied term cannot contradictan express term and, crucially, must be ne -cessary to give effect to the parties’ intentions.Terms should not be implied simply to addwhat the court considers would have beenreasonable for the parties to agree.In this case, the judge accepted that itwould have been reasonable for the Trustees’indem nity to take priority, but that such aterm could not be implied because it con tra -dicted the specific wording in the debenture.CommentThis case is interesting for several reasons.First, it reminds us that rates are anunsecured liability in a receivership – thisis not the same for occupied premises inadministrations and liquidations where ratesrank as an expense. Secondly, those whoadvise on property tax structures need tofactor in the risks inherent in propertyownership, such as rates, occupiers’ liabilityand environmental law. Often the registeredowner will be liable, but this may causeproblems if a trustee holds the pro perty ontrust for the stakeholders. Thirdly, unsecuredindemnities will not rank ahead of securedloans unless the finance documents makevery clear that this was intended by theparties. Finally, the court will only imply anunexpressed term if it is sure that the partiesmust have intended that term to form partof their contract.6 the angle Restructuring, recovery and insolvency

Company voluntary arrangementsHelen PlewsT/ +44 20 7759 6406E/ helen.plews@lg-legal.comLiverpool win on penaltiesMiss Sixty: Mourant & Co TrusteesLimited and another v Sixty UK Limited(in administration)[2010] EWHC 1890 (Ch)One of the more controversial retail CVAs ofthis downturn involved the high street fashionchain, Miss Sixty. The case hit the headlineswhen the landlords of a large shopping centrein Liverpool, in which the company occupiedtwo units, challenged the CVA on the groundthat their interests had been unfairly prejudicedand accused the administrators of misconduct.In November 2006 the landlords (theLiverpool Landlords) let two units toMiss Sixty UK Ltd for a term of ten years.The company’s Italian parent company,Sixty SpA, guaranteed rent under the leases.The company ran into difficulties and triedto surrender the leases but the LiverpoolLandlords would not accept the surrenders.In April 2008, Miss Sixty instructed a firm ofinsolvency practitioners to advise on a poten -tial restructuring and in August the companycommissioned a report on the likely level ofclaims it would face from landlords. A draft ofthe report assessed the loss relating to oneof the units to be approximately £490,000.The landlords estimated the value of thelease over the next seven years to be in theregion of £4 million.Administrators were appointed on 29 Septem -ber 2008 and a CVA proposal was formulated.Sixty SpA agreed to contribute £300,000in total towards the claims of the landlords,being the sum they would have paid thelandlords had the landlords accepted thesurrenders of the leases. The administratorsinserted wording in the proposal stating that the£300,000 would be offered to the LiverpoolLandlords as the estimated surrender valueof the leases, calculated on the basis ofcertain assumptions. The final proposal wascirculated in March 2009 which providedfor Sixty SpA to be released from all liabilityunder the guarantees it had given securingthe payment of rent upon payment of thesum of £300,000 to the Liverpool Landlords.The creditors’ meeting was convened on2 April 2009 and the Liverpool Landlordssubsequently sought to challenge the CVAunder section 6(1) of the Insolvency Act1986 (the Act) on the following grounds:a) the proposal left them in a substantiallyworse position than they would have beenin on an insolvent liquidation;b) it was unfair in principle for the CVA toabrogate their contractual rights underthe guarantees, as those guaranteeswere enforceable for the remainderof the lease term and the LiverpoolLandlords were not required to mitigatetheir loss. Were the CVA to be approved,the Liverpool Landlords would only beentitled to compensation based onuncertain assumptions regarding theirability to re-let the units;c) the proposal made unrealistic assumptionsbased on new money Sixty SpA was willingto make available;d) the proposal treated the LiverpoolLandlords differently from other landlordcreditors; ande) the CVA created no enforceable obligationon Sixty SpA actually to make the compen -sation payments, while simultaneouslyobliging the Liverpool Landlords to forgotheir guarantees.7 the angle Autumn 2010

The court quashed the CVA, finding that itdid not properly compensate the LiverpoolLandlords for the loss of their guarantees.The judge also accused the administrators(who were not participants in the trial) ofmisconduct, suggesting that they had losttheir sense of objectivity and had allowedthemselves to side with the Sixty Group. Thejudge noted the importance of maintainingindependence where a CVA could be carriedby creditors whose position would be unaffec -ted by the proposal, or even improved.CommentThe court’s criticism of the administrators’conduct in putting forward a CVA proposalon the above terms serves as a reminder topractitioners of the importance of carefullybalancing the competing interests of differentparties.The High Court considered the decision inPrudential Assurance Co Ltd v RPG Power -house (2007) where it had been held thatin certain circumstances a CVA could lawfullybe used to deprive a creditor landlord of thebenefit of a third party guarantee supportingthe liabilities of the tenant. The court notedthat the issue was whether the prejudicesuffered of putting a creditor in a less ad -vantageous position constituted an unfairprejudice and decided that horizontal andvertical techniques could be employed toassess this. The former considers the positionin comparison with other creditors. The lattercompares the outcome for the particularcreditor with that in which he would findhimself on a hypothetical liquidation.The judge’s view was that this was “a CVAthat should never have seen the light ofday”. It was the duty of the officeholders tomaintain an independent stance and onlyto propose a CVA if they are happy that itwill not unfairly prejudice the interests of anycreditor or member of the company concerned.It is a salutary lesson for practitionersproposing a complex CVA where classesof creditors may not be treated equally.On a horizontal analysis, the court recognisedthat differential treatment does not automa ti -cally make a CVA unfairly prejudicial, while ona vertical analysis it considered that the meredifficulty of assessing a fair compensatorysum should not force landlords to accept anysum as that would undermine the commer -cial function of a guarantee and leave themin a worse position than if the company hadgone into insolvent liquidation. On the facts,the court ruled that it was unfair for theLiverpool Landlords’ guarantees to be strippedin return for compensation where that com -pensation had been artificially calculated.Further, the Liverpool Landlords’ positionwas prejudiced by the fact that the companyand administrators knew the CVA would beapproved as other unsecured creditors wereto be paid in full. Additionally, there was nojustification in this case for the differentialtreatment of the Liverpool Landlords.8 the angle Restructuring, recovery and insolvency

Definition of insolvencyKanika Kitchlu-ConnollyT / +44 20 7759 6789E / kanika.kitchlu-connolly@lg-legal.comSail onBNY Corporate Trustee Services Limited vEurosail – UK 2007 – 3BL Plc and 7 others[2010] EWHC 2005 (Ch)This case analysed the “balance sheetinsolvency test” under section 123(2) ofthe Insolvency Act 1986 (the Act) and foundthat, based on the specific facts of the case,Eurosail was not insolvent for the purposesof section 123(2) of the Act even thoughits financial statements and mana gementaccounts indicated net liabilities of£75 million and £130 million respectively.Eurosail had issued notes as part of asecuritisation transaction. Eurosail’s riskrelating to interest and exchange rateswas hedged by way of swaps with LehmanBrothers Special Financing (LBSF) whoseobligations in turn were guaranteed byLehman Brothers Holdings Inc (LBH). Thesecuritisation included a post enforcementcall option (PECO). This issue was ultimatelynot relevant to the case but suffice to notethat the PECOs provided that, in the eventthat the security for the notes was enforcedand found to be insufficient to pay all amountsdue in respect of them, an associated com -pany of the Issuer (Eurosail) was to have acall option in respect of the benefit of all thenotes at a nominal price.LBSF failed to pay sums due under theswap agreements and LBH failed to honourits guarantee as a result of their respectiveinsolvencies. Eurosail therefore filed claimsagainst both Lehman entities, the value ofwhich exceeded $221 million.The noteholders asserted that the conse quen -ce of Lehmans’ failure to pay and changes inboth interest and currency rates meant thatEurosail should be deemed to be unable topay its debts within the meaning of section123(2) of the Act.The court was therefore asked to determinetwo key questions:1. was Eurosail unable to pay its debts withinthe meaning of section 123(2) of the Act(which was dependent on how the com pa -ny’s contingent and prospective liabilitieswere to be taken into account); and2. if the court held that Eurosail wasinsolvent, did the existence of thePECOs alter the court’s view?Balance sheet insolvencyThe section provides that “a company is alsodeemed unable to pay its debts if it is provedto the satisfaction of the court that the valueof the company’s assets is less than theamount of its liabilities, taking into accountits contingent and prospective liabilities.” Thecourt considered the wording of the balancesheet test and, in particular, the meaning of“taking into account its contingent and pros -pective liabilities.” In doing so, the court laiddown the following general propositions inrelation to the balance sheet test.1. Only present assets (not contingent orprospective assets) could be taken intoaccount.9 the angle Autumn 2010

2. The requirement to take account of con -tingent and prospective liabilities could notrequire such liabilities to be aggregated attheir face value with debts currently due.As an example, an obligation to pay £100today has a higher present value than anobligation pay £100 in five years. Further,the judge considered that had the simpleaggregation of present and prospectiveliabilities been intended, the subsectionwould have been stated to “include itscontingent and prospective liabilities”(as opposed to just ‘take account’).3. In order to determine the value of thecontingent and prospective liabilities, thecourt would have to take into account therelevant facts of the case, including whenthe prospective liabilities fell due, whatassets would be available to meet themand what provisions were made for theallocation of losses.Despite the fact that Eurosail had netliabilities of £75 million and £130 millionin its financial statements and managementaccounts respectively, the court nonethelessconsidered that the company was solvent.The reasons for this conclusion were as follows.i. Whilst it was normal accounting practicenot to include sums that are to berecovered from ongoing litigation, for thelegal balance sheet test, Eurosail’s claimof US$221 million against Lehmans wasto be considered as an asset and shouldnot therefore be ignored. The reason forthis was that it was possible for Eurosailto sell its interest in its claim on the secon -dary market for about 35% of its valueand it therefore had an immediate value.ii. The total liability shown on the financialstatements included a conversion intosterling of future liabilities which onlybecame due for payment in 2045. Thecourt determined that, in view of theuncertainty associated with currencyfluctuations and interest rate swaps,these were not prospective liabilities butrather contingent liabilities and shouldnot therefore be attributed any materialvalue. The court considered that theseliabilities were purely speculative.As Eurosail was deemed to be solvent, thecourt did not spend much time in deter mi -ning the PECO issue. It did, however, notethat Eurosail’s liabilities remained the same,whether or not there was a PECO or whetheror not the call option had been exercised.The facts of this case are very specific as thefuture liabilities were only due in 2045 andwere therefore so uncertain that the courtcould not conceivably have taken them intoaccount in determining solvency. This had asignificant impact on the company’s financialstatus.CommentAlthough contingent and prospective liabilitiesare taken into consideration, the court’s viewwas that they are not valued at face valueand all relevant factors as highlighted abovehave to be taken into consideration whenascribing a value to such liabilities.10 the angle Restructuring, recovery and insolvency

Directors’ dutiesNicholas PikeT/ +44 20 7759 6721E/ nicholas.pike@lg-legal.comEmail proves fatalLindsay v O’Loughnane[2010] EWHC 529(QB)Mr O’Loughnane was a director and majorityshareholder in FX Solutions Limited (FX).FX provided foreign exchange services. Itappears that for some time Mr O’Loughnanehad been fraudulently using monies receivedfrom clients to effect foreign exchange trans -actions for his own purposes.Sean Lindsay was a customer of FX. In June2008, he undertook three foreign exchangetrades with FX. Mr O’Loughnane acceptedthe instruction in relation to the first trade.There was a delay in providing Mr Lindsaywith his foreign exchange funds from thattrade, because Mr O’Loughnane had usedthe funds for his own purposes and had toawait further funds from other FX clientsbefore he could provide Mr Lindsay with hiscurrency. In relation to the other two trades,other members of FX accepted theinstructions. However, FX was by this timeinsolvent and unable to provide the foreigncurrency requested in relation to thosetrades, and Mr Lindsay lost his money.Mr Lindsay subsequently brought proceedingsagainst Mr O’Loughnane personally, on thebasis of fraudulent misrepresentation/deceit,and alternatively on the basis that in thecircumstances the court should pierce the‘corporate veil’ of FX and allow a claim againstone of its directors in his personal capacity.Mr Lindsay’s instruction was provided byemail. This is because the Statute of Frauds(Amendment) Act 1828 provides that arepresentation or assurance relating to thecharacter or creditworthiness of another person(in this case FX) may not be used as thebasis for a claim unless their representationis in writing. In this case, the court wassatisfied that the acceptance by email ofMr Lindsay’s order amounted to such arepresentation.CommentThis case raises possible issues whichmay need to be considered in relation toany representations given by directors ofcompanies in the ‘twilight period’ beforethe onset of formal insolvency. It is possiblethat representations given by the directorssometime previously may continue to apply,and could form the basis of a fraud or mis -representation claim. This is an issue whichmay need to be examined by the officeholdershould the company be placed intoformal insolvency.From an evidential perspective, it is alsoapparent in this case that had Mr O’Lough -nane not engaged in email (or other written)correspondence with Mr Lindsay, then theaction for fraud against him may not havesucceeded.Mr Lindsay’s claim against Mr O’Loughnanesucceeded, on the basis that Mr O’Lough -nane’s acceptance of Mr Lindsay’s first tradeamounted to an implied representation that FXwas solvent and trading properly and legiti -ma tely. This was false. It was also significantthat the acceptance by Mr O’Loughnane of11 the angle Autumn 2010

EmploymentGareth ShackletonT/ +44 20 7759 6940E/ gareth.shackleton@lg-legal.comStand stillUnite The Union, McCartney & Others v NortelNetworks UK Limited (in Administration)[2010] EWHC 826 (Ch)Nortel Networks UK Ltd (Nortel) went intoadministration on 14 January 2009 for aperiod of 24 months. On 30 March 2009the administrators gave notice terminatingthe employment of 37 employees at one ofNortel’s premises in Northern Ireland. These37 employees wished to make claims arisingout of the termination of their employmentand, together with Unite the Union and 203employees who had been made redun dantfrom other Nortel sites, requested theadministrators to consent to lift the moratoriumin respect of their claims so as to commenceproceedings against Nortel (as set out inparagraph 43(6) of Schedule B1 of theInsolvency Act 1986). The employees’claims were as follows:an action for a protective award owingto Nortel’s failure to consult the unionor an employee representative aboutthe redundancy plans;an action for unfair dismissal as, althoughredundancy is a fair ground, Nortel failedto follow a fair procedure in taking thedecision to dismiss the employees;Nortel had breached the terms of theemployees’ contracts by failing to complywith a term granting enhanced redundancypay over and above the statutoryentitlement;The administrators agreed to allow theprotective award claims to proceed butconfirmed that these would be defended.Consent was refused in respect of the otherfour claims as the administrators argued thatthey could be dealt with by the employeesproving their claims as debts in Nortel’sadministration. The employees argued thatpermission should be granted and applied tothe court for that order on the grounds thatthe claims had a real prospect of successand that it would have been inequitable notto allow them to proceed.Mr Justice Norris refused the employee’sapplication. He stated that as the aboveclaims were all monetary in nature it hadto be an “exceptional” case for the courtto give their consent to bring proceedingsduring the statutory moratorium.The employees argued that this was such acase as the claims sought were not provablein a future liquidation or the current adminis -tration, and that it was necessary to obtainpermission to bring proceedings and pursuethem to judgment before any provable claimcould arise. The administrators disagreedwith this and stated that they intended torecognise the employees’ claims as capableof proof as they argued these claims were inlaw to be recognised in the administrationand would be provable in a liquidation. Theadministrators argued Nortel had goodgrounds to defend the claims and that it wasNortel’s failure to pay employees’ expensesclaims; andNortel had discriminated against certainemployees on unlawful grounds whenselecting whom to make redundant.12 the angle Restructuring, recovery and insolvency

not applicable – Nortel was liable as it hadentered into a contract with the employees,not because someone decided the law ofcontract should apply.Additionally, Mr Justice Norris considered thatthe scope of provable debts be as wide aspossible. As companies, unlike bankrupts, donot survive their liquidation, he stated it wasnot desirable to create a category of claimthat could not be dealt with by the insolvencyprocess and would otherwise beirrecoverable.Commenta waste of Nortel’s resources to require themto defend the employees’ claims when thoseclaims were provable in the administration.Mr Justice Norris found for the administratorsby stating firstly that the moratorium did notdeprive the employees of their claim andsecondly that the employees’ claims wereprovable debts in Nortel’s administration.This case makes clear that the court will onlylift the administration moratorium and grantpermission for monetary claims to be con -tinued where these claims are “exceptional”,as the normal procedure would be for theseclaims to be resolved using the proof of debtprocess. In this case, the court decided thatthe various categories of employee claimsin issue were not exceptional and creditorsas a whole therefore need not sufferadditional costs and expenses which theadministration estate would have to bearif the moratorium were lifted.On the first point, Mr Justice Norris said thatparagraph 43(6) of Schedule B1 does notaddress the existence of claims, it addressesthe manner of their enforcement. Its effectis to suspend the claim, not to make itdisappear. The employees still have claimson the refusal of the court’s permissionas the suspended rights would simply bereplaced with a right to submit a claim(proof) in writing to the administrator(Rule 2.72 of the Insolvency Rules 1986).On the second point, Mr Justice Norrisconsidered that the employees’ claimsrelated to debts to which either Nortel weresubject at the date on which it went intoadministration, or were debts to whichNortel became subject after administrationby reason of an obligation incurred beforethat date, and therefore fell within Rule13.12 of the Insolvency Rules 1986 andwere provable.Mr Justice Norris distinguished this case fromthe previous line of authorities relied on bythe employees. He stated that those casesconcerned a pre-administration obligationthat depended on some level of prior dis cre -tion which had not been taken at the timeof the insolvency (eg, a discretion to awardcosts or the Secretary of State’s discretionto seek recoverability of overpayment ofjobseekers’ allowance in a bankruptcy).In the present case such a discretion was13 the angle Autumn 2010

LiquidationGareth ShackletonT/ +44 20 7759 6940E/ gareth.shackleton@lg-legal.comfunctions and the general knowledge, skill andexperience of that particular director. In otherwords, the test is both objective and subjective.Hell raiser – wrongful trading atthe moviesSurjit Singla v Thomas Hedman, Gone to HellLimited, Stonewood Communications BV[2010] EWHC 902 (Ch)The liquidator brought an action for wrongfultrading against Thomas Hedman who wasthe sole director and shareholder of the filmproduction company NMD (UK) Ltd (NMD)which was being compulsorily wound up.Hedman had signed an agreement withOne Step Beyond (OSB) to provide filmingfacilities in Namibia and under the contractfunds immediately became payable by NMD.However, at the time of signing, NMD hadissued share capital of only £2, no otherassets, no cash and no enforceable agree -ments for the provision of finance to supportthe film. Production of the film started andfinished on the same day owing to lack offinance and because the proposed mainactor refused to participate. Hedman hadhoped to finance the production in part withlow-budget film tax relief but that had notbeen put in place either. The liquidatorsargued that Hedman ought not to haveentered into the agreement knowing thatNMD had insufficient funding and had notagreed terms with the proposed lead actor.Readers will be aware that for a director to beliable for wrongful trading under section 214Insolvency Act 1986 (IA86), that director musthave known, or ought to have concluded, thatthere was no reasonable prospect that thecom pany would avoid going into insolventliquidation. The facts that a director ought tohave known, the conclusions which he oughtto reach and the steps he ought to take arethose which will be known or taken by a reason -ably diligent person having both the generalknowledge, skill and experience, reasonablyexpected of a person carrying out the sameHedman stated that it was, in his experience,unusual for a film company to begin its acti vi -ties with sufficient funds of its own to makethe film. He suggested it was quite normal tostart work on the film before the special pur -pose vehicle used to make it received fundsor even a commitment to funds. Hedman’sstatements suggested that such a remarkablylow standard of corporate responsibility in thefilm industry is quite common. This was rejec t -ed and instead the court decided that he hadtaken a casual approach to his duty as directorto look to the best interests of NMD and – ifNMD did not have assets to pay creditors –the duty that he owed to those creditors tominimise their losses. By committing NMD toits obligations under the agreement withoutbeing able to procure the necessary financeor the participation of the principal actor, heknew or ought to have known that there wasno reasonable prospect that NMD could avoidgoing into insolvent liquidation, for the pur -poses of section 214(2)(b) IA86. Hedmanhad no reasonable prospect of being satisfiedthat the lead actor would sign and noreasonable prospect of being satisfied thatNMD would secure the necessary finance tohonour its obligations under the agreement.He had been prepared to sign because heconsidered that he was not at risk and hadbeen prepared to transfer the risks on tocreditors. The require ments of wrongfultrading were satisfied and the claim undersection 214 was made out.There is nothing wrong with coming to anarrangement with creditors whereby they takea risk that money invested in a film mightnever return because the film flops. There isno problem in inviting creditors to invest in acompany which might prove to be risky. How -ever, investors should know of the risk andagree to accept the risk. What was unaccep -table was for NMD to enter arrangements withcreditors which Hedman, as director, oughtto have known could never be honoured andNMD would be driven into liquidation.CommentThis was a case with findings of forgeryand dis honesty against the director andother parties. Indeed, the judgment carriessubheadings entitled “Lies of Mr Hedman”.The director suggested a low level of cor -porate responsibility for the film industrywas normal practice, but the judge was notprepared to accept this and made the orderthat the director compensate the companyin liquidation for wrongful trading.14 the angle Restructuring, recovery and insolvency

Partnership insolvencyBhaljinder ManderT/ +44 20 7759 6657E/ bhaljinder.mander@lg-legal.comSteven CotteeT / +44 20 7759 6424E / steven.cottee@lg-legal.comCarrying the canIn the matter of Halliwells LLP[2010] EWHC 2036 (Ch)The court has recently given its blessing tofour pre-pack sales in the administration ofHalliwells LLP (Halliwells).Halliwells was a national law firm providing arange of legal services, with 116 partners andover 600 employees and offices in Manchester,Sheffield, Liverpool and London. Halliwells hadentered into a number of historic occupa tio -nal leases which had left it with onerouspayment obligations to landlords. The burdenof these payments, a fall in revenue causedby the departure of several partners, and adrop in turnover occasioned by the economicclimate left Halliwells facing insolvency.On 20 July 2010, Halliwells together with ShayBannon and Dermot Power (the ProposedAdministrators) made an application to courtfor an administration order in respect ofHalliwells, the appointment of the ProposedAdministrators as administrators, and for thecourt’s approval of four pre-pack sales ofparts of the business of Halliwells. A pre-packadministration was the only alternative asthe Solicitors Regulation Authority (SRA)would have ordered an intervention in theevent of liquidation.The Proposed Administrators had formed theview that Halliwells could not be rescued as agoing concern and that it was not reasonablypracticable to achieve the objective of abetter result for Halliwells’ creditors as awhole than would be likely if it were woundup without first being in administration. Theyconcluded that the only way forward was torealise the assets of Halliwells by means ofvarious sales in order to make a distribution toone or more secured or preferential creditors.The application marked the end of themarketing of Halliwells’ business undertakenover the course of the previous three months.The Proposed Administrators quickly discover edthat there were not many potential purchasersfor a business of Halliwells’ size and geogra -phical spread. Negotiations were conductedwith eight different firms and these generatedfour proposed sales which, in the opinion ofthe Proposed Administrators, represented thebest return available for Halliwells’ creditors.The four purchasing firms were Hill Dickinson,Kennedys, Barlow Lyde & Gilbert and HBJGateley Wareing.It was initially intended that the proposedadministration would be an out-of-courtappointment. Two notices of intention toappoint administrators were filed on a rollingbasis to protect Halliwells’ assets principallyfrom landlords whilst the sale negotiationswere taking place. However, the decision wastaken to apply for an administration orderbecause the Proposed Administrators wishedfor a court order to accept their appointmentin light of the protracted nature of the nego -tiations, the imminent expiry of the secondnotice period, and their wish to seek theapproval of the court for the proposed sales.Halliwells’ largest single creditor, the RoyalBank of Scotland (the Bank), was owedapproximately £18 million, which wasincreasing each month. The debt wassecured by way of a debenture. Sincethe projected return from the sales of therelevant parts of Halliwells’ business wasless than £10 million it was clear that, onthe basis of the Bank debt alone, Halliwellswas insolvent on a balance sheet basis.15 the angle Autumn 2010

The members also had nearly £13 million ofcapital invested in Halliwells, most of it fundedthrough Partnership Practice Loans (PPLs).The members had taken out these PPLsthrough various banks (the PPL Providers)and Halliwells had undertaken, through theHalliwells members deed, to repay eachmember’s PPL when such member ceasedto be a member. In addition, Halliwells hadgiven direct written undertakings to the PPLProviders regarding payment of the members’PPLs. Given that Halliwells was insolvent, itwas unable to honour these undertakings,leaving the members personally liable to repaytheir PPLs. This was a key commercial issuefor the purchasers in relation to those memberswho would be joining their businesses uponthe transfer of assets pursuant to the assetsale agreements. If a solicitor is declaredbankrupt his practicing certificate isautomatically suspended.In the case of each of the four asset saleagreements, the purchase price consisted,wholly or partly, of the proceeds of Halliwells’debtors and work-in-progress, which thepurchasers would endeavour to collect andpay over to the administrators. In the case oftwo of the agreements, the proceeds were tobe paid in part to the administrators, and inpart into a trust over which Halliwells wouldbe the trustee for the benefit of the PPLProviders, the transferring members and thepurchaser. In the case of the third, the trans -ferring members would have the benefit of acovenant from the purchaser that the loanswould be taken over. The reason for thesearrangements was that in each of these threecases, the purchasers made it clear that ifthe deals were to proceed they wanted toensure that the transferring members did notbecome personally insolvent by reason of theirobligations under the PPLs in circum stanceswhere Halliwells was unable to honour itsundertaking. The purchasers were not preparedto risk the fact that some or all of the trans -ferring members may no longer be able topractise as solicitors.Importantly, the Bank had provided a letterconfirming that it was content that part ofthe monies received from three of the fourpurchasers should be used for the purposeof repaying the PPLs of relevant transferringmembers. The preferential creditors, madeup of employees of Halliwells who were notrequired by the purchasers, were to be paidin full. Further, the unsecured creditors wereto receive the maximum prescribed partpayment of £600,000.The judge noted the comments made by HisHonour Judge Cooke in the case of Re KayleyVending Limited [2009] BCC 578 that inexercising its discretion in pre-pack cases, thecourt must be alert to see, so far as it can, thatthe procedure is at least not being obviouslyabused to the disadvantage of creditors andfor that purpose the court is likely to be assis tedby the provision of (at least) the informationrequired by SIP16 in so far as known orascertainable at the date of the application.A draft SIP16 report was provided to the courtwhich contained a detailed exposition of whyit was not appropriate to trade Halliwells andoffer the business for sale as a going concernin the adminis trat ion, full details of the market -ing process and a com plete explanation ofthe terms materially affecting the consider a -tion paid. The judge said that he wassatisfied that the proposals were SIP16compliant and that there was no evidence ofany abuse of the process. On the contrary,the pre-packs were the only way forward.The judge made the administration order,appointed the Proposed Administrators asadministrators and approved the four pre-packsales. The judge said that he recognised thathis order permitted the administrators to enterinto sale contracts which required them toapply substantial amounts of the consider ationreceived for the purpose of paying down PPLobligations, and to that extent repaying thecapital of the transferring members. The judgesaid that these were undoubtedly preferencesbut they were driven out of necessity in orderto maximise returns in the administrationand were a necessary evil to achieving thosereturns. In all the circumstances, the salecontracts did not unnecessarily harm theinterests of the creditors as a whole.CommentThe case provides further support for courtapproval of pre-pack administrations parti cu -larly in relation to law firms where the SRAwill intervene in the event of a liquidation anda trading administration will not be a practicaloption. It also confirms that, in certain circum -stances, it is possible to file rolling notices ofintention to appoint an administrator in orderto protect the insolvent entity’s assets whilenegotiations for a sale are taking place.The sales were structured in an unusual manneras the purchasers were not prepared to risk thetransferring members being made bankrupt.The case is going to have wide-ranging impli -cations on how banks fund law firms in thefuture and lenders will be obviously concernedthat members PPLs may be paid in priority inthe event of a pre-pack administration sale.It was also interesting that the partners wholeft Halliwells early may well have ended upin a worse position than those who stayed tothe bitter end. Unfortunately, current indica -tions are that Halliwells will not be the lastlarge law firm to face insolvency.Steven Cottee and Bhal Mander both actedfor Hill Dickinson in its purchase of Halliwells’Liverpool and Sheffield offices and are alsoadvising the liquidators of Hextalls LLP.16 the angle Restructuring, recovery and insolvency

Retention of titleKanika Kitchlu-ConnollyT / +44 20 7759 6789E / kanika.kitchlu-connolly@lg-legal.comJet awayBulbinder Singh Sandhu (trading as IsherFashions UK) v Jet Star Retail Limited (tradingas Mark One) (in administration) and others[2010] EWHC B17 1936 (Mercantile)This case considered the issue of an “allmonies” retention of title clause (RoT clause)and whether such clause was effective againstadministrators where goods were being suppliedfor immediate resale.Isher Fashions UK supplied budget fashionclothing to Jet Star for immediate on-sale.The contract between Isher and Jet Starspecifically entitled the purchaser to sell stock,without having first discharged its liabilities tothe supplier, and entitled the purchaser tocontinue to do so following its insolvency. Thecontract also contained a clause allowing thesupplier to terminate the contract if the pur cha -ser became the subject of an insolvency event.Jet Star fell behind with certain payments toits creditors, as a result of which it was placedinto administration. Following the adminis tra tion,Isher did not take steps, as it was entitled tounder the contract, to terminate the contractor to recover any stock from Jet Star. Isherdid, however, notify the administrators of itsRoT claim under the contract but still did notseek to terminate the contract or request thereturn of stock. It did, however, seek the valueof the stock for which it had not been paidby the administrators.The court was asked to decide how theRoT clause should be interpreted in lightof the other provisions in the contract whichappear ed to permit Jet Star to continuepurchasing stock from Isher for immediateresale following its insolvency.The court held that an RoT clause must beinterpreted in the context of the contract asa whole to determine its actual effect. Thecourt was also of the view that the existence ofthe clause allowing the purchaser to continueselling the goods post-insolvency underminedthe effectiveness of the RoT clause altogether.The court ultimately decided that the clausewas ineffective as it did not sit comfortably withthe fact that the goods were being supplied forthe purpose of immediate on-sale. The courtalso took into consideration the manner in whichthe post insolvency clause had previously beenused by the parties, prior to the current adminis -tration. There had been three previous triggersof the clause but the supplier had not soughtto terminate the contract, demand deliveryup of the stock or even identify it.The court was also asked to consider whethera claim for conversion existed against theadministrators who had continued to sell thestock following administration. The courtruled that it was a requirement of the tort ofconversion that the person bringing the claimhad an immediate right to possession of thegoods in question. The court was of the viewthat Isher did not have such a right in this case.CommentThis case highlights the importance of ensuringthat the wording of any RoT clause is con sis -tent with the manner in which goods are beingsupplied and the contract is being performed.Despite the clause being validly incorporatedand being clear as to its terms, the courtnonetheless held that it did not work. Thecourt’s approach in this case suggests that anall monies RoT clause will rarely be effectivein the context of a revolving supply agree ment,where goods are being sold to be sold on tothird party customers.17 the angle Autumn 2010

Section 236Ryan CarthewT/ +44 20 7759 6796E/ ryan.carthew@lg-legal.comAn insoluble issue – theinsolvency provisions of theTransfer of Undertakings(Protection of Employment)Regulations (TUPE)Bowater and others v NIS Signs Ltd (inliquidation) & others Leicester EmploymentTribunal, 29-31 March 2010 and Coombs& another v Redweb Security Ltd & othersBirmingham Employment Tribunal, 20 April2010Statutory changes to TUPE introduced in 2006included new Regulations 8 and 9. These wereintended to make it easier for buyers of busi -nesses of insolvent companies to have greaterflexibility in dealing with the existing workforce.In theory, the provisions recognise that theexisting obligations to employees often con tri -bute to the problems leading to the insolvencyand provide the buyer with the opportunity toaddress the issue when pur chasing thebusiness. In practice, we are little closer toclarity on the application of these provisionsthan we were when the provisions wereintroduced. The decisions of the EmploymentAppeal Tribunal and the Court of Appeal inOakland v Wellswood (Yorkshire) Ltd [2009]EWCA Civ 1094, and recent interpretationsof Oakland by the Employment Tribunal inBowater & Ors v NIS Signs Ltd ET/M000429/2009 and Coombs & Anor v Redweb SecurityLtd ET/1313149/2009 do little to shed lighton the gloom. This is a vexing issue for pros -pective purchasers and insolvency practitionersalike, and arguably the current position hindersrather than helps the process of resuscitatingdistressed businesses.TUPE – the key conceptsThe key concepts of TUPE are:the new employer takes over the contractsof the transferring employees, as well asthe majority of the obligations and liabilitiesrelating to the employees which arise in con -nection with the contract of employment;except in limited circumstances, anychanges to terms and conditions bythe new employer found to relate to thetransfer are void at law; and except in limited circumstances, if an em -ployee is dismissed for a reason deemedto relate to the transfer, the dismissal willbe deemed to be automatically unfair.The intention behind Regulations 8 and 9 was toderogate from these core concepts as follows:Regulation 9 of TUPE provides buyers ofinsolvent businesses with the opportunityto change terms and conditions of employ -ment by reaching agreement with employeerepresentatives during the consultationprocess;Regulations 8(2)-8(6) of TUPE provide thatcertain liabilities, including redundancy pay,payable by the Secretary of State via theNational Insurance Fund, will not transferto the buyer of an insolvent business; andRegulation 8(7) of TUPE provides that whereinsolvency proceedings are commencedfor the purpose of liquidation of the assetsof the insolvent company, contracts ofemployment will not automatically transferand any dismissals relating to the transferwill not be automatically unfair.However, the practical realities of theseprovisions have caused ongoing confusion.18 the angle Restructuring, recovery and insolvency

The basic problem with Regulation 8(7) is thedrafting. The provisions apply where insolvencyproceedings are initiated “with a view to theliquidation of the assets” of the insolvent com -pany. This is a faithful replication of the wordingin the European Directive upon which the pro -visions are based. Unfortunately, the wordingof the European Directive does not matchthe terms of our insolvency legislation.Many insolvencies are arguably initiated “witha view to the liquidation of the assets” of thecompany in question. This is usually the reasonthat creditors appoint insolvency practitionersand it is usually the reason that the practitionersmake arrangements, if practicable, to sell thebusiness. That said, this interpretation of thephrase would leave little purpose for theprovisions of Regulations 8(2)-8(6) of TUPE.The Oakland DecisionRegulation 9Regulation 9 is rarely, if ever used. The reasonfor this is simple. The provisions facilitatingchanges to terms and conditions of employ -ment assume and require consultation withemployee representatives in accordance withRegulation 13 of TUPE. For better or worse,consultation rarely occurs in an insolvency sale.Insolvency practitioners routinely forego thestatutory consultation process, requiringreleases and indemnities from purchasersunder the terms of the sale. Purchasers usuallyhave limited scope for negotiating this issue,meaning the opportunity to negotiate changesto terms and conditions with employeerepresentatives simply does not arise.Regulation 8Regulations 8(2)-8(6) offer only limited reliefto purchasers. The majority of the benefitsprotected by the National Insurance Fund arebenefits triggered by termination of employment(for example, notice and statutory redundancypay). Save for potentially avoiding liability forwages not paid by the insolvent company,these provisions present limited benefits fora prospective purchaser. This is compoundedby a strict interpretation of the provisions bythe Redundancy Payments Office.The greatest source of confusion has been Regu -lation 8(7). In theory, these provisions providethe greatest scope for flexibility for a potentialpurchaser, providing the opportunity to reducestaff numbers and introduce new terms andconditions when they purchase the businesswithout the need to navigate the complicatedprocess required under the ordinary provisionsof TUPE. Unfortunately, a gridlock has devel op -ed between the judicial interpretation of theseprovisions and the policies of key stake holderswhich shows no sign of resolution.It was in this climate of uncertainty that theEmployment Appeal Tribunal came to considerthe application of Regulation 8(7) in Oakland.Mr Oakland was an employee of Wellswood(Yorkshire) Limited, which was placed intoadministration. The business was sold undera pre-pack sale. This form of insolvencyinvolves co-operation between the companyto be placed in insolvency, secured creditors,the insolvency practitioner and the potentialbuyer prior to the appointment of the insol ven -cy practitioner, leading to a sale which takeseffect immediately following the appointment.These arrangements are con ten tious,particularly (as was alleged in this case)when there are links between those behindthe insolvent company and the purchaser.After the sale, the rump of Wellswood wasplaced into Creditors’ Voluntary Liquidation(CVL). The proceeds of the sale weredistributed to preferential creditors.Soon after the sale, the purchaser dismissedMr Wellswood and he submitted a claim forunfair dismissal. The purchaser argued thatRegulation 8(7) applied and in light of this,he had not served the statutory 12 monthperiod required to claim unfair dismissal. Atfirst instance, the Employment Tribunal agreed.On appeal, the Employment Appeal Tribunalaffirmed the earlier decision. In short, it con -firmed that when a company was placed intoadministration for the sale of a business as agoing concern, the purpose of the insolvencywas to liquidate the assets of the company.Mr Wellswood appealed again to the Courtof Appeal. He was successful. The Court ofAppeal upheld his right to pursue his claimfor unfair dismissal.19 the angle Autumn 2010

decision of the Employment Appeal Tribunalin Oakland and that Regulation 8(7) appliedas the ultimate intention of the insolvencyappointment was for the insolvent companyto be dissolved. The employees’ claims weretherefore dismissed.Following this decision, the flurry of interestin using the potential benefits of Regulation8(7) in pre-pack sales subsided and therewas a general assumption in many quartersthat Regulation 8(7) could not apply to apre-pack administration.In fact, the Court of Appeal reached no con -clusions on the issue. Although the court wasgenerally critical of the reasoning of the EAT,it decided the case not with reference toTUPE but with reference to section 216 ofthe Employ ment Rights Act 1996 (the 1996Act). In short, section 216 preserves conti -nuity of employment for an employee wherea business transfers from one employer toanother and the employee is re-engagedwithin a specified period.The situation in Oakland would rarely arise ifa purchaser is seeking to rely on Regulation8(7). Conflict would most commonly arisewhere the purchaser refused to employ anem ployee or changed their terms andconditions. Section 216 of the 1996 Actwould be of no assistance to an employeein these circumstances.The Bowater and Redweb DecisionsThis was thrown into sharp relief by therecent decisions of Employment Tribunalsin Bowater and Redweb.Redweb concerned a company which ceasedtrading and dismissed its employees. Ad min -is trators were appointed 11 days later. Threedays later the business and assets were soldto a purchaser in what was described as a prepackadministration. In reports to creditors,the administrators specifically con firmed anintention to dissolve the company withoutfirst placing the company in liquidation. Thedismissed employees claimed unfair dis -missal and various benefits, claiming thoseliabilities had transferred to the purchaser.The Tribunal decided it was bound by theIn Bowater, the employer was a profitablecompany in a group of companies which hadgiven cross-guarantees to other group com pa -nies in financial trouble. It was decided thatthe company would be sold to managementof the group via a pre-pack insolvency. Thecompany dismissed more than half the work -force before the appointment of insolvencypractitioners. Following advice, it was decidedthat the insolvency would be changed from anadministration to a CVL and the insolvencypractitioners were appointed as liquidators,who sold the company to the purchaser (themanagers) the same day. The dismissed em -ployees claimed against both companies. Thepurchaser argued that the employees had norights against the purchaser as Regulation 8(7)applied. The Tribunal decided that as the liquid -ation of assets was the only possible outcomeof a CVL, the appointment necessarily fellwithin the scope of Regulation 8(7). Althoughit was strongly arguable that the primary pur -pose of the CVL arrangements was to avoidaccruing liability under TUPE, the Tribunaldecided that the arrangements were not asham as a CVL was a legitimate option underinsolvency legislation.ConclusionSo where does this leave us? Regulation 8(7)allows a prospective future employer to pur -chase a business without taking on all of theexisting workforce and allows terms and con -ditions to be changed. It has rarely been usedof late, in part owing to misconceptions aboutthe state of the law after Oakland, currentgovernment guidance, which unambiguouslystates that it does not consider Regulation8(7) to apply in the circumstances of a prepacksale, and the risk management advisersof insolvency practitioners, who invariablyprefer the wholesale adoption of liability bypurchasers of insolvent businesses.The decisions in Redweb and Bowater showthat the scope for exploitation of Regulation8(7) is far wider than has recently beenassumed. That said, this issue will almostcertainly be considered by higher courts inthe near future. There can be no emphaticstatement on the legal position until thisoccurs. For now, there is no choice but toacknowledge the potential opportunitiespresented by the insolvency provisions ofTUPE, but to be aware of the potential risks.20 the angle Restructuring, recovery and insolvency

Personal insolvency BankruptcyRiyaz DhallaT/ +44 20 7759 6927E/ riyaz.dhalla@lg-legal.com3. The creditors of Mr Ramrattan would havemost likely lost both records and interestin the proceedings and their debts mayhave been written off.4. It would be difficult for the bankrupt and hiswife to re-finance the house and pay off themortgage owing to their age. Once againthis was linked to the passing of time.5. A substantial amount was owed in respectof solicitor’s costs under a conditional feearrangement and the risk of not recoveringfees was built into the contract.6. Statutory interest – the Registrar found alarge sum claimed by the trustee was forinterest caused by the delay.Whose house is it?Stonham v Ramrattan[2010] EWHC 1033 (Ch)Mr Ramrattan was made bankrupt in October1995 and had, in the five year relevant timeperiod for a transaction at undervalue to aconnected party, transferred his home to hiswife, even though it had previously been heldin his name. It was claimed by Mr Ramrattanthat this was due to a mistake at the time ofpurchase and that the house should havealways been bought in his wife’s name.During the appeal it was revealed that thetrans fer was a forgery and only Mr Ramrattan’ssignature on the transfer papers was genuine.All other signatures were forgeries. It alsotranspired that the facts contained in thebankruptcy questionnaire were incorrect andthe answers given were made in order tohide Mr Ramrattan’s previous bankruptcy.The trustee in bankruptcy managed to bringthe matter to trial in 2009. A two year delay,caused by the bankrupt, had ensued fromthe issuing of proceedings for the matterto come to trial. Mr Registrar Simmondsfound that Mr Ramrattan was unreliableand dis honest and made declarations thatthe transfer was a sham and/or a transactionat an undervalue. The Registrar was howeverreluctant to make an order for possessionand sale for six main reasons.1. The Registrar was concerned with thedelay between the time of the transferand the issue of proceedings. It wasfound that the delay was inordinate.The trustee argued that he was withinthe statutory time frame in which aclaim could be made.The trustee appealed the Registrar’s decisionto the High Court. The grounds for the appealwere that since the transaction was deemed asham, the property should now be transferredto the trustee to clear the estate and thatMr Ramrattan’s wife held the property ontrust for the trustee in bankruptcy.The judge on appeal found that the delay inbringing proceedings was not a reason to refuserelief and the fact that a 12 year time periodhad been specified by Parliament could notbe overturned. The judge stated that inorder for a court to exercise discretion undersection 339 of the Insolvency Act 1986required a very unusual situation. He did notbelieve the reasons reached by the Registrarwere strong enough to warrant the relief. Healso mentioned that delay in itself was not astrong enough reason and a combination ofvarious causes would be required. The judgealso concluded that the Registrar had over -stated the issue in respect of the bankruptand his wife losing their property and furtherconcluded that they had lived rent free for along period of time. As a result the originaldecision was overturned as the reasonsrelied upon by the Registrar were irrelevantor not based on evidence.CommentThis decision has been heralded as a victoryfor officeholders.It is important to realise that when con sider -ing transactions at an undervalue it is theduty of the court to exercise its discretion inthe favour of a trustee unless truly exceptionalcircumstances warrant a different order. Thestarting point should always be in favour ofa trustee.Furthermore it is important that the courtalways concerns itself with the evidence putbefore it and not conjecture.2. Evidence may have been destroyed owingto the passing of time.21 the angle Autumn 2010

Personal insolvency Individual voluntary arrangementsJames WarboysT/ +44 20 7759 6452E/ james.warboys@lg-legal.comUnfrozenHall and Shivers v Van der Heiden[2010] EWHC 537 (TCC)In most IVAs, the bankruptcy court grants aninterim order, or moratorium, preventing liti -gation from proceeding against the debtor.But this case shows it doesn’t always work.In this case the High Court ruled that it isable to continue proceedings awaiting trialnotwithstanding that a county court hadmade an interim moratorium order undersection 252 Insolvency Act 1986 (the Act)in relation to an IVA proposal. The claimantneed not apply for permission from the countycourt which made the interim order tocontinue proceedings.The debtor was the defendant in breach ofcontract proceedings in the Technology &Construction Court. A trial date of 15 March2010 had been set in October 2009. On10 March 2010, five days before the trial,the defendant told the claimants that aninsolvency practitioner was acting for him, andtwo days later the IP informed the claimantsthat an interim order under section 252 ofthe Act had been made. The IP did not statewhich court had awarded the interim order orprovide any details of the application, or theevidence in support of it. Following requestsby the claimants’ solicitor for information inrelation to the interim order, the IP sent a faxstating that the interim order had been madeby Swindon County Court. He told them thatif the claimants wished to proceed, they wouldhave to apply to that court for permission todo so. In essence the defendant argued that,as a result of the interim order, the High Courtdid not have the jurisdiction to continue withthe trial set for 15 March 2010.The claimants were of the view that the defen -dant obtained an interim order to adjourn theHigh Court trial at the last minute, withoutany costs penalty. This did not go unnoticedby Mr Justice Coulson, who described thedefendant’s actions as a “manipulative, lastminute, high-stakes attempt to avoid theconsequences of today’s trial”.Mr Justice Coulson held that the High Courtwas entitled to exercise jurisdiction undersection 252 of the Act and had the power togrant permission to the claimants to continuewith the proceedings in the High Court. Thejudge stated that there was nothing in theAct that expressly and clearly excluded theHigh Court from exercising any jurisdictionunder section 252 of the Act. The relevantaspects of the bankruptcy proceedings canbe transferred from the county court to theHigh Court under Rule 7.11 of the InsolvencyRules 1986.In his judgment, Mr Justice Coulson referred tothe authorities of Calor Gas v Piercy ([1994]BCC 69) and Coutts & Co v Clarke ([2002]EWCA Civ 943), both of which concluded thatan interim order made by a particular bank -ruptcy court does not shut out the jurisdictionof the High Court to grant permission undersection 252 of the Act, even if the county courtmight be the most usual venue to considerapplications for permission to continue.CommentThe decision clearly confirms that the HighCourt is able to continue proceedings await -ing trial despite a moratorium brought undersection 252 of the Act in a county court andwithout the need for the claimant to applyfor permission to continue from the countycourt. Mr Justice Coulson’s adverse reactionto the defendant’s application for an interimorder in a county court to avoid proceedingsin the High Court is a timely reminder thatsuch tactics will not be tolerated in practice.22 the angle Restructuring, recovery and insolvency

Meet the teamIain ThomasThe Angle introduces you topartner Iain Thomas, who joinedus in January 2010.What’s your most embarrassing nicknameand why?I haven’t really got any embarrassingnicknames – at least none that I amprepared to own up to.If you were an animal, what would you be?Probably a sloth. Or a newt.Have you ever had a brush with fame?Yes – the band in which I occasionally playwas beaten by Scouting for Girls in a searchfor talent competition a few years back. I havenever really recovered from the humiliation.If you were a sitcom, what song would beyour theme-tune and why?Embarrassment by Madness. Ask my kidswhy…If you could create any new law, what wouldit be?Abolition of speed cameras.What is your favourite movie quote?“He’s not the Messiah, he’s a very naughtyboy.”Do you have any phobias?Yes – millions.If you could take one luxury item to a desertisland what would it be?Nigella Lawson.What is your favourite dance move?Anything from the disco scene in Airplane.What would you be if you were not a lawyer?Skint.Who would play the leading man in a film ofyour life?I like to think Clive Owen. My friends and kidswould say Eugene Levy.Beer or wine or other?Yes please.If you had to live your life by one motto, whatwould it be?Just do the best you can every day.What was your best holiday ever?A ski holiday with Nick Pike when he lost itwith a Crystal Ski Holidays rep on the tarmacat Grenoble Airport. It is the only time that Ihave heard someone use the phrase “do youknow who I am?” in a real life situation.What was the theme at your best everthemed party?A bad taste party at which one of the gueststurned up as a Welsh sheep farmer. I shallstop there…What makes you angry?The list is too long to repeat here. I have alot of anger.Complete the following: in my opinion, the1980s……immediately preceded the 1990s.Something that (until now) not many peopleknew about me is…...that I am actually quite shallow.If I had three wishes, I would ask for…?The return of the 1968 Vespa ss180 that Isold on ebay a few months ago (what was Ithinking? ), Crystal Palace FC to win thePremier League and Cheryl Cole on top of myChristmas Tree.If your house was on fire, what would you save?Quite a lot on my heating bills.23 the angle Autumn 2010

Make us your first choiceLG’s Corporate Recovery and Restructuring Group is at the forefront of recovery, restructuringand turnaround. The Legal 500 – 2009 said “LG is one of the premier firms in themarket” and a “dynamic force.” Chambers Guide to the Legal Profession – 2009 agrees:Tom Withyman “has a great presence in the market”, Nick Pike is “practical, technicallystrong, commercially aware and easy to get on with” and Steven Cottee is “very responsiveto his clients’ needs – he understands where we’re trying to get to commercially, ratherthan just dispensing legal advice”. All three are named as leaders in their field.We have specialists dealing with every aspect of recovery and restructuring law. To learnwhy we are rated so highly, contact any of the team members listed below.Corporate Recovery, Restructuring and BankingTransactionsSteven Cottee steven.cottee@lg-legal.com 020 7759 6424Richard Elphick richard.elphick@lg-legal.com 020 7759 6516Alex Jay alex.jay@lg-legal.com 020 7759 6632Kanika Kitchlu-Connolly kanika.kitchlu-connolly@lg-legal.com 020 7759 6789Bhaljinder Mander bhaljinder.mander@lg-legal.com 020 7759 6657Serena McAllister serena.mcallister@lg-legal.com 020 7759 6494Alex Morgan alexandra.morgan@lg-legal.com 020 7759 6890Robert Paterson robert.paterson@lg-legal.com 020 7759 6674Nicholas Pike nicholas.pike@lg-legal.com 020 7759 6721Helen Plews helen.plews@lg-legal.com 020 7759 6406James Warboys james.warboys@lg-legal.com 020 7759 6452Tom Withyman tom.withyman@lg-legal.com 020 7759 6561Lawrence Graham LLP4 More London RiversideLondon SE1 2AUT/ +44 20 7379 0000F/ +44 20 7379 6854Lawrence Graham LLPUnit 2, Level 6Currency House Office Building 1The Gate DistrictDubai International Financial CentrePO Box 506503Dubai, United Arab EmiratesT/ +971 4 437 5100F/ +971 4 437 5101Lawrence GrahamEst-Ouest24 bd Princesse CharlotteMC 98000 MonacoT/ +377 93 10 55 10F/ +377 93 10 55 11Lawrence Graham (CIS) LLP1-st Troitsky Pereulok 12/5Moscow, 129090RussiaT/ +7 495 799-5501F/ +7 495 799-5502info@lg-legal.comwww.lg-legal.comBanking Dispute ResolutionJames Curle james.curle@lg-legal.com 020 7759 6457Andrew Dobson andrew.dobson@lg-legal.com 020 7759 6511Jean-Pierre Douglas-Henry jean-pierre.douglas-henry@lg-legal.com 020 7759 6457Andrew Witts andrew.witts@lg-legal.com 020 7759 6728PropertyJane Fox-Edwards jane.fox-edwards@lg-legal.com 020 7759 6527David Hayward david.hayward@lg-legal.com 020 7759 6526Iain Thomas iain.thomas@lg-legal.com 020 7759 6460EmploymentYvonne Gallagher yvonne.gallagher@lg-legal.com 020 7759 6537Simon Malcolm simon.malcolm@lg-legal.com 020 7759 6475InsuranceNicholas Bradley nick.bradley@lg-legal.com 020 7759 6405Michael Lacey michael.lacey@lg-legal.com 020 7759 6579Services24 hour emergency contact number 020 7759 6663Electronic enquiries recovery@lg-legal.com24 the angle Autumn 2010the angle is designed toprovide a summary of recentdevelopments in corporaterecovery and restructuringlaw. It does not purport to becompre hensive or a substitutefor specialist legal advice inindividual circumstances