Insolvency update - February edition 2012

Welcome to the latest Taylor & Emmet LLP Insolvency update. 

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STATUTORY DEVELOPMENTS

Pre-pack Legislation

On 26 January 2012, it was announced by the government that rather than bring forward legislation to control the use of pre-packed sales in insolvency, it would instead review the existing regulatory regime.  The purpose of the review is to identify ways in which the present regulatory framework can be used to encourage transparency and confidence in pre-packs as a restructuring tool. 

Members Voluntary Liquidations

IPs will be aware that the HM Revenue & Customs extra statutory concession C16(ESC C16) allow distributions made to shareholders to be taxed as capital receipts rather than income in the course of a solvent dissolution.  However, the government has taken steps to limit the amount which can be returned to shareholders using the favourable tax treatment in a solvent dissolution.  From 1 March 2012, if it is intended to distribute more than £25,000 to shareholders, the costs of dissolving a solvent company without first liquidating it by means of a members voluntary liquidation will rise.  Consequently, insolvency practitioners may find that from 1 March 2012 onwards, they will have to do more members voluntary liquidations because from that date, it will be more cost effective for companies to go down the MVL route rather than use the dissolution procedure. 

BRIEF CASE NEWS

Out of court administration appointments

The courts have recently given two contradictory decisions (on the same date) relating to making an out of court appointment of administrators to a company.  In National Westminster Bank Plc -v- Msaada Group (a firm) and Others (2011), the High Court held that in circumstances where a company had created a qualifying floating charge over its assets, the insolvent company’s directors must notify the parties set out in Rule 2.20(2) of the Insolvency Rules 1986 as well as the holder of the qualifying floating charge of their intention to make an out of court appointment and those parties must be given “reasonable” notice which in this case amounted to a minimum of five business days. 

However, the situation is not so clear cut if there is no qualifying floating charge holder.  In contrast to the decision is Msaada, the court in the Virtualpurple Professional Services Limited (2011) ordered that if there was no qualifying floating charge holder, the directors were not required to give notice to the parties referred to in Rule 2.20. 

In view of the conflicting decisions, the most prudent advice for directors is to avoid making an out of court administration appointment.  Otherwise, it is probably safer to notify all of the parties referred to in Rule 2.20(2).

Disclosure of valuations

In the case of Maltby Holdings Limited -v- Spratt and Another (2012) the court had to consider whether it should order administrators to disclose various documents relating to the value of assets sold in a pre-pack sale.  The application arose because an unsecured creditor of the company had intended to bring a claim that the pre-pack sale had been at an undervalue and the administrator’s appointment had been invalid.  The High Court refused to order than administrators should disclose the valuations.  The court said that whilst it accepted that it must be able to police pre-packs after the event, any such policing should only be carried out in accordance with insolvency legislation and in this case disclosure of the valuations was not necessary to enable any of the company’s creditors to pursue their claims.

Sale of a property in bankruptcy

In the case of Pick -v- Chief Land Registrar (2011), the court had to decide whether the Land Registry had acted correctly in registering a transferee as the registered owner of the property when the transfer had taken place before a bankruptcy restriction had been entered on the register.  The High Court decided that the transferee was entitled to become the new registered owner notwithstanding that a bankruptcy restriction had been entered on the title after the transfer but before the application for registration.

The consequence of this decision is to emphasise how important it is to IPs to register bankruptcy restrictions at the Land Registry as soon as they are appointed.