Insolvency update - November 2011

Welcome to the latest Insolvency update.  This month’s update deals with issues including a trustee in bankruptcy’s liability for costs and the effect of outstanding winding up petitions with regard to administrations. 

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Statutory Developments

1. On 7 November 2011, the Insolvency Service launched “Reform of the Process to Apply for Bankruptcy and Compulsory Winding Up”.  The Insolvency Service would like to streamline the process of uncontested bankruptcy and winding up proceedings so that courts only deal with disputed cases.

Proposed changes to bankruptcy petitions include: -

1. Electronic applications could be made to a specifically appointed independent adjudicator;
2. If there is no disagreement between the parties as to the debtor’s financial position and the appropriateness of a liquidator or bankruptcy the adjudicator could decide the outcome of each application;
3. Individual debtors can apply for their own bankruptcy on paper or electronically and in addition have the option of paying the fee and deposit by instalments;
4. Creditors who wish to commence bankruptcy proceedings will first have to take all reasonable steps towards reaching a mutually satisfactory solution to the debt problem;

Proposed changes to winding up petitions may include: -

1. Administrative applications can be made to a specially appointed independent adjudicator if the company is unable to pay its debts and has passed a special resolution that it be wound up;
2. If the winding up petition is issued by a creditor, the application notice may ask whether the company consents to the winding up application;
3. Furthermore, the Insolvency Service is proposing to stop advertising winding up petitions.

The Insolvency Service has asked for responses by 31 January 2012.

2. On 15 November 2011, HMRC confirmed that services provided by an insolvency practitioner during the administration of both individual voluntary arrangements and company voluntary arrangements are exempt from VAT (according to HMRC’s revised VAT notice 701/49).

Legal Update

1. In Hunt -v- Harb and Another (2011), the court of appeal considered whether a trustee in bankruptcy could be found liable for the costs of the parties to litigation where he has assigned a cause of action to a third party in return for a share of the proceeds of any future litigation.  The court found that the trustee in bankruptcy could be liable. 

The court has a wide discretion to make a costs order in every case and the court of appeal decided that the court’s discretion extends to allow it to make an order against the trustee in bankruptcy, on the basis that he is someone who was to benefit from the outcome of the litigation even though he was not a party to the proceedings because he had assigned the claim. 

However, the court also said that there was no reason, in principle, why a court could not make an order exonerating the trustee in bankruptcy from any future liability for the costs of the proceedings if the circumstances justified it. 

The effect of this case is that it is likely that if a trustee in bankruptcy is considering assigning a course of action in return for a share of the proceeds of litigation, it is more likely that he will initially seek an order from the court exonerating him from any potential non-party costs liability.  Alternatively, the trustee in bankruptcy may wish to obtain an indemnity from the bankrupt’s creditors against any liability on the basis that it is they, who, stand to benefit from the litigation. 

2. In Re Business Dream Limited (2011) the high court was asked to consider whether a director’s notice of intention to appoint an administrator was invalid because of the existence of an outstanding winding up petition when the notice was issued.  The court decided that simply because there was an outstanding winding up petition at the time of the issue of the notice, this did not invalidate the notice of intention to make an out of court appointment of administrators. 

The court also found that the effect of the notice of intention was to give the company the benefit of an interim moratorium and the moratorium prevented members of the company from passing a resolution to wind up the company.

Of course, there may be situations where the company via its directors changes its mind and does not want to appoint administrators.  In such circumstances, the court could order the withdrawal of a notice of intention or alternatively the issuer of the notice of intention could simply allow it to expire without making the appointment of administrators.