Section title 1

Brexit: Where are we going?

Recognition and enforcement during Risky Business Jersey Update 2018 transition and beyond Unpacking “pre-pack” Recent developments administrations Paul Heath QC Shut Up? New Associate Member Privilege and company dissolution

A regular review of news, cases and www.southsquare.com articles from South Square barristers SOUTH SQUARE DIGEST June 2018 www.southsquare.com

‘The set is highly regarded internationally,

with barristers regularly Company/Insolvency set of the year, winner 2017 appearing in courts CHAMBERS BAR AWARDS

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+44 (0)20 7696 9900 | [email protected] | www.southsquare.com In this issue 3

In this issue 06 22 44

Brexit: where are we going? Jersey Update 2018 Risky Business: unpacking “pre-packs”

Mark Phillips QC on recognition and Ogier’s Nicola Roberts and Leon Hurd Andrew Shaw on the difficulties that enforcement during transition and on some recent developments in Jersey pre-pack administrations pose to beyond insolvency practitioners

ARTICLES SOUTH SQUARE NEWS EVENTS ROUND UP Just and Equitable Winding Up 16 Paul Heath QC 28 Insolvency Lawyers’ 58 David Alexander QC on when the South Square is delighted to Association Annual court will and won’t make an order announce Paul Heath QC joins Conference 2018 under Section 122(1)(g) as an Associate Member Junior G36 Event 2018 59 BHS, Carillion and the Current REGULARS Government Consultation on Insolvency and Corporate 50 From the Editor 4 Future Events

Governance News in Brief 61 INSOL Channel Islands One Day 60 Hannah Thornley reviews what South Square Challenge 66 Seminar has happened post-BHS, what Diary Dates 68 III 18th Annual Conference, happened at Carillion and reviews CASE DIGESTS New York the government consultation paper Banking & Finance 30 Is the lawyer’s mouth shut Civil Procedure 32 forever? Commercial Litigation 35 Toby Brown explores whether legal 54 Company Law 38 professional privilege survives upon Corporate Insolvency 39 dissolution of a company Property & Trusts 43

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From the Editors

Welcome to the June edition of the South Square Digest Alongside the Royal Wedding, this season sees the commencement of another great partnership, as we begin our joint editorship of the Digest. We hope that, like the royal marriage, our friends and family will support and uphold it.

Three things stand out from the news agenda since the Digest last went to print in early March: Novichok, North Korea and “No Customs Union”.

First, the attempted murder of a Russian double- agent and his daughter with Soviet-designed nerve agent after a quiet Sunday lunch at Zizzi in Salisbury gripped the media for much of March/ April. Le Carré-esque spy expulsions on a level not seen since the Cold War ensued; followed by targeted US sanctions against a core of Russian ‘oligarchs’, leading to steep falls in the rouble and reported losses to one individual alone – Oleg Deripaska – of up to $10 billion. And finally, a no show by Roman Abramovich at the FA Cup Marcus Haywood & William Willson Final. But after government promises of tougher measures, it remains to be seen whether the booming Russian IPO market in the Square Mile exports to those three countries are the and Belgravia/Mayfair property prices will equivalent to approximately 6% of its annual really suffer. exports to the Netherlands alone. It’s going Second, the meeting of North Korean leader Kim to be a big job. Jong-un and South Korean president Moon Jae- Editing the Digest is a smaller, but nonetheless in marked a glimmer of hope in a regional war big job, and for our first edition we are assisted nearing its 70th year which undoubtedly affects with some outstanding contributions from our us all. However, beneath the promises of a halt to friends and colleagues. We have Mark Phillips nuclear testing, can the world realistically expect QC on “Brexit: Where Are We Going?”, which the North to give up its nuclear arsenal? And considers the brave new world we will face will the US recent decision to tear up 2015’s Joint when the UK loses Member State status on Comprehensive Plan of Action on Iran’s alleged 31 December 2020. New recruits to our list of efforts to develop nuclear weapons scupper any offshore contributors, Ogier’s Nicola Roberts and deal before it’s even on the table? The recent Leon Hurd, provide an invaluable overview of scrapping of the US-North Korean summit in recent developments in Jersey in both insolvency Singapore feels like a classic case of one step and civil procedure. Toby Brown tackles the forwards and two steps backwards. complex question of whether legal professional Finally, in the ever-present Brexit saga, it looks privilege survives the dissolution of a company. like our departure from the Customs Union has David Alexander QC considers just and equitable been given a stay of execution until after 2021. winding up, and Andrew Shaw unpacks pre- Nearly two years on from the Brexit referendum, packs. Finally, Hannah Thornley, who has acted one asks oneself how much (if any) air time the as a specialist legal adviser to the Work and prospect of an Irish “hard border” was given in Pensions and Business Select Committees on the run up to the vote; and reminds oneself how the BHS and Carillion enquiries, reviews the much there is still to be done. As we go to press recent Government Consultation on Insolvency the Foreign Secretary is visiting Chile, Peru and and Corporate Governance arising out of those Argentina, feeding manatees and in search of two collapses. We also have the usual case digest trade deals. But perspective is everything: UK section, edited by our most recent tenant, Rose From the Editors 5

Lagram-Taylor, and the latest South but suggests that responses to date On a final, positive, note we are Square Challenge (following on the have been cautious, largely technical, delighted to announce, at the time of heels of a bumper number of entries in and characterised by seemingly endless going to press, that Michael Crystal our March edition). consultation. QC has been awarded with the Global Restructuring Review Lifetime On 16 May 2018, the Work and Pensions Carillion could happen again – and Achievement award, which will be and Business, Energy and Industrial soon. However, it remains to be seen presented to him on 26 June. Strategies Committees published what, if any, reforms will come about their final report of their inquiry as consequence of the report and the Our thanks to everybody who has into Carillion’s spectacular collapse. company’s collapse. Indeed, the report contributed to this edition of the Digest. It presents Carillion’s rise and fall itself has received far from universal It is only right to emphasise, however, as a story of “recklessness, hubris and support. What is plain is that effective that the views expressed by individual greed” and Carillion’s business model corporate accountability will remain a contributors are theirs and theirs alone. as “a relentless dash for cash” driven central issue where there is pressure It also goes without saying that if you by acquisitions, rising debt and for both reform and development in have any feedback to give us in relation exploitation of suppliers. It concludes the law. to the Digest – positive or negative – that the government has “lacked the Having started with wedding prayers, we would be delighted to hear from you. decisiveness or bravery” to address the we finish with a funeral eulogy – failures in corporate regulation which Many thanks, and happy reading. and thank our recently departed allowed Carillion to become a “giant If you find yourself reading someone predecessor, Mark Arnold QC, for his and unsustainable corporate time bomb” else’s copy and wish to be added to the hard work, wisdom and expansion of – and calls upon the government to circulation list, please send an email our readership during his tenure as carry out an “ambitious and wide- to [email protected] and editor from November 2016 to March ranging set of reforms” to “reset our we will do our best to make sure that 2018. Mark has now gone on to better systems of corporate accountability”. you get the next edition and all future things (assuming his new role as joint It further criticises the government editions thereafter. Head of Chambers can be described for having recognised the weaknesses as such), but we look forward to filling William Willson and Marcus Haywood in the regulatory regimes exposed by the big shoes he leaves behind. Carillion and other corporate failures, SOUTH SQUARE DIGEST June 2018 www.southsquare.com

Brexit: Where are we going?

Any parent of young children can tell you that one of the most frequently asked questions on any car journey that takes longer than 15 minutes is “are we there yet?”

Often it isn’t an easy question to answer because there are several variables, the traffic, the number of breaks, and whether the journey straddles mealtimes. There is also the possibility that something goes wrong with the car. Something that is not a variable (usually at least) is the destination. When it comes to Brexit, MARK PHILLIPS QC1 we are on a journey. There are many variables. There are several possible routes. We even have the scenario, familiar to all parents, of the children squabbling in the back “Boris keeps taking my best single market toy”, “Well Theresa keeps changing the game”, “David, give Michel the map back, it’s been agreed he’s in charge of the route.” “Michel what’s the matter?”, “Boris has taken my green marker pen.” “Boris, let Michel have the yellow one and we can talk about it later.” “Liam, what’s the matter?”, “Michel won’t let me play with Donald.” Unlike the journey to a family holiday, the Brexit destination hasn’t yet been agreed. At the moment the best we can do is agree that by a particular time we are going to stop off at a convenient service station on the motorway. So the answer to the question “are we there yet?” is no. The full answer is “we haven’t yet worked out where we are going.” Brexit: Where are we going? 7

At 11pm on Friday 29 March 2019, absent is not conditional upon the EU giving agreement between Parliament and equivalent reciprocal effect to English the EU to the contrary, the UK will insolvencies or proceedings. The “exit” the EU2. At that moment the UK position of contracts under Rome I is will cease to be a Member State. The different because its application is not Draft Agreement on the withdrawal of dependent on the country of the law of the UK from the EU of 19 March 2018 the contract being a Member State. (the “Draft Withdrawal Agreement”)3 There are provisions intended to enable provides “This Agreement shall enter Ministers to alter the operation of EU into force on 30 March 2019.”4 It is now law in the UK, but the circumstances agreed that there will be a “transition are limited and it is hard to imagine or implementation period” that ends on how they could apply to these three 31 December 2020.5 EU Regulations, but in theory they In this article I focus on the law could. Section 7 of the European applicable in the UK and the 27 Union (Withdrawal) Bill provides remaining EU countries relevant to that a “Minister of the Crown may by the recognition and enforcement of regulations make such provision as insolvencies in the 28 current EU the Minister considers appropriate to 1 I gratefully becomes a member, it member states during the transition prevent, remedy or mitigate – (a) any acknowledge the will be governed by the assistance and advice UNCITRAL Model law or implementation period and, to failure of retained EU law to operate given by my colleague which has been adopted the extent that it is possible, after 31 effectively, or (b) any other deficiency Riz Mokal, who helped in those 5 member me avoid too many states. December 2020. When considering in retained EU law, arising from the mistakes and provided the question of recognition in the 27 withdrawal of the UK from the EU.”11 me with his October 7 I refer to the version 2017 paper to the ABI on of the EU (Withdrawal) remaining EU countries, I consider it Sub-section 7(2) identifies seven types Cross-Border Practice Bill in the form that it from the perspective of the applicability of deficiency. Sub-sections (c), (d) Post-Brexit. took when it went from the House of Commons of the Recast EU Regulation on and (e) might become relevant in the 2 Section 1 of the to the House of Lords. Insolvency Proceedings (848/2015) (“the present context. Those subsections European Union (Withdrawal) Bill 8 Section 3(1) of EU Insolvency Regulation”), the Recast identify as deficiencies “where the provides that “The the European Union (Withdrawal) Bill. Minister considers that retained EU law”: European Communities Brussels Regulation on jurisdiction Act 1972 is repealed on 9 Those exceptions exit day.” Section 14(1) and the recognition and enforcement are “(i) [the EU regulation] 1) “makes provision for, or in provides that “exit day” is not an exempt EU of judgments in civil and commercial means 29 March 2019 connection with, reciprocal instrument” which are at 11.00pm. Section matters (1215/2012) (“the Brussels defined in section 14(1) arrangements between …the UK… 14(4) of the European and schedule 6; (ii) Regulation”), Rome I on the law Union (Withdrawal) and the EU… which… are no applies to EU decisions, Bill provides that “A applicable to contractual obligations 12 “(iii) the EU regulation longer appropriate.” Minister of the Crown is not reproduced in an (593/2008) (“Rome I”), and in passing may by regulations … (a) enactment to which section amend the definition of the UNCITRAL Model Law. I am not 2) “makes provision for, or in 2(1) [of the European “exit day” in subsection Communities Act 1972] qualified to comment on the domestic connection with, other (1) to ensure that the day applies.” laws of the 27 remaining member states, arrangements which… involve and time specified in the definition are the day and although it remains the case that in the EU… or are otherwise 10 I refer to sections time that the Treaties are to because I assume in this the majority of the remaining member dependent on the United Kingdom’s cease to apply to the United article that the bill is Kingdom.” Schedule 7 enacted in something states, the enforcement and recognition membership of the EU… and which paragraph 10 provides like its present form. of UK insolvencies and schemes could are no longer appropriate.”13 that any such regulation They are clauses of the must be laid before 6 bill. become a matter of domestic law. Parliament. 3) “makes provision for, or in 11 Section 7(1) of The European Union connection with, any reciprocal or 3 Draft Agreement the European Union on the withdrawal of the (Withdrawal) Bill. (Withdrawal) Bill other arrangements not falling United Kingdom of Great Section 7(9) provides within paragraph (c) or (d) which… Britain and Northern that the reference in The European Union (Withdrawal) Ireland from the (a) to a failure or other are no longer appropriate, as a European Union and the Bill7 provides that on or after exit day deficiency arising from result of the United Kingdom European Atomic Energy the withdrawal of the direct EU legislation, so far as operative Community highlighting UK from the EU “includes ceasing to be a party to any of the the progress made immediately before exit day,7 forms a reference to any failure EU Treaties.”14 (coloured version; I or other deficiency arising part of domestic law on and after exit explain the colour from withdrawal taken scheme in footnote 15, together with the operation day. Direct EU legislation includes any The provisions governing deficiencies below) in the negotiation of any provision, or the EU regulation as it has effect in EU law in retained EU law range widely. round with the UK of interaction between any 16-19 March 2018. provisions, made by or immediately before exit day subject Amongst other things, they apply to under this Act.” 4 Article 168 of to certain exceptions.9 The effect of reciprocal arrangements. the Draft Withdrawal 12 Section 7(2)(c) of section 3(1) of the European Union Agreement. the European Union However, the Minister, with (Withdrawal) Bill. (Withdrawal) Bill10 will be that the EU 5 Article 121 of the Parliamentary approval, is only able Insolvency Regulation, the Brussels Draft Withdrawal 13 Section 7(2)(d) of to address deficiencies as a matter of Agreement. the European Union Regulation and Rome I “forms part of (Withdrawal) Bill. English law.15 Where the deficiency with 6 In the cases domestic law” after 11pm on 29 March reciprocal arrangements lies in the fact of Greece, Poland, 14 Section 7(2)(e) of 2019. The incorporation of these EU Romania, Slovenia the European Union that other EU jurisdictions no longer and Serbia when it Regulations into English domestic law (Withdrawal) Bill. SOUTH SQUARE DIGEST June 2018 www.southsquare.com

FEATURE ARTICLE: BREXIT

recognise or give effect to aspects of English of the transition and implementation period is insolvencies, or to certain rights of English a “known unknown”. All that can be said at this creditors, there is little a UK Minister can do. The stage is that we know that some agreement will After 31 Minister could perhaps withdraw the equivalent be made in relation to the ongoing application December reciprocity afforded to EU insolvency regimes of the EU Insolvency Regulation, the Brussels by virtue of the EU Insolvency Regulation, or Regulation and Rome I, but we do not know where 2020, as a less likely, make the reciprocal effect given to in the spectrum between no application and full non-member EU insolvency regimes dependent on reciprocity application the EU and UK will agree to go forward. being given to English proceedings. The same In the context of insolvency the three regulations state, the could be done in relation to judgments by making that matter are the EU Insolvency Regulation, recognition and enforcement in the UK dependent UK will the Brussels Regulation and Rome I. Article 63 of upon recognition of UK judgments through the the Draft Withdrawal Agreement is concerned give effect Brussels Regulation. By its nature reciprocity with jurisdiction, recognition and enforcement requires give and take by both parties. The to the EU of judicial decisions, and related cooperation provisions of section 7 can only enable unilateral “between central authorities”. As regards the EU Insolvency action, and the action that might be taken is so Insolvency Regulation, article 63(4) provides that a extreme that it must be unlikely. Regulation number of provisions “shall apply”, including under as English In addition, there are provisions in section 9 of Regulation 63(4)(c): the European Union (Withdrawal) Bill that enable “Regulation (EU) 2015/84817… shall apply to insolvency a Minister of the Crown, by regulations, to make domestic law proceedings provided that the main proceedings were “such provision as the Minister considers appropriate opened before the end of the transition period.” for the purposes of implementing the withdrawal agreement”. Schedule 7 gives Parliament the This provision is not yet agreed.18 It applies power to scrutinise. In addition section 17(5) only to insolvency proceedings where the main provides that “a Minister of the Crown may by proceedings were opened before 31 December regulations make such transitional, transitory or 2020.19 saving provision as the Minister considers appropriate As regards the Brussels Regulation, article 63(1) in connection with the coming into force of any identifies “acts or provisions” that “shall apply provision of [the Act].” In the context of the EU in respect of legal proceedings instituted before the Insolvency Regulation it is difficult to conceive end of the transition period” which is before 31 of transitional arrangements the UK government December 2020. The “acts or provisions” referred might want to introduce in relation to the UK’s to include “the provisions regarding jurisdiction” of continued application of the EU Insolvency the Brussels Regulation,20 the provisions relating Regulation. to choice of jurisdiction,21 and the recognition Given that the EU Insolvency Regulation, the and enforcement of judgments.22 In addition the Brussels Regulation and Rome I will continue arrangements between the EU and Denmark during the transition or implementation period continue to apply to the UK by article 65(2).23 in the draft Withdrawal Agreement with the EU, As regards Rome I, article 62(a) of the Draft there is no reason for the Government to alter the Withdrawal Agreement provides that Rome I shall operation of those regulations before 31 December apply in respect of contracts concluded before the 2020. After 31 December 2020 the effect of the EU end of the transition period. (Withdrawal) Act (as it then would be) would be that subject to the provisions of sections 7 and 9 The EU Insolvency Regulation to make alterations, the EU Insolvency Regulation After 31 December 2020 the UK will be a non- the Brussels Regulation and Rome I would be in member state, no longer a Member State. However, force in England as a matter of domestic law. unlike other non-member states, the UK will The Draft Withdrawal Agreement give effect to the EU Insolvency Regulation as English domestic law. There are provisions in On 19 March 2018 the EU and the UK published the EU Insolvency Regulation that apply to both the Draft Withdrawal Agreement. Where the Member States and non-member states. There are Draft Withdrawal Agreement provides for the other provisions that apply only to Member States application of EU law in the UK “it shall produce (excluding Denmark which is not a Member State in respect of and in the UK the same legal effects as for the purposes of the EU Insolvency Regulation). those which it produces within the EU and its Member States.”16 A fair reading of the Draft Withdrawal Questions of Interpretation Agreement is that it contains transitional and Before turning to the provisions of the EU implementation provisions that will apply Insolvency Regulation that will apply to the UK as until 31 December 2020. Whether or not it is an a non-member state, the question arises how the indication of what might happen after the end English Courts should approach the interpretation Brexit: Where are we going? 9

A fair reading of the Draft Withdrawal Agreement is that it contains transitional and implementation provisions that will apply until 31 December 2020

15 Schedule 7 of the European Union (Withdrawal) white corresponds to text proposed by the Union on 19 It will not apply where secondary proceedings Bill provides for the scrutiny by Parliament of which discussions are ongoing. The text quoted here are opened before 31 December 2020 even if a main regulations made by a Minster under section 7(1). is in white. The Draft Withdrawal Agreement has to proceeding is opened subsequently. Whilst rare, this The detail is not relevant for present purposes. In be treated with circumspection, not only because it is is possible. this article I focus on English law, although the EU not yet a complete agreement, but some of the issues (Withdrawal) Bill applies to the UK as a whole. on which there is not yet agreement are politically 20 Article 63(1)(a). EU Regulation No 1215/2012. charged and controversial. However, it is the best 21 Article 63(2)(a), giving effect to article 25 of the 16 Article 4(1). The Draft Withdrawal Agreement is guide we have. In this article I try to analyse what the Brussels Regulation. presented in three colours. A preamble provides: “The EU and the UK have said is going to be agreed rather colouring of the text corresponds to the following than project what I might like them to agree. 22 Article 63(3)(a). meanings: text in green is agreed at negotiators’ level, and will only be subject to technical legal 17 The EU Insolvency Regulation. 23 These transitional provisions are not yet agreed revisions in the coming weeks. For text in yellow, (they are in white) aside from the ongoing position in 18 It is in white. negotiators agreed on the policy objective. Drafting relation to Denmark (which is in green). changes or clarifications are still required. Test in SOUTH SQUARE DIGEST June 2018 www.southsquare.com

of the EU Insolvency Regulation. After laid down by section 6(5) of the EU out by changing the provisions in exit day the EU Regulation becomes (Withdrawal) Bill, the circumstances in the EU (Withdrawal) Bill so that they English domestic legislation, but it has which the higher English court might apply from the end of the transition not been drafted as English domestic refuse to follow a decision of the CJEU and implementation period, not from legislation. made prior to exit day are limited. exit day. The tensions between the EU’s wish that UK courts apply CJEU The principle of the supremacy of By contrast under the draft Withdrawal decisions and the UK’s wish that UK EU law will no longer apply to any Agreement provisions “referring to [EU] courts should no longer be bound by enactment or rule of law passed after law or concepts or provisions thereof shall CJEU decisions cannot be solved by exit day.24 Section 6(1) provides that a in their implementation and application drafting alone. court or tribunal “is not bound by any be interpreted in conformity with the principles laid down or any decisions made, relevant case law of the [CJEU] handed However, this highly charged debate on or after exit day by the [CJEU], and down before” 31 December 2020.25 Article is more symbolic than substantive. cannot refer any matter to the [CJEU] after 4(5) provides that in the interpretation Whatever the form of the final exit day.” Section 6(2) goes on to provide and application of the draft Withdrawal agreement, in order to give effect, as that a court or tribunal “need not have Agreement “the [UK’s] judicial and a matter of English domestic law, to regard to anything done on or after exit day administrative authorities shall have due the EU Insolvency Regulation, the by the CJEU… but may do so if it considers it regard to relevant case law of the [CJEU] Brussels Regulation and Rome I, the appropriate to do so.” handed down after the end of the transition English courts are highly likely to adopt period.” Nothing in Article 4 is yet the EU’s purposive approach, and are Section 6(4) of the EU (Withdrawal) agreed26 and there are a number of highly likely to have regard to relevant Bill provides that the Supreme Court tensions between those provisions of decisions of the CJEU and the courts of and the High Court sitting as a court of the Draft Withdrawal Agreement and other Member States. It makes no sense appeal (apart from some circumstances the EU (Withdrawal) Bill. The EU Draft for the English Courts to continue to not relevant here) are not bound by any Withdrawal Agreement provides that apply the EU Regulation, the Brussels retained EU case law (subject to the in the period before 31 December 2020 Regulation or Rome I, without having rules in section 6(5) referred to below). UK courts “shall” apply EU concepts regard to how those regulations have It is conceptually possible for the higher consistently with EU case law and been interpreted and understood by English courts to decide not to follow after 31 December 2020 UK courts the other states in which they apply a CJEU decision on a particular point. “shall have due regard” to relevant CJEU and by the CJEU. In an insolvency However, the circumstances in which case law. The UK EU (Withdrawal) Bill proceeding in England and one or more the higher English courts might do that provides that the UK courts are “not other EU jurisdictions it would make are prescribed by section 6(5) of the EU bound” to apply EU principles after exit no sense for the English court to give (Withdrawal) Bill. If the Supreme Court day. There is also a temporal question a different answer to that given the EU or Court of Appeal want to depart from that will need to be ironed out. The EU Member States to the same question27. any retained EU case law the English (Withdrawal) Bill applies from exit day. Experience of the English courts when court “must apply the same test as it would The draft EU Withdrawal Agreement faced with such an issue, is that the apply in deciding whether to depart from applies through the transition period Judges take a common sense approach. its own case law.” Accepting the test and beyond. That should be ironed They would avoid a conflict between the Brexit: Where are we going? 11

a conflict the EU Insolvency Regulation prevails, there are several concepts that apply both to the EU Insolvency Regulation and to the UNCITRAL model law. Of significance is the concept of COMI. The English courts are obliged by Article 8 to have regard to the decisions of the CJEU and other European courts in relation to common concepts. The Cross-Border Insolvency Regulations 2006 may apply to all insolvencies, whether in an EU country or not. It is possible that the English court

will have regard to decisions made by EU courts 24 Section 5(2) EU It is unlikely we have got after 31 December 2020 to the extent that they (Withdrawal) Bill. deal with concepts common to the UNCITRAL 25 Article 4(3) of the draft Withdrawal to the end of the journey Model law. Agreement. There is a further provision in on how EU law should be Provisions applying to member states and article 4(4) that refers to non-member states “Union law or concepts interpreted after exit day or provisions” but aside from the words being The structure of the EU Insolvency Regulation in a different order it regime is well known. The courts in a Member is difficult to discern what the difference State of the EU debtor’s COMI have an exclusive is between the two right to open ‘main’ proceedings.30 The main provisions. proceedings extend to all of the debtor’s assets. 26 It is in white.

Where the debtor has an establishment in another 27 This is also Member State, secondary proceedings may be consistent with the general principle that 31 opened in relation to local assets. Secondary domestic statutes giving proceedings may protect the interests of local effect to instruments of an international stakeholders, respond to the complexity of the character should be debtor’s estate or the differences between the legal interpreted in light of that character. systems of the COMI and establishment states. 28 After 31 December The proceedings and recognition and enforcement 2020 the English English court and the courts of the EU Member of those proceedings over the debtor’s assets and courts will be bound to apply the rules found States and the CJEU, particularly if the question creditor claims depend upon the debtor’s COMI in the EU Insolvency arose in the same case, for example, a cross border or establishment being in a Member State. There Regulation regarding the opening of main and insolvency that raised questions about the centre are some provisions that apply the laws of non- secondary proceedings of main interests (“COMI”) of entities in a group member states. dependent upon the location of the COMI operating across England and other EU states28. It After 31 December 2020 the UK will be a and an establishment. follows that, in the context of the EU Insolvency That is because of non-member state and the transitional and the effect of the EU Regulation, the 33 recitals will retain their (Withdrawal) Bill. Other implementation provisions will no longer significance as will the Virgos-Schmit report29. Member States will not apply. If the COMI of a debtor is in England, be bound by decisions Moreover, existing, and possibly future, judgments of the English courts insolvency proceedings opened in England will in other European countries and judgments of the on those questions, not be recognised by EU Member States under although the English CJEU will continue to be instructive. UK courts will courts are bound to have the EU Insolvency Regulation. If the COMI of no longer be able to refer questions to the CJEU. regard to any decisions a debtor is in a Member State and the debtor of the courts of other The courts of other member states dealing with Member States because has an establishment in England, the English the same insolvency will be able to refer questions those courts would be courts will recognise insolvency proceedings considering questions to the CJEU. The result of any such references will that apply to the case opened in the country of the COMI and any by virtue of the UK not be binding on the English court, but will be secondary proceedings opened in a Member State having adopted the EU binding on the other EU courts dealing with the Insolvency Regulation. in which there is an establishment, because same insolvency and would very likely be applied 29 The Report on the EU Insolvency Regulation has become a by the English court. It is unlikely we have got the Convention on part of English domestic law under the EU Insolvency Proceedings, to the end of the journey on how EU law should prepared by Professor (Withdrawal) Bill. However, EU Member States be interpreted when the English courts come to M. Virgos and M.E. will not recognise a secondary insolvency Schmidt, EU Council interpret what has become, after exit day, a matter document 6500/1/96. proceeding opened in England on the ground of of English domestic law. 30 Article 3(1) of an establishment in England, because England is the EU Insolvency One final matter worthy of note in the context not a Member State. Whilst England will recognise Regulation. of questions of interpretation. Article 8 of the orders made by the courts of the EU Member 31 Article 3(2) of UNCITRAL model law on cross border insolvency, States in an insolvency that falls within the EU the EU Insolvency Regulation. applied in England by the Cross-Border Insolvency Regulation, English court orders will 32 Article 7(1) of Insolvency Regulations 2006, provides that in not be recognised in EU Member States, other the EU Insolvency the interpretation of “this Law”, regard is to be than under any applicable domestic legislation Regulation. This includes the Member had to its international origin and to the need (including, in the case of Greece, Poland, Romania, State’s law of applicable to promote uniformity in its application and the Slovenia, and one day Serbia under UNCITRAL). law (‘conflicts’). So if the Member State’s law of observance of good faith. Article 3 provides that to The basic rule is that the lex concursus in both applicable (‘conflicts’) the extent “this Law” conflicts with an obligation law says that the lex main and secondary proceedings governs both situs governs rights in of the United Kingdom under the EU Insolvency movable assets, and procedural and substantive matters.32 The main Regulation, the requirements of the EU Insolvency the assets are situate and secondary proceedings must be in a Member in England, then 7(1) Regulation prevail. Whilst “this Law” is a reference requires (“shall be State, so this basic rule applies to the laws of to the UNCITRAL model law, and where there is that…”) that English law Member States. UK courts will give effect to this governs. SOUTH SQUARE DIGEST June 2018 www.southsquare.com

FEATURE ARTICLE: BREXIT

There are exceptions to the basic rule that apply the laws of Member States other than the lex concursus

basic rule in relation to insolvency (c) Article 11 concerns the effects of because the problem is primarily proceedings opened in Member States. insolvency proceedings on a the failure of the EU27 to apply So, for example, UK courts will apply contract conferring the right to English law to the London markets. article 7(2) of the EU Insolvency acquire or make use of immovable (e) Another area of concern is the Regulation, which provides that the law property. That is governed by the effects of an insolvency on of the state opening the proceedings law of the Member State where contracts of employment. Article 13 determines, amongst other things, “the the immovable property is situated. provides that “the effects of assets which form part of the insolvency UK courts will apply this provision insolvency proceedings on employment estate”, “the conditions under which to immovable property in a Member contracts and relationships shall be set-offs may be invoked”,and “the effects State. EU courts will not apply this governed solely by the law of the of the insolvency proceedings on current provision to immovable property in Member State applicable to the contract contracts”. the UK. A contract conferring of employment.” After 31 December the right to acquire or make use of There are exceptions to the basic rule 2020 the UK will no longer be immovable property in England will that apply the laws of Member States a Member State. If the COMI almost certainly be governed other than the lex concursus. However, of a company is in an EU Member by English law34. Applying the after 31 December 2020 the UK will State, the effect of the insolvency on rule in Antony Gibbs & Sons v La not be a Member State and so these contracts of employment, for Societe Industrielle et Commerciale des exceptions will not apply in the UK. example whether the employment Metaux (1890) LR 25 QBD 399, the That means that in the EU27 the lex contract has terminated, will be effect of EU insolvency proceedings concursus will apply. There are several governed by the law in the COMI37. on an English law contract is examples: The exception that would otherwise limited. There is considerable scope have resulted in the application (a) UK courts will apply article 8 of for uncertainty as to the effect of EU of English law to the effect of the the EU Insolvency Regulation which Insolvencies on such contracts. insolvency on the contract would be applies to rights in rem in respect (d) The EU Insolvency Regulation inapplicable. In the UK there would of assets situated within the provides that the effects of be a question whether the territory of a Member State. By insolvency proceedings on the incorporation into UK law of the contrast Member States will not rights and obligations of the parties EU Insolvency Regulation meant be bound to recognise rights in rem to a payment or settlement system that the English courts were bound of assets situated in the UK unless or to a financial market “shall to apply the law of the COMI to the the lex concursus points to English be governed solely by the law of effect of the insolvency on or other UK law as the governing the Member State applicable to that employment contracts of English law33. system or market”35 although employees. However, as a matter (b) Article 10 provides that insolvency English law would govern securities of contract law in England, contracts proceedings shall not affect sellers’ that are publicly registered in governed by English law, could not ROT rights where “at the time of England36. Article 12 provision will be discharged or terminated by the the opening of proceedings the asset not be applied by the EU27 to the foreign insolvency the contracts.38 is [in a Member State].” UK courts UK’s payment systems and markets The political problems that would will recognise the ROT rights of after 31 December 2020. This could arise if English employees were the seller if the assets are in a lead to different legal systems to be told that their employment Member State, but EU courts will being applied to some aspects of the contracts had been terminated by only recognise the ROT rights of a London markets by the UK courts an insolvency proceeding in a seller whose assets are in the UK if and by the courts of the EU. It is Member State of the group of which the lex concursus points to English difficult to see how this problem the English company is a part, are or other UK law. could be solved by the UK alone, obvious.39 In the circumstances Brexit: Where are we going? 13

33 Purssuant to this might be an area in which article 7.

Ministers would identify a 34 Rome I, Art 4(1)(c). deficiency in the application of 35 Article 12 of the EU the EU Insolvency Regulation in Insolvency Regulation.

England under section 7(2)(c) of the 36 Article 12(1), EU (Withdrawal) Bill. read with article 8(3) of the EU Insolvency There are also provisions in the EU Regulation. Insolvency Regulation that also 37 The law of the contract would be appear to apply the law of a non- recognised under Rome member state. I article 8 and would almost certainly be (a) Article 9 provides that set-off is English law. available where “a set-off is 38 Because of the rule in Antony Gibbs & Sons v permitted by the law applicable to La Societe Industrielle et the to the insolvent debtor’s Commerciale des Metaux (1890) LR 25 QBD 399, claim.” If set off applies in England considered further to an English law claim40, that below. should be recognised by the EU 39 Such a structure is not fanciful. Take Member States. for example a large car manufacturing (b) Article 17 gives protection to third group headquartered party purchasers41 in relation to in Germany with manufacturing acts concluded after the opening companies in England employing thousands of insolvency proceedings where a of English workers. debtor disposes of an immovable It is possible that the COMI of the group asset, a ship, an aircraft or would be in Germany securities. The validity of the and the exception for employment contracts disposition is governed by the law would not apply. of the State within the territory 40 Rome I would where the immovable asset is or continue to apply to where the register is kept. This is determining the law of the contract. not restricted to Member States 41 Rome I will continue and so will continue to apply to to apply to determining assets in the UK or registered in the law of the purchase contract. the UK. 42 As a consequence of Denmark articles 61(c) and 67(1) of the EC Treaty. The position of Denmark is unaffected by Brexit. That is because the EU Insolvency Regulation does not apply to Denmark.42 Moreover, Denmark has not given effect to the UNCITRAL Model law. Whilst the English Courts could give effect to a Danish Insolvency under the Cross-Border Insolvency Regulations 2006 (SI 2006/1030) the Danish Courts SOUTH SQUARE DIGEST June 2018 www.southsquare.com

FEATURE ARTICLE: BREXIT

could only give effect to an English insolvency Member State.49 After 31 December 2020 those under its domestic law. That is the position today. rules will cease to apply to persons domiciled in the UK. However, they will continue to apply to UNCITRAL – Greece, Poland, Romania, persons domiciled in another EU member state. Slovenia and prospectively Serbia The “special jurisdiction” provisions that enable a Greece, Poland, Romania, Slovenia and Serbia have person domiciled in a Member State to be sued The implemented the UNCITRAL Model Law. After 31 in another Member State50 will no longer apply to December 2020, English insolvency proceedings England. Recognition of a judgment or order of enforceability may be recognised and enforced in those countries the English Court, pursuant to Article 36(1) of the and by an application made to their courts under the Brussels Regulation, will no longer be automatic. local laws giving effect to the UNCITRAL Model After 31 December 2020 judgments by other recognition of Law. Member States will be recognised in England, but judgments and judgments given or orders made in England, will The Brussels Regulation & Rome I not. Article 36(1) of the Brussels Regulation is orders made The recognition and enforcement of schemes of the provision pursuant to which recognition is by the English arrangement has depended on both the Brussels given to orders convening scheme meetings and Regulation and Rome I. Rome I enables the parties sanctioning schemes of arrangement. After 31 courts will be to a contract to choose the law applicable to their December 2020, that provision will no longer apply. governed by contract and provides that the chosen law governs The enforceability of schemes of arrangement “the various ways of extinguishing obligations”43 Rome I made in England will thereafter be governed by the domestic 44 applies to non-member states, and will continue the domestic laws of the EU27. laws of the to apply to contracts with an English choice of The Brussels Regulation also completes the law after 31 December 2020. The rule in Antony member states scheme for recognition and enforcement of Gibbs & Sons v La Societe Industrielle et Commerciale judgements and orders made during the course in which it des Metaux (1890) LR 25 QBD 399 is that an English of insolvency proceedings. Article 25(1) of the EU law contract will not be discharged by a foreign is sought to Insolvency Regulation provides that judgments insolvency. This has been upheld in several cases, handed down by the court concerned with the have them most recently in Bakhshiyeva v Sberbank of Russia opening, course of and closure of the insolvency [2018] EWHC 59 (Ch). In the context of a scheme recognised proceedings, and compositions approved by that of arrangement, where English law has been court, shall also be recognised. They are enforced chosen only an English scheme will be effective in accordance with the Brussels Regulation.51 to extinguish or vary the debt.45 Applying Rome Articles 36 to 57 of the Brussels Regulation I, where there is an English choice of law, and a deal with the recognition and enforcement of scheme of arrangement varies or extinguishes judgments given in member states. The effect of that debt, that contractual effect will continue to the EU (Withdrawal) Bill is that after 31 December be recognised across the EU. 2020 England will give effect to judgments and Rome I is only effective in relation to English law orders made in insolvency proceedings in the contracts. A scheme of arrangement often also remaining 27 EU Member States (including, for involves contracts subject to other systems of law this purpose, Denmark) but the enforceability and and there may not be recognition of the effect recognition of judgments and orders made by the of the scheme under the contract.46 In relation English courts in English insolvency proceedings to the recognition and enforcement of orders will be governed by the domestic laws of the sanctioning a scheme of arrangement reliance member states in which it is sought to have the is place upon the Brussels Regulation. The EU orders recognised or enforced. Insolvency Regulation and the Brussels Regulation Are we there yet? are complimentary. Article 2(b) of the Brussels Regulation provides that it does not apply to The answers to the questions touched on in “bankruptcy, proceedings in relation to the winding- this article are politically charged. There will up of insolvent companies or other legal persons, be different views about the destination of the judicial arrangements, compositions and analogous journey we are on. Having no agreements in proceedings.”47 The list of insolvency proceedings place after 31 December 2020 is theoretically to which the EU Insolvency Regulation applies possible, but the effect would be asymmetric. The does not include schemes of arrangement.48 The insolvency processes, contracts and proceedings general provisions on jurisdiction in the Brussels of the EU27 would continue to be recognised and Regulation apply to persons domiciled in a given effect in the UK but aside from those states Brexit: Where are we going? 15

that have adopted the UNCITRAL Meanwhile, the squabbling in the back 43 Articles 3(1) and 47 Schemes of 12(1)(d) of Rome I. arrangement do not Model Law (Greece, Poland, Romania, of the car gets worse and the children fall within UNCITRAL 44 Article 2 of Rome I. it is not a “foreign Slovenia and prospectively Serbia), start threatening to stop playing with proceeding”, which is 45 Subject to the defined as “a collective only a few aspects of UK processes and each other. untested question judicial or administrative whether an EU proceedings would be given effect in proceeding in a foreign Mum says to Dad: “Nigel, I said that we composition would state … pursuant to a law the remaining EU Member States. As discharge the debt should not set off without a proper route relating to insolvency because of the wider for English law contracts, they could in which proceeding and a proper itinerary. We should have had language used in article the assets and affairs of only be restructured in England, but 32 EU Insolvency a family discussion where we want to go the debtor are subject to Regulation. Post Brexit the order sanctioning a scheme of control or supervision by before jumping into the car and setting off. this would mean a foreign court, for the arrangement would only be recognised that a discharge by a We might run out of petrol and there isn’t a purpose of reorganisation composition in an EU27 if that is what the domestic laws of the or liquidation.” service station for miles.” country of an English EU27 provide. At the other end of the law contract would be 48 Annex B. spectrum, it might be argued that the Dad replies: “Gina, if we run out of petrol recognised in England as a matter of English 49 Articles 4, 5 and 6. systems we have in place, that took we can have a picnic at the side of the road, law. This highlights many years to discuss and agree, should put out a crisp checkered picnic blanket, the asymmetry that 50 Articles 7, 8 and 9. might result from the 51 The EU Insolvency be continued. It might be argued that fold out the deck chairs, get out the wicker continued application Regulation refers to the of the EU Insolvency these provisions do not relate to the basket, have proper pork pies and drink Brussels Convention. Regulation in the UK but That was superseded single market but are the result of a Robinson’s Barley water. It will be just like the UK no longer being a by the Brussels I Member State. need, recognised internationally, to one of those scenes from the cover of an Regulation. Recital (19) make cross border insolvency efficient Enid Blyton book.” “But Nigel, we’ll be on 46 See the discussion to that that regulation of this in R Mokal states “Continuity and effective. It may not be possible to the side of a motorway! The children will get “Shopping and between the Brussels predict where in the spectrum between hit by a Continental lorry!” scheming, and the rule Convention and this in Gibbs” (2017) South Regulation should be those two extremes we may find is our ensured…”. Brussels Perhaps Nigel thinks that wouldn’t be Square Digest (March destination. It seems likely that the 2017) 58–63. I Regulation was such a bad thing.  superseded by the Recast answer to that question will remain a Brussels Regulation on 12 December 2012. “known unknown” until quite late in the Brexit piece. SOUTH SQUARE DIGEST June 2018 www.southsquare.com

Just and Equitable Winding Up

David Alexander QC on when the court will and won’t make an order under Section 122(1)(g)

DAVID ALEXANDER QC Just and Equitable Winding Up 17

In addition to the above, a shareholder Introduction Who May Petition? is not permitted to petition to wind up a When a shareholder dispute emerges in Winding up petitions on the just and company unless he or she has a tangible a company, a disgruntled shareholder equitable ground can be presented both interest as a shareholder in the winding has a number of possible means of by contributories (“every person liable up of the company: Re Rica Gold Washing seeking redress in England and Wales. to contribute to the assets of a company Co Ltd (1879) 11 Ch D 36 at 42-43 This is Depending on the facts and the nature in the event of its being wound up: usually demonstrated by showing that of the dispute, he or she may have a section 79 of the 1986 Act) and creditors. there will be more than a negligible personal remedy (e.g. an injunction). They can also be presented by the surplus for shareholders after payment He or she may have a right to enforce company itself and by its directors. of all of the company’s creditors (which articles or a shareholders’ agreement. However the most common use of the facts should be expressly alleged in the He or she may have the ability to bring just and equitable winding up petition is petition and proved at the hearing: Re a derivative claim on behalf of the where it is presented by a contributory. Martin Coutler Enterprises Ltd [1988] BCLC company. He or she may have the ability 12). However it may also be capable of Where a winding up petition on the to bring a statutory based claim, namely being demonstrated by showing that just and equitable ground is sought to an unfair prejudice claim under Section the shareholder will achieve some be presented in England and Wales by 994 to 996 of the Companies Act 2006 advantage, or avoid or minimise some a contributory, under Section 124(2) of (“the 2006 Act”) or to present a winding disadvantage, which would accrue to the 1986 Act that can only be done in up petition against the company under him by virtue of his membership of the certain circumstances, namely if: Section 122(1)(g) of the Insolvency Act company: Re Chesterfield Catering Co Ltd 1986 (“the 1986 Act”) which provides 1. The contributory is the sole [1997] Ch 373; Hamilton v Brown [2017] 1 that a company may be wound up by the shareholder of the company; BCLC 269. court if “the court is of the opinion that it is 2. The shares which the contributory Grounds for Winding Up on the just and equitable that the company should holds were originally allotted to him Just and Equitable Basis? be wound up”. or her; There are no rigid categories or The last of these possibilities, namely 3. The shares which the contributory headings under which cases must presenting a winding up petition on the holds have been held by him or her be brought in order to seek a just just and equitable ground under Section and registered in his or her name and equitable winding up. For as 122(1)(g) of the 1986 Act, has diminished for at least 6 months out of the 18 Lord Wilberforce said in Ebrahimi v in importance over time in England months before the presentation of Westbourne Galleries Ltd [1973] AC 360, and Wales since the introduction of an the petition; or HL at 374h: alternative remedy for shareholders, firstly by Section 210 of the Companies 4. The shares have devolved on him or “… there has been a tendency to create Act 1948 (a member could complain her through the death of a former categories or headings under which that the affairs of the company were holder. cases must be brought if the clause is being conducted in an “oppressive” to apply. This is wrong. Illustrations Where there is a dispute as to whether manner), then by Section 75 of the may be used, but general words should or not a petitioner falls within one or Companies Act 1980 (which for the first remain general and not be reduced to other of these categories, the position time introduced a statutory remedy for the sum of the particular instances.” used to be that the court would require unfairly prejudicial conduct) and then that dispute to be resolved before Instead when a petition is presented on by Section 459 of the Companies Act allowing a winding up petition to the just and equitable ground, the court 1985 and Section 994 of the 2006 Act proceed. But since Alipour v Ary [1997] should have regard to the full factual (both of which maintained the unfair 1 BCLC 557 that has changed. Instead, matrix of each case: Re Sino Strategic prejudice remedy). However the just since then, the court has two choices. International Ltd [2015] FCA 709 (Aust and equitable winding up remedy still It can either allow the question of Fed Ct). remains a significant one where, for standing to be decided on the hearing example, winding up is the petitioner’s Notwithstanding this, and despite of the petition. Or it can insist that preferred choice of relief or where the the fact that it is therefore obviously the question of standing be decided petitioner considers that it may be impossible to set out all the situations in other proceedings commenced for the only relief that he or she may be where a court may make a winding that specific purpose. In making that entitled to. It is also significant and up order on the just and equitable decision the court has to consider important in jurisdictions which do ground, it is undoubtedly helpful to at all the circumstances, including the not have alternative unfair prejudice least consider the types of cases where likelihood of damage to the company if provisions, for example, in the Cayman courts have and have not made winding the petition is not dismissed. Islands. up orders in the past. SOUTH SQUARE DIGEST June 2018 www.southsquare.com

FEATURE ARTICLE: JUST & EQUITABLE WINDING UP

Where the whole thing is gone, the majority cannot bind the minority to enter into an entirely new speculation

Where winding up orders have been on some quite different project or 7. Where it had become impossible made on the Just and Equitable basis speculation.” for a company to carry on business owing to failure of its internal Winding up orders have been made in, 2. Where the company’s principal constitution to work: Kingjade among other instances, the following objects had been achieved: Re Holdings Pty Ltd v Pineridge Nominees circumstances: Abbey Leisure Ltd, Viridi v Abbey Pty Ltd (1997) 15 ACLC 910. Leisure Ltd [1990] BCLC 342. In such 1. Where there had been a loss or circumstances, again, the majority 8. Where there had been justifiable failure of substratum or objects are not entitled against the wishes loss of confidence in management, (e.g. a company was formed for a of the minority to seek to achieve for example, on account of fraud, particular purpose which had been different or new objects and a serious misconduct and/or serious abandoned, come to an end or had petitioner is entitled to have his or mismanagement of the affairs of otherwise become impossible to her investment returned. the company by the directors and/ pursue): Re Suburban Hotel Co (1867) or majority shareholders: Loch v John 2 Ch. App. 737 at 750-751; Re German 3. Where the company was a mere Blackwood Ltd [1924] AC 783; Re TE Date Coffee Co (1882) 20 Ch D 169; Re “bubble” company (e.g. one which Brinsmead & Sons [1897] 1 Ch 406. Haven Gold Mining Co (1882) 20 Ch D was only formed for the purpose, 151; Re Perfectair Holdings Ltd [1990] not of work, but of getting money 9. Where there had been a breach of BCLC 423; Re Amalgamated Syndicate from shareholders and which was the agreement contained in the Ltd [1897] Ch 2; Kingjade Holdings from the beginning a “sham, a articles and/or any shareholders’ Pty Ltd v Pineridge Nominees Pty Ltd bubble, a trap”: per Lord Esher in agreement and/or any relevant (1997) 15 ACLC 910. Thus: Re Neath Harbour Smelting & Rolling statutory provisions: Re A & BC Works (1886) 2 TLR 366 at 339 or Chewing Gum Ltd [1975] 1 WLR 579. a. As it was put by Sir George Jessel in one which was fraudulent from Re Haven Gold Mining Co, supra, at 10. Where there had been a serious its inception): Anglo-Greek Steam 164: breach or breakdown in the Co (1866) LR 2 Eq 1; Re West Surrey underlying basis upon which Tanning Co (1866) LR 2 Eq 737; Re “where the whole thing is gone, the the company was set up, such London and County Coal Co (1867) LR majority cannot bind the minority basis involving a relationship of 3 Eq 355. to enter into an entirely new mutual trust and confidence (often speculation.” 4. Where a company was formed to described as a “quasi-partnership”) carry on an illegal business: Re justifying the imposition of b. As it was put by Jenkins J in Re International Securities Corpn (1908) 99 equitable considerations. As Lord Eastern Telegraph Co Ltd [1947] 2 All LT 581. Wilberforce explained in Ebrahimi ER 104 at 109: v Westbourne Galleries Ltd, supra, at 5. Where the company’s only business 379e-379g, typically the imposition “…if a shareholder has invested his was ultra vires the company: Re of equitable considerations requires money in the shares of the company Crown Bank (1890) 44 Ch D 634. one of more of the following on the footing that it is going to 6. Where there was “deadlock” elements: carry out some particular object, he (e.g. where there has been a total cannot be forced against his will by a. An association formed or continued breakdown of relations between the votes of his fellow shareholders on the basis of a personal two equal partners): Re Yenidje to continue to adventure his money relationship, involving mutual Tobacco Co Ltd [1916] 2 Ch 426, CA. confidence – this element will Just and Equitable Winding Up 19

often be found where a pre-existing management, he cannot take out directors were paying themselves partnership has been converted into his stake and go elsewhere. excessive remuneration: Re a a limited company; Company (No 00370 of 1987) Ex p. 11. Where there had been exclusion Glossop [1988] 1 WLR 1068. b. An agreement, or understanding, from management (in a quasi- that all, or some (for there may partnership): Thomson v Drysdale, 13. Where a company had been placed be ‘sleeping’ members), of the 1925, SC, 311; Re A & BC Chewing Gum into voluntary liquidation but shareholders shall participate in the Ltd, supra. a minority satisfied the court conduct of the business; and that there are grounds for an 12. Where there had been a failure investigation into the company’s c. Restriction upon the transfer of to pay reasonable dividends in affairs: Re Internet Investment Corp the members’ interests in the circumstances where (a) the Ltd [2010] 1 BCLC 458. company – so that if confidence is company could afford to pay lost, or one member removed from reasonable dividends and (b) the SOUTH SQUARE DIGEST June 2018 www.southsquare.com

What is Not Enough for Winding-up 5. A winding up order will not 10. A winding up order will not be on the Just and Equitable Basis? be granted just because some granted where a petitioner seeks shareholders take a pessimistic view to protect interests other than his Just as it is possible to give illustrations of a company’s prospects but where or her interests as a member: Re JE of what will amount to grounds for a the majority do not share that view: Cade & Son Ltd [1991] BCC 360. just and equitable winding up order, Re Agriculturist Cattle Insurance Co ex p. so it is possible to collect together 11. A winding up order will not be Spackman (1849) 1 Mac & G 170. illustrations as to what will not be granted where a petitioner uses enough to justify the grant of a winding 6. A winding up order will not be the proceedings to put pressure up order on that basis. Among other granted if the breakdown in on a company, or for an improper things, the following would not appear confidence between members purpose: Charles Forte Investments Ltd to be sufficient: is because of the conduct of the v Amanda [1964] Ch 240. petitioner: Ebrahimi v Westbourne 1. A winding up order will not be 12. A winding up order will not be Galleries Ltd [1973] AC 360 at 387. granted just because the company granted if the petition was not is a small company: Ebrahimi v 7. A petitioner is not entitled to have a presented “bona fide” but in order Wesbourne Galleries Ltd, supra, at 381f. company wound up merely because to achieve some collateral purpose the petitioner wishes to turn shares and not genuinely to bring about the 2. A winding up order will not be into money. winding up of the company: Re JE granted just because the company Cade & Son Ltd, supra. is a private company: Ebrahimi v 8. The breakdown of a relationship Westbourne Galleries Ltd, supra, at of trust and confidence between 13. A winding up order will not 381f. shareholders probably cannot of be granted if the petition is itself justify winding up on the just designed to vindicate personal or 3. A winding up order will not be and equitable ground: Hollington, business reputation (save where granted unless the petitioner comes Shareholders’ Rights, 9th Ed, at 10-01. it is incidental to a decision as to to the court with “clean hands”: whether relief sought is justified or Ebrahimi v Westbourne Galleries Ltd, 9. A winding up order will not be not): Re FI Call Ltd [2015] EWHC 3269 supra, at 387. granted where the directors (Ch) at [64]. (without conferring on themselves 4. Mere lack of confidence on the any benefit apart from reasonable 14. A winding up order will not be part of the petitioner in those who remuneration) decline to pay granted merely because a company conduct the company’s management reasonable dividends for good is not prosperous: Re Langham is not enough to justify the making commercial reasons. Skating Rink Co (1877) 5 Ch D 669. of a winding up order. Just and Equitable Winding Up 21

Even in circumstances where a petitioner appears to have a plainly good and obvious reason why a winding up order should be made, the court can refuse to make that order

15. A winding up order will not be granted merely because a Other Matters company’s chances of success are small: Re Kronand Metal Three further matters merit a mention in relation to just Co [1899] WN 15. and equitable winding up petitions: 16. A winding up order will not be granted if there is 1. A winding up order should not be sought in England and an alternative remedy and the petitioner is acting Wales in conjunction with an application for relief under unreasonably in failing to pursue that remedy: For Section 994 of the 2006 Act unless winding up is the Section 125(2) of the 1986 Act provides as follows: petitioner’s preferred remedy or the petitioner takes the 2. “If the petition is presented by members of the company on view that winding up may be the only relief which he or the ground that it is just and equitable that the company she may obtain. should be wound up, the court, if it is of the opinion – 2. The question whether it is just and equitable to wind a. That the petitioners are entitled to the relief either by up a company is to be determined as at the date of the winding up of the company or by some other means, and hearing of the petition. As a result a winding up order may be refused if circumstances have changed since the b. That in the absence of any other remedy it would be just date on which the petition was presented: Re Fildes Bros and equitable that the company should be wound up, shall Ltd [1970] 1 WLR 592. make a winding up order; but this does not apply if the court is also of the opinion both that some other remedy 3. Where the dispute in a just and equitable winding is available to the petitioners and that they are acting up petition is one which is really between rival unreasonably in seeking to have the company wound up shareholders, it is a misfeasance for those in control instead of pursuing that other remedy”. of the company to spend the company’s money in the proceedings, save in relation to things with which the The last of these reasons is particularly important. For the company is directly concerned (e.g. giving disclosure of granting of a winding up order is a drastic and draconian documents in the company’s possession or in relation remedy. It is also a fairly blunt instrument. It simply brings to any necessary application under Section 127 of the about the end or death of the company. As a consequence Insolvency act 1986). there is a natural reluctance to make winding up orders if there is a realistic alternative such as, for example, a buy- Discretion out of one party’s shares by another. The same is true if Finally, it should always be appreciated that the court has satisfactory relief could be obtained by bringing a petition a broad discretion as to whether or not a winding up order under Section 994 of the 2006 Act, by bringing alternative should be made or not. Thus even in circumstances where court proceedings or by some other means. The statutory a petitioner appears to have a plainly good and obvious provision plainly assists a court to avoid making a winding reason why a winding up order should be made, the court up order if it wishes to do so. In this regard, so far as a court can nevertheless refuse to make that order.  is concerned, winding up on the just and equitable ground is a remedy of last resort. SOUTH SQUARE DIGEST June 2018 www.southsquare.com

Jersey Update

Nicola Roberts (Counsel) and Leon Hurd (Senior Associate) of Ogier provide a brief update on some key developments in Jersey

NICOLA ROBERTS LEON HURD Jersey Update 23

1. Jersey restructuring and insolvency substantial proportion of its assets to a third party, who transferred them into a complex As a jurisdiction, Jersey is at the heart of structure – it is asserted that there was an oral cross-border insolvency and restructuring. The high agreement between Orb and the third party, not Inevitably, situations arise where insolvent reflected in the sale agreement, that Orb would profile companies’ assets or possibly important evidence continue to benefit from the assets that it had insolvency are located overseas or an overseas liquidation sold and the proceeds of their development. regime would be best for creditors. Conversely of Jersey Following an investigation by the Serious there will be situations where a foreign insolvency Fraud Office in the UK, Dr Smith pleaded guilty company process will require steps to be taken in Jersey. to a number of charges and was sentenced Orb a.r.l. The Bankruptcy (Désastre) (Jersey) Law 1990 to an eight year prison term, and was the (“the Law”) contains an assistance provision subject of a £41 million confiscation order. has firmly which gives the Royal Court of Jersey discretion The proceedings before the Royal Court of placed to provide assistance to the courts of prescribed Jersey arose from litigation funder Harbour jurisdictions (currently British Isles jurisdictions, Jersey’s Fund II LP’s (“Harbour”) efforts to recover Western Australia and Finland). Also, as a matter money and assets from Dr Cochrane and Orb. insolvency of comity the Jersey Court has consistently shown itself to be willing where appropriate to The matter has gone before the Jersey Court three regime in assist overseas liquidators or other appointed times and the court’s judgments have shown a the spotlight officers by recognising those office holders in clear desire to promote the capability of Jersey’s Jersey. Examples of recognised office holders insolvency regime and its ability to deal with have included liquidators, administrators and complex cross-border matters. The judgments receivers from a variety of jurisdictions. issued in this saga have been as follows:

During recent years applications have also i. In Representation of Harbour Fund II LP successfully been made to the Jersey Court for the [2016] JRC 171, the Royal Court declined grant of letters of request to the English Court an application by Orb’s litigation funder, to place a Jersey company into administration Harbour, to place Orb into English law where creditors’ interests would be best served administration. On examination of the facts thereby “passporting” the insolvency of the Jersey it did not consider there was any advantage company to England. Whether this trend will of using English administration in favour continue however is unclear in light of the Jersey of Désastre (i.e bankruptcy in Jersey), Court’s decision last year, whereby for the first particularly in circumstances where there time in nearly 40 years it granted a request from was no expressed desire to maintain Orb as the Viscount (the Chief Executive Officer of the a going concern (“the First Proceedings”). Royal Court (and its enforcement arm)) to issue ii. In Harbour Fund II LP v Orb a.r.l and others [2017] letters of request to the English High Court to JRC 007, Harbour duly returned to the seek her recognition in England to administer the Royal Court to seek declarations en désastre désastre of a Jersey company (and a local resident) of Orb and Dr Cochrane. Notwithstanding involved in a major cross-border insolvency case: the potential scope and complexity of the Representation of the Viscount two bankruptcies and the burden that [2017] JRC 025 would be imposed upon the Viscount and her department in respect of dealing with The high profile insolvency of Jersey company assets and actions around the world, the Orb a.r.l (“Orb”) and its sole shareholder Dr Royal Court declared both Orb and Dr Gail Cochrane (“Dr Cochrane”), a local GP, has Cochrane en désastre. The Court stated it was firmly placed Jersey’s insolvency regime in important that Jersey, as a well-respected the spotlight. The matter commenced in late financial centre, discharged its responsibility 2016 and has continued to build throughout for dealing with the affairs of a Jersey the course of 2017 and 2018, with related company and its own resident (“the Second proceedings in the BVI and before the High Proceedings”). The combined creditor claims Court in England and interested parties ranging filed to date equate to in excess of £1.2 billion. from the Serious Fraud Office to law firms. iii. In Representation of the Viscount [2017] JRC By way of brief background, the proceedings relate 025, the Viscount sought and was granted to the theft of around £35 million from a company two Letters of Request to be issued by the called Izodia by Dr Cochrane’s former husband Dr Royal Court to the High Court of England Gerald Smith in late 2002 – most of the proceeds and Wales requesting the assistance of the of the theft were misapplied to the benefit of Orb. High Court in accordance with Section 426 Once the theft had been discovered, Orb sold a SOUTH SQUARE DIGEST June 2018 www.southsquare.com

UPDATE: JERSEY

of the Insolvency Act 1986 in respect of each of other jurisdictions. It is a clear indication to the of the désastres of Orb and Dr Cochrane. international insolvency community that Jersey is The Letters of Request broadly sought the confident in its ability to have conduct of complex It is clear recognition of the Viscount in England with cross-border insolvency matters of this nature. authority to exercise various powers to include: that the 2. Other Interesting Developments ascertaining information about the assets of Royal Court Orb and Dr Cochrane, to gather in relevant A) Draft Forfeiture of Assets (Civil of Jersey will documents and to exercise various powers Proceedings) Jersey Law 201 of investigation (“the Third Proceedings”). Following MONEYVAL’s inspection of Jersey’s AML not lightly The Letters of Request were issued and the regime in 2015 and its subsequent report issued Viscount is now exercising her various powers permit in May 2016 there has been a focus in Jersey to in relation to her function within England. Jersey’s implement law and policy that will lead to more In the First Proceedings, the Royal Court found prosecutions related to financial crime. One of the insolvency that there was no advantage to using English key recommendations in the MONEYVAL report regime to administration in favour of désastre and did was the introduction of a non-conviction based not accept that Orb had substantial connections confiscation regime in Jersey to apply in parallel be circum- with England. The court considered that the with the conviction based system. The Draft vented in majority of assets, listed by an accountant, were Forfeiture of Assets (Civil Proceedings) Jersey Law situated outside England and Wales. Accordingly, 201- (“the Draft Law”), which has been debated favour of the Royal Court held that initiating the English and approved by the States (Jersey’s legislature), other administration process over a Jersey company seeks to achieve the objectives set by MONEYVAL. that had no substantial connection to England The Draft Law broadly provides for jurisdictions was unjustified. three procedural tracks by which The Second Proceedings were concerned with a civil forfeiture might be sought: claim that was filed in the English courts by Dr i. preserving the existing procedure for the Cochrane and Orb against Harbour for a sum seizure of tainted cash under the Proceeds of £73 million. Dr Cochrane and Orb instructed of Crime (Cash Seizure) (Jersey) Law 2008; Jersey Advocates to assist with resisting Harbour’s application for a declaration en désastre, on the ii. creating a procedure for the forfeiture basis that they had a significant claim against of property in bank accounts which have Harbour in England. The Royal Court refused been subject to a ‘No Consent’ by the to allow Dr Cochrane and Orb to frustrate relevant police authority for 12 months. the Jersey désastre process by engaging in iii. creating a procedure for the forfeiture of English proceedings that it considered to be property in bank accounts which is suspected a ‘last gasp’ attempt to avoid bankruptcy. to be proceeds of unlawful conduct or In the Third Proceedings, the Royal Court granted intended to be used for such conduct. an application by the Viscount for the issue by the The Draft Law also introduces the concept of a Royal Court of two letters of request, pursuant “civil forfeiture investigation”. A civil forfeiture to which the Viscount sought recognition in investigation extends to both proceedings England and authorisation to exercise her powers under the Draft Law and also non-conviction and functions as administrator of the désastres based proceedings being brought (i) under of Dr Cochrane and Orb. The Court was prepared legislation in force in any country or territory to grant a wide request for assistance including other than Jersey, (ii) relating to the forfeiture asking the English Court to authorise the Viscount of property in Jersey, (iii) by a court of that to exercise such of her powers and functions country or territory. The investigation must be in as may be necessary (including the power to relation to one or all of the following matters: intervene in and prosecute or defend or apply for a stay in various sets of proceedings currently i. the question of whether any before the English Courts and to ascertain property is tainted property; information and gather in relevant documents ii. the identity, or suspected unlawful conduct, relating to the assets of Dr Cochrane and/or Orb). of any person who holds property which The saga is ongoing and there will undoubtedly is suspected of being tainted property, or be further judgments and authority arising to whom such property belongs; and from this interesting and complex insolvency. iii. the extent or whereabouts of such property. What is certainly clear from the tenor of the judgments issued to date is that the Royal Where a civil forfeiture investigation is initiated, Court of Jersey will not lightly permit Jersey’s the Draft Law provides the Attorney General, or insolvency regime to be circumvented in favour an authorised officer acting with the Attorney Jersey Update 25

Royal Court States Building, Saint Helier Jersey

In summer of 2017, Jersey’s Royal Court Rules were amended and 11 new Practice Directions were implemented to improve access to justice and streamline the civil justice process

General’s consent, with the ability to apply B) Reform – Important changes for various investigative orders including: to Jersey Civil Procedure i. Production orders; Last summer Jersey’s Royal Court Rules (“the Rules”) were amended and 11 new Practice ii. Disclosure orders; Directions (PD) came into force to improve access iii. Account monitoring orders to justice, to streamline the civil justice process against banks; and and, where possible, reduce the risks and costs associated with litigation by encouraging the iv. Customer information orders against banks. early resolution of cases to avoid the need to The scope for orders against banks will, it is resort to court proceedings. The changes that anticipated, prove an effective tool in obtaining were introduced by Amendments No.20 are evidence and identifying and recovering tainted addressed below. assets. It is anticipated that the Draft Law will Overriding Objective become a widely used piece of legislation and banks in Jersey should certainly take note There is an now an overriding objective for of the direct impact that the Draft Law may the Royal Court to deal with cases “justly and have on their businesses and further take at a proportionate cost”, and a requirement steps to ensure that they can readily comply that the parties must assist the Court to with any of the civil forfeiture investigation further this overriding objective. orders that may be made against them. SOUTH SQUARE DIGEST June 2018 www.southsquare.com

UPDATE: JERSEY

Pre-Action Communication

The purpose of this new PD is to encourage parties amended PD now provides the court with the to exchange material information about a legal power to notify automatically the parties of the action being considered by a potential plaintiff and date when such a hearing is to take place after to allow parties an opportunity to settle the claim the matter has been placed on the pending list – prior to the commencement of proceedings. Non- usually within 3 months. The PD also provides compliance may result in an adverse costs order. guidance as to what the parties should consider One of the in an application for directions. It imposes a duty Placing Cases on the Pending List and on the parties to (i) consider what directions largest areas Adjournment by Consent Prior to Pleadings are required, (ii) endeavour to agree appropriate of contention This relates to adjournments and provides for directions for case management, and (iii) submit in litigation parties to agree to a matter that has already been agreed directions to the Court for approval. tabled, to be adjourned for a period up to four If directions are not agreed the parties are is costs weeks without leave of the Court. If a longer period required to set out the directions they require is needed the parties are required to file an and give a summary of the reasons why such a agreed written statement justifying direction is required with supporting material. the time period required. Budgets Applications for Summary Judgment One of the largest areas of contention in litigation This new PD broadens the summary judgment is costs, be it hourly rates, the threat of significant power in Jersey. The amendments include the adverse cost orders or lack of appreciation of how introduction of a “no real prospect” of success much litigation might cost. The new direction test and provisions enabling a defendant to applies to any case where the value of the claim, seek summary judgment against a plaintiff. including any counterclaim, is less than £500,000, or where it is disputed by one of the parties on Requests for Information bona fide grounds that the value of the claim is The Court’s power has now been extended to less than £500K. A costs budget must be filed require any party to provide clarification of any by all parties within seven days prior to the matter in dispute in the proceedings, or give hearing of the first summons for directions. additional information in relation to any such Discovery – Hard Copy matter, whether or not the matter is contained and Electronic or referred to in a pleading. Such a request must be concise and only relate to matters that are Previously, the discovery obligation was absolute reasonably necessary and proportionate. It and extended to all ‘relevant’ documents. The must also be served on the other party prior new PD now provides the Royal Court with to making any application to the Court. power to limit the disclosure obligations of a party to what is reasonable and proportionate. Directions Hearing A further Practice Direction has been introduced In the past a directions hearing would only which deals with documents held in electronic be fixed after pleadings had closed. The new form (previously documents in electronic and Jersey Update 27

The changes to the Rules and introduction of new Practice Directions mark a sea change in civil procedure in Jersey

hard copy form were not distinguished). This Comment new Practice Direction codifies the general principles and process for providing discovery The changes to the Rules and the introduction of electronic documents in a proportionate of the new PDs mark a sea change in civil and cost effective manner. It emphasises the procedure in Jersey and bring the Jersey process need for the parties to discuss cooperatively more into line with the principles of and the approach to electronic discovery and agree approach to case management as set out in the the process to be followed using appropriate Civil Procedure Rules in England and Wales. technology (as far as possible in advance of the C) English High Court rules that the first directions hearing). The Practice Direction limitation period for breach of directors also imposes obligations on parties to ensure duties under Jersey Law is 10 years electronic documents are preserved from the time when litigation is contemplated. The Jersey limitation period for claims against directors for breach of duty under Article 74 of the Expert Evidence Companies (Jersey) Law 1991 (“the Law”) has not This new PD provides guidance on the approach been definitively decided by the Royal Court in to applications to adduce expert evidence under Jersey. In the past it has only ever been considered Rule 6/20. In particular, it limits the number of obiter and on a relatively tentative basis in 2 expert witnesses that may be called and it Jersey cases, In the matter of Northwind Yachts requires, where possible, that the parties 2005 JLR 137 and Alhamrani v Alhamrani 2007 JLR endeavour to instruct the same expert where 44. However, last year the English High Court in the claim involves more than one plaintiff or O’Keefe & Anor v Caner & Ors1 [2017] EWHC 1105 (Ch) defendant. Thus the parties are encouraged to (which addressed the law of prescription in Jersey explore instructing a single joint expert in light applicable to claims for breach of directors’ duties) of the overriding objective to deal with cases found that the prescription period for claims fairly and expeditiously. against directors of Jersey companies for breach of their duties under Article 74 of the Law is 10 years. Offers to Settle The 10 year period was held to apply to both New rules have been introduced to encourage claims for: breach of a director’s fiduciary duty parties to put forward a proposal to settle a matter. to act honestly and in good faith with a view If such an offer is declined, it may be taken into to the company’s best interests (Art. 74(1)(a)); account when the Court addresses the question and claims for breach of the director’s duty of costs. of care, skill and diligence (Art. 74(1)(b)). Summary assessment of costs Whilst this decision of the English High Court This PD has been amended. A new process has is not binding on the Jersey courts, it is likely to been introduced pursuant to which the costs of carry considerable weight and will no doubt be 1 Antony Zacaroli QC (as he then was), interlocutory hearings (other than in respect of given close attention to by the Jersey Bar.  William Willson and a summons for directions) of less than a day can Ryan Perkins acted for the successful claimants be summarily assessed. SOUTH SQUARE DIGEST June 2018 www.southsquare.com

The Honourable Paul Heath QC

outh Square is delighted to announce Sthat The Honourable Paul Heath QC, a recently retired Judge of the High Court of New Zealand, joined chambers as an Associate Member from 9 April 2018. Paul has a special interest in cross border insolvency. He was a member of the New Zealand Law Commission (an independent statutory law reform agency) from 1999 until 2002. During that time, he was responsible for preparation of a report recommending that the New Zealand Government adopt the UNCITRAL Model Law on Cross Border Insolvency. The Government acted on that recommendation when the Insolvency (Cross-border) Act 2006 was enacted to come into force at the same time as comparable legislation in Australia. As part of his duties on the Law Commission, Paul was also responsible for the preparation of advisory reports to the Ministers of Commerce and Economic Development respectively on various aspects of insolvency law, including priority debts and voluntary administration.

Paul’s time on the Law Commission followed an extensive practice in commercial litigation from 1978 until his appointment to the High Court in late March 2002. Paul’s first connection with South Square was in 1990, when he and Gabriel Moss QC appeared against each other in the Privy Council. Their association has continued over the reported in the United Kingdom: Williams v Simpson [2011] years. Paul and Gabriel have spoken on panels together BPIR 938, Re Ced Ex Foods (formerly Cedenco Foods) (in liq); ANZ at international conferences; most notably at the INSOL National Bank v Sheahan [2013] BCC 321 and Batty (Trustee in Quadrennial Congresses in London and Sydney, in 2001 Bankruptcy of Reeves) v Reeves [2015] BCC 568. All three of and 2017. those cases involve aspects of cross-border insolvency.

During a period of sabbatical leave in 2010, Paul was a In 2000, Paul was elected as a Fellow of the American Visiting Scholar at UNCITRAL in Vienna. During that time College of Bankruptcy. He is also the co-consulting editor he prepared the first draft of the Judicial Perspective on of the leading New Zealand text on insolvency law, Heath & the UNCITRAL Model Law. The text was adopted by the Whale on Insolvency. General Assembly of the United Nations on 9 December Paul is delighted to have been offered a position as an 2011. The publication is available on the UNCITRAL website. Associate Member of South Square. An acknowledgement of Paul’s involvement appears in the preface to the publication. Paul intends to undertake dispute resolution work, primarily arbitration. Although he will be based at After practising as a barrister and solicitor (in New Zealand’s Bankside Chambers in Auckland, Paul will also, given his fused profession) between 1978 and 1998, Paul took Silk international reputation, be available to provide strategic on 1 June 1998. He was appointed to the High Court of New advice arising out of cross border insolvencies, neutral Zealand in late March 2002 and retired on 6 April 2018, after assistance with the facilitation of international disputes 16 years’ service. During his time on the Bench, Paul also and the provision of expert evidence on New Zealand law.  sat as an ad hoc member of the Criminal and Civil Appeal

Divisions of the Court of Appeal of New Zealand between Any inquiries about Paul’s availability to accept 2003 and 2016. In all, he sat on over 400 appeals. During his instructions in any particular case may be directed to period in the High Court, he gave a number of important [email protected] insolvency decisions, including three that were also Case Digest Editorial 29

Case Digest Editorial

follow the event was not appropriate, (and subsequently liquidation), the and so costs were determined to be CVA was accordingly terminated. The payable out of the LBIE estate. As to liquidators argued that this further the senior creditor group and sixth clause in effect operated as a penalty respondent, the judge agreed that they clause such that it shouldn’t be allowed had essentially conducted adversarial to stand because it infringed the pari litigation meaning they had been acting passu principle. However, in giving Rose Lagram-Taylor largely for their own benefit and so judgment, the court held that the should incur a costs liability. clause was not a penalty clause, the rule against penalties in contracts not t has been a busy time Gabriel Moss QC, Daniel Bayfield QC, applying to CVAs. for South Square since Richard Fisher, Alexander Riddiford I and Ryan Perkins acted for various Finally, Tom Smith QC appeared in both the last edition of the parties in Re OJSC International Re Herald Fund SPC, Primeo Fund v Pearson Digest, particularly in Bank of Azerbaijan [2018] EWHC 792 in the Court of Appeal of the Cayman (Ch), a case in the context of ongoing Islands, and in Dunbar Assets plc v the world of corporate litigation between the International Davey [2018] EWHC 766 (Ch). insolvency, where Bank of Azerbaijan and two “hold-out” In Re Herald Fund, the Court of creditors who are seeking to enforce Appeal held that s.112 of the Cayman thirteen of our members their claims in England. The judgment Companies Law did not confer a broader have appeared in cases is in effect supplemental to a previous power on a liquidator to rectify the decision of Hildyard J’s where it was share register of an investment fund included in this edition’s held that a moratorium preventing the whenever necessary in the interests case digests. commencement or continuation of any of justice, in the context of the action against the Bank pending the distribution methodology to be used In the latest bout of Waterfall resolution of restructuring proceedings in the liquidation of Herald (a Madoff proceedings, Antony Zacaroli QC (as in Azerbaijan could not be continued. “feeder fund”). It was determined that he then was), Robin Dicker QC, David An appeal on this is also now pending. this power would only arise where Allison QC, Daniel Bayfield QC, Adam Accordingly, in the present application, there was fraud or default which had Al-Attar, Henry Phillips and Robert the “hold-out” creditors applied to the effect of vitiating the contractual Amey all appeared for parties in Re lift the existing moratorium, and in relations between the fund and Lehman Brothers International (Europe) the circumstances, Hildyard J held shareholder, rather than where the [2018] EWHC 924 (Ch) which considered that a stay pending the appeal should NAVs at which the fund had issued the question of costs arising out of the be imposed, effectively “staying the or redeemed shares were affected by Waterfall IIC proceedings in the LBIE lifting of the stay”, on the provision fraud in some way. In Dunbar Assets, a administration. Waterfall IIC concerned of undertakings by the “hold-out” case arising out of the advancement the construction and effect of various creditors. of lending for the funding of a standardised pre-administration development site in Canary Wharf, As with all cases involving the agreements on creditors’ entitlement London, an administrator’s powers insolvency of well-known high street to statutory interest. In judgment, and duties were analysed. In a detailed brands, those relating to BHS are always the fourth respondent prevailed on judgment, Snowden J considered the of interest. Stephen Robins recently many of the issues. They contended objective of an administration, the appeared in Re SHB Realisations Ltd that they should be entitled to their use of agents, the realising of secured (formerly BHS Limited) [2018] EWHC costs, the usual principle being that property, and the liability of secured 402 (Ch), in which the court was asked costs follow the event. They also creditors, with the case re-emphasising to determine the effect of certain asserted that the senior creditor group the requirement for an administrator provisions in the BHS CVA. One such and sixth respondent should not be to exercise independent judgment, not clause of the CVA allowed the company allowed their costs out of the estate, being bound to follow the wishes of to pay reduced rents to landlords. as they had essentially conducted creditors. However, by a further clause, if the CVA adversarial litigation. In giving was terminated in accordance with that This by no means summarises all of judgment, Hildyard J held that as the clause, landlords were entitled to claim the very interesting cases which are Waterfall IIC application had been made against the company for the original, digested in this edition, and so it leaves in the interests of the general body of full rents. On entering administration me to say, happy digesting!  creditors, the usual principle that costs SOUTH SQUARE DIGEST June 2018 www.southsquare.com

Case Digests

JSC BTA Bank v Ablyazov recognised that the tort took two forms: (i) conspiracy to injure where the overt (No 14) [2018] UKSC 19 (Lord Mance, Lord acts done pursuant to the conspiracy may Sumption, Lord Hodge, Lord Lloyd-Jones, be lawful but the predominant purpose is Lord Briggs JJSC) 21 March 2018 to injure the claimant; and (ii) conspiracy Alleged embezzlement by bank’s chairman to do by unlawful means an act which may – tort of conspiracy to injure by unlawful be lawful in itself, albeit that injury to the means – jurisdiction claimant is not the predominant purpose. Once it is established that a conspiracy The first defendant Mr Ablyazov was the has caused loss, it is actionable as a chairman and controlling shareholder distinct tort, as primary and not of the claimant bank (“the Bank”). secondary liability. The Bank alleges that he embezzled US$ 6 billion of its funds. In 2009 Mr As to what makes the tort actionable, their Banking Ablyazov fled to England and obtained Lordships stated that the more useful test asylum, and the Bank commenced was the absence of “just cause or excuse”. and Finance various proceedings against him and A person has a right to advance his own Digested by Toby Brown others in the English courts alleging interests by lawful means even if the misappropriation of funds. The Bank foreseeable consequence is to damage the obtained against Mr Ablyazov a interests of others. The existence of that disclosure order, a worldwide freezing right affords a just cause or excuse. Where, order and subsequently a receivership on the other hand, he seeks to advance order. In 2011, the Bank applied for and his interests by unlawful means he has was granted an order committing him no such right. The position is the same for contempt of court for breaching these where the means used are lawful but the orders. Mr Ablyazov fled England and predominant intention of the defendant default judgment was entered against was to injure the claimant rather than to him for over US$ 4.6 billion, though little further some legitimate interest of his has been recovered. own.

In the present proceedings, Mr In the present case, the unlawful means Ablyazov’s son-in-law, Mr Khrapunov, relied upon are criminal contempt is the second defendant. The Bank of court, albeit punishable in civil alleges that Mr Khrapunov has at all proceedings. Whilst the Bank did not times been aware of the freezing order contend that the defendants’ predominant and the receivership order, and in 2009 purpose in hiding Mr Ablyazov’s assets entered into and actively participated was to injure it, Lord Sumption and Lord in an understanding with Mr Ablyazov Lloyd-Jones held that damage to the Bank to dissipate and conceal his assets. On was necessarily intended. The object of this basis the Bank brought an action the conspiracy and the acts pursuant to it based on the tort of conspiracy to cause were to prevent the Bank from enforcing financial loss by unlawful means, namely its judgments against Mr Ablyazov. The by serial contempt of court through Supreme Court therefore held that the breaches of the freezing and receivership cause of action in conspiracy to injure orders. The appeal concerned an the Bank by unlawful means was made application by Mr Khrapunov, a resident out. This was subject to the argument of Switzerland, in which he contested that such a cause of action was consistent the jurisdiction of the English court to with public policy; however, Lord entertain this claim. Sumption and Lord Lloyd-Jones held that it was. Accordingly, the Bank’s pleaded First, Mr Khrapunov argued that allegations disclosed a good cause contempt of court cannot constitute of action. unlawful means for the purpose of the tort of conspiracy and accordingly there The second issue on appeal was whether was no good arguable case on which there was jurisdiction under the Lugano to found jurisdiction. In their jointly Convention 2007. Under the Convention, delivered judgment, Lord Sumption the general rule in Article 2 is that a and Lord Lloyd-Jones considered the person should be sued in his or her state history of the tort. Since the decision of of domicile; however, special jurisdiction Quinn v Leathem [1901] AC 495 it had been is provided for, including in Article 5 that Case Digests 31

“A person domiciled in a state bound by this be strictly interpreted. The decisions the place where the conspiratorial Convention may, in another state bound by of the European Court of Justice agreement was made as the place of the this Convention, be sued: ...(3) in matters showed that the expression “place event which gives rise to and is at the relating to tort, delict or quasi-delict, in the where the harmful event occurred” had an origin of the damage. In entering into courts for the place where the harmful event autonomous interpretation, and covered the agreement Mr Khrapunov would occurred or may occur.” The only event both (a) the place where the damage have encouraged and procured the said to have occurred in England was the occurred and (b) the place of the event commission of unlawful acts by agreeing conspiratorial agreement itself, and giving rise to it. The result was that the to help Mr Ablyazov to carry the scheme Mr Khrapunov contended that it was defendant may be sued either in the into effect. The making of the agreement the alleged events done outside England courts of the place where the damage in England should, in their view, be pursuant to the agreement that were occurred or in the courts of the place of regarded as the harmful event which harmful. the event which gives rise to and is at set the tort in motion. Accordingly, the the origin of that damage. English courts had jurisdiction and the Lord Sumption and Lord Lloyd-Jones appeal was therefore dismissed.  stated that it was well established that Their Lordships considered that the the special jurisdiction provisions must Court of Appeal correctly identified

Openwork Limited v Alessandro Forte investment to zero at three years. Mr Forte argued that it was not open to the Judge to invent his own calculus, relying on the [2018] EWCA Civ 783 (Arden LJ, Simon LJ and Newey LJ) proviso referred to by Lord Wilberforce in Cudgen Rutile (No.2) 18 April 2018 Pty Ltd v Chalk [1975] AC 520 PC: “…in modern times, the Courts are readier to find an obligation which can be enforced, even though Financial adviser – payment of commission - enforcement of apparent certainty may be lacking as regards some terms such as the incomplete contractual terms price, provided that some means or standard by which that term can The primary issue on this appeal was the extent to which be fixed can be found.” the court can give effect to a contractual term whose overall Simon LJ (with whom Newey and Arden LJJ agreed) delivered effect is explicit, but whose detailed terms are incomplete. the judgment of the Court of Appeal. He stated that the court The claimant (“Openwork”) is a company associated with should strive to give some meaning to contractual clauses Zurich Assurance Limited, which runs a network of franchised agreed by the parties if it is at all possible to do so. The financial advisers. The defendant (“Mr Forte”) is a financial authorities were reviewed, with Simon LJ ultimately citing with adviser. In 2005 the parties entered into a written agreement approval the commentary in Lewison, Interpretation of Contracts: under which Mr Forte became one of Openwork’s franchisees. “A provision in a contract will only be void for uncertainty if the court Upon a sale by Mr Forte of a particular investment to a client, cannot reach a conclusion as to what was in the parties’ minds or Openwork was entitled to a commission from the investment where it is not safe for the court to prefer one possible meaning to other provider, and Mr Forte was entitled to a proportion of the equally possible meanings, while bearing in mind that what is in the commission from Openwork. Under the contract, if the investor parties’ mind is a legal construct and not an enquiry into subjective withdrew a “no exit penalty bond” within 3 years, Mr Forte was intent.” obliged to repay a proportion of his commission to Openwork Applying this approach to the present case, Simon LJ held (“the clawback provision”). Two particular clients withdrew that the Judge was correct to find that the parties’ intention such investments within this period, and so Openwork brought was reflected in a straight-line calculation of entitlement to proceedings to clawback commission paid to Mr Forte. clawback, which although not expressed, gave effect to the The contract provided that “where funds are withdrawn within identified criteria. This was for four reasons. 3 years of the most recent investment, a percentage of the initial First, the parties plainly intended the clawback provision commission will be debited to your Commission Account. The amount to have some effect, but if it was treated as being so vague of initial commission clawed back relates to the amount invested, as to give Openwork no rights, it would defeat the intent. length of time invested and amount withdrawn.” As the Judge Second, the intent was that Openwork would be entitled to (Mr Recorder Blohm QC) held at first instance, the clawback recover commission paid to Mr Forte if his client’s funds were provision was “vague” in that it did not provide any express withdrawn within three years. Third, a definite meaning on formula by which the calculation is to be made. Further, it which the court could safely act could be extracted from the was inherently unlikely that a franchisee would have agreed criteria expressed in the clause. Thus, fourth, the amount to confer on Openwork a general discretion to claw back such of the clawback is expressed as a percentage of the amount sums as Openwork considered reasonable. These findings were of the commission paid. If funds are withdrawn after three not challenged on appeal. years there is no clawback and the advisor retains 100% of the Mr Forte did, however, challenge the Judge’s finding that commission. Conversely, if the funds are withdrawn the day since the clawback was to be calculated on the basis of three after the most recent investment, the advisor would not be identified factors, the intent of the provision was clear, entitled to any commissions. Accordingly, the straight-line and that commission would be clawed back on a straight- basis reflected the parties’ intentions. Together with other line reducing basis from the full commission at the date of issues, the appeal was therefore dismissed.  SOUTH SQUARE DIGEST June 2018 www.southsquare.com

CASE DIGESTS Akcine Bendrove Bankas As the orders obtained in Lithuania and Switzerland were not direct means Snoras v Vladimir of enforcing the freezing order the Antonov & Ors remaining question for the court was whether they were orders “of a similar [2018] EWHC 887 (Comm) (Peter Macdonald nature”. On this, the claimant submitted Eggers QC sitting as a Deputy High Court that the undertaking’s reference to a Judge) 20 April 2018 “similar order” was intended to prevent an applicant from framing an application Freezing Orders – undertakings before a foreign court for fresh relief, This case concerned proceedings dating when in reality the application was back to 2012 where the claimant had merely seeking to enforce the English commenced proceedings against the freezing order. The court accepted this defendants seeking relief for alleged and concluded that the words were breaches of the defendants’ duties as apt to deal with foreign court orders Civil Procedure directors, officers and shareholders, which were only directly or in substance Digested by Rose Lagram-Taylor applying for a worldwide freezing order enforcing the freezing order, rather than against Mr Antonov. This application those orders having to be anything more was granted by Teare J with the than enforcement. freezing order referring to a number of The second question for the court was undertakings given by Snoras including whether Snoras had failed to comply that it would not seek to enforce the with the undertaking having obtained order in any country outside England the Lithuanian and Swiss orders. On and Wales, or seek a similar order this, the claimant submitted it had not including orders conferring a charge such that there was no breach. Having or other security against Mr Antonov considered the nature of the orders, the or his assets without the permission of court relied on the fact that the orders, the court. The proceedings were stayed even if similar in effect to the freezing by consent at the end of 2012 without order, were obtained pursuant to rights prejudice to the freezing order. engrafted in Lithuanian and Swiss law In 2017, Snoras commenced fresh and independent to the freezing order proceedings and in support of those obtained in England, and so could not proceedings obtained orders against Mr be viewed as being obtained for the Antonov in Lithuania and Switzerland purpose of enforcing that freezing order restricting Mr Antonov’s use of his or of being an order of a similar nature. assets in those countries. Accordingly, the court found there to be no breach of the undertaking. Accordingly, the matter before the court was whether, on the application In the alternative, the court also of the claimant, the orders obtained in considered the question of whether Lithuania and Switzerland constituted a it would have granted retrospective breach of its earlier undertaking. permission for the order, should there have been a breach of the undertaking. In querying whether Snoras failed As to this and in reaching the decision to comply with the undertaking, the that permission would have been given, court was required to first consider the court placed emphasis on (i) the the meaning of the undertaking. fact that the breach was inadvertent It was contended by Snoras that the and unintended, (ii) that as soon as undertaking only intended to require Snoras realised the breach it made it to obtain the court’s permission this application, (iii) that there was no before taking any steps abroad which evidence of prejudice or oppression to actually or substantially amounted to Mr Antonov on his ability to defend the enforcement of the freezing order the proceedings, (iv) that the court overseas, it not requiring it to obtain was previously satisfied of the risk of permission if the application to the dissipation of assets and the possibility foreign court did not rely upon the for further freezing orders being sought existence of the English freezing order. abroad, and (v) that the allegations The court concluded that the purpose against Mr Antonov involved serious of the undertaking was to (i) avoid the wrongdoing.  oppression of the defendant by the [Robert Amey] institution of multiple proceedings for the enforcement of the English freezing order, and (ii) prevent the enforcement of the freezing order in a foreign jurisdiction having a more far- reaching effect in that jurisdiction than in England. Case Digests 33

Loson v Stack [2018] EWCA Civ 803 (Patten LJ, Floyd LJ) 17 April 2018

Civil Procedure Rules – bankruptcy petitions – judgment debts – The appellant’s appeal before the Court of Appeal was enforcement dismissed.

A judgment debtor appealed against a decision that her Firstly, it was held that the circuit judge had been correct application to pay a judgment debt by instalments pursuant to consider that the district judge had incorrectly exercised to CPR r.40.9A should have been refused. his discretion under r.40.9A. The district judge was wrong in believing that the instalment order would not interfere The case arose following a dispute over an unpaid parking with the bankruptcy petition. Whilst it was correct that the fine where the appellant was ordered to pay £5000 in costs. petition had not been secured or compounded pursuant to After failing to pay these costs, the respondents served a s.271(1)(a) of the Insolvency Act 1986 on the basis that the sum statutory demand. Following an unsuccessful application to was due and payable at the date of the presentation of the set aside the statutory demand, the appellant was ordered to petition, the effect of the instalment order was nevertheless pay a further £3000. The appellant applied to vary the costs that the petition debt would no longer be due and payable. order so as to pay by instalments. It was considered by the Court of Appeal that the district The respondents served the appellant with a bankruptcy judge should have balanced the judgment debtor’s desire petition on the basis of the unpaid costs. On hearing the to extend time for payment and avoid enforcement against appellant’s application, the district judge held that the the judgment creditors who had an order for costs with no costs order should be varied, ordering the debt to be paid in prospect of the principal or interest ever being paid. monthly instalments of £50 (this being the maximum the Secondly, the correct approach a court should take when appellant could afford). considering a r.40.9A application where the debtor could On the respondent’s appeal of the instalment order, a not really afford to pay anything was not to interfere with circuit judge held that the district judge’s decision had been the judgment creditor’s right to seek enforcement through perverse, the instalments of £50 not even discharging the whatever means were available to them. The court’s power statutory interest accruing on the costs order. Accordingly, under r.40.9A has to be exercised in a way which properly the circuit judge concluded that the interests of the respects the judgment creditor’s rights. Should a judgment judgement creditors had not been properly balanced creditor wish to obtain the benefit of an instalment order, against those of the judgment debtor and set aside the the court has to be presented with a sensible and realistic instalment order. repayment schedule. 

Best Friends Group & he had entered into with the bank in his the unlimited company as the claimant own name. However, as consequential was not a genuine mistake and would Anor v Barclays Bank Plc loss had not been agreed, proceedings have caused reasonable doubt as to the were issued, naming the unlimited identity of the claimant. [2018] EWCA Civ 601 (Arden LJ, Simon LJ) company as claimant. An amendment 28 March 2018 The Court of Appeal dismissed the was purportedly made to the claim vet’s appeal. In considering the facts, Civil Procedure Rules – limitation – form under CPR r.17.1 to add the name particular emphasis was given to the substitution of parties of the vet as claimant, but in the bank’s fact that (i) the vet must have given defence, they claimed that the swaps This case concerned an application instructions for the claim to be brought, had only been entered with the vet under CPR r.17(4) to amend the name of and (ii) no evidence was provided personally, that the cause of action was a party after the expiry of the limitation by the vet. Further, as to the court’s time barred and that permission for period. R.17(4) provides that the court discretion, whilst the court should not the substitution or addition of the vet may allow an amendment where that exercise its discretion so as to punish to the claim outside of the limitation amendment is to correct a mistake as a party for a harmless error by its legal period had not been obtained. Following to the name of the party where that representative, this was not what had the service of a strike out application mistake is genuine and does not cause occurred. In this case, it was clear that from the bank, the vet then sought reasonable doubt as to the identity of the there had been delay in making the the permission to substitute his party in question. r.17(4) application, the claim not being name outside of the limitation period, conducted with any sense of urgency. The party concerned was an unlimited asserting that he had always intended This was particularly the case seeing company owned by a vet. The bank that he would claim as an individual. as the issue of the proper claimant had had paid compensation to the vet in However, in giving judgment, it was been raised in the defence, and yet no relation to certain swap transactions held at first instance that the naming of steps were taken to rectify the matter.  SOUTH SQUARE DIGEST June 2018 www.southsquare.com

CASE DIGESTS Civil Procedure

Burnden Holdings (UK) Ltd v Fielding [2018] UKSC 14 (Lord Kerr, Lord Sumption, Lord Carnwath, Lord Lloyd-Jones, Lord Briggs JJSC) 28 February 2018

Limitation – trusts – insolvency

The Supreme Court considered s.21(1)(b) of the Limitation Act were precluded by the operation of s.21(1)(b) from relying 1980 which provides that no limitation period is applicable to on the six-year limitation period specified in s.21(3) of the actions by a beneficiary under a trust to recover trust property Limitation Act. The appeal was dismissed by the Supreme in the possession of the trustee or previously received by him Court. and converted to his use. First, on the scope and application of s.21(1)(b), it was held that The claim concerned a transfer of shares. The defendants the starting point was to pay due regard to its purpose, this were the former directors and controlling shareholders of being that it gave a trustee the benefit of the lapse in time the claimant holding company. Following the transfer of where he had done something legally or technically wrong, certain shares from one of the claimant’s subsidiaries to a but not morally wrong or dishonest. The provisions had not new holding company of which the defendants were also been intended to enable a trustee to gain something that they majority shareholders, the claimant went into liquidation. should never have had. Whilst s.21 was primarily aimed at Six years later, the liquidator issued proceedings against the express trustees, it was applicable to company directors defendants for the unlawful distribution in specie of the by analogy. claimant’s shareholding in that subsidiary, his case being Secondly, on whether s.21(1)(b) applied to the current case, that the defendants had received trust property belonging it was held that it did as the defendant had participated in to the claimant and had converted it to their own use. The the unlawful distribution of the shares when the claimant’s defendants were granted summary judgment on the ground shareholding in its subsidiary was converted to the new that the liquidator’s claim was statute barred. However, this holding company. In assuming the distribution was unlawful, was set aside by the Court of Appeal which applied s.21(1)(b) it represented a taking of the claimant’s property in defiance such that no limitation period applied to the claim. The sole of the claimant’s ownership rights to the economic benefit of issue before the Supreme Court was whether the defendants the defendants. 

Barton v Wright Hassall LLP [2018] UKSC 12 (Lady Hale (President), Lord application for validation. However, this It was held to be insufficient that the Wilson, Lord Sumption, Lord Carnwath, was refused by a district judge, county claimant’s mode of service did bring Lord Briggs JJSC) 21 February 2018 court judge and Court of Appeal. the claim form to the defendant’s attention, as the manner in which this Civil Procedure Rules – service – litigants The Supreme Court also dismissed is done is important, with rules of the in person the appeal, Lord Briggs and Lady Hale court having the purpose of identifying dissenting. The Supreme Court set out the approach necessary formal steps which should to be taken to applications under CPR Firstly, on deliberating the proper be taken. r.6.15(2) for an order validating service approach under r.6.15(2), the court had As to the fact that the claimant was a of a claim form which has not been to decide whether there was a “good litigant in person, it was considered properly served. reason” for validating service, this that their lack of representation would being a matter of fact. In considering The appellant, a litigant in person, not usually justify departing from the the case of Abela v Baadarani [2013] UKSC appealed against a decision refusing expected standards of compliance with 44, [2013] 1 WLR 2043 which set out the his application for an order to validate the rules which provide a framework relevant principles, the relevant factors the service of the claim form which he intended to balance the interest of for the court’s consideration included (i) had issued. The claim form had been the parties. The balance would be whether the claimant issued on 25 February 2013 with the disturbed should a litigant in person had taken reasonable steps to effect time for its service expiring on 25 June be given greater indulgences than his service in accordance with the rules, 2013. On 24 June 2013, the appellant represented opponent which could (ii) whether the defendant or their purported to serve the claim form on affect their legal rights. Accordingly, solicitor were aware of the contents the respondent’s solicitors by email. it was determined that unless the of the claim form at the time when However, those solicitors had not stated rules and practice directions were time for service expired, and (iii) they were prepared to accept service by particularly inaccessible and obscure, whether the defendant would suffer that means. As it was common ground it was reasonable to expect a litigant in any prejudice by the retrospective that service using this method was not person to familiarise themselves with validation bearing in mind their good service, the appellant made his the relevant rules which applied to the knowledge of the claim form. Case Digests 35

steps they were intending to take. As issued at the very end of the limitation have been more diligent, there was to the rules of service, these were not period, this meant that prejudice could no reason why the appellant should inaccessible or obscure. be caused to the respondent as they be absolved from his errors at the would be retrospectively deprived of respondent’s expense.  Accordingly, on the basis that the a limitation defence should service be appellant made no attempt to serve validated. Given the appellant could in accordance with the rules, and only

“(2) Damages are also available on a similar Morris-Garner and basis for patent infringement and breaches another v One Step of other intellectual property rights. (Support) Ltd “(3) Damages can be awarded under Lord Cairns’ Act in substitution for specific [2018] UKSC 20 (Lady Hale (President), performance or an injunction, where the Lord Wilson, Lord Sumption, Lord Reed, court had jurisdiction to entertain an Lord Carnwath JJSC) application for such relief at the time when 18 April 2018 the proceedings were commenced. Such Damages damages are a monetary substitute for what is lost by the withholding of such relief. The Supreme Court considered the correct measure of loss in damages “(4) One possible method of quantifying CASE DIGESTS for breach of a restrictive covenant damages under this head is on the basis of prohibiting the appellants from the economic value of the right which the competing with the respondent. In court has declined to enforce, and which it Commercial so doing Lord Reed, with whom Lady has consequently rendered worthless. Such Hale, Lord Wilson and Lord Carnworth a valuation can be arrived at by reference Litigation agreed (Lord Sumption agreeing that to the amount which the claimant might Digested by Madeleine Jones the appeal should be allowed but reasonably have demanded as a quid pro giving a separate judgment), reviewed quo for the relaxation of the obligation in the principles relating to damages in question. The rationale is that, since the general before considering so-called withholding of specific relief has the same Wrotham Park or negotiating damages, practical effect as requiring the claimant to which are damages awarded to reflect permit the infringement of his rights, his the sum that the claimant could have loss can be measured by reference to the negotiated in return for releasing the economic value of such permission. defendant from the obligation which “(5) That is not, however, the only approach he failed to perform and which are to assessing damages under Lord Cairns’ dealt with in a line of cases following Act. It is for the court to judge what method Wrotham Park Estate Co Ltd v Parkside of quantification, in the circumstances of the Homes Ltd [1974] 1 WLR 798. case before it, will give a fair equivalent for Summing up the discussion, Lord Reed what is lost by the refusal of the injunction. laid down the following principles, “(6) Common law damages for breach of at [95]: contract are intended to compensate the “(1) Damages assessed by reference to claimant for loss or damage resulting from the value of the use wrongfully made the non- performance of the obligation of property (sometimes termed “user in question. They are therefore normally damages”) are readily awarded at common based on the difference between the effect law for the invasion of rights to tangible of performance and non-performance upon moveable or immoveable property (by the claimant’s situation. detinue, conversion or trespass). The “(7) Where damages are sought at common rationale of such awards is that the person law for breach of contract, it is for the who makes wrongful use of property, where claimant to establish that a loss has been its use is commercially valuable, prevents incurred, in the sense that he is in a less the owner from exercising a valuable right favourable situation, either economically or to control its use, and should therefore in some other respect, than he would have compensate him for the loss of the value been in if the contract had been performed. of the exercise of that right. He takes something for nothing, for which the owner “(8) Where the breach of a contractual was entitled to require payment. obligation has caused the claimant to suffer SOUTH SQUARE DIGEST June 2018 www.southsquare.com

CASE DIGESTS Commercial Litigation economic loss, that loss should be measured awarded more than nominal damages. considered as an asset. The defendant has or estimated as accurately and reliably as taken something for nothing, for which the “(10) Negotiating damages can be awarded the nature of the case permits. The law is claimant was entitled to require payment. for breach of contract where the loss suffered tolerant of imprecision where the loss is by the claimant is appropriately measured “(11) Common law damages for breach of incapable of precise measurement, and by reference to the economic value of the contract cannot be awarded merely for the there are also a variety of legal principles right which has been breached, considered purpose of depriving the defendant of profits which can assist the claimant in cases where as an asset. That may be the position where made as a result there is a paucity of evidence. the breach of contract results in the loss of “(12) Common law damages for breach “(9) Where the claimant’s interest in a valuable asset created or protected by the of contract are not a matter of discretion. the performance of a contract is purely right which was infringed. The rationale They are claimed as of right, and they economic, and he cannot establish that any is that the claimant has in substance been are awarded or refused on the basis of economic loss has resulted from its breach, deprived of a valuable asset, and his loss legal principle.”  the normal inference is that he has not can therefore be measured by determining suffered any loss. In that event, he cannot be the economic value of the right in question,

Crowther v Arbuthnot Latham & Co Ltd [2018] EWHC 504 (Comm) (HHJ Waksman QC) 27 February 2018 this the test was one of objective reasonableness, not the lower Contractual construction standards of rationality or Wednesbury unreasonableness. Disputes regarding a loan facility secured on a property had In determining objective reasonableness it was necessary to been settled on the terms of a Tomlin order. This contained look at the background and purpose of the provision. At the a provision that the lending bank would not unreasonably time the order was agreed the parties knew that the property withhold its permission to the sale of a property. did not secure the entire debt and the sale would leave an unsecured shortfall. There was no reason to think a better The property-owner received an offer for sale in line with offer would soon be obtainable, as the property market was valuations of the property. The bank refused to consent slow. In this case reasonableness meant that the sale should to the sale without proposals for securing the remaining be at arm’s length and at fair market value. The desire for indebtedness and an agreed repayment plan. The sale was lost. further security was collateral to the purpose of the relevant The court held that the bank was in breach of the order by provision, and therefore not something that could reasonably having withheld its consent unreasonably. When assessing be taken into account in relation to it. 

Rehman v Santander The Cs sought to rescind the guarantee The Court found that none of Cs’ UK PLC on the ground that: arguments had any real prospect of success: 1. S had breached its duty to ensure [2018] EWHC 748 (QB) (HHJ Klein) the valuations were performed by 1. This was an ordinary commercial 12 April 2018 a competent valuer, by sending the transaction that did not impose Bank valuations - duty of care valuations to the Cs; a duty to ensure the valuation was competently performed. The The claims of the former directors 2. S made the fraudulent or negligent provision of valuation reports also and shareholders of a company implied misrepresentation that the did not give rise to such a duty of (Cs) were dismissed in a summary valuations were a true and fair care; judgment application by a bank (S) estimate of the nursing homes’ and the valuer (B) of a nursing home market value and provided adequate 2. The bank had not made any implied (Ds) and S obtained judgment under a security for the company’s liabilities representation about the accuracy personal guarantee. Cs’ company had and that the Cs could rely on them; of the valuation. In circumstances run two nursing homes. The company where it had engaged a third party 3. S was in breach of a fiduciary duty to refinanced its debt with S. B valued the to undertake the valuation on its advise the Cs to obtain their own homes for S in a report that stated it behalf, it was not reasonable to valuations; or was private and confidential and could conclude that simply passing on the not be disclosed or relied on by a third 4. The guarantee had been discharged valuation reports could constitute a party without B’s prior written consent. by operation of the rule in Holme representation about the veracity of The company defaulted on the loan v Brunskill (1878) 3 QBD 495 (a the contents of those reports; and then went into administration and guarantee is discharged if the liquidation. S sought to enforce under a guaranteed contract is altered personal guarantee. without the guarantor’s consent). Case Digests 37

3. The bank/customer relationship or prospective guarantor. This was and therefore knowing that they is not inherently a fiduciary not alleged. were likely to rely on the reports in relationship. The fact that the entering into the guarantee. The 4. Holme v Brunskill did not apply: the parties had done business over a disclaimers in the report were anyway parties’ dealings had stayed within long period of time did not make enough to prevent any duty of care the scope of the contract. the relationship a fiduciary one. arising. A fiduciary relationship could only The claim against B failed as Cs had All the claims were dismissed and S’ arise if the bank could reasonably be no real prospect of showing that B counterclaim under the guarantee expected to subordinate its interests consented to or knew of S giving the succeeded.  to those of the customer reports to the prospective guarantors

Al Nehayan v Kent [2018] EWHC 333 (Comm) (Leggatt LJ) 22 February 2018

Duress

C claimed from D amounts due under a promissory note The test in Chitty could be made more precise by transposing and joint venture agreement. D alleged that his consent to into objective requirements the elements of the offence of the agreement and the note was obtained by unfair means, blackmail: a demand coupled with a threat to commit a lawful including threats of physical violence and economic duress. D act will be regarded as illegitimate if (a) the defendant has no pleaded duress, a defence in contract which entitles the party reasonable grounds for making the demand and (b) the threat pleading it to rescind a contract. would not be considered by reasonable and honest people to be a proper means of reinforcing the demand. Leggatt LJ restated the law on duress at [184]-[191]. Further, he concluded that, contrary to earlier views, the He approved the following definition in Chitty on Contracts better view is that the doctrine of duress is based not on lack of (32nd ed), vol 1, para 8-046, as applied in in Times Travel (UK) consent but on showing that a party’s consent was obtained in Ltd v Pakistan International Airlines Corp [2017] EWHC 1367 (Ch): circumstances which make it unjust to allow the other party to “there can be no doubt that even a threat to commit what would enforce the agreement. Therefore that legal advice was taken otherwise be a perfectly lawful act may be improper if the threat or rational or independent judgment exercised in entering is coupled with a demand which goes substantially beyond what is into a contract does not preclude a finding of duress. What is normal or legitimate in commercial arrangements.” necessary is that the illegitimate pressure caused the claimant to enter into the contract. There is no reason the distinction between lawful and unlawful behaviour should be decisive of whether the As to causation, a threat of violence causes a party to enter defendant can retain money or other benefits demanded a contract if it is “a” reason for entering it. With economic from a claimant in a situation of extreme vulnerability. It is duress the “but for” test applies. appropriate to take account of the legitimacy of the demand It is not necessary that the claimant had no reasonable and to judge the propriety of the defendant’s conduct by alternative to giving in to the illegitimate pressure. What is reference not simply to what is lawful but to basic minimum required is very strong evidence of whether the claimant was standards of acceptable behaviour. induced by the threat or other illegitimate pressure to enter into the contract. This is also a relevant factor in deciding whether use of pressure was illegitimate even though there is no illegality.  SOUTH SQUARE DIGEST June 2018 www.southsquare.com

The company in question was the the allocation of responsibility for Egyptian Association of Great Britain management to the board, given that limited (“EAGB”), a registered charity. such an application would make little Its articles provided that EAGB was sense unless the applicant director could to be “managed by the trustees”, where be given permission to defend the claim the “trustees” were defined to refer to in the relevant company’s name. There EAGB’s directors. A judgment in default was no evidence that the applicants had was obtained against EAGB by a been authorised by the board to apply to CASE DIGESTS Mr Abdelmamoud. Certain members of set aside the judgment against EAGB, EAGB, three of whom had purportedly and if there had been, they would not been directors/trustees, applied to have have needed to resort to CPR r. 40.9 Company the default judgment set aside. At first As to the contention that the applicants instance, the default judgment was set were directly affected by virtue of Law aside. The applicants were also granted being members of EAGB, the applicants Digested by Edoardo Lupi permission to defend the claim on argued that the judgment should be EAGB’s behalf. Subsequently, Mr Edward set aside to allow them to institute a Murray, sitting as a Deputy High Court derivative action and consolidate those Judge, allowed an appeal against that proceedings with the defence of Mr decision on the basis that the applicants Abdelmamoud’s claim, so as to permit lacked standing to apply under CPR r. the merits of the latter to be properly 40.9 ventilated. Newey LJ noted that no such The applicants contended that they were derivative claim had been launched “directly affected” by the default judgment several years after the application to against EAGB both because they were set aside the default judgment had members of the company, and three of been made. Moreover, EAGB’s articles them had been directors/trustees. The specifically provided for the company’s Mohamed v Court of Appeal unanimously dismissed business to be “managed by the trustees”, the appeal, holding that the applicants not by the members. It followed that Abdelmamoud were not directly affected by the default individual members of EAGB or, for that judgment and thus could not apply to matter, of any ordinary commercial [2018] EWCA Civ 879 (Longmore LJ, have it set aside under CPR r. 40.9. company cannot be considered directly McCombe LJ, Newey LJ) 23 April 2018 affected by a judgment or order against As to the contention that some of CPR r. 40.9 – Locus standi of company the company: any other conclusion the applicants were directly affected directors – derivative actions would allow particular members to take by virtue of being some of EAGB’s upon themselves matters allocated to This case concerned the question of directors, Newey LJ concluded that the board and, furthermore, to do so when individual directors or members of the management of a company is without having to satisfy requirements a company can be “directly affected” by a conventionally entrusted to its board as such as those laid down by the judgment or order against the company a whole, and not to individual directors Companies Act 2006 in relation to for the purposes of CPR r. 40.9, pursuant – EAGB was no exception. He considered derivative actions.  to which a non-party may apply to have that allowing individual directors to a judgment or order set aside or varied. apply under CPR r. 40.9 would subvert

Toone v Robbins [2018] EWHC 569 (Ch) (Norris J) 20 March 2018 At first instance, Chief Registrar Baister considered that £94,000 of the sums paid to the directors were unlawful Unlawful dividends – disguised remuneration – burden of proof dividends based, among other things, on the fact that Pinetum Ltd (the “Company”), entered liquidation in February Company’s own books and records described the payments as 2011. During the months prior to entering insolvency, the dividends. Company made substantial payments to the directors. One of A further £50,122 had been paid to the directors in 2009 (the the Company’s directors was also its sole shareholder. Having “2009 payments”). Of the 2009 payments, the Company’s Sage entered liquidation, the joint liquidators sought to recover the records recorded £40,094 as being “wages” whereas a further sums paid to the Company’s directors as unlawful dividends. £10,098 were left uncategorised. The Company’s articles The directors argued that the payments were disguised contained two articles which respectively provided that: (i) remuneration. where the company had one member and that member took Case Digests 39

a decision required to be taken in general meeting, then the As to the 2009 payments, Norris J considered what the effect decision would be valid as if a general meeting had taken was of non-compliance with article (ii). Norris J held that place; and (ii) a decision taken by a sole member under (i) “shall on the face of article (ii), the validity of a decision under be recorded in writing and entered in to the company’s minute book”. article (i) was not dependent upon the formal requirement of recording such a decision in the minute book: a resolution of No record of any general meeting was in evidence, nor did a sole shareholder at a formally convened meeting would not the minute book contain a record of any decision by the sole have been invalidated by a failure to comply with the duty to shareholder to pay the remuneration. Chief Registrar Baister keep records under section 355 of the Companies Act 2006, held that the 2009 payments could nevertheless be retained so there was no reason why a decision under article (i) should by the directors on the basis that the evidence pointed to the be invalidated by a failure to observe the procedure under sole shareholder authorising the payments of remuneration article (ii). Accordingly, the appeal in respect of the £40,094 under article (i) above, and in any event the principle in Re designated as “wages” was dismissed, albeit for different Duomatic was available notwithstanding that the proper reasons from those given by the Chief Registrar. procedure under article (ii) above had not been followed. As to the uncategorised £10,098, there was no clear evidence As to the remaining uncategorised £10,098, Norris J considered either way but the Chief Registrar gave the directors “the that the Chief Registrar had erred in law in holding that the benefit of the doubt” such that that sum was also to be treated as burden lay on the joint liquidators to show that payments were remuneration paid to the directors. made by the Company, and that the burden then shifted to the directors to explain them. Norris J pointed to the case of On appeal, the directors’ cross-appeal in respect of the Re Idessa (UK) Ltd [2011] EWHC 804 (Ch) for a statement of the characterisation of the dividends as being unlawful dividends proper approach to the burden of proof in the absence of clear failed. It was not open to the directors to re-characterise the evidence in such cases: once the liquidator has proved that a payments as instalments of salary. The fact that there were relevant payment has been made, the burden is on the director other routes not in fact employed by which the Company to explain the transaction in question. Accordingly, the benefit could have transferred assets to the directors did not avail of any doubt in relation to the £10,098 had to be given to the the directors when the route chosen was the payment of joint liquidators and not to the directors.  (unlawful) dividends.

Re Herald Fund SPC, investment fund, and under the Winding Up Rules, the power is exercisable where Primeo Fund v Pearson the relevant Net Asset Values at which the fund issued or redeemed shares are Court of Appeal of the Cayman Islands net asset values (NAVs) which are not (Goldring P, Martin, Newman JJA) 27 binding by reason of fraud or default. February 2018 However, the Court of Appeal rejected Investment funds – rectification of the the conclusion of the Judge at first share register – distribution methodology instance that section 112 also conferred in liquidation a broader power on a liquidator to rectify The issue before the court concerned the the register whenever necessary in the CASE DIGESTS distribution methodology to be applied interests of justice. It was only where in the liquidation of an investment fund, there was fraud or default which had Herald. Herald had been a “feeder fund” the effect of vitiating the contractual Corporate to Madoff and, as a result of the collapse relations between the fund and the of Madoff, had gone into liquidation. shareholder that the power to rectify Insolvency The Liquidator of Herald argued that would arise, and it would not arise under the Cayman Companies Law he merely because the NAVs at which the Digested by Ryan Perkins had power to rectify the share register of fund had issued or redeemed shares Herald on a net cash basis, reflecting the were affected by fraud in some way (such cash payments and withdrawals they as where the fund had invested in an had made from the fund, rather than by entity which was fraudulent).  reference to their shareholdings shown [Tom Smith QC] on the register.

Under the Cayman Companies Law (section 112), a liquidator has the power to rectify the share register of an SOUTH SQUARE DIGEST June 2018 www.southsquare.com

CASE DIGESTS Corporate Insolvency

Re SHB Realisations Ltd effect does not mean that it has every attribute of a contract or that every principle of the law of contract applies to it. The (formerly BHS Limited) rule against penalties has no application to CVAs. In any event, Clause 25 could not be regarded as penal. The Judge relied [2018] EWHC 402 (Ch) (Christopher Pymont QC, upon the statement of Lord Westbury in Thompson v Hudson sitting as a Deputy High Court Judge) (1869) LR 4 HL 1 at 28 that “if a man submits to receive, at some 6 March 2018 future time and on the default of his debtor, that which he is entitled Administration – CVA – penalty clauses – pari passu rule to receive, it is impossible to understand how that can be regarded as a penalty”. (2) Clause 25 did not infringe the pari passu The Court was asked to determine the effect of various principle. The termination of the CVA could not properly be provisions in the “BHS” CVA. The CVA was proposed for said to have increased the landlords’ claims in the company’s the usual purpose of imposing rent reductions on some of administration or liquidation; the true position was that the the company’s landlords. Clause 9 of the CVA provided for rent concession which might have applied if the company’s the company to pay reduced rents, and set out the duration finances had been re-structured was brought to an end and of the rent concession period. Clause 25 identified the the original rent (and other sums) continued to have effect. circumstances in which the CVA could be terminated. If the The liquidators could not seek to “pick and choose” between the CVA was terminated in accordance with Clause 25, then the terms of the CVA: all these terms were required to be viewed reduced rents were deemed never to have been agreed, and the and given effect as a whole. (3) The additional sums falling due landlords were entitled to claim against the company for the to the landlords upon the termination of the CVA were payable original, full rents (less any payments made during the CVA). as administration expenses for the period during which the The company entered into administration (and subsequently original administrators were in possession of the premises liquidation), and the CVA was terminated pursuant to Clause for the purposes of the administration. This was a necessary 25. The liquidators submitted that Clause 25 operated as a consequence of Clause 25, which operated to restore the rent penalty, and that it infringed the pari passu principle. These payable under the relevant leases with retrospective effect.  contentions were rejected by the respondent (one of the [Stephen Robins] landlords bound by the CVA). The respondent also argued that the outstanding rent fell to be paid as an expense of the administration for the period during which the original administrators had continued to trade from the relevant premises.

The Court held as follows. (1) Clause 25 did not infringe the rule against penalties. The fact that a CVA has contractual

Burnden Group Holdings Ltd v Hunt [2018] EWHC 463 (Ch) (Norris J) 14 March 2018

Contributories – inspection of proofs

The sole shareholder of the company, The Court held as follows. (1) A fully proofs. (2) Nevertheless, the shareholder whose shares were fully paid-up, applied paid-up shareholder is a contributory should not be permitted to inspect the to examine all of the proofs which had for the purposes of rule 4.79(b). This proofs. Relief would only be granted if been lodged in the company’s liquidation is clear from a long line of authorities, the shareholder had a real interest in pursuant to rule 4.79 of the Insolvency starting with Re Anglesea Colliery Co the relief sought (Deloitte & Touche AG v Rules 1986. The liquidator was suspicious (1866) LR 2 Eq 379. Authorities pointing Johnson [1999] 1 WLR 1605 applied), and of the shareholder’s motives in making to the contrary conclusion, such as no real interest had been demonstrated. the request and refused, stating that the Re Marlborough Club Co (Contributories) In particular, the evidence did not proofs were confidential. He also argued (1867-68) LR 5 Eq 365 and Re Aidall Ltd establish that the liquidation would be that a shareholder whose shares were [1933] Ch 323 should not be followed. likely to yield a surplus which could be fully paid-up was not a “contributory” Accordingly, the shareholder had distributed to the shareholder.  within rule 4.79(b). standing to apply for the inspection of Case Digests 41

Dunbar Assets plc v Davey essential question in all cases will be whether the agents to be appointed are competent and able to discharge their fiduciary [2018] EWHC 766 (Ch) (Snowden J) duties to the company. 11 April 2018 An administrator will not be liable for breach of duty if he Administrators’ powers and duties – valuation reasonably relies on advice which appears to be competent, even if that advice turns out to be wrong. A bank (Dunbar) had advanced lending to a company (Angel House Developments Limited) for the purposes of funding a Realising secured property: In relation to the pursuit of the development site in Canary Wharf, which had potential for third objective of administration, administrators owe the development from an office block into a residential tower. usual duty to take reasonable steps to obtain a proper price for The loan was guaranteed in part by the sole shareholder and the property being disposed. However, they also owe a duty to director, Ms Davey. Events of default occurred under the avoid unnecessary harm to the general body of creditors. This loan, and the bank appointed Administrators pursuant to its imposes a more stringent duty including as to the timing of security. The Administrators subsequently sold the property. realisations.

Dunbar brought a claim against Ms Davey for the Accordingly, an administrator cannot simply decide to recovery of its enforcement costs under the guarantee. sell the company’s assets at a time to suit the interests of Ms Davey counterclaimed against Dunbar and against the the secured creditor, if by doing so he causes harm to the Administrators. It was alleged that the Administrators unsecured creditors which is not necessary for the protection had breached their duties by conducting a “light touch” of the interests of the secured creditor. The interests of the administration in which they failed to exercise independent unsecured creditors therefore receive enhanced protection in judgment and instead followed the instructions of Dunbar, and an administration compared with a receivership. that they sold the property at an undervalue using unsuitable In relation to the marketing of property, there is no invariable agents whom Dunbar had selected. Against Dunbar it was requirement that the property must be advertised for sale alleged that it interfered in the administration so as to make publicly, and what is appropriate will depend on the facts of the Administrators its agents and was therefore liable for each case. their breaches, that it had procured breaches of duty by the Administrators and that it had conspired with the agents to Generally: an administrator must exercise independent cause loss by unlawful means, namely a sale of the property at judgment. He must not simply allow another person to dictate an undervalue. to him how he should exercise his powers as administrator. Nor should he unquestioningly act in accordance with the The claims were dismissed in their entirety. The judgment wishes of another. This does not mean that an administrator establishes the following points: cannot take account of the wishes of the relevant creditor(s) Objective of administration: In deciding how to run the whose interests are likely to be affected by the decisions he administration, an administrator is required to have regard takes. An administrator is entirely at liberty to consult with to the interests of all of the company’s creditors, and he can those creditors to ascertain their views, and in many cases only limit the objective to seeking to realise assets to repay it will be entirely sensible that he should do so. He is not, the secured creditor if he thinks that it is not reasonably however, bound to follow their wishes. practicable to achieve anything else. Even then, he must not Liability of secured creditors: In principle a secured creditor unnecessarily harm the interests of the creditors as a whole. may become liable for breaches of duty by an administrator, However, an administrator’s decision as to which objective at least where the administrator is selling property subject to pursue will only be open to challenge if it is one which is to a fixed charge, pursuant to the line of authority providing irrational or not taken in good faith and an administrator for the liability of a mortgagee for interfering with a receiver. will be permitted to exercise his commercial judgement in However, the point remains open in relation to liability for deciding which objective(s) to pursue. other steps in an administration or sales of property subject to a floating rather than fixed charge. The level of interference This standard of review does not however apply to the methods required in order for liability to arise requires something going by which an administrator then carries out the objectives. beyond the legitimate involvement that a secured creditor Use of agents: In relation to the use of agents, there is no hard could expect to have in the administration process by reason and fast legal rule requiring a selection process to be held, of his legal status and rights.  or prohibiting the appointment by administrators of agents [Tom Smith QC] who have been recommended by the secured creditor(s). The

Re OJSC International This judgment is the latest episode in the release of the Bank’s financial the litigation between the International liabilities, some of which were governed Bank of Azerbaijan Bank of Azerbaijan and two “hold-out” by English law. Two creditors (Sberbank creditors who are seeking to enforce and Franklin Templeton) contended that [2018] EWHC 792 (Ch) (Hildyard J) 12 April their claims in England. The Bank their English law debts had not been 2018 promulgated a restructuring plan discharged (relying on the rule in Gibbs Cross-Border Insolvency Regulations 2006 under the law of Azerbaijan, which v La Société Industrielle et Commerciale des – lifting the stay was approved by a substantial majority Métaux (1890) LR 25 QBD 399), and sought of its creditors. The plan provided for to enforce their claims in England. SOUTH SQUARE DIGEST June 2018 www.southsquare.com

CASE DIGESTS Corporate Insolvency

The Bank sought to resist enforcement January 2018, Mr Justice Hildyard held important to ensure that the Bank’s by relying on the Cross-Border that the Moratorium Continuation appeal against the dismissal of the Insolvency Regulations 2006 (the Application should be dismissed on Moratorium Continuation Application “CBIR”), which implement the the basis that it sought to achieve an would not be rendered nugatory. In UNCITRAL Model Law on Cross-Border impermissible form of substantive relief those circumstances, a stay pending Insolvency. On 5 May 2017, the Bank which was contrary to the rule in Gibbs: appeal should be imposed – in effect, appointed one of its officers to act see [2018] EWHC 59 (Ch), summarised “staying the lifting of the stay”. as its Foreign Representative, who in the previous edition of the Digest. An Sberbank and Franklin Templeton would applied to the English Court for the appeal from that decision is due to be only be permitted to issue proceedings recognition of the Bank’s restructuring heard in October. against the Bank upon a satisfactory proceeding in Azerbaijan. On 6 June undertaking that would prevent any Following the January judgment, 2017, Mr Justice Barling made an order judgments or arbitral awards being Franklin Templeton and Sberbank recognising the Bank’s restructuring obtained against the Bank prior to the applied to lift the existing moratorium proceeding as a foreign main proceeding final determination of the appeal.  under the Recognition Order. Mr Justice under the CBIR, and imposing a Hildyard granted those applications, [Gabriel Moss QC, Daniel Bayfield QC, moratorium on actions against the and held as follows: (1) Given that the Richard Fisher, Alexander Riddiford, Bank or its property for the duration Bank’s restructuring plan had already Ryan Perkins] of the restructuring proceeding (the been approved in Azerbaijan (such that “Recognition Order”). On 15 November the restructuring proceeding was, in 2017, the Foreign Representative applied substance, complete), there was no for a permanent moratorium under the basis or justification for continuing CBIR so as to prevent Sberbank and the moratorium under the CBIR. The Franklin Templeton from taking action moratorium should therefore be lifted, against the Bank or its property after and Franklin Templeton and Sberbank the termination of the restructuring should be given permission to enforce proceeding (the “Moratorium their claims. (2) However, it was Continuation Application”). On 18

Re Lehman Brothers International (Europe) [2018] EWHC 924 (Ch) (Hildyard J)

Waterfall proceedings – costs

This judgment deals with a question of costs in relation to the administration of the estate, and as on that footing being the “Waterfall IIC” proceedings in the LBIE administration. within a category of cases where, as a general proposition, Waterfall IIC concerned the construction and effect of the costs of all respondents should be paid as expenses of the various standardised pre-administration agreements (and administration of LBIE. especially two forms of ISDA Master Agreements) on creditors’ entitlement to statutory interest: see Lomas & Ors v Burlington The Court held as follows: (1) The general rule that costs should Loan Management Ltd & Ors [2016] EWHC 2417 (Ch). follow the event was a starting point from which the court may depart, having regard to all the relevant circumstances. The In the Waterfall IIC proceedings, the arguments of one court had been disposed to depart from that general principle particular respondent (“Wentworth”) prevailed on most of the and allow costs as an expense in the administration process issues. Wentworth contended that it should be entitled to its where the proceedings had in effect been sponsored by the costs under the usual rule that a successful party is entitled estate’s administrator and the parties’ involvement had been to its costs from the unsuccessful party. Wentworth opposed by way of contribution to a judicial inquiry. The question was the applications made by the Senior Creditor Group (“SCG”) ultimately one of discretion, the exercise of which should and Goldman Sachs (“GSI”) for their costs to be paid out of the be guided by the characterisation of the proceedings, Kostic LBIE administration estate, contending that the proceedings v Chaplin [2008] 2 Costs LR 271 applied. (2) Applying that were no different in substance from ordinary adversarial approach, it was necessary to consider each set of issues in litigation. The SCG and GSI, on the other hand, contended the Waterfall IIC proceedings and to determine, in relation to that it would be unfair to characterise the process instigated that set of issues, how the costs burden should be distributed by the Joint Administrators as adversarial litigation. They between the parties. (3) The issues relating to the effect of the submitted that the issues in the Waterfall IIC proceedings, like ISDA Master Agreements were necessary for the distribution the issues in the earlier proceedings before David Richards of the surplus in LBIE’s estate. Accordingly, in the interests J (as he then was) in Waterfall IIA [2015] EWHC 2269 (Ch) of fairness, the costs of the SCG and GSI would be paid out of and Waterfall IIB [2015] EWHC 2270 (Ch), should properly be the estate, subject to the proviso that only one set of costs characterised as necessarily brought for resolution by the court was allowed for the SCG, even though its members were to enable the Joint Administrators to proceed further with represented by a number of different solicitors. (4) By contrast, Case Digests 43

the issues relating to the effect of the German Master Agreements (the “GMA issues”) were to be characterised as essentially a commercial claim by the SCG for its own benefit, and contrary to the interests of the estate. Therefore, that part of the claim should be characterised as adversarial commercial litigation, notwithstanding the form of the application, and the SCG was liable for costs accordingly. 

[Antony Zacaroli QC (as he then was), Robin Dicker QC, David Allison QC, Daniel Bayfield QC, Adam Al-Attar, Henry Phillips, Robert Amey]

be given an interest in possession under that the trustees had proceeded on the the settlement in which he or she was basis that the deeds of appointment were a prime beneficiary. This change was valid and had allowed the claimants to purportedly made by the execution of proceed on the same basis could amount six deeds of appointment. However each to a representation, the claimants had deed only was only signed by three of suffered no detriment. The deeds of the four trustees of the settlements; appointment had been executed in order neither Alan nor June signed the deeds of to improve their net financial position appointment of the settlements of which so the fact that the claimants had been they were trustees. caused to pay tax themselves was not indicative of a net financial detriment. The errors in the deeds of appointment Leaving aside the question of whether relating to the three settlements of Property and an estoppel could arise by reason of a which Alan was a trustee were identified contingent or unconscious detriment and rectified. However, June died before Trusts suffered, HHJ Hacon held that there was the deeds of appointment relating to her Digested by Andrew Shaw insufficient evidence to establish any settlements could be corrected. Alan such detriment. Further, the effect of and June’s three children consequently the estoppel would be to bind persons brought claims against the trustees of to whom no representation was made, June’s settlements alleging that there including HMRC, a stranger to the was a proprietary estoppel binding the settlements. This was impermissible. trustees to act consistently with the valid execution of the relevant deeds of The claimants’ alternative argument appointment or, alternatively, that the was that the trustees had the power to relevant deeds of appointment should be execute the deeds of appointment but treated as having been executed by June the execution was defective. Accordingly, on the principal that equity will remedy the court could rectify the defective the defective exercise of a power of execution under an equitable doctrine appointment. that dated back to at least Tollet v Tollet (1728) 2 Peere Williams 489. HHJ Hacon In support of their primary case, the English & Ors v Keats held that the four trustees of the relevant claimants argued that a proprietary settlements had intended to exercise & Ors estoppel could apply to a representation their power to amend the settlements but made by trustees to beneficiaries and [2018] EWHC 637 (Ch) (HHJ Hacon sitting as the exercise of the power was defective that in the present case the claimants a Deputy High Court Judge) 28 March 2018 because the deeds of appointment had had been allowed by the trustees to not been signed by June Thunder and this Deeds of appointment – proprietary proceed on the basis that the deeds of defect could be corrected by the court. estoppel appointment were effective. In reliance A potential difficulty arose because, on on this representation, the claimant Alan Thunder and his wife June each the authorities, the power to rectify the maintained that they paid tax on their made three settlements of shares they defect could only be exercised in favour income from the settlements, which owned in Thunder Investments Limited. of certain classes of beneficiary. While amounted to a detriment. Alternatively, The beneficiaries under the settlements children were included in those classes, the claimants argued that they were included their three children (together the claimants were not the children of subject to a contingent detriment because with their children and remoter issue) two of the trustees. However, the judge HMRC might require back payment of and a number of charities. Each of the held that two of the trustees were the tax from the settlements and money settlements made one of Alan and claimants’ parents and the defect was would have to be paid by the claimants to June’s children a prime beneficiary. associated with June Thunder’s failure to advisers to sort the matter out. Subsequently, it was decided that to sign the deed of appointment, so there obtain perceived tax advantages, each HHJ Hacon held that there was no was no bar to the relief sought.  of Alan and June’s three children would proprietary estoppel; while the fact SOUTH SQUARE DIGEST June 2018 www.southsquare.com Risky Business: An examination of some of the difficulties that pre-pack administrations present to insolvency practitioners

n the recent case of Ve Vegas Investors IV LLC v I Shinners [2018] EWHC 186 (Ch), Mr Registrar Jones considered an application under paragraph 88 of Schedule B1 to the Insolvency Act 1986 (‘Schedule B1’) to remove the administrators of Ve Interactive Limited (the ‘Company’). The application was made by a number of creditors who were concerned that the pre-packaged sale of the Company’s business and assets to an entity with links to the Company’s management was at an Pre-pack Administrations 45

ANDREW SHAW undervalue should not carry out any sale that their proposals under paragraph 52 of could frustrate consideration of Schedule B1. Lawrence Collins J referred In granting the application, Mr their proposals by creditors without to these changes in In re Transbus Registrar Jones held that these concerns directions from the court. However, International: gave rise to a serious issue requiring in Re T & D Industries plc [2000] 1 “There will be many cases where the investigation. As the incumbent WLR 646, Neuberger J held that an administrators are justified in not laying administrators had advised on the administrator was able to exercise all of any proposals before a meeting of creditors. sale (prior to their appointment) and the statutory powers set out at section This is so where they conclude that the subsequently implemented it, they had 14 of the Insolvency Act 1986, including unsecured creditors are either likely to be a conflict of interest and could not carry the power to sell the company’s paid in full, or to receive no payment, or out the necessary investigations. business and assets, without the need where neither of the first two objectives for for prior approval of the administrator’s Pre-packaged sales (‘pre-packs’) the administration can be achieved… The proposals by creditors or the sanction of whereby an administrator sells the Enterprise Act 2002 reflects a conscious the court. business and assets of a company in policy to reduce the involvement of the court administration without the approval The same question was considered by in administrations, where possible.” (or even knowledge) of the company’s Lawrence Collins J in In re Transbus Criticisms creditors have a mixed reputation. International [2004] 1 WLR 2654, which Although pre-packs undoubtedly offer was heard after the reforms to the An oft-cited advantage of a pre-pack a number of commercial advantages administration regime effected by the is that the value of the company’s as a restructuring process, including Enterprise Act 2002 had come into business and assets is not affected by preservation of the value of the force. Applying Re T & D Industries, he the stigma of insolvency because their company’s business and, consequently, held that an administrator could sell sale occurs on the appointment of an of employees’ jobs, the absence of the business and assets of a company administrator. This should enable the creditor involvement in the sales before his proposals had been approved administrator to realise a higher value process is controversial, particularly by creditors and without any need for for the company’s assets and can also where the sale is to a connected party. directions from the court. preserve the jobs of the company’s This article considers the development employees, who are often transferred It has thus been clear for some time of the oversight of pre-packs, the duties to the purchasing entity. that administrators have been able to placed on insolvency practitioners effect pre-packs and that the entry Notwithstanding these potential engaged in relation to a pre-pack, the into force of the Enterprise Act 2002 benefits, pre-packs have proved risks posed by such an engagement and did not affect this power. However, controversial, with much of the how those risks might be mitigated. this statute did introduce a number of controversy stemming from the Legal basis reforms which reduced the involvement lack of transparency involved. It is of both creditors and the court in understandable that a creditor might Even when administration was a administrations (and, concomitantly, react adversely on discovering that not nascent insolvency process, it was the scrutiny of the administrator’s only is the debtor company insolvent recognised that an administrator acts): for example, the introduction but that its business and assets have could sell the business and assets of of out-of-court appointments and the already been sold. Compounding such the company in administration before ability of administrators to dispense dissatisfaction is the fact that the the creditors’ meeting. It was initially with a creditors’ meeting to consider majority of the buyers in pre-packs thought, though, that administrators SOUTH SQUARE DIGEST June 2018 www.southsquare.com

FEATURE ARTICLE: AN EXAMINATION OF PRE-PACK ADMINISTRATIONS

are connected in some way to the company1; an indicator of how much it is prepared to pay, rather very often they are the insolvent company’s than the market value of the assets in question.” management. The Graham Review also identified that pre- This gave rise to concerns that pre-packs packs to connected parties were associated facilitated ‘phoenixism’, whereby unscrupulous with worse outcomes both for creditors and the directors effectively resurrect insolvent companies purchaser. It made six recommendations: by appropriating the business and assets via a sale 1) Creation of a ‘pre-pack pool’ of experienced and leaving creditors to seek what they can from business people, so that, on a voluntary basis, an insolvent shell. If any such sale were at the connected parties can approach a pool proper value, then there would be no detriment to member before the sale and disclose details creditors; however, the absence of transparency in The Graham of the deal for the pool member to opine on. pre-packs to connected parties frequently leads to suspicions that such sales are at an undervalue. Review 2) The voluntary completion by connected party purchasers of a viability review stating how SIP 16 concluded the purchaser will survive for at least the To counter these concerns, the Joint Insolvency that “there next six months. Committee commissioned and adopted Statement should 3) The consideration of a redrafted SIP 16 by the of Insolvency Practice 16 (‘SIP 16’), which was Joint Insolvency Committee. first promulgated in January 2009.2 SIP 16 gives be major directions to insolvency practitioners as to the improvements” 4) All marketing of pre-packs comply with conduct of work for which they are engaged prior six principles of good marketing and that any to their appointment and requires administrators to how deviation from these principles be brought to who have effected a pre-pack to provide detailed pre-packs are creditors’ attention. information to creditors at the earliest opportunity 5) SIP16 be amended to the effect that (which is usually when the creditors are notified administered valuations must be carried out by a valuer of the administration) in the form of a SIP 16 who holds professional indemnity insurance. statement to enable the creditors to be satisfied that the administrator has had due regard for their 6) The withdrawal of the Insolvency Service interests.3 SIP 16 was also adopted as a benchmark from monitoring SIP16 statements and by the courts: in Re Hellas Telecommunications that monitoring be picked up instead by the (Luxembourg) II SCA [2010] BCC 295, Lewison J held Recognised Professional Bodies. that it was good practice for the same information The Graham Review also proposed that if the as would be provided to creditors to be put before recommended changes did not have the desired the court on an application for an administration impact, then the Government should consider order in the context of a pre-pack.4 legislation. The Graham Review Following the Graham Review, a revised SIP 16 The introduction of SIP 16 did not eliminate was promulgated that included considerably criticism of pre-packs, not least because there more detailed guidance on marketing the was substantial non-compliance with SIP 16 by business and assets to be sold and set out more insolvency practitioners.5 In its report on the detailed requirements on the content of the SIP Insolvency Service published on 6 February 16 statement. In addition, section 129(4) of the 2013, the BIS Select Committee recommended Small Business, Enterprise and Employment that BIS and the Insolvency Service commission Act 2015 contains a reserve power for the research to “renew the evidential basis for pre-pack Secretary of State to make regulations to prohibit administrations.” This research was undertaken by connected party sales or to impose requirements Teresa Graham CBE, who published her report on or conditions to allow such a sale to proceed. 30 June 2014 (the ‘Graham Review’). IP / office-holder duties The Graham Review concluded that “the benefits As well as the regulatory obligations imposed by that pre-packaging brings to the UK’s insolvency SIP 16, insolvency practitioners engaged to act in process is worthwhile, however, there should be some relation to a pre-pack owe a duty of care to the major improvements to how they are administered.” In company to act with reasonable skill and care. particular, pre-packs lacked transparency, there was often insufficient marketing carried out and in Similarly, administrators also owe the company many cases of connected party sales, the purchase a duty to exercise reasonable skill and care but in price often matched the valuation figure “leading addition are subject to various statutory duties, to a suspicion that a purchaser has set a valuation as including a duty to select the purpose of the Pre-pack Administrations 47

1 According to The administration6 and a duty to act in the interests conduct of the insolvency practitioners advising Pre-Pack Pool Annual 7 Review 2016 dated March of the company’s creditors as a whole. As agents of upon it and the administrators who effected it. 2017, in the period 1 the company,8 administrators also owe it fiduciary Indeed, it is notable that the only two reported November 2015 to 31 December 2016, there duties and so must act in good faith; must not cases in which applications under paragraph 88 of was a connected party make a profit out of their position; must not place Schedule B1 were ultimately successful concerned purchaser in 51% of pre- packs. This represents themselves in a position where their interest and allegations by creditors that a pre-pack was a marked decrease from their duty conflict and may not act for their own at an undervalue.11 Once removed, the former 2011, when 79% of pre- packs were to connected benefit or the benefit of a third party without the administrators are obviously exposed to an action parties. informed consent of the company. In addition, as by the company brought at the behest of their 2 SIP 16 was officers of the court9 administrators are subject successors. In addition, following a successful subsequently amended with effect from 1 to further duties, including a duty to be entirely removal application remuneration drawn by the November 2013 and candid with the court. former administrators might be at risk. again from 1 November 2015.

Risks to IPs and office-holders involved in Risk mitigation 3 The current version pre-packs of SIP 16, in effect from 1 The best way for insolvency practitioners and November 2015, requires Non-compliance with SIP 16 can lead to insolvency office-holders to avoid liability in relation to the SIP 16 statement should contain sufficient practitioners being reported to their regulatory pre-packs is for them to take all reasonable steps information “such that a body, which might levy a fine: between January to ensure that the best possible price is obtained reasonable and informed third party would conclude 2010 and around May 2012, 6 fines were imposed for the company’s business and assets. However, that the pre-packaged sale was appropriate and that on insolvency practitioners for non-compliance this trite statement is, of itself, of little practical the administrator has acted with SIP 16 ranging from £250 to £2,500.10 use. Insolvency practitioners engaged in relation with due regard for the to pre-packs frequently have to balance the type creditors’ interests.” Of far more risk financially (and, arguably, and duration of any marketing period against that 4 However, reputationally) is the possibility that the company compliance with risk that widespread knowledge of the company’s SIP 16 alone will not or its creditors might bring a claim against the situation could destroy the value of the assets necessarily be sufficient administrators in relation to their pre- and post- for the Court to make being marketed. The insolvency practitioners will an administration order appointment conduct in relation to the pre-pack. therefore be working to tight deadlines and usually where a pre-pack is A claim in relation to pre-appointment conduct contemplated: Re UK with incomplete knowledge of the company’s Steelfixers Ltd [2012] BCC would need to be made by the company against situation. In such circumstances, what steps can 751. the insolvency practitioners who advised it (who reduce the risk of subsequent litigation? 5 In its Report on the will usually have been appointed subsequently Operation of Statement of Insolvency Practice 16 as administrators). A claim in relation to post- 1) Initial assessment of the company’s options 1 January to 31 December appointment conduct could be brought by the 2011, the Insolvency When engaged, insolvency practitioners should company or, under paragraph 74 of Schedule Service found that ensure that they have enough information to be in 32% of pre-packs B1, by members or creditors of the company. If reviewed, insolvency confident that a pre-pack is the best option for practitioners had not it were established that a breach of duty by an the company’s creditors. While the engagement complied with SIP 16 in insolvency practitioner or administrator resulted some way. might be limited to advising on a pre-pack, if a in a pre-pack at an undervalue, their liability could 6 Paragraph 3 of pre-pack is subsequently effected the insolvency potentially be very substantial indeed. Schedule B1. practitioners (as administrators) will have to 7 Paragraph 3(2) of While incumbent administrators might feel fairly justify why they have not pursued the primary Schedule B1. confident that the company will not bring a claim statutory objective of rescuing the company as a 8 Paragraph 69 of against them, as this would effectively amount going concern. Indeed, it might be the case that a Schedule B1. to them suing themselves, such confidence pre-pack is not in fact a viable option because the 9 Paragraph 5 of would be misplaced. Under paragraph 88 of timescale within which it would need to be carried Schedule B1. Schedule B1 the court has the power to remove out is simply too short. 10 BIS Select Committee report on the an administrator. The statutory discretion is very Insolvency Service dated 2) Obtaining enough information to market and wide and although it will be necessary for an 6 February 2013. value the company applicant under this provision to show sufficient 11 Clydesdale Financial Services v Smailes cause, the grounds relied upon do not necessarily Without robust valuations and a proper marketing [2009] BCC 810 and Ve have to include misconduct. It is enough for the exercise, it will be difficult for an administrator to Vegas Investors IV LLC v Shinners. In Coyne v DRC applicant to show, for example, that there is a justify the pre-pack price and thus that the pre- Distribution Ltd [2008] serious issue requiring investigation and that due pack was in the best interests of the company’s BCC 612, which did not concern a pre-pack, to an actual or perceived conflict of interest, the creditors. Both valuation and marketing require the Court of Appeal incumbent administrator is unable to carry out detailed information about the company which held that an application under paragraph 88 such an investigation. In the context of a pre- will need to be obtained from the company’s of Schedule B1 would pack, it is easy to see how such a situation could management. If this information is unavailable have succeeded had it not been rendered arise because any allegation that the pre-pack in the time required, then serious consideration nugatory by the entry was at an undervalue will necessarily impugn the of the company into compulsory liquidation. SOUTH SQUARE DIGEST June 2018 www.southsquare.com

FEATURE ARTICLE: AN EXAMINATION OF PRE-PACK ADMINISTRATIONS

should be given as to whether a pre-pack should business and assets have been marketed to other be pursued. potential purchasers. Insolvency 3) Valuation and marketing 5) SIP 16 practitioners In order to obtain the best price for the company’s Full compliance with SIP 16 is not only a regulatory assets, the administrator will obviously need requirement for insolvency practitioners but is engaged to to know the value of those assets. Valuation by also likely to go a considerable way to limiting the advise on or reputable and independent third parties will risk of future litigation in relation to the pre- be of great assistance in reassuring creditors pack. However, this will only be so if compliance implement subsequently that the best possible price for the is with both the substance and spirit of SIP 16. pre-packs company’s business and assets was obtained. Compliance with SIP 16 should be built into the While it is a truism that the most accurate pre-pack plan from the outset so that plans are valuation of an asset is the price someone is can be made in advance to mitigate any areas vulnerable willing to pay for it, this is only true if a proper of potential difficulty; for example, where the marketing process has been carried out to allow time available for marketing the assets is short. to claims by all interested parties time to assess the value of Attempts to reverse engineer compliance with disgruntled the company and then bid against each other. SIP 16 after the sale has completed are unlikely to Where it is not possible to carry out such a survive the scrutiny of the court if proceedings are shareholders marketing process, serious consideration should subsequently brought in relation to the pre-pack. be given as to whether a pre-pack will achieve the and creditors 6) Responding to a challenge to the pre-pack best outcome for the company’s creditors. If allegations are made by aggrieved shareholders 4) Connected party purchasers or creditors in relation to a pre-pack, The most obvious difficulties arise where a administrators should resist the urge aggressively potential purchaser is connected to the company to defend the pre-pack on account of their and, in particular, where the company’s involvement in it. Rather, the administrators management are connected to the potential should consider dispassionately whether purchaser because there is an obvious conflict the allegations raise any serious issues that for the management between assisting the require investigation and then decide how such insolvency practitioners in obtaining the best investigation should be carried out. For example, possible price for the company and their desire if the allegations concern the administrators’ for the purchaser to buy the business and assets conduct, either pre- or post-appointment, then it as cheaply as possible There is also an obvious might be appropriate for a conflicts administrator information asymmetry between the connected to be appointed to investigate this. party and other prospective purchasers, which Conclusion can hinder the latter in producing competitive bids. Pre-packs remain controversial and various regulatory reforms have not assuaged concerns Where there is a prospective connected party about them. The Government is undertaking an purchaser, a key function of the insolvency assessment of the voluntary measures introduced practitioners will be to ensure that there is a level by the Graham Review. If these have not had the playing field with other potential purchasers desired impact, it might well be that statutory in order that an effective marketing process regulation is introduced under the reserve power can be carried out. In particular, insolvency in the Small Business, Enterprise and Employment practitioners should avoid a situation where they Act 2015. are negotiating with a connected party before the Insolvency practitioners engaged to advise on and (as administrators) implement pre-packs are vulnerable to claims by disgruntled shareholders and creditors. In order to avoid such claims, insolvency practitioners should satisfy themselves that the pre-pack is genuinely in the best interests of the company and its creditors before implementing it. 

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BHS, Carillion and the Government Consultation on Insolvency and Corporate Governance

Hannah Thornley was appointed as a specialist legal adviser to the Work and Pensions and Business Select Committees for the BHS inquiry in 2016 and for the Carillion inquiry in 2018. Here she reviews what has happened post-BHS, what happened at Carillion and discusses the different areas of insolvency and corporate governance law in the consultation on which the Government seeks the views of different stakeholders by 11 June 2018 BHS and Carillion 51

HANNAH THORNLEY

Introduction

The failure of BHS in 2016 seemed to After the collapse of Carillion, on 20 of BHS and connected companies informing catch the nation’s collective attention. March 2018, the Government issued them that we intend to bring proceedings Therefore the Work and Pensions a consultation on insolvency and to have them disqualified from running Select Committee and the Business corporate governance, seeking the or controlling companies for periods up Innovation and Skills Committee, views of a number of stakeholders to 15 years. We can also confirm that we now the Business, Energy and on the proposals, including amongst have written to Sir Philip Green, also a Industrial Strategy Committee (“the others, a vast majority of those who former director of BHS, informing him Committees”) chose to investigate read this Digest, such as: insolvency that we do not currently intend to bring BHS because the failure encapsulated professionals (both legal professionals disqualification proceedings against him. As many of the Committees’ ongoing and insolvency practitioners); business this matter may now be tested in the Court concerns about the regulatory and representative bodies; professional it is not appropriate to comment further. cultural framework in which business bodies and members of the public. The intention to bring disqualification operates, including the ethics of proceedings follows an investigation by the The collapse of BHS business behaviour, the governance Insolvency Service, an executive agency of of private companies, the balance Sir Philip Green owned BHS privately the Department for Business, Energy and of risk and reward, mergers and through a holding company within a Industrial Strategy. Leading counsel has acquisitions practices, the governance complex corporate structure for 15 years confirmed all our findings”. and regulation of workplace pension before he sold it to Dominic Chappell The collapse of Carillion schemes, and the sustainability of (a former bankrupt) through his defined benefit pensions. company, Retail Acquisitions Limited, Carillion was the second largest for £1 in March 2015, having taken out construction firm in the UK in 2017. It The collapse of Carillion in January substantial monies in dividends. The was a public company with a complex 2018 was unexpected as it simply BHS report found that Mr Chappell group of subsidiaries. This was mainly seemed too big to fail. However, had very little credibility. due to acquisitions of rival companies the government were ultimately over the past 10 years or so. However, unprepared to bail it out as it was a Having been stripped of its assets, BHS with those acquisitions came additional private company. At the end, there was then entered into administration on pension schemes that were in deficit, to so little cash left in the company that Monday 25 April 2016 leading to the add to the Carillion deficit. none of the insolvency practitioners loss of 11,000 jobs and a pension deficit at the big four accountancy firms were estimated at £571m. As at the sign off and publication of prepared to accept appointments as its March 2016 accounts on 2 March A report on the collapse of BHS was administrators and the company was 2017, Carillion appeared to be perfectly published on 25 July 2016. put into compulsory liquidation with healthy. However, it was said by the special managers appointed. Therefore, The BHS report noted that breach directors of the company that problems it will in any event end up costing the of duty, wrongful trading and began to arise between March and June taxpayer many millions of pounds. disqualification in the public interest 2017 which led to the profit warning may all apply regarding the former and in July 2017. On 10 July 2017, Carillion After the collapse of BHS in 2016 current directors of BHS. suddenly announced that they would be and the collapse of Carillion in 2018 including a provision for £845m against amongst others, the Government Eventually, Sir Philip Green paid over at least 18 contracts in their interim has been looking at ways to tighten £363m in cash to help rescue the BHS financial results. The share price fell up the laws which allow the winners pension scheme. from 192p on Friday 7 July 2017 to just in these massive collapses to retain On 27 March 2018, the Insolvency 57p by Wednesday 12 July 2017 (a 70% big pay-outs and which leave the Service confirmed the outcome of its fall). The share price never recovered, losers with worthless shares, claims, investigation into the directors of BHS. falling further to 14p by the time the jobs or pensions. However, the A spokesperson for the Insolvency company sought a winding up order. Government also wishes to retain the Service said: “We can confirm the When further interim results were competitiveness of the UK market. Insolvency Service has written to Dominic released in September 2017, £200m Chappell and three other former directors was added to the provision which SOUTH SQUARE DIGEST June 2018 www.southsquare.com

FEATURE ARTICLE: BHS AND CARILLION

completely wiped out the company’s equity and left it with net liabilities of £405m.

The company sought to negotiate with the Government for assistance, which was ultimately not forthcoming. Clearly it was not considered “too big to fail”. Carillion went into compulsory liquidation on 15 January 2018. The estimated pension deficit at the time of the liquidation was £2.6bn. Debt had also risen from £689m in 2016 to £961m in 2017.

In the evidence sessions before the Committees, MPs were particularly critical of the directors and the auditors of Carillion. A report on the Carillion collapse was published on 16 May 2018. The Insolvency and Corporate Governance Consultation

As a result of both the BHS and Carillion collapses, the Government has been motivated to suggest ways in which the current law might be improved in order to catch the worst offenders when the big firms go bust.

The government is already working to implement reforms to improve the corporate governance regime in relation to executive pay, strengthening the employee and stakeholder voice in the boardroom, and corporate governance in large privately held businesses.

As noted above, on 20 March 2018, the Department for Business, Energy and Industrial Strategy issued a consultation paper entitled: “Insolvency and Corporate Governance”. The aim of the consultation paper is to deliver: “a strong business Sales of Businesses in Distress environment…by seeking views on new proposals to improve the governance of companies when they are in This section of the consultation seeks views on or approaching insolvency”. It is recognised that the whether directors of a parent company should The BEIS insolvency regime is an important part of the UK’s be held to account and penalised where the business regime, but that it must be continually sale of an insolvent subsidiary causes harm consultation improved. to creditors, where this was foreseeable at the paper seeks time of sale. This section arises as a result of the The consultation looks at: scenario that occurred in BHS, where Sir Philip to deliver • Sales of businesses in distress; Green through his Taveta Group sold BHS (the “new proposals subsidiary) to Dominic Chappell for £1 through • Reversal of value extraction schemes; Mr Chappell’s vehicle Retail Acquisitions Limited, to improve the • Investigation into the actions of directors which had no real funding or capital to rescue or governance of of dissolved companies; and improve the position of BHS and its huge pension deficit. There is currently no requirement for a companies when • Strengthening corporate governance in holding or parent company (or its directors) to pre-insolvency situations, including: they are in or do any due diligence regarding the purchaser of • Group structures; a subsidiary. The proposal in this section is that approaching directors of holding companies should be held • Shareholder Responsibilities; insolvency ” to account if they conduct a sale which harms • Payment of Dividends; the interests of the subsidiary’s stakeholders, such as employees or creditors, where that • Directors’ duties and the role of harm could have been reasonably foreseen at professional advisors; and the time of the sale and the subsidiary enters • Protection for company supply chains in administration or liquidation within two years the event of insolvency. of the completion of the sale. In line with the current law the appropriate penalties might Each of these areas in the consultation are include disqualification and/or personal liability. reviewed and commented upon in the following paragraphs. . BHS and Carillion 53

Reversal of Value Extraction Schemes

This section of the consultation seeks views on whether new powers should The report found Carillion wanting be introduced in addition to those that already exist to undo a transaction, in respect of its corporate governance or a series of transactions, which unfairly strips value from a company. and transparency The Government wishes to provide ways of undoing transactions which unfairly strip value from an ailing company. The concern is that where an State be given the power to: (i) require 3. Payment of Dividends ailing company has been “rescued” by information to allow investigation In this section the appropriateness investors, they then extract value to of former directors of a dissolved of payment of dividends in certain return at least part of their investment company; (ii) seek disqualification situations is considered, especially quickly and to lessen their potential of such directors; (iii) seek orders for where a company is approaching loss should the company fail. These financial compensation for creditors; insolvency and/or has high debts and arrangements could take the form of (iv) seek prosecution where there is a large pension deficit as with Carillion. management fees or excessive interest evidence of criminal conduct. The law on the payment of dividends is on loans (as happened with Retail Strengthening Corporate well-established and is set out in the Acquisitions and its failed “rescue” of Governance in Pre-insolvency Companies Act 2006 and the relevant BHS). The proposal in this section is Situations accounting rules. However, examples that alongside the current antecedent of large companies like Carillion transaction powers, new powers might This section of the report in the main continuing to pay out large dividends be introduced which allow an office- reflects the Government’s response to in the period immediately before holder to apply to reverse a transaction the collapse of Carillion. their insolvency raises questions or series of transactions which are 1. Group structures about whether reform is needed. The considered to have unfairly removed proposal in this section is that there value from a company in the approach It is important that as companies may need to be changes to the legal, to insolvency. grow, their group structures remain governance and technical framework effectively managed and governed. Investigation into the Actions of within which companies determine Groups should have clear records Directors of Dissolved Companies dividend payments. regarding identity of directors and This section of the consultation ownership of assets. This was found 4. Directors’ Duties and the Role explores the Government’s proposal to wanting in respect of Carillion. In this of Professional Advisors extend existing investigative powers section it is proposed that stronger In this section the Government is into the conduct of directors to cover corporate governance and transparency interested in views on whether some directors of dissolved companies. measures are required, such as large directors are commissioning and using This section is not a reflection of companies and their subsidiaries professional advice without a proper findings relating to BHS or indeed disclosing their corporate governance awareness of their duties as directors, the circumstances of the Carillion arrangements. and in particular the requirement to collapse. There are a number of ways 2. Shareholder Responsibilities apply an independent mind. in which a company can enter into dissolution. There are approximately A large corporate failure can give 5. Protection for Company 400,000 company dissolutions annually. rise to questions about whether Supply Chains in the Event Complaints are regularly received from shareholders, particularly large of Insolvency the public about alleged wrongdoing by institutional shareholders, should have Small and medium-sized companies directors of companies after they have been more alert to the warning signs, in the supply chain were one of the been dissolved and often in relation to more engaged with long term company main losers in relation to the Carillion successive company failures. There is strategies and done more to challenge collapse where 120-day payment terms also evidence that points to a recurring boards to take timely remedial action. had often been enforced on those theme of directors using dissolution Although there has been some progress smaller suppliers. In this section views to avoid debts, including tax, civil in investor engagement in recent are sought as to whether more should penalties and employment tribunal years, recent corporate failures like be done to help protect payments to awards or other judgments. The current Carillion demonstrate that institutional suppliers, particularly smaller firms, legislative framework does not provide investors should be more actively in the event of insolvency of a customer for the investigation of the conduct of engaged. The proposal in this section is and whether there would be any wider directors where their company has been that shareholders should be challenging consequences of such protection.  dissolved. Also, as there is no office- directors on management and holder’s report in the case of a dissolved mitigation of risks as well as ensuring company, the trigger for investigation executive remuneration policies align The consultation can be found on the will be complaints from members of the the interests of the directors with the BEIS section of GOV.UK: public, a creditor or other government interests of the company. An update www.gov.uk/government/ department, or in relation to an of the Stewardship Code may assist consultations/insolvency-and- existing investigation. The proposal with strengthening the quality of corporate-governance in this section is that the Secretary of investor engagement. SOUTH SQUARE DIGEST June 2018 www.southsquare.com

Is the lawyer’s mouth shut forever?

Toby Brown explores whether legal professional privilege subsists upon dissolution of a company and thus whether a lawyer can be compelled to divulge privileged information of a dissolved client

Every lawyer will be aware they must is the right of the client, rather than maintain the privilege of their client. something in the gift of the lawyer to Legal professional privilege is not waive unilaterally. But absent a waiver just an esoteric rule - it is a principle by the client, is the lawyer’s mouth shut TOBY BROWN that is firmly established in popular forever regardless of what happens to knowledge, not least thanks to TV and the client? In particular where the client film from the USA (where it is termed has died, or (in the case of a company) “attorney-client privilege”). The has been dissolved, does formerly concept has featured many times on privileged material suddenly become the silver screen, arguably the best is fair game? This was the situation the the 1993 adaptation of John Grisham’s Upper Tribunal had to consider in late book “The Firm”, where Tom Cruise’s 2017, when a solicitor (represented by character must work out how to bring the present author) received a witness down his mafia-representing law firm summons in relation to proceedings without getting disbarred for breaching before the Upper Tribunal in the matter the privilege of his clients. Fast forward of Ford v FSA, requiring him to attend to (the apparently non-Hollywood and give evidence as to communications reality of) April 2018 and President between his law firm and its former Trump is complaining on Twitter that client, a company which had since been “Attorney Client privilege is now a thing dissolved. of the past”, following the arrest of his Previous case law lawyer and the seizure by investigators of apparently privileged material. The position in relation to individuals (as opposed to companies) has been Back in England, modern jurisprudence clear for over 100 years, following has held that privilege is not just a the decision in Bullivant v Attorney procedural right to resist compulsory General of Victoria [1901] AC 196, where disclosure of information, but it is a the House of Lord held that privilege fundamental right, and one absolute (there legal advice privilege) was not in nature in that privilege cannot be lost by the death of the client because overridden once established (save the executors were the deceased’s through clear legislation). Further, it Legal Professional Privilege 55 Donald Trump speaking 2011 in at CPAC Washington, Skidmore Gage D.C.

successors in title. The wider principle is that 2006) was “sufficiently wide to include as bona successors in title can assert privilege, and vacantia vested in the Crown a right to assert legal this may extend beyond a personal right to the professional privilege which still persisted at the time situation where the privilege is an incident of a of the dissolution of the Company”. That legislation property right, so that the successor in title to provided as follows, and is identical to the current the property may be able to assert the privilege: s. 1012 (save for the lack of reference to the Duchy Crescent Farm (Sidcup) Sports v Sterling Offices[1972] of Lancaster and Duke of Cornwall): Ch 553 (a principle we will return to). “When a company is dissolved, all property and Similarly, litigation privilege is not limited - a rights whatsoever vested in or held on trust for the document privileged from disclosure in one action company immediately before its dissolution is privileged from disclosure in a subsequent (including leasehold property, but not including action in which the document is relevant. The property held by the company on trust for another extreme example is Calcraft v Guest [1898] 1 QB person) are deemed to be bona vacantia and (a) 759 which concerned documents prepared for accordingly belong to the Crown, and (b) vest and the defence of an action for assault in 1787, may be dealt with in the same manner as other where the successor in title was entitled to assert bona vacantia accruing to the Crown.” the privilege in a related trespass action 110 In 2016-17, The Crown Solicitor of Northern Ireland had years later. In that case Lord Lindley MR stated declined to take part in the proceedings. The Judge some 85 that “I take it that, as a general rule, one may say suggested that the Crown’s role was akin to that of once privileged always privileged”. And thus, the companies a custodian entrusted with assets for safekeeping, textbooks enjoy quoting the dicta of Buller J from save that it is permitted by legislation to dispose were wound Wilson v Rastall (1792) 100 ER 1283 that “the mouth of of property. However, the response of the Crown [the attorney] is shut for ever”. up on public indicated that where the right (such as privilege) interest Garvin Trustees was not capable of being turned to account, the Crown would neither assert nor waive that right, The question of whether privilege subsists upon grounds. something the Judge said was consistent with dissolution of a company appears almost never the statutory scheme since the Crown has no to have been directly addressed by the courts. power to act on behalf of a company which no The exception is in the Upper Tribunal, where longer exists. The Judge therefore concluded that in Garvin Trustees Ltd v Pensions Regulator [2015] the Crown is not a successor in title in the same Pens LR 1 a director of a Northern Irish company way as an executor of a deceased’s estate. If any which had been dissolved sought directions as to person has an interest in the right being asserted whether he was required to maintain privilege the appropriate course would be to restore the over the company’s documents. Judge Timothy company, albeit the 6-year deadline had passed. Herrington stated that the starting point was The Upper Tribunal therefore concluded that “the that the company itself could not assert any Crown having no interest in asserting the privilege [the right to privilege as it no longer existed, but director] is under no obligation to maintain the privilege that the previous Northern Ireland legislation simply because the right has been vested in the Crown”. (the equivalent of s. 1012 of the Companies Act SOUTH SQUARE DIGEST June 2018 www.southsquare.com

FEATURE ARTICLE: IS THE LAWYER’S MOUTH SHUT FOREVER?

Ford v FCA As Lord Taylor stated in R v Derby Magistrates’ The issue was considered again by the Upper Court [1995] 1 AC 87 “….a man must be able to consult The Upper Tribunal in the case of Ford v FCA, when a solicitor his lawyer in confidence, since otherwise he might challenged a witness summons requiring hold back half the truth. The client must be sure that Tribunal evidence to be given in relation to a former what he tells his lawyer in confidence will never be decided that client which had since been dissolved. In an revealed without his consent. Legal professional extemporary and unreported judgment delivered privilege is thus… a fundamental condition on which the solicitor on 18 October 2017, Judge Berner accepted the the administration of justice as a whole rests.” On this could not submission that solicitors have a duty to maintain basis it might be argued that the importance of the privilege on behalf of a former client, but, the principle means that the law should continue assert applying the Tribunal’s previous decision in to protect privilege (particularly where the privilege Garvin held that “the duty to maintain confidentiality information is still held by lawyers) even though cannot survive dissolution of the company”. Whilst it cannot be asserted by the company nor will be and that the privilege vested in the Crown as bona asserted by the Crown. One potential solution to the witness vacantia, the Judge stated that the Tribunal’s the problem might be for directors to claim joint previous decision made clear that the Crown privilege with the company as in Ford v FSA [2011] summons has no power to act to assert the right. Whilst EWHC 2583 (Admin). However, this is likely to be would not here the company could still be restored given it unusual. was less than 6 years after dissolution, the Judge Second, whilst it might be argued that a different be set aside decided that the mere possibility of restoration rule should exist for individuals because after did not alter the analysis. Further, there was death there continue to be people (i.e. the no suggestion any steps had or would be taken executors) in whom the privilege vests and who to restore the company. Accordingly, the Upper can assert it, the Upper Tribunal in both cases Tribunal decided that the solicitor could not decided that in principle the right to privilege assert privilege and that the witness summons vests in the Crown as bona vacantia. This is on would not be set aside. the basis that s. 1012 of the Companies Act 2006 A subsequent application to the Tribunal for refers not just to the company’s property vesting permission to appeal to the Court of Appeal was in the Crown but “all…rights whatsoever vested in…. successful. However, the appeal did not progress, the company”. Whether and to what extent this becoming academic shortly afterwards when the provision does indeed vest the right to privilege in applicant for the witness summons asked the the Crown (or the Duchy of Lancaster or Duke of Tribunal to set aside the summons in particular Cornwall) remains to be tested in future cases. One because of the potential delay and costs of the argument may be that privilege only vests where appeal. The two decisions of the Upper Tribunal, it is incidental to specific property that passes to which is a superior court of record, therefore the Crown i.e. in accordance with Crescent Farm, stand and so the arguments remain to be tested whilst an alternative position might simply be that another day. all privilege is extinguished upon dissolution. The Tribunal drew a distinction based on an analysis The arguments that the Crown’s role was not to assert or waive As to these arguments, there is logic to the privilege either on its own behalf or on behalf of reasoning employed by the Upper Tribunal that the company. However, it is conceivable in other the company no longer exists and so cannot itself cases the Crown might (unusually) wish to assert assert privilege, and nor it appears will the Crown privilege, for example because valuable property seek to do so. There is also an obvious simplicity has become its property as bona vacantia and the and clarity in a conclusion that upon dissolution Crown becomes successor to the rights of privilege privilege does not subsist in any enforceable relevant to that property. manner. But there are also potential issues with Third, unlike the death of an individual (which the conclusion of the Tribunal, four of which on current science is permanent), a dissolved will now be discussed and which highlight the company may potentially be restored to the uncertainty that remains. register by the court, the general effect of which First, it might be questioned why there should is that “the company is deemed to have continued be a different position for corporate clients as in existence as if it had not been dissolved” (s. 1032, opposed to individuals, given the key policy Companies Act 2006). This could occur within 6 reason for protecting privilege as a fundamental years of dissolution (or at any time for personal right is to support access to legal advice and injury claims). Thus if indeed privilege has representation. In reality, it is still people who vested in the Crown as bona vacantia, the right seek legal advice on behalf of a company, and its should revest in the company upon restoration officers and employees should not be deterred (or if instead privilege was extinguished upon from communicating with the company’s lawyer. dissolution, it would presumably be revived). Legal Professional Privilege 57

Potentially bona vacantia property may have been sold by the Crown to a third party who may claim that they succeeded to the privilege incidental to that property under the Crescent Farm principle. A further issue is that even if Whether privilege can subsist the privilege did revest in the company, upon dissolution depends upon during the period following dissolution material may have been disclosed to the material still being capable third parties or made public and so have of being privileged at that point lost its essential confidential nature. It seems unlikely that a claim would be brought against the company’s lawyer The Firm © Paramount HE for breach of duty if they divulged information during the intervening

period (though potentially the court Cruise,Tom could assist the lawyer under s. 1032(3) which provides that “The court may give such directions and make such provision as seems just for placing the company and all commentary by Matthews and Malek bankruptcy, who is no longer (at least other persons in the same position (as nearly on Disclosure 5th Ed suggests that on the first instance decision in Leeds v as may be) as if the company had not been “Presumably, in the absence of any other Lemos) to be considered the successor in dissolved or struck off the register.”) relevant transfer, the Crown will succeed title to the bankrupt’s privilege under to the rights of privilege relating to the the Crescent Farm principle. Fourth, where lawyers retain privileged property of a dissolved company as bona information (in documents or in Concluding thoughts vacantia, although subject to a revesting memory), they have a positive duty to in the company if it is revived” and cites Before completing this discussion, it assert the former client’s privilege, the Garvin decision in a footnote for should be remembered that whether irrespective of whether the client has the proposition “What the Crown may or privilege can subsist upon dissolution any interest in asserting privilege. So will do with the privilege is quite another (or for that matter death) depends held Blackburne J in Nationwide Anglia matter.” upon the material still being capable Building Society v Various Solicitors [1999] of being privileged at that point. There PNLR 52, albeit not in the context of The only judgment to cite Garvin is the are routes through which privilege a dissolved client (“…it is the lawyer’s first instance decision in Shlosberg v may be lost in the intervening period, duty to claim the privilege on behalf of the Avonwick Holdings Ltd [2016] EWHC such as through waiver. In relation to a client, or former client, whose privilege it 1001 (Ch) (a case in which Tom Smith QC company, a liquidator or administrator is, at any rate where it is at least arguable and Henry Phillips appeared). Arnold has the power to assert or waive that the privilege exists”). It might J referred to the decision in Garvin privilege during their time in office prove detrimental to the standing of without criticism, commenting that (and so for practical purposes is the the profession if a lawyer’s lips were “…given that the company had ceased to successor in title). A further, albeit suddenly loosened upon their former exist, then its privilege had either to cease unusual route by which privilege client being dissolved. However, the to exist or to be transferred to someone may be “lost”, is if it is decided that answer may require a more careful else. Furthermore, [the bona vacantia privilege never existed because the distinction between a duty to protect provision] expressly vests not only property, communications with the lawyer privilege as opposed to a duty of but also ‘all . . . rights whatsoever’ in the were in furtherance of a criminal or confidence, and a distinction between Crown”. It is noteworthy that Arnold J fraudulent proceeding (the iniquity a legally enforceable obligation as contrasted the bona vacantia legislation exception). The equivalent US version compared to a professional obligation to the bankruptcy provisions under of this principle is, according to sanctionable only by the regulators. the Insolvency Act 1986, where the commentators in the John Grisham- Thus the true position based on Garvin bankrupt’s estate (as defined) vests esque drama unfolding in Washington may be that, following dissolution, in the trustee upon appointment but DC, how a judge could have been lawyers continue to have a professional without comparable language vesting satisfied to issue the recent warrants obligation of confidence and so their “all the rights” of the bankrupt in the for the search and seizure of material mouth will ordinarily be “shut forever”, trustee. The Court of Appeal in [2016] held by President Trump’s lawyer. but since the client’s right to assert EWCA Civ 1138 dismissed an appeal privilege can no longer be asserted, the against Arnold J’s decision (though But returning to the topic of this court may order a lawyer to divulge the without reference to Garvin), holding article, the question of whether information. that the effect of the Insolvency Act privilege subsists following dissolution 1986 is not to vest privilege in the of a corporate client has for now been Subsequent consideration of trustee in bankruptcy (a point which addressed by the Upper Tribunal. Garvin required the clarification provided Pending consideration in a future case, These are some of the issues with by Leeds v Lemos [2017] EWHC 1826 the prudent advice for lawyers would the Upper Tribunal’s two judgments (Ch), a case in which Felicity Toube QC be to continue to protect privileged in Garvin and Ford, which decisions appeared. The position of a deceased’s information even after a corporate appear to have received little attention. executor, or potentially of the Crown in client has been dissolved, unless There is sparse commentary relating relation to a dissolved company, must and until a court directs that such to the reported decision in Garvin. The now be contrasted to that of a trustee in information must be divulged.  SOUTH SQUARE DIGEST June 2018 www.southsquare.com

Past Events Insolvency Lawyers’ Association Annual Conference 2018

Reviewing last year’s ILA Conference in the South After making the most of the weather enjoying Square Digest Jeremy Goldring QC questioned lunch outside, we reconvened to listen to a what might happen by the time the 2018 presentation by sponsors GLAS, following which Conference came round. Jeremy Corbyn as Prime Neil Golding (Freshfields), Nick Segal (Judge of the Minister? Mike Pence as US President? Well, Grand Court in the Cayman Islands) and Brendan neither of those have come to pass, but there O’Neill (Goodmans) shared their insights into have been lots of developments in the world of assisting the court with valuation disputes in CHARLOTTE insolvency and restructuring. restructuring in the UK, the Cayman Islands and in Canada. COOKE On one of the hottest April days in recent years, members of the ILA, including a number from Mark Arnold QC (South Square) and I spoke about South Square, gathered at Mary Ward House the coherence of directors’ duties in England for the 2018 Conference to listen to stimulating after Re Ralls Builders and the Small Business, presentations about those developments, and to Enterprise and Employment Act 2015, hopefully catch up with colleagues and friends during coffee persuading the audience that focusing on loss to breaks in the sunshine. the company in the context of wrongful trading deprives the relevant provisions of much of their Richard Levin (Jenner & Block) anchored the utility and that there is a case for further reform. conference by sharing his insight into how certain key restructuring issues are addressed in Finally, before the Conference Chair, Lord Justice As always, the US by Chapter 11, generating much discussion Newey, brought the day to a close, we were as to whether and how the US Bankruptcy Code treated to a lively panel session chaired by Sarah the varied might be used as model for reform in the UK. Paterson (ILA Vice President) and featuring Ian Johnson (Slaughter and May), Nick Herrod (Maples sessions Developing issues raised by that debate, Joanne and Calder), Richard Levin (Jenner & Block) Rumley (Foot Anstey) and Felicity Toube QC made for an and Sophie Vermeille (Droit et Crossance). For (South Square) considered whether the UK should those worried that Brexit didn’t feature in the extremely ban ipso facto clauses in executory contracts. programme, the panel considered recognition of a A show of hands at the end suggested they interesting typical leveraged debt restructuring implemented succeeded in persuading the audience that, whilst in the US, England or an offshore jurisdiction and day we need to keep an eye on the development of the the implications of various post-Brexit scenarios pari passu and anti-deprivation principles, on for the analysis. balance a flexible regime is to be preferred. As always, the varied sessions made for an Focusing on the UK, Camilla Lamont (Landmark extremely interesting day and many thanks must, Chambers) provided an interesting perspective on of course, go to the ILA Committee for organising restructuring leasehold estates and, in particular, it. And who knows what might happen by the the strengths of CVAs in preventing a minority time the 2019 Conference comes round. Jeremy of dissenting creditors disrupting proposed Corbyn as Prime Minister? Mike Pence as US restructuring arrangements that the majority President? We shall have to wait and see.  support, and which ultimately seek to preserve value for the collective value of all creditors. Events round up 59

Junior G36 Event 2018

Events organised by INSOL International have The scenario, which contained elements always attracted eminent, senior practitioners from a number of recent, real cases, ROBERT AMEY from the world’s leading restructuring and concerned a German company which wished law firms. Building on this success, INSOL to restructure its New York law-governed International, Brown Rudnick LLP and South debt in England, despite the fact that its Square recently held their first event aimed only connection with the jurisdiction was specifically at more junior practitioners from that one of its creditors was domiciled in G36 firms, who might not normally attend England. To complicate matters, disgruntled INSOL events. employees had purchased some of the debt with the intention of blocking the The first Kindly hosted by Brown Rudnick at their proposed restructuring. The panel discussed London offices on 12 April, the evening began INSOL event commercial and legal strategies for ensuring with a presentation from Alex Leicester of a successful restructuring and avoiding aimed private equity firm, Alchemy Partners, damage to the operating business in the on UK and worldwide macroeconomic situation. specifically at process, before taking questions from the Then, Brown Rudnick associate Grégoire audience. more junior Hansen chaired a discussion between Alex practitioners Leicester, Brown Rudnick associate Sabina Khan, The evening concluded with drinks and and South Square’s Robert Amey, about how canapes, giving attendees an opportunity to commercial and legal considerations might network with their contemporaries at other interact in the context of a cross-border G36 firms.  restructuring.

GDPR ALERT: CONTINUE TO RECEIVE YOUR SOUTH SQUARE DIGEST The General Data Protection Regulation came into force in May this year. We are taking this opportunity to let you know that you will continue to receive the Digest from us, and we will hold your details on our database for this purpose as you are a valued contact of South Square. However, if at any time you decide you don’t wish to receive it, or that you don’t want us to hold your contact details, please let us know and will we remove you from our database and mailing list. If you would like to know more about how we protect the privacy of our clients and other individuals whose personal data we collect, please visit our website to see our Privacy Policy. SOUTH SQUARE DIGEST June 2018 www.southsquare.com

Future Events INSOL Channel Islands One Day Seminar

The INSOL International Channel Islands Seminar will take place on Tuesday 3 July 2018 at the Radisson Blu, St. Aubin’s Bay in Saint Helier. South Square is delighted to be sponsoring the networking breakfast.

As always, INSOL has drawn together speakers from onshore and offshore jurisdictions across the globe who will contribute to an informed commentary on the issues that touch and concern the practices of restructuring professionals today and in the future, with an emphasis on offshore issues. This year the sessions will be focused on the common theme of looking to the future of insolvency processes and the environments we will operate in.

South Square’s Tom Smith QC will be part of a panel entitled “Locking the stable door before the horse has bolted”, looking at the developing role of the provisional liquidator and equitable receiver as a first port of call to guard against asset jeopardy.

We hope to see you there. 

III 18th Annual Conference, New York Following the success of the first III to be held in London last year, the 18th Annual International Insolvency Institute’s Conference will be held between 23 and 25 September 2018 in New York. Keynote speakers will Marking the tenth anniversary of include Steven Rattner the 2008 financial crisis, this year’s and Justice Sundaresh Conference activities will focus on Wall Street. The opening reception will be Menon held at the historic Alexander Hamilton US Custom House, current home for the US Bankruptcy Court for the Southern District of New York.

Keynote speakers include Steven Rattner, the ‘car czar’ of the US during the bail-out of the automobile industry, and Justice Sundaresh Menon, Chief Justice of the Supreme Court of Singapore. Non-members are welcome to attend Michael Crystal QC and Mark Phillips and registrations can be made at: QC will be attending.  www.iiiglobal.org/2018conference News in brief 61

News in brief Not every tale condemns me for a villain Tony GardnerTony and Caleb Roberts and Lady Justice Hallett

Richard III has been found ‘not guilty’ the defence, with Ian Winter QC and Two professional murderers also of multiple murders following a West Jonathan Laidlaw QC acting for the took to the stand, claiming that they End trial at the Novello Theatre on prosecution. The 1000-strong audience had acted under a royal warrant. 29 April 2018. The trial, in support of formed the jury, led by Jury Foreman Although no bodies had been found, the Shakespeare Schools Foundation, Hugh Dennis. the murderers (in return for immunity was presided over by Lady Justice from prosecution) testified that they The prosecution argued that it was the Hallett. Lady Hallett is no stranger to had committed murderous acts in the defendant’s intention that he would Richard III, having formed part of the name of the King. The defence team become King after his brother King High Court Panel in 2014 that decided argued that there was no evidence that Edward IV. To achieve this he needed to that the remains of the King (killed the King had instructed the murderers. remove all those who stood in the line at the Battle of Bosworth in 1485 and of succession after King Edward IV: the Richard’s brother, the Duke of Clarence, disinterred from under a car park in defendant’s elder brother, Clarence, who in a dramatic twist survived the Leicester by a team of archaeologists in and the two sons of King Edward IV alleged attempted drowning in a butt of 2013) should stay in Leicester and not be – the so-called Princes in the Tower. Malmsey wine, also took the stand.  returned to York. Witnesses called to the stand included John Kelsey-Fry QC and Sallie Bennett- Lady Anne, Richard’s wife, and his Jenkins QC were the barristers for former ally the Duke of Buckingham.

Man threatens to bill It was alleged by the husband that the wife for ‘exceptionally mother-in-law rearranged his socks and shirts in the wardrobe, “ranted” The mother-in-law difficult’ mother-in-law about the television being on late at night and pulled up, then threw away, rearranged his socks and In April this year the family law garden plants which she didn’t like. court in Ennis, Co. Clare, heard a shirts in the wardrobe, case where a woman applied for a The man denied he had ever been “ranted” about the safety order against her husband who violent towards his wife and blamed had threatened to send her a bill for the breakdown of their marriage on television being on late at accommodating her “exceptionally financial issues and his “sulking” night and pulled up, then difficult” and “disruptive” mother in mother-in-law. The court dismissed the their home. The 78-year-old woman application for the safety order against threw away, garden had stayed with the couple on and off the husband, but asked him plants which she for a number of years but in June of last to treat his wife “with the respect year settled in permanently. she is due”.  didn’t like SOUTH SQUARE DIGEST June 2018 www.southsquare.com

News in brief

SFO to employ robot lawyer The Serious Fraud Office (SFO) began using a robot to sift evidence on all new casework in April. Ben Denison, chief technology officer at the SFO said; “AI technology will help us work smarter, faster and more effectively investigate and prosecute economic crime”.

The agency claims that the new Axcelerate system will reduce costs and achieve a lower error rate, as well as having speed benefits over the work of human lawyers. The SFO has already been using a pilot robot, able to process more than half-a- million documents a day, to scan for legal professional privilege content in its 4-year investigation Has the rug been into Rolls-Royce.  Skype a Justice pulled out from Between April and June this year the Supreme Court is running a new “Skype a Justice” scheme with under Poundland school pupils being given the chance to question the most senior judges in the land over the internet. Children and Carpetright? from six schools will be able to put questions to one of the 12 justices of the Supreme Court in sessions In the ongoing spiral of high street lasting 30 minutes. decline, Poundworld has become the latest in a string of retailers considering The discount Lady Hale said: “School students from shutting stores. The discount retailer across the UK will have the opportunity to is said to be considering a company retailer is said to chat to us from their classrooms. We hope voluntary arrangement (CVA) to close be considering a to reach out to young people far beyond up to 110 of its 355 stores, putting our courtrooms here in London who 1,500 jobs at risk. company voluntary might otherwise find it difficult to visit us.”  On the flooring front, on 26 April a arrangement (CVA) majority of Carpetright’s creditors and to close up to 110 of landlords backed the retailer’s CVA to allow it to close just under a quarter of its 355 stores its stores and to seek rent reductions Charlotte Cooke returns of up to 50% on a further quarter of its to full time practice outlets. Chief Executive of Carpetright, Wilf Walsh said: “Addressing our legacy We are delighted that Charlotte property issues to reduce our fixed has returned to full-time practice costs to sustainable levels is critical in Chambers following her to securing Carpetright’s recovery”.  maternity leave.

To enquire about Charlotte’s availability to accept instructions please contact our practice managers either on: 0207 696 9900 or by e-mail to [email protected] News in brief 63

“Prince of Darkness” to

spearhead courts reform Judges are good at many things, but perhaps not Tim Parker has been appointed chair Lord Burnett of Maldon, the lord chief communication of of the board of HM Courts & Tribunals justice, said; “Judges are good at many Service. Mr Parker was once dubbed things, but perhaps not communication a major reform “the Prince of Darkness” by the GMB of a major reform programme”. programme Union after allegedly turning up in Under those reforms courts are his Porsche to sack a group of factory moving to paperless proceedings, workers. Taking up his new post on with online pleas and hearings, 27 April, Parker said “I am delighted and increased use of video links. to be joining HMCTS and look forward to The continuing court closures will spearheading its programme of reform pay for some of the reforms. – bringing courts and tribunals into the digital age and ensuring they are providing Andrew Walker QC, chairman of the best service possible for the public”. the Bar Council, has cautioned that the adoption of technology “must not Consultants from Accenture are to be at the expense of justice itself or of the help senior judges to draw up a paper involvement of real justices and human (“Judicial Ways of Working: 2022”) to interaction in the determination of those explain the benefits of online courts disputes in which this is necessary”.  and video-link hearings to their junior colleagues.

Economic storms hit New Small Claims Online Service goes live seaside towns In addition to appealing tax decisions and applying for divorce, claims worth up to £10,000 can now be handled online as the latest initiative to modernise the Research by Moore Stephens has found courts system came on stream in April. The new system eliminates the need to that 7 out of the 10 towns with the complete and post a paper form, or to use the outdated online system largest numbers of people who have launched in 2002. become insolvent were beside the sea. The top spot, with 47.5 insolvencies Justice minister Lucy Frazer, formerly a member at South Square, said: “We know per 10,000 people, goes to Plymouth, that using the civil courts has been a daunting prospect for some. This innovative, quick and compared with the national average easy online system will enable people and small businesses to get back the money that is of 19.9 insolvencies per 10,000 people. rightly owed to them. This is an excellent example of the work we are doing under our £1bn Jeremy Willmont, Moore Stephens plan to transform the courts system, allowing people to access justice online and around head of restructuring and insolvency, their busy lives.” said “Personal debt in many British seaside Whilst the Personal Support Unit (a charity which supports people who represent towns shows no sign of improving … themselves in the civil and family justice system) has welcomed the initiative People living in these towns continue to as being intuitive and avoiding most of the formal legal language of traditional fall into insolvency as the costal economy court processes, the Bar Council has counselled caution, saying ‘the pilot must fails to keep up with the rest of the country”. be evaluated carefully, and it must not be assumed that lessons learned are necessarily The economies of British seaside applicable more widely or to more substantial or complex claims’.  towns have suffered from the decline of shipbuilding, fishing and other traditional industries, allied with SOUTH SQUARE NOTICES the popularity of package holidays overseas.  Youngest Crown Court Judge Barrister Richard Archer has become the youngest crown court judge in recent history at the age of 32. Mr Archer is based at Winckley Square barristers’ chambers in Preston, a set that practises mainly criminal law. As a part-time recorder Mr Archer will sit several days a month in the crown court.

SOUTH SQUARE DIGEST June 2018 www.southsquare.com

News in brief

Some of South Square’s team with fellow walkers: Toby Brown, Anna Barlow, Rt Hon Dominic Grieve QC MP, Georgina Peters, Rose Lagram-Taylor and Mr Justice Robin Knowles CBE London Legal Walk

Members and staff were proud to Solicitor bankrupts wife of £5,000 on account of those costs by take part in the London Legal Walk in 31 October 2013. Loson unsuccessfully support of the London Legal Support over parking ticket appealed the order but filed a new appeal Trust on Monday 21 May 2018. This seeking permission to pay the £8,000 Immigration solicitor Tiki Emezie, is an annual event where thousands in instalments of £50 per month. The who refused to pay a Camden Council of judges, barristers, solicitors, defendants said that even without parking fine eight years ago, has put legal staff and students cover one taking interest into account, it would his wife on the ‘verge of bankruptcy’, of two 10km routes around London, require 160 months for the debt to be the Court of Appeal has said, throwing raising much-needed funds through paid at the rate of £50 per month. out an attempt to dismiss an eight- sponsorship to support free legal year case which has left Diana Loson, Dismissing the appeal, Lord Justice advice centres. The money raised wife of Emezie, with a legal bill of over Patten said Loson had rightly enables the centres to offer help to £8000. In Loson v Stack & Anor, Lord been refused permission to pay by the homeless, housebound, elderly, Justice Patten said he had ‘considerable instalments. As a result of Emezie’s victims of domestic violence, people sympathy’ for Diana Loson whose failed attempts to resist payment, he trafficking and many more. In 2017 predicament he said was ‘largely, if said, ‘Ms Loson finds herself on the over £800,000 was raised by over not entirely’ down to the failure of her verge of bankruptcy. But she has no 12,000 walkers. Donations for this husband to pay a parking fine for which ability to pay nor, on the evidence, any year are still being counted and he was responsible. realistic prospect of discharging in the can be made through the following reasonably near future.’  website: Emezie’s failure to pay the fine after an unsuccessful challenge caused www.londonlegalsupporttrust.org.uk Loson’s car to be clamped, after which Loson took legal action against the Correction bailiffs responsible and a debt recovery specialist. Loson sought an order In the March 2018 issue of the Digest stopping them from selling the car and in Simon Mortimore QC’s article also sought damages but her case was “The Carlyle Case – The Duty of Loyalty thrown out by District Judge Jackson Revisited” the presiding judge in the in the Central London County Court in Carlyle case was incorrectly referred 2013, ruling that the delay in recovering to as Lt-Bailiff, Her Honour Hazel the vehicle was ‘entirely due to the Williamson QC instead of Her Hon, unjustified refusal by Emezie to pay the Lt-Bailiff Hazel Marshall QC. parking fine.’ We apologise for the confusion.  Jackson ordered Loson to pay the costs of both defendants as well as the sum News in brief 65

News in brief

Gibson go out of tune Gibson Brands have filed for bankruptcy financing via a “restructuring support protection. The 116-year-old company agreement” between its largest has provided guitars to legends shareholders to provide it with enough Gibson Brands estimated including Jimmy Page, BB King, Bob liquidity to keep operating during the its liabilities to be in the Marley and Slash. Chuck Berry was even bankruptcy proceedings. buried with his treasured Gibson guitar range of $100m to $500m The company said its domestic and bolted to the inside of his coffin lid. international musical instrument Gibson was founded in 1902 by Orville business were performing strongly Gibson who sold mandolins from a and generating positive cash flow. It workshop in Kalamazoo, Michigan. In has, however, suffered from a costly 1935 it launched its first electric guitar. attempt to diversify into headphones After running into financial troubles and hi-fi markets through its Gibson in 1984, it was forced to shut down its Innovations unit, which is being wound Kalamazoo plant, and Nashville became down as part of its reorganisation. Gibson’s headquarters. Regulations implemented in 2017 under In a Chapter 11 filing in the US the Convention of International Trade Bankruptcy Court in Delaware Gibson in Endangered Species have also slowed Brands estimated its liabilities to be in the trade in rosewood, a material prized the range of $100m to $500m, but has by guitar aficionados.  lined up $135m of debtor-in-possession

Stuart Frith becomes new R3 President

Stuart Frith, a partner in Stephenson Harwood’s restructuring and insolvency practice, has become the latest President of R3, the Association of Business Recovery Professionals.

In addition to his appointment as a deputy judge in the Insolvency and Companies Court, Stuart is a past president and honorary member of the Insolvency Lawyers Association, and is a member of the general technical committee of R3.

Stuart has extensive experience in both corporate and individual insolvency, advising all types of stakeholders in the insolvency process. During his career, he has been involved in a number of important cases, including, in recent years, Rangers Football Club and Lehman Brothers.  SOUTH SQUARE DIGEST June 2018 www.southsquare.com

SOUTH SQUARE CHALLENGE SET BY Martin Pascoe QC

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10 11 South Square Challenge 67

Enter the June 2018 South Square Challenge ENTRY DETAILS and you could win a magnum of champagne! Please send our answers by e-mail to [email protected], or by Welcome to the June 2018 South Square Challenge. With our March Challenge post to Kirsten at the address on the involving Patron Saints related to the law being our most popular to date, this back page. Entries to be in by 27 July time around your task is to identify the people (fictitious or otherwise) in the 2018 please. Best of luck! images, and pair them with the correct legal quote. As ever, the prize for the winner (drawn from the wig tin if we have more than one correct entry) is a magnum of champagne and a much-coveted South Square umbrella.

A B C “But the mere truth “Law is the embodiment “A lawyer is a person won’t do. You must of the moral sentiment of who writes a 10,000-word have a lawyer.” t he people.” document and calls it a ‘br ie f ’.” D E F “The law is reason free “Argument weak; speak “Laws are the sovereigns from passion.” loudly!” of sovereigns.” G H I “When you have no basis “The study of law is “If the laws could speak for an argument, abuse sublime, and its for themselves, they the plaintiff.” practice vulgar.” would complain of the J K lawyers in the first place.” “Where law ends, “The power of the lawyer tyranny begins.” is in the uncertainty of t he law.”

MARCH CHALLENGE

The answers to the March 2018 challenge were:

1. Thomas More (Patron saint of court 4. Saint Juan de Capistrano 7. Saint Raymond of Penyafort (Patron clerks, judges and lawyers) (Patron saint of jurists) saint of canon lawyers)

2. Saint Ivo of Kermartin (Patron saint 5. Saint Genesius (Patron saint of 8. Saint Jude (Patron saint of lost and of lawyers) lawyers, barristers and also clowns) desperate cases)

3. Saint Mark (Patron saint of notaries 6. Saint Catherine of Alexandria 9. Saint John Chrysostom (Patron saint and lawyers) (Patron saint of jurists, lawyers, of oratory) argument and rhetoric)

The connection being that they are all saints to whom lawyers might appeal. The winner, drawn from the wig tin, is Hannah Brown of Herbert Smith Freehills LLP to whom goes our congratulations, a magnum of champagne and a South Square umbrella!

. SOUTH SQUARE DIGEST June 2018 www.southsquare.com

Diary dates

South Square members will be attending, speaking and/or chairing the following events

South Square also runs a programme 12 June 2018 7-12 October 2018 of in-house talks and seminars – both GRR Live Offshore - Cayman International Bar Association in Chambers and on-site at our client Annual Conference 2018 premises – covering important recent  Cayman Islands decisions in our specialist areas of practice, as well as topics specifically  Roma Convention 3 July 2018 requested by clients. Centre La Nuvola, Rome INSOL International Channel For more information contact Islands One Day Seminar 4 October 2018 [email protected], or visit INSOL Europe Annual our website www.southsquare.com  Radisson Blu Waterfront Congress Hotel, St Helier, Jersey

 Athens 20 September 2018 South Square/Mourant Ozannes Litigation 7 November 2018 Conference INSOL International Hong Kong One Day Seminar  London  Hong Kong

23-25 September 2018 International Insolvency 19 November 2018 Institute 18th Annual RISA Conference 2018 in Conference association with South Square  New York  Ritz Carlton, Grand Cayman

The content of the Digest is provided to you for information purposes only, and not for the purpose of providing legal advice. If you have a legal issue, you should consult a suitably-qualified lawyer. The content of the Digest represents the views of the authors, and may not represent the views of other Members of Chambers. Members of Chambers practice as individuals and are not in partnership with one another. Pupillage 2018/19

Your future in commercial law

Pupils are drawn to South Square for our reputation as a top commercial set and the opportunity to learn from leading lights at the Bar. Our barristers advise on a wide range of commercial disputes and have acted in many of the most high-profile insolvency, restructuring, banking, company and fraud- related cases of recent times.

‘The pupil supervisors have been brilliant; very friendly and supportive throughout the year, always willing to answer any questions I had or to discuss a point of law.’

ROSE LAGRAM TAYLOR, PUPIL (2017)

We are looking to meet exceptionally talented and ambitious candidates for our various pupillage programmes.

VISIT US AT THE CITY LAW FAIR TO FIND OUT MORE

+44 (0)20 7696 9900 [email protected] www.southsquare.com SOUTH SQUARE DIGEST June 2018 www.southsquare.com

‘The set is highly regarded internationally, Company/Insolvency set with barristers regularly of the year, winner 2017 CHAMBERS BAR AWARDS appearing in courts Insolvency set of the year, shortlisted 2017 around the world.’ LEGAL 500 BAR AWARDS

CHAMBERS UK Section title 71

Practice areas

Insolvency & Banking & Offshore Restructuring Finance Litigation

Commercial Litigation Company Civil & Arbitration Law Fraud

Sport Insurance Trusts & Property

Mediation Members of Chambers have frequent experience of mediation and other forms of alternative dispute resolution, and a number have been trained as mediators and accept appointments.

Sectors

• Financial Services • Insurance • Sport • Banking • Manufacturing • Aviation • Energy • Professional Services • Technology & Communication • Government/ • Retail Regulation • Shipping

 +44 (0)20 7696 9900 | [email protected] | www.southsquare.com SOUTH SQUARE DIGEST June 2018 www.southsquare.com

"South Square has endless expertise and there is pretty much nothing the barristers there haven't been involved in." CHAMBERS AND PARTNERS “In a league of its for own insolvency law” Michael Crystal QC David Allison QC Henry Phillips Gabriel Moss QC Tom Smith QC Charlotte Cooke Richard Hacker QC Daniel Bayfield QC Alexander Riddiford Mark Phillips QC John Briggs Matthew Abraham Robin Dicker QC Adam Goodison Toby Brown William Trower QC Hilary Stonefrost Robert Amey Martin Pascoe QC Lloyd Tamlyn Andrew Shaw Fidelis Oditah QC Richard Fisher Ryan Perkins David Alexander QC Stephen Robins Riz Mokal Glen Davis QC Marcus Haywood Madeleine Jones Barry Isaacs QC Hannah Thornley Edoardo Lupi Felicity Toube QC William Willson Rose Lagram-Taylor Mark Arnold QC Georgina Peters Jeremy Goldring QC Adam Al-Attar JUNE 2018JUNE

3-4 South Square I Gray’s Inn I London WC1R 5HP I UK

Tel. +44(0)20 7696 9900. Fax. +44(0)20 7696 9911. LDE 338 Chancery Lane. Email. [email protected] www.southsquare.com