Insolvency View February 2019

Contents INSOLVENCY VIEW THE LATEST MAJOR CASES REVIEWED BY NEW p1 Sleight v The Crown Estate SQUARE CHAMBERS’ INSOLVENCY SPECIALISTS Commissioners: standing of a trustee in bankruptcy to apply for a vesting order Jessica Powers

p3 Heidi Boulton v Queen Margaret’s School, York Limited : Unreasonable Sleight v The Crown Estate Commissioners: refusal of a compounding standing of a trustee in bankruptcy to apply part-offer Jeff Hardman for a vesting order Jessica Powers p4 Global Corporate Limited v Hale: The pitfalls of using [2018] EWHC 3489 (Ch) dividends to remunerate a High Court of Justice Business and Property Courts in Leeds shareholder/director Insolvency and Companies List (ChD) employee His Honour Judge Davis-White QC Hermione Williams 19 December 2018 p6 Horsley v HMRC: the right to It is not at all uncommon for a trustee in appeal pre-bankruptcy tax bankruptcy to disclaim onerous property. But what assessments happens when that property is subsequently Kristina Lukacova realised such as to create a surplus; can a trustee in bankruptcy apply for a vesting order in respect p7 Pearse v HMRC: serving a statutory demand despite a of that surplus? guarantee excluding

bankruptcy proceedings Facts James McKean

Jillian Mascall passed away on 4 December 2014. Upon realising that the estate was insolvent, the Latest Updates executrix petitioned for an insolvency administration To receive the latest updates order. That order was granted on 22 December 2015, from our Insolvency team, and James Sleight was appointed as trustee in straight to your inbox, sign up bankruptcy. to our mailing list here >>> | Page 1 Insolvency View February 2019

In March and May 2016, Mr Sleight disclaimed (2)(a) of the Insolvency Act 1986 as referring approximately 20 properties owned by Ms to a person who, at the time of the application, Mascall as onerous property. Two of the has or claims a proprietary interest in the disclaimed properties, both of which were property. The Judge considered that freehold and were subject to a charge in construction was supported in the context of favour of Bank of Scotland, were sold by the section 320 of the Insolvency Act 1986 as a Bank in March and May 2018. Both sales whole, and by the authority of Hill v The East created a surplus, totalling approximately and West India Dock Company (1884) 9 App. £19,000. If that surplus were received into the Cas. 448. estate, the dividend to creditors would increase by 7p in the pound. It was therefore held that the trustee had no standing to bring the application. The applicable law Subject of the vesting order sought The effect of disclaimer of property is set out in section 315(3) of the Insolvency Act 1986: The trustee sought a vesting order in respect “[…] operates so as to determine, as from the of the surplus sale proceeds, rather than the date of the disclaimer, the rights, interests and freehold properties which he had disclaimed liabilities of the bankruptcy and his estate in or (those properties having been sold to a third in respect of the property disclaimed […]”. party).

The ability to apply for a vesting order in The position with respect to disclaimed respect of disclaimed property has a long freehold property is that the freehold title is statutory history. The current provision is determined and the property escheats to the section 320 of the Insolvency Act 1986. Crown. Following disclaimer, the possibilities are that: Locus standi of the trustee 1. The Crown might create a new freehold Section 320(2) of the Insolvency Act 1986 title; prescribes who can apply for a vesting order. 2. A chargee/mortgagee might apply for a The trustee contended that he had standing vesting order; under section 320(2)(a) of the Insolvency Act 3. A chargee/mortgagee might rely upon its 1986 as a “person who claims an interest in existing proprietary interest and section the disclaimed property”. The basis for that 315(3) of the Insolvency Act 1986 as if contention was that the trustee was claiming the freehold interest remained in to have an interest vested him under the existence; or vesting order sought. That argument was 4. A chargor/mortgagor might apply for a rejected as patently bad, it being entirely vesting order (on the ground that s/he is circular. still liable to repay a charge/mortgage).

HHJ Davis-White QC construed section 320 HHJ Davis-White QC considered that, if the third of the above possibilities had occurred in this case, then the surplus would vest in the Crown.

The case of Lee v Lee [1999] BPIR 926 was considered as, in that case, on an application by the mortgagee for a vesting order the Court ordered that the surplus be paid to the trustee in bankruptcy (the mortgagee having consented to that order). The Court of Appeal upheld that order on the basis that the Court had a wide discretion as to the terms of a | Page 2 Insolvency View February 2019 vesting order. been unreasonably refused by the School. Ms Boulton sought to overturn the bankruptcy Unfortunately, in this case, as the Judge found order. that he could not make a vesting order, Lee could not rescue the surplus. The Judge Appeal acknowledged that the likely consequence was that the surplus would be held in the It was agreed that the judge had erred in law Court funds office for an indefinite period. by holding that the appellant could not dispute the debt recovery costs despite not applying to set aside the statutory demand (see Barnes v Whitehead [2004] BPIR 693). Nevertheless, the School contended that the offer was not one which fell within the ambit of s.271(3)(b) which provides that: “The court may dismiss the petition if it is satisfied that the debtor is able to pay all his debts or is satisfied … (b) Heidi Boulton v Queen Margaret’s that the acceptance of that offer would have School, York Limited : Unreasonable required the dismissal of the petition…” (underlined for emphasis). refusal of a compounding part-offer Jeff Hardman The School contended that an offer in respect of only part of a debt would leave open the [2018] EWHC 3729 (Ch) High Court of Justice balance for dispute at a later date. In other Chancery Division words, the dismissal of the petition would not Mr Justice Arnold have been the immediate consequence 31 October 2018 following the acceptance of the offer. Facts Mr Justice Arnold preferred the approach of Ms Boulton had accrued arrears of school the appellant and held that the debtor’s offer fees for the period April 2012 to July 2013. did qualify under s271(3). To the extent that Queen Margaret’s School (“the School”) part of the petition debt was disputed bona served a statutory demand on Ms Boulton on fide, that element could not fall into s.271(1). 30 November 2017 for the sum of £44,520.75 The disputed part was not a ‘debt’ for the comprising unpaid school fees and inclusive purposes of s.271 regarding which the of interest and contractual costs. The School appellant was required to make an offer under presented a bankruptcy petition on 10 January s.271(3). 2018. Ms Boulton admitted the debt to the value of £38,279.78 but disputed the balance. The case is a stark reminder that petitioners Ms Boulton offered to pay the debt plus should be wary of refusing offers which cover interest at 3% in instalments, to be paid by her only part of the sum demanded. The partner, and secured by a charge over a consequence on appeal in the extant case property. The School replied that it would only was the setting aside of the bankruptcy order. accept the offer if the charge included the debt recovery costs and its costs on an indemnity Jeff Hardman appeared on behalf of the basis. Ms Boulton argued that the court Respondent. should dismiss the petition as her offer had been unreasonably refused (s.271(3)).

The judge held that Ms Boulton could not dispute the debt recovery fees because she had not applied to set aside the statutory demand. Furthermore, as her offer had not been for payment of the whole debt, it had not | Page 3 Insolvency View February 2019

from 24 January 2014 to 26 October 2015 – in which time H received £23,511 in dividend payments, each being recorded as an “interim dividend” in a “dividend tax voucher” prepared by the company’s accountants for HMRC.  The strategy proposed was that, if it Global Corporate Limited v Hale: The appeared at the end of the financial year that there were insufficient distributable pitfalls of using dividends to reserves out of which dividends could be remunerate a shareholder/director declared, the accountants would reverse employee the dividends and re-characterise them as Hermione Williams salary.

[2018] EWCA Civ 2618  The Company was placed in a CVA on 25 Court of Appeal November 2015 and its statement of affairs Patten, Asplin, and Coulson LJJ indicated that there was a deficiency of 27 November 2018 some £173,594.99.

In Global Corporate Limited v Hale (the  The liquidators took the view that the “Case”), the Court of Appeal (“CoA”) has dividends had been unlawful because at unanimously held that dividends received the relevant time the Company had by a shareholder/director of a company insufficient distributable reserves of profits were not lawfully made as distributions out of which the dividends could have been and should be repaid. The Case provides paid in conformity with section 830 of the a helpful example of what can go wrong Companies Act 2006 (the “2006 Act”). when dividends are used either wholly or partly by a company to compensate a  H was asked to repay the money to the shareholder/director for their services and liquidator but failed to do so. what issues parties need to be alive to in such circumstances. Furthermore, the  Thereafter the liquidators assigned their judgment of the CoA illustrates the rights to receive the monies to Global difficulties that can arise in cases involving Corporate Limited (the “GCL”) which unrepresented parties. sought declarations that the £23,511 was recoverable as unlawfully paid dividends or Facts on the basis that the payments were made in breach of the respondent's fiduciary duties as a director and amounted to  Mr Hale (“H”) was both a shareholder and misfeasance. director of PowerStation UK Limited (the

“Company”) which had run a performance vehicle tuning centre.  GCL lost at first instance before HHJ Matthews (the “Judge”). H appeared in person.  H worked for the Company six days a week

and received tax advice that his Reasons for dismissal by the Judge renumeration should comprise a small

salary to cover national insurance Whilst the Judge found that the Company had payments as well as a dividend each no profits available for distribution and thus month. the dividend payments would be unlawful (and

consequently repayable under ss.847(2) and  The period subject to the Court’s review ran (3) of the 2006 Act) he dismissed the claim for

| Page 4 Insolvency View February 2019 two alternative grounds reasons: him unlawfully. His case was that the payments he received were structured in 1. The decision to make the disputed part as dividends rather than payments as dividends was no more than remuneration in order to minimise the what the Judge described as a decision in amount of tax payable on the receipts. H principle and was subject to confirmation by also denied that he knew that the the Company's accountant at the end of the Company had insufficient distributable financial year once the accountant had reserves from which the dividends could ascertained whether there were sufficient lawfully be paid; distributable reserves out of which the payments could lawfully be made as b. Regardless of H’s belief at the time of dividends. the payments, it was apparent by the time of the hearing that they were 2. Properly analysed, there had been no valid unlawful distributions. Moreover, there decision at all to pay the monies as had been no interim accounts during dividends at the time when the monies 2014/2015 and whatever may have were paid so that, the Judge reasoned, been the practice in previous years the sections 830 and 847 of the 2006 Act had Company's accountants had taken no had no application to the £23,511. steps to "reverse" or re-characterise the

relevant dividend payments before the Finally, the misfeasance claim was also Company was placed into liquidation; rejected by the Judge on the grounds that even if H was obliged to repay the money c. Crucially and in any event, it was not because it had not been properly paid to him, been part of H’s case that the decision he had a claim to an equivalent sum as a to pay the dividends had been quantum meruit for the services he had provisional; provided to the Company. d. It follows that the two alternative

grounds upon which the Judge based The appeal concerned the dismissal by the his findings (as set out above at 1) and Judge of the claim to recover the £23,511 as 2)) had no evidential basis. unlawful dividends.

Judgment of the Court of Appeal 2. The factors that should have guided the Judge’s decision on the dividends were: The CoA unanimously allowed the appeal. The leading judgment was given by Patten LJ a. At the time that they were made, the with Asplin and Coulson LJJ adding further payments were distributions under observations in relation to the nature and section 830 of the 2006 Act when they extent of the Judge’s questioning of H. The were made; key points to be taken from the judgment are: b. The payments had been expressly

1. Whilst a trial judge was entitled to ask a party to clarify answers given during evidence and the Judge had been faced with the difficulty that H was acting in person, the Judge's ultimate finding was based on a new line of cross-examination which he had introduced and for which there was no evidential basis. To demonstrate this point: a. H did not dispute that the money had been paid to him as dividends. However he disputed that they had been paid to

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declared by the directors, and to HMRC, Whilst there is nothing objectionable in as “interim dividends”; principle to structuring remuneration in a tax efficient manner, parties must be astute to c. The accountants had believed the ensure that there are sufficient distribution dividends to be lawful and no steps had reserves at the time of payment and if there been taken to adjust the arrangements are safeguards in place with a company before the Company went into accountant of the kind described in the Case, liquidation; they need to be conscientiously applied. d. H and his co-director did not have service contracts to which the payments In the interests of legal certainty it is helpful were attributable and they had chosen that the CoA robustly and unequivocally to receive the money as shareholders rejected an approach which focuses on the and not as remuneration for past intentions of the directors at the time they services; and authorised the distributions. The CoA made it clear that any subsequent realisation that e. At the point of payment the monies were payments should not have been made will not gratuitous distributions from the cure illegality. Company's assets which increased the

deficit on its balance sheet. Whilst GCL did not seek to appeal the Judge’s 3. It is apparent from the reasoning of the ruling on the quantum meruit aspect of the Judge that he was preoccupied with the Case, the CoA dealt with the matter as it intentions of H as opposed to how section raised an issue as to whether a quantum 830 of the 2006 Act operates. This point meruit claim (even if established) would comes out well when one looks at his provide an effective defence to a claim to questioning of H – an extract of which is recover unlawfully paid dividends in included in the CoA’s judgment. The CoA circumstances where a company was in describes the questions as “highly leading” liquidation. and according to Coulson LJ the nature and extent of the questions was “inappropriate”:

a. The Judge asked H a series of questions which appear designed to examine the basis on which the dividends had been declared having regard to the possibility that after the Horsley v HMRC: the right to appeal year end the accountants might take pre-bankruptcy tax assessments steps to "reverse" that process; Kristina Lukacova b. The CoA make it clear that section 830 of the 2006 Act is directed to [2019] UKFTT 13 (TC) distributions as they are made and a First-Tier Tribunal Tax Chamber subsequent realisation that they should Judge Christopher Staker not have been made does not cure the 8 January 2019 illegality of the original payment. The Judge was therefore wrong to The Tribunal held that even though the concentrate on the directors' intention Appellant had been discharged from when authorising the payments rather bankruptcy, the right of appeal against tax than on the payments themselves. assessments in respect of periods preceding the bankruptcy remained The Case provides a cautionary note to those vested in the trustee in bankruptcy, and providing services to companies in which they the Appellant no longer had any right to hold shares and may also be on the board. | Page 6 Insolvency View February 2019 pursue an appeal before the Tribunal. of the assessments, then that court could refer the matter to the Tribunal, but that it is not for Background the Tribunal to determine the amounts without such a request. In 2011, HMRC issued to Ms Horsley (“the Appellant”) tax assessments in respect of tax The Tribunal noted that it had the power, in its years 2002-03 to 2006-07. On 2 September discretion, to inform the trustee in bankruptcy 2013, the Appellant commenced appeal of the proceedings (and to invite him to proceedings in relation to these assessments indicate whether he wished to apply to take (“the Appeal”). over and continue the proceedings). However, the Tribunal decided not to take that course in On 29 October 2014, the Tribunal directed circumstances where the trustee in that unless the Appellant confirmed that she bankruptcy must have been aware of the intended to proceed with the Appeal within 14 relevant assessments (which had formed the days, the Appeal would be struck out. On 19 basis of the bankruptcy petition), and would November 2014, the Appeal was struck out. (presumably) have been aware of the Appeal, given that the hearing of the bankruptcy The Appellant was made bankrupt on 5 June petition was postponed to allow the Appellant 2015, and received an automatic discharge to pursue the Appeal. Moreover, in from bankruptcy in June 2016. circumstances where the bankruptcy order was made over three years before the hearing On 7 August 2017, the Appellant requested of the application to reinstate the Appeal, if the that the Appeal, struck out almost three years trustee in bankruptcy had not made any earlier, be reinstated. application to reinstate the Appeal within those three years, it was difficult to see why Decision he would have an interest in doing so at the time of the hearing. The Tribunal noted that a bankrupt’s estate comprises amongst other matters “all property belonging to or vested in the bankrupt at the commencement of the bankruptcy” (s.283(1) (a) of the Insolvency Act 1986) and refused the Applicant’s application to reinstate the Appeal for the following reasons:

The Appellant no longer had any right to Pearse v HMRC: serving a statutory pursue an appeal before the Tribunal in demand despite a guarantee excluding respect of tax assessments or penalties in bankruptcy proceedings respect of periods preceding the bankruptcy, particularly given that the assessments were James McKean issued before the bankruptcy order. Only the trustee in bankruptcy had standing to bring an [2018] EWHC 3422 (Ch) High Court of Justice appeal before the Tribunal. Business and Property Courts of England and Wales Insolvency and Companies List (ChD) Rose J Any application made directly by the Applicant 12th December 2018 (rather than the trustee in bankruptcy) would need to be made in the bankruptcy jurisdiction A personal guarantee excluded of the High Court. In Ahajot (Count Artsrunik) v Waller (Inspector of Taxes) [2004] STC enforcement by way of bankruptcy (SCD) 151, it was said that if the Bankruptcy proceedings against the guarantor. Could Court were to re-open the bankruptcy and this be side-stepped by obtaining a request the Tribunal to determine the amounts judgment against the same guarantor and serving a statutory demand on that basis? | Page 7 Insolvency View February 2019

Facts Such agreement is strictly without prejudice to HMRC’s other rights and remedies (legal This appeal was brought by Mr Pearse, a or otherwise) outside the terms of the former partner of the ill-fated firm of solicitors Guarantee, including for the avoidance of Follett Stock LLP (‘the Firm’). By February doubt any enforcement remedies (other 2013, the Firm owed HMRC some £1.2 million than bankruptcy) in respect of the Part Debt in taxes. The Firm entered into a time to pay or the indemnities’. agreement (‘the Agreement’) with HMRC on 27th February 2013. The Firm defaulted on the Agreement and was wound up. HMRC then pursued Mr Under the Agreement, the Firm undertook to Pearse under the Guarantee and obtained make monthly payments, the default of any of judgment in default against him on 14th which would cause all monies owing to HMRC February 2014 in the sum of £589,115.26 to become payable. Mr Pearse and another (‘the Judgment’). partner also agreed to guarantee personally the sum of £600,000. On 25th October 2016, HMRC served a statutory demand on Mr Pearse. The Mr Pearse duly gave a personal guarantee by demanded sum was £716,674.98, comprising way of deed dated 10th April 2013 (‘the the Judgment sum, costs and interest. Guarantee’). The Guarantee contained the following, so far as relevant: Mr Pearse applied to set aside the statutory demand. Insolvency and Companies Court 1. Liability under it was limited to the sum of Judge Briggs dismissed the application at first £600,000 (‘the Part Debt’); instance. This appeal on three grounds went before Rose J. 2. The guarantors ‘jointly and severally

guarantee[d] to HMRC as a secondary The first ground of appeal liability the performance by Follett Stock

LLP of [its primary obligations under the The first ground of appeal, and the one which Agreement], and guarantee[d] the payment will be of most interest, concerned whether or of the Part Debt’; not the terms of the Guarantee prevented 3. Failure to fulfil their secondary obligations HMRC from presenting a bankruptcy petition under the Guarantee in respect of the Part on the basis of the Judgment. Debt would result in enforcement action for the Part Debt being taken against the Mr Pearse’s position was that, as HMRC guarantors; could not bring a petition on the basis of a debt due under the Guarantee, HMRC could 4. Clause 5(2): ‘In consideration for the giving equally not bring a petition on the basis of a of this Guarantee HMRC agrees not to judgment debt obtained under the Guarantee. pursue the bankruptcy of the guarantors as Clause 5(2) (reproduced above) prevented a remedy for enforcement of the Part Debt HMRC from doing so. or of the indemnity [in the Guarantee]…

Rose J rejected this ground. It was accepted by all parties that that HMRC’s rights under the Guarantee had merged into the Judgment [paragraph 23]. As set out by Arden LJ in Clark v Focus Asset Management Tax Solutions Ltd [2014] EWCA Civ 118 at [5]: ‘Merger explains what happens to a cause of action when a court or tribunal gives judgment. If a court or tribunal gives judgment on a cause of action, it is extinguished. The claimant, if successful, is then able to enforce | Page 8 Insolvency View February 2019 the judgment, but only the judgment.’ With this, all three grounds had failed and the appeal was dismissed. Mr Pearse submitted that the most obvious way in which HMRC would enforce the Practical implications Guarantee would be by obtaining a court judgment. The parties must have Ultimately, individual agreements will fall to be contemplated this would happen, and interpreted on their own terms. This guarantee therefore a reference to a Part Debt of is no exception. But it is important for £600,000 ‘must be taken to include a practitioners to be aware that not ‘every judgment for that amount’ [23]. The Guarantee reference in a contract to a debt incorporates could after all be enforced in other ways: a a judgment obtained to enforce that debt’ [27]. writ or warrant of control, a third-party debt The distinction is fine but potentially important. order or through a charging order. Judgment debts have a number of advantages, their rate of interest being the Rose J disagreed. Clause 5(2) only prevented most obvious – as on the facts here – but the HMRC from commencing bankruptcy merger principle can be equally useful. proceedings to recover the liquidated sum due Forbearance clauses and other restrictions under the Guarantee. It did not prevent a that may attach themselves to one cause of judgment being obtained first and then action will not necessarily apply to a judgment enforced [28]. debt into which it may merge. When faced with such a restriction, it may be worth The second ground of appeal considering when a judgment debt can be obtained to circumvent it. Even if Mr Pearse had succeeded on the first ground, he also had to overcome the hurdle Furthermore, here we see yet another that – in addition to his liability for the Part reminder of the difficulty of implying terms into Debt – he was separately liable to HMRC for commercial agreements following Marks & some £125,000 of costs and interest. The Spencer v BNP Paribas. At [33] Rose J put it second ground of appeal therefore was for bluntly: ‘The contract works perfectly well as it ‘Part Debt’ to be read as including interest and is.’ More often than not, that will be enough. costs on the principal sum. Rose J gave this short shrift. The Part Debt was limited to £600,000. It clearly did not refer to that amount plus additional costs and interest that might accrue subsequent to the ICC Interim Applications Court creation of the Guarantee. A new Insolvency and Companies The third ground of appeal Court Interim Applications Court has been established. The ICC Interim Finally, Mr Pearse asked the Court to imply a Applications Court will sit on Thursdays, term into the Guarantee that prevented HMRC Fridays, and every other Monday. The from pursuing the Judgment debt by way of ICC Judges’ listing officer should be statutory demand. It was submitted that it was obvious that HMRC should not be able to contacted for applications to be ‘sidestep’ clause 5(2) by obtaining judgment heard on other days. The Court will and then bankrupting on that judgment [32]. hear urgent applications including Rose J applied the well-known principles in injunctions to restrain the presentation Marks & Spencer plc v BNP Paribas or advertisement of petitions, Securities Services Trust Company administration orders, the appointment (Jersey) Ltd [2015] UKSC 72 and concluded of provisional liquidators, and that the implication sought was neither validation orders. obvious nor necessary for business efficacy.

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