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CASES |
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Relief from unfair prejudice awarded against company in administration See CLM ¶2105+ Re Woven Rugs Ltd (in administration), Sharafi and another v Woven Rugs Ltd (in administration) and others [2010] EWHC 230 (Ch) The High Court has awarded relief from unfair prejudice against a company and one of its shareholders despite the fact that at the time of the hearing the company was in administration. The petitioners, Messrs S, owned 40% of the shares in WR Ltd. The remaining 60% of the shares were held together by the respondents, AMC Ltd and Mr M. The parties’ intention was for WR Ltd to be used for the sole purpose of acquiring, holding and leasing premises from which they each conducted their business. WR Ltd bought a property partly with funds lent to it by Messrs S and AMC Ltd (received by them as compensation for surrendering their interests in a previous property) and partly with a loan from the bank. Mr M subsequently caused WR Ltd to enter into a new loan agreement to raise additional funds without reference to or the knowledge of Messrs S. The additional sums raised were used to repay the existing loan to the bank and to repay part of the debt due to AMC Ltd. A further payment was made to AMC Ltd, again without the knowledge of Messrs S. No payment was made to Messrs S in respect of the debt due to them. Mr M had also failed to hold AGMs and to provide accounts. Messrs S applied for relief from unfair prejudice in respect of alleged unfairly prejudicial conduct of WR Ltd’s affairs by AMC Ltd, which acted for the most part by Mr M. The High Court found that: » the refinancing was detrimental to WR Ltd and Messrs S. It had the purpose and effect of preferring AMC Ltd’s interests (and hence Mr M’s interests) over those of WR Ltd and Messrs S; » the further payment made to AMC Ltd was a misappropriation of funds without any benefit to WR Ltd; and » the failure to hold AGMs and to provide accounts was not only in breach of statutory obligations, it was an attempt by Mr M to conceal his wrongful acts. Mr M was in breach of his duties as a director of WR Ltd and in breach of the arrangements on which he, AMC Ltd and Messrs S had agreed to use the company. This was unfairly prejudicial to Messrs S as shareholders of WR Ltd. The court ordered AMC Ltd and Mr M to jointly and severally buy Messrs S’s shares, to be valued at a date before the refinancing and misappropriation took place. This was not a penalty even though WR Ltd was in administration at the time of the order and Messrs S’s shares were effectively worthless. WR Ltd was in administration as a result of the unfairly prejudicial conduct and this was no bar to relief being granted. The buy out order was the means by which Messrs S would be compensated for the damage caused by the wrongful conduct. The court also ordered the repayment of the debt due to Messrs S. Balancing exercise required where shareholders both allege unfairly prejudicial conduct by the other See CLM ¶2113, ¶2115, ¶2124 Boughtwood v Oak Investment Partners XII, Limited Partnership [2010] EWCA Civ 23 The Court of Appeal has dismissed the appeal of the respondent (a director and shareholder of a company which was set up as a joint venture and operated as a quasi-partnership) who, on a finding of unfair prejudice, was ordered to sell his shares in the company to the petitioning shareholder. The High Court had found that the director had acted improperly in (amongst other things) failing to adhere to his agreed management role (see CLM 2009 Newsletter Issue 2). The respondent had not questioned the judge's findings of fact, but requested a reconsideration of the order so that it be the other way around (namely, the petitioning shareholder selling its shares to him instead). His appeal was based on the arguments that: » the company's business was originally his; » he had invented the technology which was being represented by the company; and » the petitioning shareholder was purely a commercial investor. The Court of Appeal dismissed his appeal. It found that the High Court judge had been correct in carrying out the balancing exercise required where both parties alleged unfairly prejudicial conduct by the other. In this case the director had overstepped the limits of his management role. His conduct was underhanded, unconstitutional, damaging to the company's group and its business, and destroyed any continuing element of trust and confidence that might still have existed between him and the petitioning shareholder. Although the petitioning shareholder was itself in breach of its disclosure obligations to the director as a quasi-partner, the director had suffered no prejudice as a result. In addition, the director had been paid by the petitioning shareholder (and other investors) for giving up some of his shares in the company. Overall, it found that the judge's conclusion that to meet the overall justice of the case it should order the director to sell his shares in the company to the petitioning shareholder was inevitable and unchallengeable. Comment: The director also appealed against certain instructions given by the High Court to the valuer when determining the price of the director's shares. His appeal on this point was allowed in part because the High Court judge had effectively tied the valuer's hands on a matter that was for the expertise of the valuer, which the court ought not to have done. Is there a difference in the way a court should deal with solvent and insolvent schemes of arrangement? See CLM ¶6523 The Scottish Lion Insurance Company Ltd v Goodrich Corporation and others [2010] CSIH 6 There is no requirement in the legislation for the court to differentiate between a solvent scheme and an insolvent scheme when exercising its discretion as to whether or not to sanction a scheme. SLIC Ltd was a solvent insurance company, which had issued many occurrence insurance policies (whereby claims can be made after the relative policy has expired). It had not issued any new policies since 1994 and was in “run-off”. Its shareholders put forward a scheme of arrangement to enable the period of run-off to be brought to an end and SLIC Ltd wound up. To this end SLIC Ltd applied to court for a meeting of the creditors to be called and, if the creditors voted in favour of the scheme, that it be sanctioned by the court. As ordered by the court, two creditors’ meetings were held, at which it was reported that at least 75% in value of the creditors present and voting had voted in favour of the scheme. GC, a creditor of SLIC Ltd, had voted against the scheme, under which its occurrence insurance policies would be compulsorily terminated. It challenged the decision of the chairman that the requisite majority had voted in favour of the scheme contending that the way in which the chairman had evaluated claims for voting purposes was not fair and reasonable. The Court initially dismissed SLIC Ltd’s application, in favour of GC. SLIC Ltd reclaimed (appealed). The question for the Court of Session was whether the court could sanction a solvent scheme of arrangement (i.e. one in which the company was not insolvent, nor at risk of becoming insolvent should it fail to make a compromise or arrangement with its creditors) in the face of opposition from dissenting creditors. The Court of Session held that it can. A company’s solvency is only one factor for the court to take into account when exercising its discretion. In addition, the existence of a problem (i.e. an adverse situation facing both the company and the shareholders, or creditors, as the case may be) that needs to be resolved is not a pre-condition to the sanctioning of a scheme, whether solvent or otherwise. The existence of a problem is also only one factor for the court to take into account when exercising its discretion. Comment: This is a Scottish decision but it is based on the same provision in the new Companies Act as applies in England and Wales (s 899 CA 2006). Co-operation between member states under the EC Insolvency Regulation See CLM ¶7366+ Re MG Probud Gdynia sp. Zo.o. [2010] EC Case C-444/07 After main insolvency proceedings have been opened in one member state, the competent authorities of a second member state (in which no secondary proceedings have been opened) are required under the EC Insolvency Regulation to recognise and enforce all judgments relating to the main insolvency proceedings. Therefore, the competent authorities of the second member state cannot order enforcement measures relating to the assets of the insolvent company, which are situated in the second member state, when the law of the first member state does not permit this. This is subject to the two grounds for refusal, namely if it would result in a limitation of personal freedom or postal secrecy or if the effects would be manifestly contrary to that member state’s public policy. MG PG carried on business in the building sector. Its registered office is in Poland and it carried out construction work in Germany through a branch. Insolvency proceedings were opened against MG PG in Poland in June 2005. 2 days later, the German court ordered the attachment of MG PG’s assets held by banks and of various contractual claims of it against German parties in respect of unpaid wages and unpaid social security contributions. An appeal against the order of the German court was dismissed on the basis that insolvency proceedings had been opened in Poland, so there was reason to fear that MG PG would collect the sums payable and transfer the amounts to Poland in order to prevent the German authorities from having access to them. Furthermore, the court held that the insolvency proceedings in Poland did not prevent the attachment order in Germany. The Polish court sought a preliminary ruling from the ECJ questioning whether the attachment was lawful, as Polish law (the law applicable to the insolvency proceedings) would not allow such attachment after MG PG had been declared insolvent. Essentially, it asked: » whether a member state court was entitled to attach funds held in a bank account of a company following a declaration of that company’s insolvency in another member state; and » whether a court in one member state, in which secondary proceedings have not been opened, can refuse to recognise and enforce judgments concerning the opening and course of insolvency proceedings opened in another member state. The ECJ answered both questions in the negative. The main proceedings opened in Poland encompassed all of MG PG’s assets and Polish law governed the insolvency proceedings and the treatment of those assets. As Polish law does not permit enforcement proceedings relating to assets in an insolvency to be brought against the insolvent company after insolvency proceedings have been opened, the German court could not validly order, pursuant to German law, enforcement measures relating to MG PG’s assets situated in Germany. Only the opening of secondary proceedings would be capable of restricting the universal effect of the main insolvency proceedings. US receivership not a “foreign proceeding” within the Cross-Border Insolvency Regulations See CLM ¶7377 Re Stanford International Bank Ltd [2010] EWCA Civ 137 The Court of Appeal has upheld the High Court decision in Re Stanford International Bank Ltd [2009] EWHC 1441 (Ch), in which a receivership imposed by the court in the US was not considered to be a “foreign proceeding” within the Cross-Border Insolvency Regulations (which implement the UNCITRAL Model Law in the UK). It was alleged that SIB Ltd was involved in a fraudulent “Ponzi” scheme, which had collapsed in 2009. Its registered office was in Antigua and Barbuda. Various insolvency proceedings followed in Antigua and Barbuda, the US and England including: » the US authorities appointing a receiver of SIB Ltd’s assets wherever situate; » the Antiguan court ordering the compulsory winding up of SIB Ltd and appointing liquidators; » a restraint order made by the Central Criminal Court (in England) on the application of the Serious Fraud Office in respect of SIB Ltd’s assets in the UK; » an application being brought in the High Court (in England) by the Antiguan liquidators for recognition of the Antiguan liquidation as main proceedings under the UNCITRAL Model Law (and for those of SIB Ltd’s assets situate in England to be distributed to them in their capacity as liquidators); and » an application being brought in the High Court (in England) by the US receiver for recognition of the US receivership as main proceedings under the UNCITRAL Model Law. The recognition applications were heard together. In summary, the High Court allowed the application of the Antiguan liquidators, but dismissed that of the US receiver. The US receiver and the Serious Fraud Office appealed against that decision. The Court of Appeal found that the High Court had been correct in finding that the US receivership did not possess the necessary characteristics to satisfy the definition of a foreign proceeding, namely: » a collective proceeding; » pursuant to a law relating to insolvency; » in which there is control or supervision of the assets or affairs of the debtor by a foreign court; and » for the purpose of reorganisation or liquidation. The US receiver was not appointed under a law relating to insolvency, but under a law which enabled the US court to grant equitable relief for the benefit of investors (rather than creditors). The US receivership was not collective in the relevant sense. Nor was it for the purpose of reorganisation or liquidation; it was for the protection of investors and the assets of SIB Ltd. In addition, the Court of Appeal endorsed the test applied in Re Eurofood IFSC Ltd (C-341/04) in relation to determining a company’s centre of main interests (COMI). Namely, that the presumption that a company's COMI is the country in which its registered office is situated unless it can be proved otherwise, can only be rebutted by objective factors: the COMI should be the place from which the company administers its interests on a regular basis and which is ascertainable by third parties. The Court of Appeal found that this was the correct test to apply under the UNCITRAL Model Law as well as under the EC Insolvency Regulation. The ambit of costs and expenses in an administration See CLM ¶8746, ¶8752, ¶8927 Re Capitol Films Limited, Irish Reel Productions Ltd v Capitol Films Ltd [2010] EWHC 180 (Ch) Where the court thinks it fit to do so, it can order that the costs of a person who has presented a petition for the company's winding up should be paid as an expense of the administration, where the winding up petition is dismissed on the making of the administration order. This is one of the purposes for which a person who has presented a winding up petition is permitted to attend the hearing of the administration application (r 2.12(1) IR 1986). Such an order can be made in relation to both the costs of that person in attending the administration application hearing and their costs of presenting the winding up petition which is dismissed at the same time (r 2.12(3) IR 1986). In this case, a winding up petition had been presented against CF Ltd, in which IRP Ltd had become the petitioner by substitution. CF Ltd subsequently applied for an administration order. On making the administration order, the High Court also dismissed the winding up petition. The administration of CF Ltd on its own application was the last stage in a long process by which the company was subjected to an insolvency process in the interests of it creditors. An earlier stage in that process was the presentation of the winding up petition, which had been fiercely opposed by CF Ltd. Accordingly, the High Court found that it should exercise its discretion to allow IRP Ltd’s costs of prosecuting the winding up petition (after it had been substituted as the petitioner) to be payable as an expense of the administration, in addition to its costs in attending the administration application hearing. Pre-appointment expenses of administrators involved in pre-pack sales See CLM ¶9026 Re Johnson Machine and Tool Co Ltd, Re Empire Surfacing Ltd [2010] EWHC 582 (Ch) The High Court has considered further whether it is appropriate for the pre-appointment expenses of an administrator involved in a pre-pack sale to be treated as an expense of the administration. The court endorsed the guidance given in Re Kayley Vending Limited [2009] EWHC 904 (Ch) (see CLM 2009 Newsletter Issue 3). In both cases, the administrators were appointed by the court but, as the existing management used companies (controlled by or connected to them) to purchase the existing business and assets from the administrators in pre-pack sales, the test required was whether the benefit of the advantage to creditors was outweighed by the advantage to the management. The court decided that in these cases it was and did not allow the administrators’ pre-appointment expenses to be treated as an expense of the administration. In a case where the existing directors are the purchasers, it considered that it will rarely be possible to establish clearly that the balance of advantage is in the creditors' favour. The High Court also commented that any pre-appointment expenses which are allowed as an expense of the administration should be limited to the costs incurred in bringing the administration application. They should not include the costs of any insolvency advice, nor the costs of considering and arranging any pre-pack sale (such as the negotiation of the terms of the pre-pack sale, arranging valuations of assets to be sold and considering whether to market the business). This narrows the guidance given in Re Kayley Vending Limited (above). Therefore it will be necessary for the creditors, company and/or the directors to agree to pay these separately. |
