Monday, 10 May 2010

Stephen Hunt asks: Who should sit on a Creditors' Committee?

Last week I attended the creditors meeting of Portsmouth FC. A frantic affair with a huge range of creditors from the very small and local to the very large and absent. Many of the larger claims came from individuals linked to the club by way of previous ownership or control.

An additional curiosity was caused by the High Court ordering that an 'informal committee' be formed to assist the Administrators.

The first issue arose when the meeting was convened and the proxy forms were sent out. Under the voting instructions for resolutions was the following:

2. That the creditors consider and if thought fit appoint a creditors' committee to assist the joint Administrators (such committee must comprise of between 3 and 5 creditors)

The following creditors have expressed their interest to form part of the committee (Please only choose 5 creditors)
  • Stade Rennais Football Club Yes/No
  • HM Revenue & Customs Yes/No
  • etc
  • Other (provided consent has been
    obtained):__________________ Yes/No

This would appear to conflict with Rule 8.2(1) which states that:-

8.2(2) ......no form so sent out shall have inserted in it the name or description of any person.

This caused some debate at the meeting which was remedied by the holding of a fresh vote of those in attendance. This however led to a more difficult and, given the current national interest in voting schemes, timely one. By what method should a committee be elected if there are more than 5 nominations?

The original ballot by the Administrators was conducted on the basis of one creditor, one vote, with each creditor being able to nominate 5 candidates. There was then a great deal of discussion about whether this was the correct basis. The meeting agreed that it had to be based on the amount of debt but there was no agreement as to how many candidates a creditor could vote for. I had researched the Insolvency Act in advance and knew that it was silent on this point. The only guidance I could find was SIP8, but this purports to apply to only meetings convened under S.98 of the Insolvency Act 1986 and its cites no legislative support for the basis it recommends. It permits each creditor to vote up to 5 times. After much disagreement, the Administrators adopted the SIP8 approach.

I have also spoken to other insolvency firms who appear to handle the vote in different ways. The main 3 I have identified are as follows.
  1. Each creditor may vote for up to 5 candidates (the SIP 8 approach).
  2. Each creditor votes for 1 candidate (normally themselves) and the top 5 are appointed.
  3. The 5 largest creditors are appointed.
This cannot be an acceptable state of affairs. It is clear that the different approaches give different outcomes.

Options 1 & 3 above prevent smaller creditors having a voice. Option 1 can give a variety of outcomes but if the top 5 creditors voted for each other then there is no way to oppose this. More worryingly, a dominant single creditor could vote for itself and 4 smaller creditors with whom it had an arrangement and prevent anything other than its view holding sway. Option 2 would normally give the same result as 3 but enables smaller creditors to vote for a single candidate to represent their views.

None of this deals with the other problems that became apparent in the Portsmouth FC case and have concerned me before; if there is a difference of interest between the general body of creditors and the committee then this can bring harmful results.

In a case I dealt with many years ago, HMRC were preferential creditors for £6m but was not on the committee. The unsecured creditors who were had no financial interest in the outcome of the insolvency as all the realisations were to be absorbed in fees and as a result took little interest in the exorbitant fees that were being charged.

In Portsmouth's case, the committee is a mix of HMRC, football creditors and former chairman. It was only with some effort that the major creditors permitted a small creditor onto the committee. It is well-established that creditors with a conflict of interest may be asked to absent themselves from certain business of the committee. It is however not clear what should be done when a majority of that committee is in that position.

This is not meant as an exhaustive examination of the law but an attempt to ask a question about what we want from a creditors' committee. Should it only represent the majority creditors? Should there be more scope for classes of creditors to be represented? Should there be an employee representative and should connected parties be excluded in all cases? Does it make a difference if the committee is dominated by creditors who will be paid in full early on, or those who stand to get paid only at the very end?

Should we have some authoritative guidance?

Perhaps we should take something from the attitude of an officeholder that my partner recently replaced. When the creditors' committee reviewed his fees and found them to be excessive, he sought to convene a meeting of creditors to change the constitution of the committee!

Picture Credit: http://www.iconarchive.com/icons/giannis-zographos/british-football-club/256/Portsmouth-FC-icon.png

14 comments:

Constantine Nana said...

As regards the question of the correct basis on which the ballot has to be conducted, may be guidance could be sought from the established procedure for voting on written resolutions during company meetings. In the case of a company having a share capital, each member has one vote in respect of each share or each £10 of stock held by her/him (section 284 of Companies Act). This may give the same result as option 3 (the 5 largest creditors are appointed) but the voice of each creditor will logically be proportional to the debt it is owed and this is not as unjust as a case where a dominant single creditor votes for itself and 4 smaller creditors with whom it had an arrangement and prevents anything other than its view holding sway.

With regard to the question of what should be done when a majority of the committee is faced with a conflict of interest, again guidance may be sought from the Companies Act. A director’s duty to avoid conflicts of interests is not infringed if the matter has been authorised by the other directors and nothing in the company’s constitution invalidates such authorisation (section 175). Thus, where a majority of creditors on the committee are faced with a conflict of interests, the other creditors could allow them to continue acting on the committee where nothing in the law on insolvency prevents this.

Stephen Hunt said...

Thank you for your comment. I considered the Companies Act but left it out of the article as I did not think it applied. For example, in shareholder ballots the rules on what can be on a proxy are far more lax. Plc voting forms for director appointments are quite biased in favour of the existing board if they wish it to be. The more I researched the less suitable company law became.

I think that position of the committee is unique and the rules for its formation are unclear. Perhaps I should look back at the Cork Report to consider the matter further.

Stephen Hunt said...

Is the voting point a simple one? If the nomination of each member of the committee is a separate resolution then all creditors can vote on it and the majority wins? Rule 2.43 in an Administration would cover this. This would support the SIP8 approach.

If it is not a series of individual votes then voting once for a group of 5 candidates allows smaller creditors to vote tactically to get one of them on board.

This doesn't answer the question of who ought to be on the committee and what to do if the majority creditors have no financial interest in the decisions being taken by the committee.

Is a committee special because of its powers? In most cases an IP is grateful (or surprised) if he has any interest in forming a committee.

Stephen Hunt said...

Contrast Rule 2.43 with Rule 4.63(2). The former relates to resolutions which you can vote in favour or against. Rule 4.63(2) deals with the nomination of candidates, in this case for the post of liquidator, which does not consider the concept of voting against a particular candidate.

If you apply the Rule 2.43 approach, what would happen if a creditor representing 30% of the debts had their nomination rejected because 35% of creditors made up of smaller creditors opposed it? All of the creditors could veto each other's nomination, which is not how it is supposed to be.

Is SIP 8 wrong?

Stephen Hunt said...

For the sake of completeness of this posting, I should have referred to SIP 10 for added guidance on the proxy form question. It states at Para 3:

"Rule 8.2 of the Insolvency Rules 1986 stipulates that, when notice is given of a
meeting to be held in insolvency proceedings and forms of proxy are sent out with the
notice, no form so sent out shall have inserted in it the name or description of any
person. No proxy form, therefore, should have inserted in it the name or description of
any person for appointment as an insolvency office holder, either solely or jointly, or
for appointment as a member of a committee, or as proxy-holder."

Stephen Hunt said...
This comment has been removed by the author.
Anonymous said...

What if there aren't the minimum 3 creditors to form a committee from? Will 2 do if there are only 2 creditors? Or 1 if there is only 1 - the other 1 being a compromised director with a conflict of interest??

Stephen Hunt said...

Rule 4.152 appears clear. A committee cannot be established with less than 3 members.

As regards your second point, there is no reason why all 3 members could not be directors who are also creditors. It would seem sensible that if there were new rules drafted for forming a committee then any non-associated creditors should take priority over associated creditors. Perhaps you might disagree? Just because you are connected to the company, should you have less rights on its insolvency?

Constantine Nana said...

However, the Cork Report (para 939) did not support the appointment of representatives to the committee by shareholders (they may also be directors) because it is seldom possible to assess their interests at the outset of proceedings.
The Report (para 942) also endorsed the view of the Trades Union Congress that committees should reflect in their membership the balance of interests of employees. Directors (in certain instances) may then represent the workforce although this is needed only where there is a possibility of continued employment.

Stephen Hunt said...

That opens up the question of what the committee is for. It must be a representative body for the interests of creditors as a whole but ought it not also be a body of people who understand the estate being managed and can provide an informed insight into the work of the officeholder. Who is better placed to sanction a compromise a book debt claim than the director who knows the work done?

Constantine Nana said...

That is true. But then again when the same director was involved in the activities that led to the insolvency and has interests not so dissimilar to those of a few creditors (or a class) his position on the committee becomes untenable. However, given that directors remain responsible for keeping shareholders informed, it is only fair that they stick around but they should remain effectively under the administrator’s thumb unless it is possible to assess their interests at the outset.

Anonymous said...

What I meant by "compromised director" was a director with a claim on Old Co (at least nominally) but who has been well and truly compensated by New Co (subrogation of claim, which will be or has been paid, and more shares in New Co than he had in Old Co). Clearly this is not a true creditor - I suppose the issue of invisible subrogation is a matter for a different debate.

When I asked whether 2 will do I thought I might not be able to get 3 interested. I did in the end.

However, I could not foresee what was going to happen at the creditors meeting I then attended....

Background: company went into pre-pack administration. Sells assets for £x to NewCo. External investor immediately puts £y in NewCo in return for 40% of shares. If you do the sums, assets have been sold for 2% of value external investor attaches to same assets on same day.

Further background: upon trailing through creditors list and contacting a lot of them it turns out most have been fully paid by NewCo. A case of secretive subrogation.... not obvious to any unsuspecting real creditor.

After allowing for the subrogations only a handful true victims remain: HMRC of course, a small handful of big corporate incidental suppliers for small amounts and me, a private investor who put her life savings in the company and ex-employee with a large unpaid salaries claim. Not only lost my claim, but also 15% of shares. Needless to say I didn't get any shares in New Co....

Back to creditors meeting: In the nick of time I had managed to get 3nominations for committee. Other 2 could not attend and would give me proxy.

Upon arriving for meeting it turns out that 1 proxy hasn't come through. I suspect foul play: I have the impression this creditor (less than £ 1,000) has been paid off.

Meeting starts late - it turns out we are waiting for a director of both Old- and Newco. Has a lot of (proxy) votes behind him - enough to sabotage a vote CONTRA Administrator's proposals....

Whilst I wait I call HMRC who confirm they will after all nominate for creditors committee to make up the required 3.

Director arrives 45 minutes late. As I am summoned in I call HMRC from my mobile to be sure they have confirmed their nomination to Administrator.

HMRC say they called Administrator who said she would phone them back, but she never did. So HMRC sent fax through BEFORE MEETING ACTUALLY STARTED at 10:45(but after it was supposed to have started at 10:00).

I hand my mobile, with HMRC at one end of the line, over to Administrator, who coldly and resolutely tells HMRC that she will not allow them to sit in the creditors committee.

Is this legally possible? Can an Administrator sabbotage a creditors committee this way?

Is there anything that can be done about this, other than the costly, time consuming route through the Court?

This Administrator clearly does not want scrutiny, perhaps concerned about selling assets at undervalue???

Constantine Nana said...

It may be difficult to prove the claims of secretive subrogation and sabotage (the latter may even be deemed to be libel). The Administrator and director of both Old- and Newco must be confident of their plan of action because they have a lot of votes. However, although going to Court may be costly and time consuming, the threat of going to Court (related to the threat of having the Court closely examine the transactions and determining whether the sales were at an undervalue) may be an effective way forcing the Administrator to give an ear.

Also, where the “victims” include a private investor who put her life savings in the company and ex-employee with a large unpaid salaries claim and the HMRC, the story becomes palatable to the press, something which the fledgling Newco certainly does not need. With the threat of litigation and media exposure, they may be prepared to look at a win-win plan for everybody.

Stephen Hunt said...

Anonymous

It sounds like I would need to go through the point in more detail. Email me on sjh@griffins.net privately and I will see if I can assist. I have a lot of involvement with pre-packs at the moment.

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