Wednesday, 22 December 2010

Seasons Greetings! - Back on the 5th January 2011

Dear Readers

I would like to take this opportunity to thank you for reading and commenting on the blog over the last year. We have had over 60,000 visits from 68 countries in 2010. Thank you for paying the site a visit. 

Have an excellent Christmas and New Year. As Tiny Tim (pictured right  with his father Bob Cratchit) would say "God bless us, every one!," I hope you do not get any visits from Jacob Marley!! Seasons greeting and ta ta for now. 

See you back here on the 5th January 2011!

Best Regards


Friday, 17 December 2010

ss.238 and 241 of the Insolvency Act 1986 and Professor Goode considered - Stanley & Anor (As the Joint Liquidators of New Grass of Manchester Ltd) v TMK Finance Ltd & Anor [2010] EWHC 3349 (Ch) (21 December 2010)

Mr Justice David Richards has handed down his judgment in Stanley & Anor (As the Joint Liquidators of New Grass of Manchester Ltd) v TMK Finance Ltd & Anor [2010] EWHC 3349 (Ch) (21 December 2010). The case relates to a claim for relief under ss.238 (transaction at an undervalue) and 241 of the Insolvency Act 1986. Section 238 provides as follows:

"...(2) Where the company has at a relevant time (defined in section 240) entered into a transaction with any person at an undervalue, the office-holder may apply to the court for an order under this section.
(3) Subject as follows, the court shall, on such an application, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into that transaction.
(4) For the purposes of this section and section 241, a company enters into a transaction with a person at an undervalue if—
(a) the company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration, or
(b) the company enters into a transaction with that person for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by the company."

The learned judge's judgment contains a number of interesting points, not least a supportive reference to Professor Sir Roy Goode QC's (pictured) monograph on corporate insolvency (at paragraph 14).

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Thursday, 16 December 2010

IP v.s IP and Trusts v.s Insolvency - Green v Bramston & Ors [2010] EWHC 3106 (Ch) (02 December 2010)

His Honour Judge David Cooke has handed down his decision in Green v Bramston & Ors [2010] EWHC 3106 (Ch) (02 December 2010). The case makes for very interesting reading as it involves not only a dispute between two IPs but also a discussion of how the law of insolvency and the law of trusts inter-relate. The case also contains a consideration of the Berkeley Applegate jurisdiction (named after the case of Re Berkeley Applegate (Investment Consultants) Ltd [1989] 1 Ch 32.) The principle was described in the following passage from the judgment of Mr Edward Nugee QC in that case, beginning at page 50:

" the authorities establish, in my judgment, a general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property. It is a discretion which will be sparingly exercised; but factors which will operate in favour of its being exercised include the fact that, if the work had not been done by the person to whom the allowance is sought to be made, it would have had to be done either by the person entitled to the equitable interest … or by a receiver appointed by the court whose fees would have been borne by the trust property … ; and the fact that the work has been of substantial benefit to the trust property and to the persons interested in it in equity …"

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Wednesday, 15 December 2010

Latest Cases from the BPIRs - another interesting set - [2010] BPIR 1297-1488 Number 6

The learned editors of the BPIRs have put together another interesting set of cases for our consumption. This is the final volume of the year. Here are the latest volume's contents and catchwords:

"[2010] BPIR 1297 
Re ABC Ltd and Another [2010] EWHC 1645 (Ch) 
ChD, Nicholas Strauss QC (sitting as a deputy High Court judge), 18 June 2010 
LIQUIDATION - Disclosure - Letter of request - Insolvency Act 1986, s 236 - Crime (International Co-operation) Act 2003, ss 7, 9 

[2010] BPIR 1304 
Annulment Funding Company Ltd v (1) Cowey (2) Cowlam [2010] EWCA Civ 711 
CA, Arden and Jackson LJJ and Morgan J, 23 June 2010 
- BANKRUPTCY - Annulment - Annulment funding - Loan to debtor and his co¬habitee secured on their home - Enforcement of annulment funding agreement - Extent to which annulment funding agreement procured by undue influence by debtor on co-habitee - Extent to which annulment funding agreement procured by misrepresentation by debtor to co¬habitee - Whether co-habitee jointly liable with the debtor on the loan - Whether co-habitee entitled to set aside loan and charge as against debtor and lender 

[2010] BPIR 1322 
Consolidated Finance Ltd v Hunter 
Macclesfield CC, District Judge Swan, 1 July 2010 
- BANKRUPTCY - Annulment - Annulment funding - Enforcement of annulment funding agreement - Whether annulment funding agreement enforceable - Consumer Credit Act 1974, ss 140A-D 

[2010] BPIR 1331 
Cook v Consolidated Finance Ltd [2010] EWCA Civ 369 
CA, Lord Neuberger of Abbotsbury (Master of the Rolls), Thomas and Wall LJJ, 17 March 2010
- BANKRUPTCY - Annulment - Annulment funding - Enforcement of annulment funding agreement - Extent of debtor's liability to annulment funder - Whether adequate reasons provided by trial judge 

[2010] BPIR 1339 
Re Energy Holdings (No 3) Ltd (In Liquidation) [2010] EWHC 788 (Ch) 
ChD, Sir John Lindsay (sitting as a High Court judge), 19 March 2010 
- COMPANY VOLUNTARY ARRANGEMENT - Supervisor - Creditor - Adjudication of creditor claims 

[2010] BPIR 1368 
Re Metrocab Ltd and Re Frazer Nash Technology Ltd [2010] EWHC 1317 (Ch) 
ChD, Philip Marshall QC (sitting as a deputy High Court judge), 11 June 2010 
- LIQUIDATION - Winding-up order - Rescission of winding-up order - Extension of time for application to rescind - Delay - Civil Procedure Rules 1998, r 3.9 - Insolvency Rules 1986, r 7.47 

[2010] BPIR 1389 
R (Payne and Cooper) v Secretary of State for Work and Pensions [2010] EWHC 2162 (Admin) 
QBD, Cranston J, 26 July 2010 
- DEBT RELIEF ORDERS - Authorities seeking to recover overpaid benefits from debtors - Whether recovery process a 'remedy' - Whether caught by moratorium 

[2010] BPIR 1407 
Report on an Investigation into Complaint No 08 014 087 against Brighton and Hove Council, Tony Redmond (Local Government Ombudsman), 3 February 2010 
- BANKRUPTCY - Council tax arrears - Failures in scrutiny practice adopted by local authority as prelude to use of bankruptcy - Whether bankruptcy would have proceeded had appropriate procedures been followed 
- LOCAL GOVERNMENT OMBUDSMAN - Whether council guilty of maladministration in vetting council defaulters for bankruptcy process 

[2010] BPIR 1420 
Report on an Investigation into Complaint No 09 006 694 against Thurrock Council, Tony Redmond (Local Government Ombudsman), 3 February 2010 
- LOCAL AUTHORITIES - Council tax arrears - New collection policy designed to avoid bankruptcy of council tax defaulter - Levy charged on those defaulters using the instalments repayment scheme - Whether legal 

[2010] BPIR 1431 
Sands and Another (Trustees in Bankruptcy of Monem (A Bankrupt)) v Monem and Another [2010] EWHC 1972 (Ch) 
ChD, Norris J, 30 July 2010 
- BANKRUPTCY - Preference - Permission to appeal - Extension of time for application seeking permission to appeal - Standing of bankrupt to seek permission to appeal 

[2010] BPIR 1437 
Sands and Treharne (Trustees in Bankruptcy of Mark Ward) v Wright 
ChD, Mr Registrar Simmonds, 14 October 2009 
- BANKRUPTCY - Post-petition payment - Whether payment void - Whether payment made for value - Whether recipient acting in good faith - Insolvency Act 1986, s 284(1), (4) 

[2010] BPIR 1443 
Warwick (Formerly Yarwood) v Trustee in Bankruptcy of Clive Graham Yarwood [2010] EWHC 2272 (Ch) 
ChD, His Honour Judge David Cooke (sitting as a High Court judge), 13 September 2010 
- BANKRUPTCY - Bankruptcy petition - Ancillary relief proceedings - Husband and wife agreeing to sale of matrimonial home and enhanced sum to be paid to wife out of the proceeds of sale - Enhanced sum paid to wife after presentation of bankruptcy petition against husband - Whether binding agreement for compromise of ancillary relief proceedings - Whether wife entitled to enhanced sum on basis of constructive trust or proprietary estoppel - Whether distribution of proceeds of sale void as being post¬petition disposition - Insolvency Act 1986, s 284 
- BANKRUPTCY - Ancillary relief proceedings - Whether compromise of ancillary relief proceedings enforceable 

[2010] BPIR 1459 
Weir v Area Estates Ltd [2010] EWCA Civ 801 
CA, Carnwath, Moore-Bick and Wilson LJJ, 20 July 2010 
-BANKRUPTCY - Sale of land - Deposit - Lease - Surrender - Disclaimer - Notice - Insolvency Act 1986, s 284 - Law of Property Act 1925, s 42 

[2010] BPIR 1468 
Young and Others v Hamilton and Others [2010] NICh 11 
ChD, Treacy J, 11 June 2010 
- BANKRUPTCY - Causes of action - Whether cause of action hybrid or personal to the bankrupt - Whether cause of action vested in trustee in bankruptcy vesting of property - Insolvency Act 1986, ss 306, 283 and 436 
- BANKRUPTCY - Disclaimer - Effect of disclaimer - Whether effect of disclaimer to revest disclaimed property in the bankrupt 
- BANKRUPTCY - Cause of action vested in trustee in bankruptcy - Whether restrictions on bankrupt's ability to pursue cause of action affected bankrupt's Convention rights - European Convention on Human Rights, Arts 6, 8, Protocol 1, Art 1 

[2010] BPIR 1477 
Young v Official Receiver [2010] EWHC 1591 (Ch) 
ChD, Mann J, 23 March 2010 
BANKRUPTCY - Causes of action - Cause of action relating to land vested in trustee in bankruptcy - Whether disclaimer of interest in land applied also to cause of action 
- BANKRUPTCY - Disclaimer - Effect of disclaimer - Whether effect of disclaimer to revest disclaimed property in the bankrupt 
- BANKRUPTCY - Matrimonial home - Causes of action regarding the matrimonial home - Whether effect of use it or lose it provisions applied to the cause of action - Insolvency Act 1986, s 283A 
- BANKRUPTCY - Cause of action vested in trustee in bankruptcy - Whether trustee's failure to advance cause of action affected bankrupt's Convention rights - European Convention on Human Rights, Arts 6, 8, Protocol 1, Art 1."

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Tuesday, 14 December 2010

Interesting article on the history of imprisonment for debt: Dr Philip Woodfine (University of Huddersfield) - Debtors, Prisons, and Petitions in Eighteenth-Century England - Eighteenth-Century Life 30:2 Eighteenth-Century Life 30.2 (2006) 1-31.

I have recently happened across the following article on debtors' prisons and thought it might also be of interest to blog readers. Here is the citation and abstract: 

Dr Philip Woodfine (University of Huddersfield) - Debtors, Prisons, and Petitions in Eighteenth-Century England - Eighteenth-Century Life (2006) 30:2 Eighteenth-Century Life 30.2. pp-1-31.

"Drawing on manuscript sources including the petitions of prisoners, mainly in the county of Yorkshire, this article sets out to suggest a darker view than is customary of what prison life was like for eighteenth-century debtors. An important recent book by Margot Finn, by contrast, may leave the unwary reader with an overly sanguine view of prison conditions. Finn skillfully highlights the cultural richness of prison life, the loose, custodial forms of management, and even a kind of autonomy enjoyed by some debtors, extending as far as their own choice to enter or remain in prison (109–51). This exploration of the agency available to prisoners draws attention to features of eighteenth-century imprisonment that distinguished it from the penal systems that followed. Finn's very success in recreating the vitality of debtors' lives and outlook, though, may lead her readers to downplay the harshness of the prisoners' lot. A corrective is called for. We need to give due weight to some basic facts about the prisons in which debtors were confined, and the regimes that they encountered there."

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Monday, 13 December 2010

pari passu considered - Bloom & Ors v The Pensions Regulator (Nortel, Re) [2010] EWHC 3010 (Ch) (10 December 2010)

Mr Justice Briggs has handed down another huge judgment in the Chancery Division (some history on which is pictured). The judgment in Bloom & Ors v The Pensions Regulator (Nortel, Re) [2010] EWHC 3010 (Ch) (10 December 2010) is particularly interesting for insolvency scholarship generally and restructuring practice. The learned judge mulls on, inter alia, the nature of pari passu. In 2001 Professor Mokal wrote a thought provoking critique on the use and function of pari passu (see: 'Priority as Pathology: The Pari Passu Myth’ [2001] Cambridge Law Journal 581-621). This Nortel judgment is perhaps the latest piece of support in favour of Professor Mokal's arguments although Mr Justice Briggs' comments that, "The pari passu principle is a fundamental principle of justice, equity and fairness, with application in a wide variety of circumstances. Nowhere is it more fundamental than in the insolvency code..." might suggest otherwise. The case is too detailed to discuss in depth in this forum, but here are two snippets to tempt a further read.

The exposition of the history of pari passu begins at paragraph 64. The learned judge notes, "Since the mid-19th century a succession of Bankruptcy and Insolvency Acts have sought to establish a wide and inclusive definition of claims qualifying for pari passu treatment, by providing that provable debts are to include both debts and liabilities, and to extend to debts and liabilities which are, at the cut-off date, both present, future and contingent. In relation to personal bankruptcy, the underlying policy is not merely that creditors should be fairly treated inter se, but that the bankrupt should receive as full as possible a discharge from his debts. In relation to corporate insolvency, the requirement for the fair treatment of the company's creditors is sharpened by the fact that, (save in exceptional cases) the company will be dissolved at the end of the insolvency process so that, if the claim is not subjected to pari passu treatment by that process, it will not be met at all. It will fall down what was described in argument as a black hole. For a claim to qualify for pari passu treatment it must be a provable debt. Generally speaking, although the precise nature of this requirement has been the subject of intense debate at the hearing, provable debts arise only out of matters which have occurred, or have begun to occur, prior to the cut-off date."

At paragraph 197 the judge then observes, "The outcome is, in my view, likely to prove unfair to the creditors of an insolvent target, unless perhaps the Regulator and the Upper Tribunal treat the pari passu principle as a cardinal aspect of the very broad discretions which arise at the three consecutive stages of (1) the determination whether to issue an FSD to an insolvent target, (2) the decision whether particular proposals for financial support by the insolvent target are reasonable in all the circumstances, and (3) the decision whether to issue a CN to an insolvent target, and if so, in what amount. It may be that, by bearing in mind that a pari passu sharing would be the automatic result of any FSD issued before a target went into an insolvency process, this approach to the exercise of the discretion in post cut-off cases will actually occur, but it is no part of my task to bind either the Regulator or the Tribunal."

Happy reading! 

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Friday, 10 December 2010

s.6 of the Insolvency Act 1986 considered - Macaria Investments Ltd v Sanders & Anor [2010] EWHC 3353 (Ch) (17 December 2010)

Mr Justice Roth (pictured) has handed down his judgment in Macaria Investments Ltd v Sanders & Anor [2010] EWHC 3353 (Ch) (17 December 2010). The case concerns an application pursuant to section 6 of the Insolvency Act 1986 for an order that the approval of a Company Voluntary Arrangement ("CVA") be revoked on the grounds that there was material irregularity in relation to that meeting. After a lengthy exposition of the facts the learned judge concludes: "In my view, it cannot be disputed that a decision in a creditors' meeting to approve a CVA that was carried only because of the votes based on alleged liabilities that did not in truth exist constitutes a material irregularity within the terms of section 6(1)(b) of the Act. Under section 6(4) of the Act, the court therefore has power to revoke any decision of the meeting approving the CVA. In the circumstances, I consider that it is clearly appropriate to exercise that power and I shall make an order accordingly."

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Thursday, 9 December 2010

In the matter of Capitol Films Limits (in administration), David Rubin and Henry Lan (Joint Administrators of Capitol Films Ltd v. Cobalt Pictures Limited and 24 others [2010] EWHC 3223 (Ch) - IPs tested.

Mr Richard Snowden QC (sitting as a deputy High Court Judge - pictured) has handed down his judgment in In the matter of Capitol Films Limits (in administration), David Rubin and Henry Lan (Joint Administrators of Capitol Films Ltd v. Cobalt Pictures Limited and 24 others [2010] EWHC 3223 (Ch). I have managed to speak to one of the solicitors who was involved in the case, Mr Michael Mulligan of Field Fisher Waterhouse. He has summarised the case in the following manner: 

"This judgment serves as a warning to insolvency practitioners that they could incur significant financial penalties if they bring misconceived applications to court which affect the security of creditors and if they fail to investigate the conduct of directors and antecedent transactions in an insolvency. In normal circumstances the administrators would expect to recover their own legal costs from the assets of the insolvent company in priority to floating charge holders and unsecured creditors. 

In this case, however, the judge considered that the conduct of the administrators was unreasonable to the extent that they should only recover their costs and expenses after both fixed and floating chargeholders and unsecured creditors are paid from any realisations in the estate. In effect, the administrators will have to pay significant sums of money to creditors personally.”

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Wednesday, 8 December 2010

s.6 of the CDDA86 considered - Secretary of State for Business, Innovation & Skills v Doffman & Anor [2010] EWHC 3175 (Ch) (06 December 2010)

Mr Justice Newey (pictured) has handed down his judgment in Secretary of State for Business, Innovation & Skills v Doffman & Anor [2010] EWHC 3175 (Ch) (06 December 2010). The case concerns the application of section 6 (unfitness) of the Directors' Disqualification Act 1986 (CDDA86).  As the learned judge notes, "That section requires the Court to make a disqualification order against a person where his conduct as a director of one or more companies which have become insolvent makes him unfit to be concerned in the management of a company." What makes the case particularly interesting is that the defendants are both solicitors, one of whom went to my alma mater (the last part of that sentence is not particularly interesting!). The professional ramifications of disqualification are therefore perhaps more severe than for the typical 'lay person' director. 

The learned judge summaries the position on unfitness very succinctly. He notes at paragraph 24 (onwards):

"In In re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164, the Court of Appeal emphasised the importance of adhering to the statutory words, "unfit to be concerned in the management of a company". Dillon LJ (with whom the other members of the Court agreed) said this (at 176):

"It is beyond dispute that the purpose of section 6 [of the CDDA] is to protect the public, and in particular potential creditors of companies, from losing money through companies becoming insolvent when the directors of those companies are people unfit to be concerned in the management of a company. The test laid down in section 6 - apart from the requirement that the person concerned is or has been a director of a company which has become insolvent - is whether the person's conduct as a director of the company or companies in question 'makes him unfit to be concerned in the management of a company.' These are ordinary words of the English language and they should be simple to apply in most cases. It is important to hold to those words in each case."

When considering whether a person's conduct makes him unfit to be concerned in the management of a company, the Court is required by section 9 of the CDDA to have regard, in particular, to the matters specified in schedule 1 to the Act. In the present case, the Secretary of State relies on paragraph 1 ("Any misfeasance or breach of any fiduciary or other duty by the director in relation to the company ... "), paragraph 2 ("Any misapplication or retention by the director of, or any conduct by the director giving rise to an obligation to account for, any money or other property of the company") and paragraph 6 ("The extent of the director's responsibility for the causes of the company becoming insolvent").

As, however, Lawrence Collins J explained in Re Bradcrown Ltd, Official Receiver v Ireland [2001] 1 BCLC 547 (in paragraph 7):

"The matters listed in Sch 1 are not exhaustive of the matters which may be taken into account in determining unfitness …. Accordingly, a finding of breach of duty is neither necessary nor of itself sufficient for a finding of unfitness …."

Incompetence "to a very marked degree or a high degree" can amount to unfitness: see the Bradcrown case (at paragraph 10). The "degree of incompetence should not be exaggerated": see Re Barings plc (No 5), Secretary of State for Trade and Industry v Baker [2000] 1 BCLC 523 (at paragraph 35)."

After an exhaustive treatment of the facts in the case the learned judge concludes:

"I have found proved allegations relating to (a) the option which Cindan Southampton granted to Axelpark New Forest in May 2004 (paragraphs 94-99 above), (b) the £1,216,487 which Cindan Littledean paid in March 2005 for an option to buy the Humbrol Site and the borrowing from Barclays for this purpose (paragraphs 142-149 and 157 above), (c) the transfer from Stakefield to Axelpark Hull of 70 Mansfield Street in April 2005 (paragraphs 204-210 above) and (d) the waiver of debts owed to Stakefield in October 2005 (paragraphs 211-217 above).

Do these matters establish unfitness? To my mind, they do. While I recognise that a breach of duty will not necessarily show a director to be unfit, the allegations which have been proved involved a series of breaches of duty, in each case to the benefit of the defendants or entities associated with them, and large sums of money or assets of substantial value. The allegations have, moreover, a common theme: disregard for the separate interests of the individual companies. A person who, like the defendants, uses a company as a special purpose vehicle seeks to take advantage of the entity's separate legal personality; he must also recognise the concomitant duties.

In my judgment, the defendants' conduct does make each of them unfit to be concerned in the management of a company, with the result that I must impose disqualification orders. I shall hear further submissions as to the length of those orders."

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Tuesday, 7 December 2010

Smith & Anor v QBE Insurance (Europe) Ltd & Ors [2010] EWHC 3172 (Ch) (08 December 2010)

Mr Justice Norris (pictured) has handed down his judgment in Smith & Anor v QBE Insurance (Europe) Ltd & Ors [2010] EWHC 3172 (Ch) (08 December 2010). The case concerns the use of liquidation and the procedure's interaction with judgment debts. As the learned judge notes: 

"It is not difficult to see what is going on. Alerted to the possibility that it had a claim against SGC, Templeton was anxious to turn that claim into a judgment debt before SGC was wound up, so that when it came to proof in the liquidation Templeton could rely on the 2007 Judgment and would not have to persuade the liquidator to admit the claim to proof. It looks as though Mr Williams was particularly co-operative and Templeton's objective was achieved. In the ordinary course Templeton would be treated (for voting and other purposes) as an unsecured judgment creditor in the liquidation: and nothing in the papers suggests that this case is out of the ordinary."

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Monday, 6 December 2010

Bankrupt Comedian - no laughing matter as prison awaits

The BBC recently reported on the celebrity bankruptcy trend. A celebrity in the shape of a comedian has recently been sent to prison for insolvency related offences. The Insolvency Service (IS) note: 

"Liverpool Crown Court sentence bankrupt former comedian Anthony Lee Wright, also known as Anthony Cronley, to 40 months imprisonment on Friday 4 December for attempting to pervert the course of justice and breaching bankruptcy rules. The criminal prosecution by the Department of Business, Innovation and Skills followed an investigation by The Insolvency Service.

The Insolvency Service investigation found that Mr Wright (48) attempted to conceal his interest in a property worth £108,000 by assuming the identity of ‘Anthony Cronley’, with the intention of deceiving the Official Receiver. Had he been successful in his deceit he would have prevented the property being realised for the benefit of his creditors.

Mr Wright, who was made bankrupt on 8 April 2003, was found guilty of:-

Failing to deliver up a property to a trustee in a bankruptcy, contrary to sections 354(1)(a) and 350(6) of The Insolvency Act 1986 and sentenced to 10 months imprisonment.

Fraud, contrary to sections 1 and 2 of the Fraud Act 2006 and sentenced to 15 months imprisonment.

Doing acts to pervert the course of public justice and sentenced to 15 months imprisonment.

The sentences are to run concurrently.

Before sentencing the Court heard that Mr Wright:-

Falsely claimed in written correspondence that he, as Mr Anthony Cronley, was not bankrupt;
Used a false passport (a crime in itself) in an attempt to support his false identity;
Instituted legal proceedings against his own trustee using the false identity in order to prevent the proceeds of a property sale from rightly going to his creditors;
Knowingly and falsely signed a ‘statement of truth’ in the legal proceedings asserting truth of the details contained in the court documents.
Commenting on the case, Graham Horne, Deputy Inspector General for the Official Receiver said:

“People struggling with debt who want to benefit from the debt relief arrangements offered by the insolvency regime must be prepared to declare all of their financial assets or face the penalty imposed on them. It is for the Official Receiver to decide which assets should be sold for the benefit of the creditors and which many be retained by the debtor.”

Dave Jones, Deputy Chief Investigation Officer, Manchester, for BIS said:

“The length of the sentence handed down to Mr Wright sends a clear message, fraudulent behaviour and perverting the course of justice are serious matters which will not be tolerated and anyone found guilty of can expect a serious punishment.”

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Friday, 3 December 2010

What is in a name? Some misleading activity by debt management companies

Hot on the heels of the BBC's Rip off Britain yesterday, where Ms Angela Rippon (pictured) exposed front loading of IVA fees, Aunty has now published a piece highlighting misleading practices by debt management firms. In essence it seems as if the OFT are displeased at some of the naming practices some debt management companies have been using. Specifically they have been importing officialism into their corporate identity in a bid to attract customers. See here

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Thursday, 2 December 2010

Holland (Respondent) v The Commissioners for Her Majesty’s Revenue and Customs (Appellant) and another [2010] UKSC 51

The Times has now reported the UK Supreme Court's decision in Holland (Respondent) v The Commissioners for Her Majesty’s Revenue and Customs (Appellant) and another [2010] UKSC 51. This is a fascinating case in which the Supreme Court (by a majority of 3 to 2) dismisses the appeal. Lords Hope, Collins and Saville gave the majority judgments. Lords Walker and Clarke gave dissenting judgments. I personally prefer the view of the minority. In an insolvency arena Lord Walker and Lord Clarke's pragmatic approach to the realities of the situation are more attractive. We will have to wait for Parliament to decide which set of Supreme Court justices has the better view! For those of you who do not subscribe to The Times here is the marvelous summary of the case from the UKSC pages:

"The primary question in this appeal is when a person should be considered to be a de facto director of a company so that he can be held responsible for the payment of unlawful dividends as if he had been formally appointed as a director.

When a company is wound up, section 212 of the Insolvency Act 1986, as amended, allows a creditor
to request a court to compel an “officer” of the company to pay sums in respect of misuse of a power
or breach of fiduciary duty. It was accepted that the definition of “officer” includes a director, whether
he is formally appointed or not.

Mr and Mrs Holland ran a business administering the business and tax affairs of contractors, especially
those working in the IT sector, who did not want to go to the trouble of setting up and running their
own companies. In February 1999 a complicated corporate structure was established to run the
business. Under the new structure, 42 trading companies were created, referred to in these proceedings
as the “composite companies”. Two further companies called Paycheck (Directors Services) Ltd and
Paycheck (Secretarial Services) Ltd were created to act respectively as the sole director and secretary of
each composite company. Mr and Mrs Holland were the directors of Paycheck Directors and Paycheck
Services and owned each company via another company.

The business model involved the composite companies contracting out the services of the contractors
to their clients. The contractors became both employees and (non-voting) shareholders of the
composite companies. The aim of the structure was to seek to ensure that the annual taxable profits of
each composite company did not exceed £300,000, in order to get the benefit of the small companies’
rate of corporation tax. From the income the composite companies received from the contractors’
clients, they paid a salary to each employee/shareholder and also declared dividends to each
shareholder/employee (after making provision for the payment of corporation tax at the small
companies’ rate). Dividends were paid regularly on the basis of timesheets submitted by shareholders/
employees for the work they performed as contractors. Paycheck Services used a software programme
which calculated the dividends due and generated a document purporting to be a minute of a directors’
meeting of the relevant composite company. The programme generated onto the minute a copy of Mr
Holland’s signature authorising the dividend, beneath which appeared the words “for and on behalf of
Paycheck (Director Services) Ltd.” Paycheck Services received a fee for its administrative services.
No allegation was made that this structure was a sham and there was never any pleading of dishonesty
against Mr or Mrs Holland. However, HMRC did challenge the structure. The structure failed because
Mr Holland was the settlor of the one voting share in each composite company, with the result that
the composite companies were treated as associated for tax purposes thus exceeding the £300,000
threshold. The resultant increased tax liability meant that the composite companies were insolvent, with HMRC being the only creditor. HMRC alleged that Mr and Mrs Holland were de facto directors of the insolvent companies and responsible under section 212 for causing the payment of dividends to
the companies’ shareholders (the contractors) when the companies had insufficient distributable
reserves. HMRC sought orders requiring Mr and Mrs Holland to pay amounts in excess of £13m to
compensate the insolvent companies.

The High Court dismissed the claims against Mrs Holland and that decision was not appealed.
However, the High Court held that Mr Holland was a de facto director of each composite company
and so in principle answerable to HMRC’s claims. The Court of Appeal unanimously allowed Mr
Holland’s appeal and held that he was not a de facto director of the composite companies.

Lord Hope considered that the question of whether Mr Holland was acting as a de facto director of
the composite companies must be approached on the basis that Paycheck Directors (the sole corporate
director of each of the composite companies) and Mr Holland were in law separate persons, each with
their own separate legal personality: [25]. The mere fact of acting as a director of a corporate director
will not be enough for an individual to become a de facto director of the subject company: [29]. One
must look at what a person actually did to see whether he assumed the responsibilities of the office of
director: [39]. Everything Mr Holland did was under the umbrella of being the director of a sole
corporate director: [40]. Until Parliament provides otherwise, if acts are entirely within the ambit of
the duties and responsibilities of a director of the corporate director, it is to that capacity that acts are attributed: [42].

Lord Collins agreed with Lord Hope. Lord Collins held that whether a person is a de facto director is
not simply a question of fact: the question was whether all of his acts can be attributed in law solely to
the activities of the corporate director: [95]. It did not follow from the fact that Mr Holland took all
the relevant decisions that he was a de facto director of the composite companies; if that were so, the
guiding mind of every sole corporate director would find themselves the de facto director of another
company: [96]. The basis of liability for a de facto director is an assumption of responsibility and being
part of the governing structure. Parliament has already intervened in the Companies Act 2006 to
ensure that there is a natural person to whom responsibility is attributed. The further extension of the
concept of de facto director contended for by HMRC is a matter for the legislature and not for the
Supreme Court: [96] Lord Saville agreed with Lord Hope and Lord Collins.

Lord Walker considered that if a person takes all the important decisions affecting a company and sees that they are carried out, then he is acting as a director of that company. Lord Walker considered that to attribute acts on the basis of capacity in a corporate structure was the most arid formalism: [115].

Lord Clarke agreed with Lord Walker and held that capacity should be irrelevant to the question of
whether an individual is a de facto director: [132]. Lord Clarke thought it artificial and wrong to hold
that Mr Holland was doing no more than merely discharging his duties as a de jure director of
Paycheck Directors: [142]."

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