Inside Finance
Pinsent Masons LLP Banking and Finance Group Newsletter – Issue [ ] [
] 2009
Pinsent Masons LLP Banking and Finance Group Newsletter
letter – Issue 104 6
November 2009
All hyperlinks in this newsletter are to publicly available material. Where an item does not have a hyperlink it
is because the source material is only available on a subscriber service and copyright restrictions prevent its
distribution. If you have a query about any item without a hyperlink please contact Lucy Shurwood using the
contact details below
BANKING & FINANCE
•
General knowledge
•
Guarantees and Security
•
Asset Finance
•
Capital Markets
•
Financial Regulation
•
Leveraged Finance
•
Project Finance
•
Real Estate Finance
RESTRUCTURING
•
General knowledge
•
Administration
•
CVA
•
Liquidation
•
Personal insolvency
•
Prior transactions and directors' malpractice
OTHER FEATURES
•
Spotlight
•
Deal watch
SPOTLIGHT – our quarterly look at a hot legal topic…..this month: Slavenburg resurrected??
The implementation of Part 25 of the Companies Act 2006 and the Overseas Companies (Execution
of Documents and Registration of Charges) Regulations 2009 were supposed to spell the end for
Slavenburg registrations - so why is there talk of bringing them back?
The Overseas Companies Regulations 2009 (the "OC Regulations") require a company with a UK
establishment to register at Companies House. The Overseas Companies (Execution of Documents and
Registration of Charges) Regulations 2009 (the "Registration Regulations") provide that a charge granted
by an overseas company is only registrable if:
(a)
it is one of the types of mortgage or charge registrable by a company incorporated in England and
Wales or Northern Ireland;
(b)
on the date it is created, the overseas company granting it has registered particulars of a places
of business under the OC Regulations and those particulars have been entered on the register
and are available for public inspection; and
(c)
on the date it is created, the property subject to the mortgage or charge is situated in the UK.
The intention behind the Registration Regulations was that a chargee, when taking security from an
overseas company, could simply search against the name of the overseas company at Companies House. If
the search did not show that the overseas company was registered the charge would not be registrable at
Companies House. Slavenburg registrations would be a thing of the past.
However, there is a complication. Section 1048 of the Companies Act 2009 allows an overseas company
that is required to register particulars with Companies House under the OC Regulations to deliver to the
registrar for registration a statement specifying a name, other than its corporate name, under which it
proposes to carry on business in the UK. If this is done, pursuant to section 1048(3), the alternative name
under which the company is registered "is treated for all purposes of the law applying in the United Kingdom
as the company's corporate name".
Companies House has confirmed, in correspondence conducted on behalf of the City finance PSLs group,
that at present a search against a company's corporate name would not reveal any alternative name under
which it may have registered in the UK. It is therefore possible that, whilst security would be taken from the
company under its corporate name, it could have registered at Companies House under an alternative
business name (of which the chargee may not be aware). A search at Companies House against the
corporate name (in which the security was taken) would not reveal the established place of business
registered under the alternative name.
In the circumstances outlined above, the risk to the chargee is that, in spite of it having undertaken a search
at Companies House which did not reveal a registered place of business for the overseas company, the
overseas company does have a registered place of business under an alternative name and therefore the
charge is registrable. If the Companies House search did not reveal a registered place of business, the
chargee would not register the charge. Failure to register a registrable charge within the 21 day time period
would render the charge void as against a liquidator, administrator or creditor.
It has been suggested that one way of dealing with this would be to continue with a form of "Slavenburg"
registration, i.e. deliver particulars of the charge to Companies House even if a Companies House search
does not reveal a registration for an overseas chargor. This is despite the fact that the Slavenburg
registration regime no longer exists and Companies House will no longer accept registrations of charges
granted by unregistered overseas companies. The rationale for this attempted registration is that by
delivering particulars of the charge to Companies House the chargee has complied with its obligations under
the Registration Regulations and therefore the charge would not be void as against a liquidator,
administrator or creditor.
However, it is arguable that delivery of these particulars would not meet the requirements of the Registration
Regulations: the particulars would not contain the company number or the name under which the company
was registered and therefore arguably would not constitute "required particulars" for the purposes of the
Registration Regulations.
It is also questionable whether attempted registration under the wrong company name would be held by a
court to constitute registration at all, notwithstanding that it the chargee did not know it was using the wrong
name. It is possible that the courts would be even more inclined to disregard these attempted registrations
when it is considered that one of the principal purposes of the Registration Regulations was to bring an end
to the Slavenburg registration regime.
An alternative would be to require the chargor to confirm whether it was registered in the UK and, if so, what
name it was registered under. This would involve including a representation in the facilities agreement that
no obligor has registered (under any name) in the UK or, if it has, that it has registered under a specified
name or number. If there were particular concerns about whether the company had properly directed its
mind to this point, a director's certificate could also be sought to back this up. If necessary, an undertaking
could also be included in the facilities agreement requiring the company to notify the agent/lender if at any
time it did register in the UK, but this is probably superfluous if the representation is repeated and no further
security is taken after the date of the facilities agreement. Any opinion given on the Finance Documents
would also need to contain an assumption that no obligor had registered in the UK (as there is no definitive
way to confirm this independently).
It has been suggested that relying on the borrowers' confirmation in this way leaves a residual risk to the
lender that, if the information provided by the borrower is incorrect, its security will be void. However, this
risk only arises in circumstances where the borrower has, negligently or fraudulently, withheld information
from the lender and, as always, it is difficult (if not impossible) to allow for a borrower failing to disclose
accurate information when asked directly to do so.
As always there is a balance to be struck between the risk to the validity of the security and the time, cost
and potential ineffectiveness of continuing to attempt registration of charges granted by overseas
companies, even where they do not appear to have registered at Companies House. Companies House has
indicated that it is taking its own legal advice on the matter and there are hopes that it may be able to resolve
this issue completely by upgrading the search function for overseas companies.
BANKING & FINANCE - General knowledge
High Court considers meaning of all reasonable endeavours and if distribution agreement validly
novated or assigned: the High Court has considered the issues of when consent to the assignment or
novation of a contract can be inferred from the parties' conduct, and whether a party was in breach of its
obligation to use all reasonable endeavours to promote the sale of certain products. Although the case was
decided on its facts, the judge's analysis of the claimants' actions is a helpful illustration of the practical steps
that a party who is subject to an all reasonable endeavours obligation to promote the sale of products might
be required to take to discharge the obligation. The case is also a helpful illustration of issues that can arise
when a party to a contract attempts to establish an assignment or novation through conduct. CEP Holdings
Ltd v CEP Claddings Ltd [2009] EWHC 2447 (QB).
Agreements to agree: the Scottish Court of Session has held that an agreement to use all reasonable
endeavours to agree a purchase price wholly acceptable to the seller in respect of the purchase of land was
enforceable. In R & D Construction Group Ltd v. Hallam Land Management Ltd [2009] ScotCS CSOH_128,
the Court of Session found that while the "wholly acceptable" element of the condition was a subjective
criterion, this did not make the condition unenforceable because the obligation was directed towards a
particular object. This object was only the negotiation of the purchase price under the terms of the option
agreement, rather than the negotiation of the whole agreement. This case confirms that the courts will, in
some circumstances, enforce an agreement to agree.
Cash pooling: an article from PLC magazine outlines different types of cash pooling, explaining its
increasing relevance and examining the legal and practical issues involved in its use.
Payments made in error: Banking partner Tony Anderson has written an article for the Lawyer considering
the recent case of Jones v Churcher and Abbey National plc (2009). The article looks at current practices
between remitting and beneficiary banks where payments have been made in error.
Tax and debt buybacks: on 14 October 2009, the Treasury announced changes to the rules on the way
groups of companies are taxed when they buy back their debt at a discount to the amount at which they
borrowed it. On 22 October 2009, HM Revenue & Customs issued a note to clarify some aspects of the
announcement.
Defaulting lender provisions in the US: PLC US magazine has published an article - "What's market:
defaulting lenders" considering the market standard for defaulting lender provisions in the US.
Banks not liable for loss of profit: on 8 October 2009 in Timothy Duncan Earles v Barclays Bank PLC
[2009] EWHC 2500 (Mercantile), the High Court considered a clause limiting the bank's liability for damages
in the case of breach of contract. The clause read:
"We will not be liable to you in any circumstance for:
ƒ
Loss of business, loss of goodwill, loss of opportunity, loss of profit;
ƒ
Any type of special, consequential or indirect loss whatsoever."
The court held that it was entirely reasonable for a bank to limit the commercial consequences for any
defaults by it in the provision of its services to commercial customers. The judge commented that commercial
customers took considerable risks in return for profit while the bank made no such trade off. The clause was
therefore fair under the Unfair Contract Terms Act 1977.
The case was primarily concerned with disclosure requirements and the weighing of factual evidence. The
judge gave his opinion on the limitation of liability clause in passing (his decisions earlier in the judgment
meant that the point was no longer relevant to the case). However, the clause is commonly used so a
statement by the court that it is considered to be fair and enforceable is likely to be of interest to lenders and
financial service providers.
Reductions of capital: memorandum on solvency statement procedure published on CLLS website:
on 5 October 2009 a memorandum relating to reductions of capital supported by solvency statements was
published by the City of London Law Society. The solvency statement procedure for effecting reductions of
capital (under sections 641 to 644 of the Companies Act 2006) was introduced for private companies with
effect from 1 October 2008 as an alternative to court-approved reductions. The memorandum records some
consensus views of members of the Company Law Committee of the Law Society as to practical steps
directors can take before making a solvency statement to reduce the risk of committing an offence under
section 643(4) of the 2006 Act.
BANKING & FINANCE – Guarantees and security
The difference between a primary and secondary obligation: the Journal of International Banking Law
has published an article (“Guaranteeing Certainty”) on the difference between a primary and secondary
obligation, in light of the recent Court of Appeal decision in Associated British Ports v Ferryways NV.
Command performance: no mercy for on demand guarantors: on 6 October 2009, the High Court ruled
in Enka Insaat Ve Sanayi AS v Banca Popolare Dell'alto Adige SPA [2009] EWHC 2410 (Comm) that the
beneficiary of an on demand performance guarantee is under no obligation to show that the damage caused
by the breaches relied on to enforce the guarantee is commensurate with the money claimed under the
guarantee.
Enforcement of guarantees: construction projects: Property Law Journal (P.L.J. 2009, 238, 17-19) has
published an article which examines the drafting and enforcement of guarantees, given by parent or sponsor
companies to development project lenders, in the construction and development sector. The article explains
the formalities and types of performance and financial guarantee and reviews, with reference to relevant
cases, the situations where a guarantee might be unenforceable including non-consensual variations of
liability, the winding up or dissolution of the borrower, and the expiration of time or judgment. It also observes
the practical problems of enforcing guarantees.
Place of performance of guarantee: the High Court has held that where a guarantee is governed by
English law, in the absence of an express provision, the place of performance is the creditor’s place of
business, which is where the creditor is entitled to commence proceedings against the guarantor under the
Brussels Regulation. See Commercial Marine Piling Ltd v Pierse Contracting Ltd [2009] EWHC 2241 (TCC)
for further details.
Supreme Court gives judgment in Sigma Finance Corp case: the Supreme Court has reversed the
decisions of the High Court and the Court of Appeal in the case of Re Sigma Finance Corporation [2009]
UKSC 2. Whilst the lower courts had held that the receivers were obliged to pay liabilities falling due for
payment during the Realisation Period as they fell due, the Supreme Court disagreed and held that, on the
construction of the overall scheme of distributions in the Security Trust Deed, liabilities falling due for
payment during the Realisation Period should form part of the pool of assets available to all creditors in
respect of short term liabilities and be distributed pari passu. The decision is interesting because it reverses
those of the courts below, giving greater weight to the other provisions of the Security Trust Deed rather than
focusing narrowly on the discrete sentence relating to payments during the Realisation Period. Lord Mance,
giving the leading judgment, also noted that the clause in question "was drafted in contemplation of the
situation where no question of insolvency arose" - highlighting the fact that possibly adequate consideration
was not given to the possibility of Sigma becoming insolvent when certain provisions were drafted.
BANKING & FINANCE - Asset Finance
New valuation method for ships triggers inflation fears: HSH Nordbank and Deutsche Shiffsbank have
endorsed the Hamburg Ship Evaluation Standard, which will produce ship values well above market rates in
a move that has raised concerns over the potential inflation in value of billons of euros in assets should other
banks follow suit.
BANKING & FINANCE - Capital Markets
Exclusive jurisdiction agreements and non-parties: In Morgan Stanley & Co International Plc v China
Haisheng Juice Holdings Co Ltd [2009] EWHC 2409 (Comm), the court had to consider the question of
whether an exclusive jurisdiction clause in favour of the English courts extended to claims against an entity
that was not a party to the agreement. The exclusive jurisdiction clause was contained in an agreement
between the parties based on the ISDA Master Agreement (2002 form).
BANKING & FINANCE - Financial Regulation
Too big to fail: the FSA has published a discussion paper on measures to address the problem of
systemically important ‘too-big-to-fail’ banks. The paper also examines the trade-offs involved in increasing
capital and liquidity requirements, and stresses the need to assess the cumulative impact of multiple reforms.
BANKING & FINANCE - Leveraged Finance
VAT recovery on deal costs: HMRC are challenging VAT recovery on deal costs in relation to corporate
finance transactions. There are a couple of test cases currently going through the Tax Tribunal. HMRC are
mounting two main challenges:
ƒ
Where the deal costs are billed to a Newco, which was incorporated only shortly before the
transaction and after engagement letters were signed and costs incurred - they argue that the
services cannot have been supplied to Newco if it did not exist at the relevant time. This will be
particularly relevant on private equity transactions where a SPV will be incorporated for the purposes
of making the acquisition.
ƒ
Where services (eg due diligence) are supplied jointly to the bank/investors and the Buyer - they
argue that the supply is really to the bank/investors who typically can not recover VAT.
This challenge could have implications for the terms of engagement of professionals on corporate finance
transactions.
BANKING & FINANCE - Project Finance
PfS appoints 15 firms to academies frameworks: Following its announcement of its shortlists in May
2009, Partnerships for Schools (PfS) has announced the 15 successful firms who now have a place on the
two regional academies frameworks. With the education sector, PfS and public spending all high on the
political agenda at the moment, the construction and engineering industries and local authorities affected by
academies schemes will be hoping that PfS can successfully navigate potentially troubled waters, to
successfully procure the new projects.
NAO: Performance of PFI Construction review: on 5 October 2009, the National Audit Office (NAO)
published Performance of PFI Construction (Review), a review of the performance of PFI projects. The
Review updates a previous report published by the NAO in 2003 and follows two surveys undertaken in
2008.
The Review finds that:
ƒ
A majority of PFI projects are still being delivered on time or with only minor delays. However, an
increasing number of projects are being delivered more than two months late.
ƒ
A majority of PFI projects are being delivered on, or close to, the price originally quoted. However,
the number of projects delivered exactly to the originally contracted price has declined. This is due to
public sector bodies instructing changes to projects after contracts have been signed.
ƒ
In comparison with PFI, non-PFI public sector construction projects have delivered on time in around
two thirds of cases and on budget in around half.
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A majority of PFI projects receive good user and quality ratings and environmental evaluations are
becoming more routine.
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PFI experience is lacking in many public sector project teams and this is an important part of
managing PFI contracts.
Source: NAO: Performance of PFI Construction.
BANKING & FINANCE - Real Estate Finance
Land Registry updates practice guides: points to note for finance lawyers: the Land Registry has
updated a number of practice guides in light of the Land Registration (Amendment) Rules 2009, which came
into force on 1 October 2009. The following amended practice guides are of particular interest to finance
lawyers:
ƒ
Execution of deeds (Practice Guide 8).
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Approval of mortgage documentation (Practice Guide 30).
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Discharges of charges (Practice Guide 31).
To access the Land Registry practice guides, go to: http://www.landreg.gov.uk/publications/?pubtype=309
RESTRUCTURING - General knowledge
Continuity preserved where buyer took on employee of insolvent business: the long-awaited transcript
of the Court of Appeal's decision in Oakland v Wellswood (Yorkshire) Ltd [2009] EWCA Civ 1094 has now
been published. The Court held that continuity of employment was preserved by section 218 of the
Employment Rights Act 1996 when an employee of a company in administration was employed by the buyer
following a pre-pack sale. The question of whether, and in what circumstances, the buyer in a pre-pack
administration can avoid the automatic transfer of employees by virtue of regulation 8(7) of the Transfer of
Undertakings (Protection of Employment) Regulations 2006 remains uncertain. However, buyers should be
aware that, whatever the position under TUPE, any existing employees actually taken on will have their
continuity preserved.
Retention of title and EU law: the European Court of Justice has held that claims based on retention of title
fall within the broad concept of civil and commercial matters for the purposes of the EU Regulation on
Recognition and Enforcement of Judgments and therefore under the EU Insolvency Regulation retention of
title claims need not be brought in the member state where main proceedings have been opened. The court
held that an action concerning a reservation of title clause constitutes an independent claim, as it is not
based on the law of the insolvency proceedings and requires neither the opening of such proceedings nor
the involvement of a liquidator. In those circumstances, the mere fact that the liquidator is a party to the
proceedings is not sufficient to classify those proceedings as proceedings deriving directly from the
insolvency and being closely linked to proceedings for realising assets. See German Graphics Graphische
Maschinen GmbH [2009] EUECJ C-292/08 for full judgment.
City of London Law Society response to evaluation of EU Insolvency Regulation: the Insolvency Law
Committee of the CLLS has published its response to the evaluation of the EU Insolvency Regulation. The
response provides a useful summary of the case law on the Regulation and highlights key issues with the
application of the Regulation by the courts (so far).
Insolvency Service gives an update on the reform of the Insolvency Rules: the Insolvency Service has
published an update on progress with the reform of the insolvency rules. The implementation timetable is
unchanged. Interim amendments to the Insolvency Rules 1986 (1986 Rules) will be made with effect from 6
April 2010. A revised and consolidated set of rules will come into force to replace the 1986 Rules in April
2011. The main aims of the proposed changes are:
ƒ
to increase the use of electronic communication in formal insolvency procedures (including allowing
remote attendance at creditor meetings).
ƒ
to promote transparency (especially in relation to the remuneration of insolvency practitioners) and
simplicity (for example, by reducing the volume of court filings). Of particular note is the intention to
allow creditors to approve the payment of costs incurred by a prospective administrator before he
takes office as expenses of an administration.
To read the Insolvency Service's update in full, click here.
Contribution notices: DWP unwilling to extend insolvency practitioner exemption to receivers: the
Department for Work and Pensions has rejected a call to extend the exemption from contribution notices
issued by the Pensions Regulator to cover receivers. In contrast to administrative receivers, who historically
assumed responsibility for most of a company's property under floating charges, receivers are typically
appointed to enforce security held by fixed chargeholders. They are frequently not licensed insolvency
practitioners.
Under section 38(3) of the Pensions Act 2004 (PA 2004), the Regulator cannot issue a contribution notice to
a person "acting in accordance with his functions as an insolvency practitioner". As defined in section 388 of
the Insolvency Act 1986 and section 121 of the PA 2004, this includes an administrative receiver, but does
not cover a receiver who is not a licensed insolvency practitioner.
In response to concerns raised about this omission by the Financial Markets Law Committee, the DWP has
ruled out amending the law. The DWP suggests that the terms of a security could provide that a receiver's
assumption of liability would be conditional on clearance being obtained from the Regulator. More generally,
the DWP says that "the perceived risk to receivers is mitigated by safeguards contained in the legislation". It
notes two particular points:
ƒ
The Regulator must conclude that it is "reasonable" to issue a contribution notice by reference to a
set of factors listed in the PA 2004, including whether it was reasonable for the potential recipient to
act as they did.
ƒ
The decision to issue a contribution notice is taken by the independent determinations panel rather
than by the Regulator's investigative staff. The recipient of a notice can appeal against the decision
to the Pensions Regulator Tribunal and ultimately to the Court of Appeal.
Source: Letter from the DWP to the FMLC, 5 October 2009.
Supreme Court gives judgment in Sigma Finance Corp case: the Supreme Court has reversed the
decisions of the High Court and the Court of Appeal in the case of Re Sigma Finance Corporation [2009]
UKSC 2. Whilst the lower courts had held that the receivers were obliged to pay liabilities falling due for
payment during the Realisation Period as they fell due, the Supreme Court disagreed and held that, on the
construction of the overall scheme of distributions in the Security Trust Deed, liabilities falling due for
payment during the Realisation Period should form part of the pool of assets available to all creditors in
respect of short term liabilities and be distributed pari passu. The decision is interesting because it reverses
those of the courts below, giving greater weight to the other provisions of the Security Trust Deed rather than
focusing narrowly on the discrete sentence relating to payments during the Realisation Period. Lord Mance,
giving the leading judgment, also noted that the clause in question "was drafted in contemplation of the
situation where no question of insolvency arose" - highlighting the fact that possibly adequate consideration
was not given to the possibility of Sigma becoming insolvent when certain provisions were drafted.
RESTRUCTURING – Administration
Consequences of failure to comply with SIP16: the High Court has held that a failure to comply with
Statement of Insolvency Practice 16 alone is not a basis for removing an administrator from office. The court
also did not accept that the lack of prior consultation with creditors amounted to grounds on which to remove
the administrator from office - keeping creditors in the dark about the sale was a legitimate pre-pack tactic, if
it was adopted honestly and assisted the administrator in getting a better deal for creditors. However, the
court did order the removal of the administrator from office as there was no clear evidence that the deal to
sell the company was the best available and the administrator could not review the deal because he lacked
independence, having been involved in the negotiation and sale process. Clydesdale Financial Services
Limited and others v Smailes [2009] EWHC 1745 (Ch) (not yet reported).
The balancing act under section 236 of the Insolvency Act 1986: third parties often hold information and
documents relating to the affairs of an insolvent company. Administrators and liquidators can seek a court
order requiring a third party to provide them with such information (section 236, Insolvency Act 1986 (1986
Act)). In Cowlishaw and Wong v O&D Building Contractors Limited [2009] EWHC 2445 (Ch), the High Court
refused an application under section 236 of the 1986 Act, made by the administrators of an insolvent
company. The High Court balanced the benefit to the administrators and the creditors of the insolvent
company in having the information against the prejudice to the third party in having to provide it. The High
Court found that the balance fell against the administrators. The key factors in the High Court's decision
were:
ƒ
The administrators had not shown an inability to obtain some or all of the information sought from
other sources.
ƒ
The administrators couched their request for information (and the justification for requesting that
information) in general terms, rather than asking for specific documents and information to achieve
specific ends. This meant that the prospective burden on the third party in complying with the
administrators' request was disproportionate to the identified benefit to the insolvent company and its
creditors.
ƒ
The insolvent company had not paid the third party for creating the information sought and had no
contractual right to the documentation requested.
Application of the insolvency set-off rules in administration clarified by the High Court: in In the
matter of Kaupthing, Singer and Friedlander Limited (in administration) [2009] EWHC 2308 (Ch), the High
Court clarified the application of insolvency set-off in administration. Rules 2.85 to 2.89 of the Insolvency
Rules 1986 (the 1986 Rules) set out how insolvency set-off applies in the distribution of assets in an
administration. Rule 2.105 of the 1986 Rules sets out how an administrator should discount future debts
when applying insolvency set-off. The administrators of an insolvent bank wanted to distribute the bank's
assets to its depositors. Some of the depositors had also borrowed money from the bank. The administrators
asked the High Court to clarify the extent to which the administrators should set off the debts due from a
depositor to the bank against the debt due from the bank to the depositor. The High Court held:
ƒ
A "future debt" for the purpose of the relevant 1986 Rules was any debt that fell due after the bank
went into administration. For the purposes of insolvency set-off, future debts that fall due after the
administrators notify creditors of their intention to distribute assets are subject to a discount (using
the formula set out in rule 2.105 of the 1986 Rules).
ƒ
The administrators should apply the rules on the quantification of debts (in rules 2.86 to 2.88 of the
1986 Rules) to debts due to and from the insolvent bank. The administrators should not include any
interest that accrued after the insolvent bank went into administration.
Administration expenses: new scope for "necessary disbursements"? In Lomas & Ors v RAB Market
Cycles (Master) Fund Limited & Ors [2009] EWHC 2545 (Ch), the administrators of Lehman Brothers
International (Europe) (LBIE) sought the court's directions in relation to certain amounts of cash received by
LBIE post-administration, which related to securities held by LBIE on behalf of prime brokerage clients. The
court held that, on a proper construction of the prime brokerage contract, the cash was subject to a trust on
behalf of the owners of the security. Accordingly, the administrators were entitled to distribute the cash to the
beneficiaries.
The court went on to consider, as an alternative, whether distribution of the cash could be regarded as a
"necessary disbursement" and, therefore, an administration expense within the meaning of Insolvency Rule
2.67(1)(f). It was held that payments ought to be made in fairness and justice to the relevant clients because
the administrators had retained, against the clients' instructions, the securities in relation to which the cash
had been received. On that basis alone, the payments ought properly to be described as a "necessary
disbursement".
RBS awaits court ruling on Cattles and the terms of a guarantee: RBS has argued in the High Court
that it should have priority over bondholders if Cattles, the doorstep lender went into administration. RBS,
which is the biggest bank lender to Cattles, told the High Court that its claim ranks ahead of bondholders
because of a guarantee given to the banks by Welcome, a Cattles subsidiary. The court is being asked to
decide, in the event of an administration, whether the words of this guarantee will mean Cattles’ banks and
private placement noteholders will receive most of the cash the company gets back from its customers.
William Trower, QC, representing RBS said that the case hinged on a key clause in the guarantee which
said that no guarantor “shall in competition with or in priority to the bank make any claim against any debtor
or co-guarantor or their respective estate or make a claim in the insolvency of any debtor….” He said the
clause was “about preserving the pot against which RBS can recover, and said there was “no linguistic
ambiguity” about it. However Robin Knowles QC acting for party A, who is an unidentified bondholder, said
that if RBS’s interpretation of the clause was right, Cattles had signed away its main asset for a period until
RBS had been paid in full. The hearing has concluded and a judgment is expected in due course.
RESTRUCTURING – CVA
"Lehman and the hedge funds: a scheme too far?" – this article from PLC magazine considersthe extent
of the meaning of "a compromise or arrangement" within the scope of Part 26 of the Companies Act 2006
and the court’s jurisdiction to sanction such a scheme of arrangement (a scheme) so as to bind a dissenting
minority in the context of the recent High Court case In the matter of Lehman Brothers International (Europe)
(in administration) (No 2) [2009] EWHC 2141.CVAs, JJB and proposals by the Insolvency Service to
improve the CVA process: Accountancy (2009, 144(1394), 39-40) has published an article discussing the
use of company voluntary arrangements as a form of corporate rescue. The article summarises the basic
features of a CVA and notes proposals by the Insolvency Service to improve the CVA process. The article
includes a box describing, by way of case study, the CVA implemented for the retailer JJB.
RESTRUCTURING – Liquidation
Is summary judgment ever appropriate in insolvency claims? the decision in Phillips & Another v
McGregor-Paterson [2009] EWHC 2385 (Ch) related to various claims brought by the liquidators of a
company against a former director (D). The claims against D were based on various sections of the
Insolvency Act 1986, namely:
•
Avoidance of dispositions of the company's property after the commencement of winding up (section
127).
ƒ
Misapplication of the company's property and/or misfeasance and/or breach of fiduciary duty
(section 212).
ƒ
Wrongful trading (section 214).
ƒ
Preferences (section 239).
The judgment is interesting in that it suggests that summary judgment will rarely, if ever, be appropriate to
determine these types of claim. The liquidators obtained summary judgment against D. D's appeal was
allowed. The appeal judge held that the master had been wrong to conclude, on the evidence available to
him, that D's defence to each of these claims had no prospect of succeeding.
For a transaction to be set aside as a preference, it must be shown that the company's decision to enter into
the transaction had been influenced by a desire to put the beneficiary in a better position than it would
otherwise have been in on the company's insolvency. The necessary desire is presumed to have existed
where the beneficiary of the preference is a person connected with the company (section 239(6)). The
presumption can, however, be rebutted. The judge commented that it would be only in the clearest of cases
that it would be possible to determine whether or not the statutory presumption has been rebutted without a
full trial. Moreover, claims for preference require establishing that the payment was made at a time when the
company was unable to pay its debts (sections 240(2) and 123). The judge said that whether the company
was unable to pay its debts at the time of each of the relevant payments was a question that "cannot
possibly be determined on a summary basis".
The judge also suggested that a claim for misfeasance against a director cannot be disposed of summarily:
issues of whether the director was in breach of his statutory and/or fiduciary duties, and, if so, whether and to
what extent he should be excused for those breaches, are questions that require the full examination of
evidence at trial.
This means that insolvency practitioners who wish to pursue these types of claims must be prepared to
pursue them to trial and secure the necessary funding to do so.
The decision also addresses two technical points on procedure:
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The liquidators brought the claims under CPR Part 7, although they should have been made by an
ordinary application in the winding-up proceedings under rule 7.2(2) of the Insolvency Rules 1986 (SI
1986/1925). The court noted that it was desirable that applications should be heard by a registrar
with specialized knowledge of insolvency proceedings. However, because no injustice had been
caused to the defendant as a result of the claims not being brought under the Insolvency Rules
1986, this would not invalidate the claim.
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The value of the claim stated in the claim form was considerably less than the value claimed in the
particulars of claim. Therefore, the issue fee paid under the Civil Proceedings Fees Order was
significantly less than it should have been. The court required this underpayment to be remedied.
This confirms that understating the value in a claim form will not allow a claimant to benefit from a
lower fee on issue.
RESTRUCTURING - Personal insolvency
High Court considers how contingent is "contingent" in the context of bankruptcy debts: upon the
discharge of his bankruptcy, a bankrupt is released from his bankruptcy debts (section 281, Insolvency Act
1986 (1986 Act)). Bankruptcy debts include debts or liabilities which arise from an obligation incurred before
the bankruptcy, but which fall due afterwards (section 382, 1986 Act). Casson and Wales v The Law Society
[2009] EWHC 1943 (Admin) concerned a compensation award made by the Legal Complaints Service
against two solicitors who gave inadequate advice to clients. The solicitors were discharged bankrupts. They
argued that, as they gave the advice complained of before being made bankrupt, the compensation awards
were bankruptcy debts. Consequently, the solicitors' case was that their discharge from bankruptcy relieved
them of the obligation to pay compensation.
The High Court held that for there to be a bankruptcy debt there must be an obligation that will inevitably
result in a payment falling due after the bankruptcy. In this case, the payment obligation did not arise until the
LCS made a compensation award. The LCS had discretion not to make an award. Consequently, even
though the advice that led to the compensation awards being made was given before the bankruptcy, there
was no element of inevitability about the awards being made, so the awards were not bankruptcy debts.
RESTRUCTURING – Prior transactions and directors' malpractice
Preference claims and guarantees in the spotlight: in In the matter of Oxford Pharmaceuticals Limited
[2009] EWHC 1753 (Ch) (not yet reported), the High Court considered an application by a liquidator to set
aside payments by an insolvent subsidiary to its parent company as preferences under section 239 of the
Insolvency Act 1986 (1986 Act). M was a director of, and guarantor of the liabilities of, the insolvent
subsidiary and also of its parent company. The liquidator of the insolvent subsidiary argued that there was a
preference under section 239(4) if, as a result of the payments, the director was put in a better position in the
event of an insolvent liquidation of the subsidiary. This was whether or not the improvement in his position
arose in his capacity as guarantor of the subsidiary or otherwise (such as, as a guarantor of the subsidiary's
parent company). The High Court did not agree with the liquidator's interpretation of section 239(4) of the
1986 Act. The liquidator's interpretation would mean that section 239(4) could operate to require a person to
disgorge a benefit obtained in some other capacity just because they happened to be a guarantor or surety
and even though the benefit had nothing to do with their status as a guarantor or surety.
Trading loss can be a loss to the insolvent company: the High Court has held that a trading loss was, in
principle, capable of being a loss to the insolvent company recoverable under section 212 of the Insolvency
Act 1986. In In the matter of E D Games [2009] EWHC 233 (not yet reported) it was held that money that the
company did not pay to HMRC in VAT (because the director caused the company not to file VAT returns in
breach of his duties as a director) effectively funded the company to trade. That trading increased the overall
net shortfall on the company’s balance sheet. This meant that the company traded on beyond the point at
which it would otherwise have ceased trading for lack of working capital, which generated a loss. In principle,
that loss was capable of being a loss to the company recoverable under section 212.
FRC publishes revised Guidance for Directors on Going Concern Assessments and Disclosures: The
Financial Reporting Council (FRC), the United Kingdom’s independent regulator responsible for promoting
confidence in corporate reporting and governance, has published updated Guidance for directors of UK
companies to assist them when making their assessment of going concern. The Guidance is based on three
principles covering the process which directors should follow when assessing going concern, the period
covered by the assessment and the disclosures on going concern and liquidity risk. The Guidance
emphasises the importance of balanced, proportionate and clear disclosures about going concern issues
and the key assumptions being made in one place in an annual report. See guidance for more information.
DEALWATCH – our quarterly report on what the Banking and Restructuring teams have been up to…
Gerber Emig Group: working with our alliance partner Salans, we have advised HSBC Bank plc and
Rabobank International as co-ordinating mandated lead arrangers providing EUR75.4 million and £65 million
facilities to Gerber Emig Group. The facility also included Commerzbank, Lloyds Banking Group and The
Royal Bank of Scotland as mandated lead arrangers and Santander as lead arranger.
The proceeds of the facility will be used to refinance existing debt. The borrower, whose subsidiary Emig is
headquartered in Hamburg, is based in the UK but also has manufacturing operations in Germany, France
and Poland. Consequently, the transaction required advice to be given in respect of each of English,
German, French and Polish law.
Commenting on the advice provided by Pinsent Masons and Salans, HSBC Bank plc Director Matthew
Osborne said, "The legal process on this deal went very smoothly and we thought Pinsent Masons and
Salans did an excellent job. The Alliance between the two firms, who between them covered all the work on
the deal in the UK, Germany, France and Poland, provided a seamless service from a client perspective."
The transaction team was led by Pinsent Masons' Banking partner Chris Tart, supported by solicitors
Beverley Roberts and Liam Terry in London, with the Salans team comprising Philippe Max and Maria
Nenova in Paris, Hermann Meller in Berlin and Michal Mezykowski in Warsaw.
Heywood Williams Group PLC: a combined Northern team from international law firm Pinsent Masons has
advised Heywood Williams Group PLC, the fully listed distributor of branded building products, on a
significant capital restructuring. A new stronger group will continue to serve its customers and, backed by
additional financing, will enhance its relationships with suppliers, creditors and employees.
The key elements of the restructuring include:
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over 1,000 jobs secured worldwide
£6 million of new investment for the new Group from its UK banking syndicate
banks to write off £21 million of debt in return for a major stake in the new Group
business as usual with the same board and management teams in place across the Group
The Pinsent Masons team advising on the restructuring was led by corporate partners Helen Ridge and
Farook Khan and included Rory Cray, John Christian, Simon Horsfield, Anthea Whitton, Anna Whetham,
Andy Phillips, Pippa Whitmore, James Cameron, Hannah Pinsent and Louise Taylor. The company was
also advised by Rothschild and Ernst & Young, while the UK banking syndicate were advised by Walker
Morris.
Robert Barr, chief executive of Heywood Williams said "We see the Pinsent Masons team as an integral part
of our team who have worked tirelessly to deliver a first class service giving pragmatic commercial advice
and proactively helping to deliver this key deal for us."
IMI plc: we acted for international engineering company IMI plc on its recent issue of US$175,000,000
Senior Notes due 2016/19 to the US private placement market. The Notes issued consisted of two tranches
with $75,000,000 being taken with a 7-year maturity and $100,000,000 at a 10-year maturity. The fund will
be used to refinance $65,000,000 of US Notes maturing later this year with the balance being used to reduce
existing bank debt.
Head of Banking and Finance, John Cleland, assisted by solicitor Rebecca Wilcock, acted for IMI plc and
Bingham McCutcheon LLP partner, Jim Greenfield, assisted by Anthony Goodman, acted for the
Noteholders.
Viking Moorings: we advised HSBC Private Equity (UK) on the management buyout of Viking Moorings, a
market leader in the offshore oil and gas moorings industry – in a deal widely believed to be one of the
largest private equity deals in Europe this year. Viking is a market leader in the design, rental and sale of
mooring systems for drilling rigs and single hull vessels, operating from offices in Scotland, Norway, Australia
and Singapore. Viking has been acquired from Inflexion Private Equity and management who will both be
making significant re-investment into the deal. Private Equity partner Gregg Davison led a team of over 40
lawyers to advise on the deal including Peter Wood, Giles Warrington and Phil Scott.
© Pinsent Masons LLP 2009
Should you have any questions please contact Lucy Shurwood (lucy.shurwood@pinsentmasons.com) or your usual Pinsent
Masons adviser who will be able to assist you further.
This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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