what's in the news

It is looking increasingly likely that 2012 will be another difficult year for the automotive sector, leading to a decline, not only in vehicle sales, but also in goods and services supplied to the sector. As a result, businesses may experience cash flow problems and increased creditor pressure to pay invoices.

There are a number of ways in which a business may look to ring fence its existing unsecured debt. If the underlying business is sound, a company struggling to pay its creditors may propose a composition of its debts via a Company Voluntary Arrangement (“CVA”). A CVA is a legally binding agreement between a company and all of its unsecured creditors to pay off historic debt over a period of time, usually 3 to 5 years. Any CVA must offer a greater potential dividend return to creditors than would be achieved if the company were to enter into insolvent liquidation.

Once the CVA is approved by the requisite majority of creditors it becomes a contract between the company and its creditors and binds all unsecured creditors. However, the rights of secured or preferential creditors cannot be adversely affected without their express consent.

One of the fundamental issues with CVAs is that, for the majority of companies, there is no statutory moratorium to prevent creditor/s taking action to recover sums owed to them whilst the CVA is put to creditors. However, “small companies” can obtain the benefit of a statutory moratorium designed to prevent creditors taking action against the company whilst the CVA proposal is put to the creditors. A “small company” is defined as one whose turnover does not exceed £5.6 million; its balance sheet total does not exceed £2.8 million and has no more than 50 employees.

For companies that do not fall within the “small company” criteria it is possible to enter into a formal insolvency process, known as administration, with the intention of exiting it via a CVA once the CVA has been approved. The primary purpose of any administration is to try and rescue the company as a going concern. Administration allows time for a company’s affairs to be re-organised under the protective umbrella of a statutory moratorium.

If it is not possible to rescue the company as a going concern then the business/assets of the company may be sold to a third party via a “pre-pack.” A pre-pack involves the company entering into administration and immediately selling its business and/or assets to a third party under a sale the terms of which were negotiated before the administrators were appointed. It allows the business to continue trading via a new company and secures the employment (employees will transfer to the buyer) whilst leaving behind the burden of historic debt with the company in administration.

Pre-packs are frequently used where the core business is still viable, but the company carries significant historic debt that it can no longer service. Invariably there is no funding available for the business to continue to be traded by the administrators and, for whatever reason, any CVA proposals are not appropriate or have been rejected by a majority of the creditors.

If you have concerns or queries about any of the issues dealt with in this article or wish to explore confidentially the various methods of restructuring and/or refinancing your business please contact us and we will be happy to provide you with advice and assistance.

Adrian Wilmot
Director
T: 0118 957 0595
E: awilmot@pitmans.com

Suzanne Brooker
Partner
T: 0118 957 0516
E: sbrooker@pitmans.com

From 19th March 2012, all money claims issued in the County Court under the Civil Procedure Rules (Part 7) will be issued in the Northampton County Court. 

The National Civil Business Centre based in Northampton will act as an administrative office and will manage the preliminary stages of actions commenced in the County Court including issuing Claim Forms, applying for Judgment and filing of acknowledgement of service and defences.

This change is being accompanied by increased automation and whilst this might ultimately speed up court process and turnaround volumes and times, we would like to warn all our clients in advance about potential delays in the first weeks of the new scheme.

Please note that there will be an opportunity to have an action transferred out of the Northampton County Court to a more local/convenient County Court at the allocation stage where the Defendant is not an individual.  As is standard practice now, where the Defendant is an individual, the action will be automatically transferred to the Defendant’s home Court. 

For more information, please contact Pitmans’ Debt Recovery team.

Donna Goddard
Director, Debt Recovery
T: 0118 957 0507
E: dgoddard@pitamns.com

Courtesy of the Thames Valley Business Magazine July/August 2011.

It has become increasingly commonplace for commentators to cast doubt on the effectiveness of the AIM market.  Since the start of the current financial turmoil, prior to which the number of new entrants to the market boomed, there has been a significant slump in primary issues and fundraisings on AIM.  This has of course coincided with a downturn in the global economy and the resulting drain on the cash available for investment in the UK, but does the problem run deeper than that?

When AIM was launched in 1995 it sought to provide a platform for smaller and growing companies, providing them with liquidity and access to capital on a global scale.  This made AIM a very popular choice for small and medium sized companies looking for growth and for investors looking for an exit route. Over the last 15 years the success of the AIM market has shown why it is important to have a strong, functioning junior stock market in the UK and it has become a model for other stock markets across the financial world. 

Most growing companies reach a point in their development when they need access to more capital.  Frequently they will turn to venture capital or private equity funding to obtain it.  Any such investors typically will be looking to exit that investment in a three to five year timescale, often dictated by the lifespan of the funds which they in turn have raised from external investors.  Although the growth of a secondary and tertiary buy out market over the years has meant that has become a very serious alternative, and a trade sale to a competitor is in many cases another option, an IPO onto AIM or the full list is one of the classic exit routes. 

If this IPO exit route is increasingly closed out, it reduces the exit options for those investors.  Given how important the financial investor sector has been to the UK economy over the last two decades, this in itself is a reason to try to address some of the problems that AIM has been experiencing.  It is even more pressing because of the issues that currently dog the debt funding market.  As we know, many banks (both UK and international) are busy focusing on strengthening their own balance sheets following the 2008 credit crisis (and given the sovereign debt risk that is still out there in much of Europe) rather than on new lending to corporates.  Therefore, the number of avenues for corporates to seek new capital to grow their businesses is further reduced. 

So what has gone wrong and why have we seen an increase trend in de-listings and alternative investment routes? In some ways AIM has been a victim of its own success. Sold on a brochure of lighter regulation, access to international investors providing increased visibility and profile and the badge of being a listed company, entrants to market have not been hard to find in the good times.  Now that investment capital is limited, is the market is self regulating the quality of successful applicants as investors become more selective or cautious about where they invest their money? Is there a danger that this self regulation will disappear when the equity taps begin to open again and how should this be addressed? Alternatively is it the cost of regulation that is putting off growth companies these days from going down the IPO route?

More emphatic regulation by the London Stock Exchange both of AIM market companies and their Nominated Advisors would be welcomed in some quarters to counteract any reputational damage sustained over recent years and further improve the quality of market applicants.  In order to achieve this any such regulation could make it harder to get an inappropriate company onto the market, or make the consequences for failures to meet minimum standards more severe.  The fear amongst the investment community is however that over regulation may strike at the heart of what AIM is about and further dampen the appetites for IPOs.  

Whilst greater regulation is a cornerstone of a sound financial market, it is unlikely to address all of the issues currently facing AIM. There has been some discussion as to whether the UK Government should give further tax incentives to those making AIM investments.  While this seems unlikely in the current economic climate, encouraging a broader mix of investors into AIM, which is still dominated by investment funds, would certainly be likely to increase the range of investors and liquidity in the market generally, thereby reviving the market. 

Whilst it is true that if nothing is done to turn the AIM market around, it may continue to slide in popularity and that would be to the detriment of UK industry, particularly at the medium sized company level, many of the problems faced by AIM are not of its own doing and the solution should not be found in tinkering with the market. Medium sized companies need access to long term, reliable sources of capital.  The absence in the UK of a banking system like the German regional banks, who support these types of companies over the long run, means companies, who are not FTSE 350 size, but have long outgrown friends and family and business angel funding, do need a functioning junior public market as an alternative.  Regulation coupled with tax breaks can be a good thing where market regulation fails, but on their own they will not change market sentiments. Confidence is slowly returning and advisors are reporting an upturn in AIM related instructions. Now is the time for investors in AIM to lead the way, allowing medium sized companies to access capital, grow and succeed, providing confidence to other sectors in the economy. Of course we could just create a new regional banking structure – but that is another challenge altogether.

If you would like to know more information about this article, then please contact either Andrew Peddie or Daniel Jacob of our corporate team.

This article first appeared in Solicitors Journal www.solicitorsjournal.com

Majority Rule

In the case of Minmar (929) Ltd –v- Khalastchi and another [2011] EWHC 1159(Ch) the Court considered whether an out of court appointment of administrators, made by the directors of a company, was valid where the decision of the directors was not taken in accordance with the company’s Articles of Association.

The decision to appoint administrators was made by the majority of the directors of the company but the decision was made without a proper board meeting, no notice of the meeting had been given to directors, there was no quorum and only one person was in attendance.

The effect of Paragraph 105 of Schedule B1 of the Insolvency Act 1986 is that, where something is to be done by the directors of a company, it is to be done by a majority of the directors.  The court held that this did not mean that the majority of directors could dispense with the rules of internal management set out in the Articles of Association.  On these grounds it was held that the appointment was invalid and should be set aside.

In addition, the appointment was found to be invalid on the grounds that notice of intention to appoint an administrator was not given to the company.  It was argued that this was not necessary since this is merely an additional obligation imposed by Insolvency Rule 2.20(2), to be complied with only in circumstances where persons entitled to appoint an administrator or administrative receiver were to be served with such notice, in compliance with Paragraph 26(1) of Schedule B1.  The Court considered that the additional persons to be served with notice would be concerned with this whether or not there were persons to be served under Paragraph 26(1) and that notice should be given regardless.  It was noted that there is no prescribed form or period of notice specified.  As no notice was given to the company at all, the appointment of administrators was considered invalid on this ground too.

The Court acknowledged that it is difficult to reconcile paragraphs in Schedule B1 when trying to determine the notice that needs to be given. However, this decision gives some clarity as to the practice that the Court expects to be adopted in circumstances where the Insolvency Act is not only ambiguous but contradictory. 

Moral Hazard

The Pensions Regulator (“tPR”) has reached a settlement with Michel Van De Wiele NV (“VDW”) in relation to its claim against VDW for a contribution to the Bonas Group Pension Scheme, a scheme of which Bonas Machine Company Limited (“Bonas”) was the employer. VDW has, as a result, been issued with a Contribution Notice (one of tPR’s “Moral Hazard” powers) in the sum of £60,000.  This is substantially lower than the £5 million contribution that tPR’s Determinations Panel (the “DP”) decided should be made and a small contribution to the “buy out” deficit in the scheme of around £23 million.

The settlement follows a hearing in the Upper Tribunal of VDW’s application to bar tPR from pursuing certain allegations made against it.  Whilst Mr Justice Warren was not required to decide the claims against VDW, he considered them in some detail.  In the course of giving judgement, he expressed a view that the amount that the DP had decided should be paid by VDW was too high and that the amount should not have been more than around £100,000.

TPR is able to serve a Contribution Notice, under the Pensions Act 2004, upon a person associated and connected with an employer (i.e. an employer who is obliged to provide a final salary pension to its employees past and/or present) where (amongst other things) tPR is of the opinion that the person was a party to (or knowingly assisted in) an act or deliberate failure to act and where the main purpose or one of the main purposes of it was to prevent recovery of the whole or any part of a debt due to the pension scheme.  tPR is required to act reasonably.

VDW was Bonas’ parent company.  Its only client was a company in the VDW group.  Bonas was loss making and entirely reliant upon VDW’s support.  VDW decided to withdraw that support and Bonas went into Administration.  The assets of the company were immediately sold to another VDW group company incorporated by VDW for that purpose.

TPR relied on three acts in support of its claim: walking away from the pension scheme without openly engaging with the Trustees of the scheme or TPR; minimising the sum paid by VDW for the  assets of the business; and retaining the business while avoiding ongoing liabilities.

It was clear, from the evidence, that VDW had taken professional advice and had considered the possibility of contacting tPR to seek advance clearance from tPR.  It had also considered the possibility that tPR may use its Moral Hazard powers against VDW as a result of the sale.  VDW had chosen not to seek clearance.  The DP were in doubt that VDW took a calculated and deliberate risk in relation to the use of tPR’s powers and had a  purpose of minimising the amount that it paid into the scheme by failing to consult with creditors and by selling the business assets to a subsidiary without properly marketing the business for sale. Mr Justice Warren noted that there was no obligation to contact tPR or the Trustees but concluded that there could be a deliberate failure to do something even where there is no obligation to do it.

Mr Justice Warren considered that the liability imposed under a Contribution Notice could not be more than the amount that had been lost by the scheme as a result of relevant act or failure to act and that the amounts to be imposed on persons under Contribution Notices were intended to be compensatory and not a penalty.  Therefore, if it was the case that the employer would not have been able to pay the debt to the scheme, had the act or failure to act not occurred, then there would be no loss.  In the case of Bonas, the loss to the scheme was the amount that it would have received in its insolvency had the assets been sold a higher market price. 

Mr Justice Warren considered whether the cessation of the business of Bonas, causing the non-payment of future contributions to the scheme, could be said to be an act preventing payment of the debt to the scheme.  He considered that it did not have this effect, it merely caused the debt itself to increase.

Mr Justice Warren’s views do not have to be followed in the Upper Tribunal.  However, if this is the view that the Upper Tribunal takes in future then the threat of a Contribution Notice may have less impact as a deterrent to others contemplating the same type of arrangements as VDW. It would appear that the most that tPR could require a person to contribute to the scheme, in the event of a sale at an undervalue, is the amount that it should have paid in any event, reduced further where there are other creditors that would have shared the additional proceeds of sale.  Such persons will therefore be dissuaded from applying for clearance in advance of the event since the price attached to clearance is likely to be higher than the amount payable under a Contribution Notice.

Mr Justice Warren was of the view that a Financial Support Direction (“FSD”) could be issued, in some cases, in order to recover additional funds or support for the Scheme.  An FSD can be issued where the employer has insufficient assets to pay half of the debt to the scheme but an associated and connected person could pay the balance.  That person could be required to provide support to the scheme e.g. payment, a guarantee, a charge over assets etc.  The effect of this is to ensure that an underfunded scheme has access to all of the value in a group of companies.  If Mr Justice Warren is correct then a party to a deliberate attempt to cause detriment could not be penalised for this but merely required to provide compensation to the scheme for its actual loss whereas a company that merely finds itself in a position of wealth, whilst the employer is not, without any deliberate act or intention to cause detriment to the scheme, may be required to support the scheme up to the full value of the debt due from the employer.

No Surrender

In Peoples Phone Ltd –v- Theophilos Nicolaou [2011] EWHC 1129 (Ch) the High Court held that the supervisor of  an Individual Voluntary Arrangement could not conclude the IVA and thereby prevent a potential creditor (“P”) from participating in the final dividend, where P’s entitlement was the subject of court proceedings yet to be determined.

P was a landlord who had entered into a Deed of Surrender that released the debtor from liabilities under the lease.  However, P was seeking rectification of the deed on the grounds that it was not intended that liability for rent arrears would be released. 

The supervisor took the view that the question of whether P’s claim was valid was to be considered at the time of the distribution and at that time there was no debt due under the terms of the Deed of Surrender.

On hearing P’s application to reverse or vary the supervisors’ decision, the Court considered that it should be adjourned and the rectification application decided in the first instance.  In the event that the Deed of Surrender was rectified, P’s status as a creditor would be reinstated from the date of the Deed of Surrender and P would therefore be entitled to a dividend.

Meanwhile, in Re WW Realisation 1 Ltd (In Administration) [2010] EWHC 3604, the Court held that a distribution could be made to secured creditors without any further provision being made for liabilities that may be payable as an expense of the administration unless such claims were notified to the administrators within 28 days of further letters being sent to potential claimants. 

The decision followed an application for directions made by the applicants as administrators (under paragraph 63 Schedule B1 of the Insolvency Act 1986) and liquidators (under section 168(3) Insolvency Act 1986).  The administrators had already sent letters to landlords and local authorities inviting them to submit claims as expenses of the administration. 

Anti-Social Administration Orders

An application was made for an administration order in relation to a social club on the grounds that it was a company under paragraph 111(1A) of Schedule B1 of the Insolvency Act 1986. 

The Court held that the club was not an unregistered company and could not be the subject of a winding-up order.  The application for an administration order was then refused.

Social clubs will have to turn to their constitution where the business needs to cease and the club needs to dissolve.

Understanding Employers

On 18 May 2011 Jobcentre Plus, R3 and the Insolvency Service entered into a Memorandum of Understanding.  This was an extension of an existing voluntary partnership between the three bodies.

The purpose of the partnership is to ensure cooperation and sharing of information between the organisations and development of joint practises.  The intention is to assist Jobcentre Plus in providing a service to redundant employees and to actively support Insolvency Practitioners by having experts on hand to answer questions and deal with employee queries.  Insolvency Practitioners will be encouraged to give “early warning” of potential redundancies to Jobcentre Plus.

It will be for R3 to communicate to Insolvency Practitioners the practise to be followed.

Denise Fawcett
Insolvency & Restructuring Partner
+44 (0)207 634 4642
dfawcett@pitmans.com