Inform: Insolvency

Welcome

Welcome to the first edition of Inform: Insolvency, a periodical newsletter produced by Speechly Bircham’s insolvency team, highlighting legal developments affecting Insolvency Practitioners.

Our specialist insolvency team regularly carries out re-structuring, insolvency and recovery work for a number of blue chip clients including insolvency practitioners, banks and asset based lenders. We also work closely with office holders on pure insolvency matters.  We provide an integrated service, working alongside the firm’s strong banking and asset based lending (ABL) practice, the growing IT/IP practice and our Pensions, Corporate, Insurance and Property teams.

Our practice is expanding and I am delighted to announce the arrival of Simon Ridpath to our team. Simon has six years experience in advising on insolvency matters and joins us from Devonshires.

Recent months have seen a number of significant cases which will have an impact on insolvency matters.  These are covered in more detail below, as are some salient points relating to CGT which you should be aware of.

If you would like any further information on the issues raised in this newsletter or to discuss how our Insolvency Team could help you, contact myself or Simon Ridpath on 020 7427 6400.

Christopher Harlowe

Cases of interest

Trident
Exeter City Council v Bairstow and Others, Re Trident Fashions

Do Administrators have to pay business rates incurred during the course of the Administration as an “expense” as defined by Rule 2.67 of the Insolvency Rules 1986?

In this recently published case, despite forceful arguments for the profession by a Court appointed advocate, the Court decided that the Rules, as currently drafted, do impose an obligation on office holders to pay rates (for both occupied and unoccupied premises) as an “expense” of the Administration.  This order is unlikely to be appealed.  The real concern is less for future administrations, but more for any trading administrations since September 2003, when the amendments to the rules came into effect. W here administrators will probably already have distributed funds they now may well find claims being made retrospectively by local authorities.

We will circulate a more detailed analysis of the decision shortly.

Sands v Clitheroe

This recent case decided by Registrar Jacques in the High Court offers a useful summary of the developing nature of actions brought by office holders under section 423 of the Insolvency Act 1986.  You will remember that section 423 of the Insolvency Act 1986 ( the Act ) applies to transactions at an undervalue entered into by both individual and corporate debtors and can be used by creditors and office holders in either case.  This case highlights how these claims can be brought many years after the offending transaction even if there is no suggestion of insolvency at the time.

The case concerned a claim by joint trustees in bankruptcy for a share of the matrimonial home that had, since its acquisition in 1988 (some 15 years before the bankruptcy), been held in the sole name of the spouse of the bankrupt.  The Trustees argued that the acquisition of the property had been financed by the sale of the couple’s former jointly owned property and that the transfer into the sole name of the spouse had been intended to put the asset beyond the reach of creditors of the bankrupt, who at that time was in the process of forming a law firm.  Importantly, none of the bankrupt’s creditors on the date of bankruptcy were creditors at the date of the transaction: all creditors at the earlier date had been paid off.

The argument raised in opposition to the application was that section 423 was limited to providing a remedy to those creditors who “suffered harm” as a result of the transaction - implying that those creditors could only be those at the date of the transaction in 1988, all of whom had been paid before the bankruptcy. 

In reaching his decision, Registrar Jacques considered previous cases from 1997 and 2001 and commentary from legal texts .  His finding was that bankruptcy, by its very nature, is a class action and that the interpretation of “victim of the transaction” as referred to by section 423 (5) , should extend to anyone who as, at the date of bankruptcy, could prove to have suffered prejudice as a result of the transaction.  In this case the whole class of unsecured creditors could claim such prejudice as the asset was effectively put beyond their reach by the transfer at an undervalue in 1988 - so the trustee was right to bring the claim.  He did not accept the argument by the spouse and bankrupt that the creditor class should be limited to those creditors who the parties to the transaction intended to be affected by the transaction.

The other point considered by the Registrar was that of intent.  It was submitted by the spouse and bankrupt that section 423 could only be used when it was clear that the bankrupt was divesting himself of assets in contemplation of a risky activity.  This argument was dismissed by the Registrar who concluded that engagement in a “risky business” could be indicative of intent, but it was not a pre-requisite.  The intention had to be established, but participation in a “risky business” was only one of the factors that could establish such intent.

Given the prevalence of such transactions and the restrictive time limits under sections 238, 239, 339 and 340 of the Act, this case is important because it expands the potential for these actions even where the disposition, as in this case, took place many years before the onset of insolvency.

Capital Gains Tax (“CGT”)

Liability of Trustees in Bankruptcy

Who is responsible for payment of CGT on a chargeable gain on investment properties realised by Trustees in Bankruptcy?  The legal title holder of the property or the Trustee in Bankruptcy who has received the proceeds of sale and is beneficial owner, for and on behalf of the estate?

The issue of CGT liability for office holders is likely to be of increasing importance given the increasing prominence of investment properties in an individual’s investment portfolio.  CGT liability will be payable on any increase in value over the personal allowance of the individual on the sale of any property that is not the primary/ matrimonial residence of the bankrupt.  A misconception that we have encountered is that it is good practice to assist the bankrupt in settling the CGT liability but that the liability remains with the individual.  That is incorrect.  Under the Taxation of Chargeable Gains Act 1992, a trustee who sells the asset is liable to HM Revenue and Customs for the CGT.  Therefore all office holders who sell investment properties in accordance with their duties to creditors to realise the assets must ensure that they receive appropriate tax advice on the potential CGT liability and that sufficient provision is retained to settle the resulting tax bill.

CGT relief and Personal Guarantees

There is a provision contained within the Taxation of Chargeable Gains Act 1992 that enables individuals or companies that have made a “qualifying loan” to another individual or company to claim tax relief against CGT liabilities for up to 5 years from 31 January of the year following the year in which the payment was made.
This provision applies not only to the loans and the individuals or companies that make the loans but also extends to those who have guaranteed a loan and made repayment on that guarantee.  There are of course exceptions and qualifying criteria but given the prevalence of personal guarantees this may be of interest and use to some of your clients and we would be happy to go into greater detail of the exemption and its application to a set of circumstances.

Contact Us

It is not our intention to provide specific advice in this bulletin.  We aim to regularly update you on all the issues, including statutes, case law and practice guidance that may affect you as Insolvency Practitioners.  If any of the topics covered above are of interest then we will be happy to discuss them further with you personally, Please don’t hesitate to contact us:

Christopher Harlowe, Head of Insolvency
0207 427 6475
christopher.harlowe@speechlys.com

Simon Ridpath , Insolvency Solicitor
020 7427 6406
simon.ridpath@speechlys.com