Insolvency Case Highlights: misconduct, procedural errors, accountability and scrutiny

As the days grow longer and summer approaches, it’s time to take stock of some recent interesting insolvency cases. They say insolvency law is full of surprises, and these cases are no exception, delivering their fair share of unexpected twists – from debates over costs and liabilities to the ever-present challenge of procedural missteps. In this roundup, we explore key rulings that have provided valuable lessons and points of debate for practitioners and stakeholders alike.

Burke & Ors v Peabody Construction Ltd [2024] EWHC 392 (Ch)

This case involved an appeal against a decision by ICC Judge Prentis concerning the allocation of costs in a Company Voluntary Arrangement (CVA) dispute.

The lower court had ordered the Joint Supervisors to be jointly and severally liable for these costs, prompting the appeal. The central issue determined by the Court was whether the Joint Supervisors of the CVA should be held personally liable for the costs incurred by Peabody Construction Ltd from the trial onwards. The appellants contended that they were named as parties solely in their capacity as supervisors, not personally, and thus should not be personally liable for costs. It was argued that the Joint Supervisors maintained a neutral stance during proceedings and that there was no evidence of misconduct warranting a personal costs order.

The High Court allowed the appeal, setting aside the costs order against the Joint Supervisors. The court emphasized that costs orders against nominees are rare and typically require evidence of personal misconduct.

In this instance, no such misconduct was established. Allegations of misconduct centred on the Joint Supervisors’ failure to engage with the court proceedings, to agree consequential matters and to attend the 27 April hearing and then, during the appeal hearing, to attempt to vary the terms of the CVA to address one of the flaws or “quirks” within it.

The court found that the existence of a flawed CVA will not qualify as misconduct on the part of the Joint Supervisors merely because they supported it, as was the case here. The court further noted that joint representation and the tone of legal arguments did not necessarily indicate a departure from neutrality.

This judgment underscores the principle that, absent explicit personal misconduct, nominees such as Joint Supervisors of a CVA should not be made personally liable for cost orders.

Haw v QM Systems Ltd [2024] EWHC 1944 (Ch)

In this case, the Administrators sought the court’s confirmation of their appointment as administrators of QM Systems Ltd, despite procedural defects in the notice of appointment.

The company faced cash flow challenges and accumulated rent arrears, leading its directors to engage RSM Restructuring Advisory LLP to assist in entering administration.

On 12 July 2024, a Notice of Intention to appoint the applicants was filed at court, including a signed written consent from National Westminster Bank (NatWest), the holder of a qualifying floating charge over the company’s property.

However, the subsequent Notice of Appointment filed on 15 July 2024 contained several procedural defects. The notice erroneously suggested that the company, rather than its directors, appointed the administrators. Additionally, only one copy of the notice was filed instead of the required three, and the consent from NatWest was not exhibited.

The court found that the errors in the NOA were procedural and did not invalidate the appointment.

The incorrect heading related to the prescribed procedural requirements for a proper appointment; it was not connected to the defined circumstances in which a power to appoint arose, and did not invalidate the administrators’ appointment. The court emphasised that the substance of the notice was correct and that no party could have been misled by the incorrect heading.

Given the NOA had been filed electronically, the option to file three copies of the document in accordance with rule 3.26 simply was not available. The requirement under the rules appears to be a hangover from the days before CE-filing was the norm. Nevertheless, it is a requirement of the rules and the court ordered further enquiry into this point. The court did find that the failure to file duplicate copies did not invalidate the appointment.

The court granted the Administrators’ application, confirming the validity of their appointment. Costs were not sought by the applicants, as the mistakes should not be borne by the creditors in any distribution.

This judgment happily underscores the court’s pragmatic approach in addressing procedural defects in insolvency proceedings, emphasising substance over form, provided no substantial injustice is caused. In the age of CE-Filing, the requirement to file multiple copies of documents, in this case the NOA and written consent of those given notice in accordance with r.3.26 remains, despite the fact that on a practical basis the requirement appears to be superfluous!

Manolete Partners PLC v Freed & Ors (Re Just Recruit Group Ltd – Insolvency Act 1986) [2024] EWHC 2242 (Ch)

This case involved Manolete Partners PLC (Manolete), a litigation funder, which had acquired claims from the administrators of Just Recruit Group Ltd (JRGL).

Manolete pursued claims against Mr. Freed, a director of JRGL, and two associated companies, Key People Limited (KPL) and Achieva Group Limited (AGL), alleging breaches of fiduciary duty, transactions at an undervalue, and preferences under the Insolvency Act 1986 (the “Act”). Specifically, it was contended that Mr. Freed caused JRGL to make payments totalling £918,590 to KPL and AGL, which were connected entities.

The defendants argued that any liability should be limited to the shortfall in JRGL’s administration, approximately £350,000, rather than the full amount of £918,590 claimed. They engaged a circularity argument contending that recovering the full amount would result in a “money-go-round,” as KPL was a significant creditor of JRGL.

The High Court, presided over by ICC Judge Mullen, found in favour of Manolete on all claims. The court held that Mr. Freed breached his fiduciary duties by authorising the payments to KPL and AGL, which were transactions at an undervalue and constituted preferences.

Regarding the “circularity argument”, the court rejected the defendants’ contention that liability should be limited to the shortfall in the administration. ICC Judge Mullen emphasised that imposing such a limitation would discourage the pursuit of claims intended to uphold corporate governance standards and would prejudice other creditors.

The court ordered the defendants to pay the full amount of £918,590.

This judgment demonstrates the court’s commitment to holding directors accountable for breaches of duty and reinforces the principle that recoveries in assigned claims are not limited to the shortfall in the insolvent estate, thereby promoting the integrity of insolvency proceedings.

Amanda Wade and Nicholas Nicholson (Joint Liquidators of MSD Cash and Carry Plc (In Liquidation)) v Mohinder Singh, Surjit Singh Deol, Raminder Kaur Deol, the Estate of Bakshish Kaur (Deceased) [2024] EWHC 1203 (Ch).

This case concerned the liquidation of MSD Cash and Carry Plc, a family owned cash and carry business which was placed into liquidation in early 2012. During the course of their appointment the Joint Liquidators issued proceedings to enforce a series of charging orders which had secured a judgment debt of £996,494 from Mohinder Singh and Surjit Singh Deol. These individuals were part of a larger family group involved in the company and the ownership of a property portfolio. Part of this portfolio was a property called The Oaks which was the subject of these proceedings.

The Defendants attempted to rely on a Declaration of Trust dated 17 April 2017 which purported to confirm that The Oaks was held on for another family member, Raminder Kaur Deol, since its purchase in 2003. However, the Defendants contended that despite the common intention that Ms Deol was the beneficiary of The Oaks, no steps in writing had been taken until 2016 when their accountants were notified and then subsequently the Declaration of Trust was entered into. In the absence of written evidence, the Defendants sought to rely on a common interest constructive trust which they alleged had been in place since 2003 when The Oaks was purchased.

The court also had to consider whether the trust was a sham. This involved consideration of whether the parties deliberately created the appearance of rights and obligation which did not reflect their true intentions. This issue linked to whether the Defendants had purposefully attempted to mislead creditors about the true ownership of the property. If the Declaration of Trust was found to be genuine, then the court had to consider whether section 423 of the Act was applicable and the creation of that trust in 2016 had been an attempt to put The Oaks out of the reach of creditors.

Given the lack of contemporaneous evidence that a trust was supposed to exist and the lack of evidence suggesting any intention on the part of the Defendants the court found there had not been a common intention constructive trust established when The Oaks was purchased in 2003. As a result, the Declaration of Trust dated 2017 did not formalise the earlier oral trust, it created a new disposition of The Oaks the timing of which was particularly pertinent.

Whilst the court did not find that the Declaration of Trust was a ‘sham’ there was comment made that the circumstances of its creation (at a time when The Oaks was under threat from enforcement actions by the Liquidators and HMRC) were suspicious. However, it was still found that the Declaration of Trust did represent a transaction defrauding creditors under section 423 of the Act. The court therefore had the authority to set aside the Declaration of Trust.

The court’s finding demonstrates how important the intentions, coupled with transparency and necessary formalities, of those seeking to rely on trust documents are when considering if documents are genuine or not. It also provides an indication of the emphasis that a court will place on the protection of creditor rights in an insolvency situation and is a salient reminder of the effectiveness of section 423 of the Act as a means of recovering assets which have been transferred away from a company.

To conclude

These cases are a reminder that Insolvency law exists at the intersection of commercial practicality and legal precision. It seeks to navigate the challenges of distressed businesses while ensuring fairness and transparency whilst ensuring the best result for creditors is obtained. As these cases demonstrate, a failure to adhere to professional duties, procedural standards, or equitable principles can have significant legal and financial repercussions.

Our Restructuring and Insolvency team has considerable experience in advising businesses, directors and individuals facing financial distress. Should you require any assistance, please contact any one of our partners in the Restructuring & Insolvency team. We are experts in this field and are here to help.

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