Friday, 29 October 2010

Insolvency Service Policy Formulation: New Insolvency Rules - Tinker with the status quo like Manson or reform completely like Romilly

The Insolvency Service (IS) have published a number of new documents on insolvency law and policy. Arguably the most important is that which relates to the proposed new Insolvency Rules (IRs). The IS are seeking views on how the IR reformulation should progress. Before noting their discussion document I thought it might be appropriate to cite some interesting quotes on the sister subject of company law reform that might be considered relevant. Writing in in the context of company law reform Professor Manson ((1890) 24 LQR 428, at 428-429) once observed: “The English mind, by a curious paradox, is constitutionally distrustful of change while full of reforming energy . The result is a superabundance of legislation, but of a tentative and temporising kind, unscientific, crude, confused; the despair of judges and all who value law as a science.”

Of company law reformers generally it has also been noted that, "“for a lawyer his appearance was unusual. He had a remarkably shaped cranium” (Lord Cohen (1888-1973)) and of the Earl Loreburn (1846–1923 - Lord Chancellor) it was once said that in addition to being a company law reformer he was also, "A stout, bluff, good-natured man, addicted to his cup of tea and his clay pipe, with a strong physique and a large head (which critics called ‘swelled’)." I am sure that the policy people at the IS do not have unusually shaped craniums, swelled heads or tea and pipe habits. They do however have a desire to know about stakeholders' views on the new IRs. In particular the IS note (my bold emphasis):

"New Insolvency Rules  

This letter invites your views upon whether work we have been undertaking to re-write the Insolvency Rules(“the Rules”) should be continued or whether an alternative option of making only limited and necessary amendments to the existing 1986 Rules should be pursued

Background
Over the last few years we have been working  on a project to modernise the Insolvency Rules 1986 (“the 1986 Rules”). Amendments made to the 1986 Rules in April 2009 and April 2010 have included those to allow greater use of electronic communications(including websites), modern channels of publicity and advertising, and greater transparency and possibility of challenging fees charged by insolvency practitioners. 

As the final phase of this work we have been planning to put a new set of Rules into force (in October 2012) to replace the 1986 Rules. Our lawyers have now completed around a third of the drafting but before finalising the remainder we would like to engage with stakeholders and invite feedback not only on the proposed structure of the new Rules, but also more generally on the value of having them. The parts currently in draft - what we have called ‘the common parts’(see below)- have now been published on the Insolvency Service’s website along with tables of destinations and derivations, and brief explanatory notes to explain key changes within the drafting...

Although stakeholders have hitherto been supportive of this re-write, some have recently expressed concern that it will impose significant transitional costs on them as a result of the re-numbering of existing provisions which will result. Some have said they would like to see a delay before putting the new Rules in place. This is not an option for us because while we have the resources now to complete the task, given the implications of the Spending Review it is improbable that we could resurrect the project if we do not complete it now.   

Benefits of the Re-write
We consider that over time the short-term transitional costs users will experience will be far outweighed by the benefits that will result from new Rules. These benefits include:- 

1. Consolidation. The existing rules have been amended at least 22 times since they were put into force in 1986 and this number will increase further over time. New rules will: 
Establish a new base set of Rules against which to make future amendments.
Reduce the number of statutory instruments relating to the rules of insolvency procedure from 23 to one, thereby making the law itself more accessible.

2. Drafting Clarity. The origins of some of the rules are very old indeed and are in need of modernisation and alignment. We can only do this by re-writing the rules in their entirety. We will:  
Create legal certainty by removing the many internal inconsistencies which exist within the drafting and language used. 
Reduce the inherent complexity within the rules to help users of insolvency law gain a better and clearer understanding of the way in which the rules operate. 
The numerous requirements to send and serve documents and the various ways in which time limits operate within the rules is an example of this complexity. The new rules will distinguish between documents (such as statutory demands and petitions) which must be served with a degree of formality, and other documents and information which may be sent by any effective means. For the latter, we will create new provisions to set out when documents and information sent by the various means are to be treated as delivered.

3. Better Structure. We will make it easier for users to navigate their way around the rules and will improve usability by:
Introducing ‘common parts’ whereby rules which are common to more than one procedure will instead be brought within their own part within the rules. Each of the proposed common parts have now been published to give stakeholders an opportunity to comment on structure and points of detail. 
Providing a full write-out of the rules applicable to each of court winding-up, members voluntary winding-up and creditors’ voluntary winding-up. This will remove the current difficulty users can encounter in needing to identify which rules or sub-rules apply to which type of winding-up.  

4. Policy Change. Having amended the rules substantively in April 2010, further policy changes will be limited. We will though:    
Introduce measures that will result in financial savings or which might otherwise reduce costs. 
An example of this is a change to remove the mandatory requirement for documents delivered by post to be sent 1st class (which  arises because Part 6 of the Civil Procedure Rules now applies to documents sent under our rules). This will bring substantial cost savings. 
Make numerous smaller amendments which, over time, will reduce administrative and financial burdens on insolvency practitioners and creditors. The explanatory notes published alongside each of the draft parts we have put on our website detail some of these changes. Similar amendments will be introduced for parts 1 to 10, which are still to be finalised. 

5. Prescribed Forms. Mandating the use of paper forms will, over time, act as a barrier to electronic delivery. We will:-
Review whether all the forms currently prescribed within Schedule 4 of the rules need to be prescribed as statutory templates.
In every case where information must be sent from one person to another, ensure that the relevant rule makes it explicit as to what information must be provided. 

6. Essential Amendments. 
We will put right the rules to make a number of corrections which have become apparent since the April 2010 amendments were put into force. 
These amendments will remove legal uncertainty and in some cases will remove burdens on users of the law.

The Alternative Option
Having regard to what some stakeholders have recently told us about the re-write, I welcome wider views on whether instead of new Rules we should just amend the existing 1986 Rules to deal with the essential amendments (see point 6. above). There might also be scope for certain other changes to be included which might reduce costs, including perhaps the policy change mentioned to allow most postal notices to be sent other than by 1st class. 

Should we decide to pursue this secondary option, the relevant amendments to the 1986 Rules would take effect by October 2011. Thereafter, the 1986 Rules would remain with us for some years to come.  

Questions
It would be helpful if you would please let me have responses to the following questions:
1. Would you prefer to see a new set of Insolvency Rules or, instead, the Alternative Option of only essential amendments to the 1986 Rules? 

2. If you favour the Alternative Option, do you think that the existing rules are fit for purpose for the medium-term (say the next 10 years)?

Questions 3 to 6 relate to the proposed new Rules:
3. Do you consider that the proposed new structure will bring benefits to the user in terms of clarity and ease of use?  

4. Do you feel that the longer-term benefits of a new set of Rules outweigh the short-term transitional costs of implementing the new Rules? If so, are you able to specify what those benefits are and can you put a financial value upon them by reference, say, to efficiency savings you would anticipate?  

5. If you think there will be costs or burdens placed upon you or your firm by the new Rules, would you please identify what the nature of those costs are and, if possible, provide an approximation of what the costs will amount to to you in each of those areas?

6. Do you agree that unless there is a regulatory need for it, there is no need for any form to be prescribed within the Insolvency Rules, provided there are acceptable templates which meet the requirements of the rules available on the Insolvency Service’s website?

7. Please comment on anything else you would like to see either the new Rules or the Alternative Option of essential amendments to the 1986 Rules deliver. Should we decide to push ahead with the new Rules there will be a further opportunity to comment on points of detail within the drafting.  

All responses should be sent to The Insolvency Service Policy Unit at policy.unit@insolvency.gsi.gov.uk or by post to The Insolvency Service, Zone B, 3rd Floor, 21  Bloomsbury Street, London WC1B 3QW  by Monday 6 December 2010..."

It will be interesting to see if responses are reformist - i.e. “supporting or advancing gradual reform rather than abolition or revolution” (OED), or if a more Benthamite like approach to reform will be adopted. In relation to company law reform the late Professor Pettet once opined: "There was a tendency to remain focused on specific problems which had become apparent rather than embarking on a wholesale reassessment of fundamental principles” ((1998) Co.Law, vol.19, no.5 at page 134). Will a Romilly like robustness be adopted? Let us wait and see. These are very interesting times! Some commentators will hope that a Romilly like approach is the way forward otherwise our current insolvency laws may suffer the same perception as those of the late 19th century where it was observed: “our commercial code, so far as bankruptcy administration is concerned, is a national disgrace, and we are compelled to exclaim, with Hamlet, “Reform it altogether”. (from: Editorial. Anomalies of the Bankruptcy System. The Bankers’ Magazine and Journal of the Money Market. Vol.13, September, 1853, pp.609-615, at page 615.)


Picture Credit: http://www.insolvency.gov.uk/

Insolvency Service consultation response documents published and some new insolvency legislation

The Insolvency Service (IS) have published two important documents on insolvency law and policy. The documents contain a summary of responses to two recent consultations:
A number of new pieces of legislation have also been published:
"(a) provide that the reference to the Insolvency Rules 1986 (S.I. 1986/1925) in the Bank
Insolvency Rules includes all amendments to the Insolvency Rules 1986 up to and
including those made by the Insolvency (Amendment) Rules 2009 (S.I. 2009/642) and
the Insolvency (Amendment) (No.2) Rules 2009 (S.I. 2009/2472) (“the 2009 amending
instruments”) (rule 4);
(b) reflect amendments made to the Insolvency Rules 1986 by the 2009 amending instruments
(rules 49, 51, 60, 62, 63, 65-67, 74, 75, 78 and 82);
(c) make other minor amendments to the Bank Insolvency Rules; and
(d) correct minor drafting errors."


  • The Building Society Insolvency (Scotland) Rules 2010 - "These Rules set out the procedure for the building society insolvency process under Part 2 of the Banking Act 2009 (as applied to building societies by the Building Societies (Insolvency and Special Administration) Order 2009 (S.I. 2009/805, amended by S.I. 2010/1189). The main features of building society insolvency are as follows. In the event of a building society becoming insolvent, it enables those depositors who are eligible for compensation under the Financial Services Compensation Scheme (“the FSCS”) to either—

(a) receive compensation for their lost deposits as soon as possible after the building society
goes into building society insolvency; or
(b) have their account transferred to a different building society.

This is the first objective of the building society insolvency process.

The procedure can only be initiated by the Bank of England or the Financial Services Authority
(“the FSA”) by application to the court. The court then makes a building society insolvency order,
appointing a building society liquidator. In the initial stages, the building society liquidator is
accountable to a liquidation committee formed of the FSA, the Bank of England and the FSCS.

Once the building society liquidator considers that the first objective is achieved, the liquidation
committee will pass a resolution to that effect and the building society insolvency will move to the
second objective which is to wind up the affairs of the building society so as to achieve the best
results for the creditors as a whole.

The Rules are based on the Insolvency (Scotland) Rules 1986 and certain provisions of the 1986
Rules are applied to these Rules, subject to a number of general and specific modifications."


Picture Credit: http://www.insolvency.gov.uk/

Thursday, 28 October 2010

The biggest bankrupt?! - no, a draw for first place though!

We have touched on the dubious accolade of the world's biggest bankrupt before. A new name can now join the illustrious list. The Scotsman is reporting that an Edinburgh based property magnate, who was once valued at £500 million, has been declared bankrupt (sequestrated in Scotland). The article continues:

"...A notice in the Edinburgh Gazette... showed that Patrick Hegarty had been sequestrated... at the request of Bank of Ireland. The notice read: "The estate of Patrick Hegarty was sequestrated by the sheriff at Edinburgh and Brian Milne, of Deloitte, has been appointed to act as trustee on the sequestrated estate."

At its height, Hegarty's WG Mitchell property empire included the Radisson hotels in Edinburgh and Glasgow, along with residences on Edinburgh's Charlotte Square and George Street.

But Royal Bank of Scotland called in administrators to 29 of WG Mitchell's 75 subsidiaries last year. The firm had grown from a chain of family butchers in Hegarty's native Northern Ireland to include properties throughout the UK."

Hegarty is not the UK's biggest bankrupt, but he is close to the top spot if his personal indebtedness is £500m. Willie Stern became known as Britain’s biggest bankrupt for a period in the early 1970s with a total liability of £118 million.[1] Stern did not hold the title for long. Mr Rajendra Sethia was declared bankrupt in 1979 owing £140 million.[2] Mr Kevin Maxwell (pictured) then took the crown when he was declared bankrupt in 1992 owing £406 million.[3]


[1] equivalent to £825.2m according to: Fletcher, R. Ramsden faces new money woes. The Sunday Times, February 20, 2005.
[2] equivalent to £ £475.5m today (ibid).
[3] equivalent to £ £554.4m today (ibid). 




Picture Credit: http://news.bbc.co.uk/olmedia/290000/images/_294785_max300.jpg

Wednesday, 27 October 2010

CP Snow's 'Time of Hope' - A view of bankruptcy in 1914 (from a 1940 perspective)

Readers of the blog who are familiar with CP Snow's Strangers and Brothers novel series will not need me to remind them of how excellent the books are. In my view the Lord Snow PhD KBE CBE (1905–1980 - pictured) evokes the trials and tribulations of academia almost perfectly. This ability perhaps stems from his long career as variously: an academic, scientist and administrator. He was we are told, "everyone's idea of a wizard scientist" his "owlish, spectacled face, heavy jowls, bald dome, and ponderous frame, often accoutered in a shapeless suit, and his inevitable cigarette in hand, were recognizable worldwide." The purpose of this blog entry is to recognise the Lord Snow's contribution to bankruptcy in his Strangers and Brothers novel series.


The series contains eleven novels. These range over British life and politics from just before the Great war  until the 1970s. The Masters, for example, contains a brilliant exposition of the machiavellian world of college politics and intrigue. The twists and turns discussed in the book could easily be seen in any University today. There is a Professor Gay in every College - "I congratulate you!" One of my colleagues thinks I am somewhat of an Arthur Brown type character. If only I had Brown's watercolour and wine collection! The Masters has in my view rightly been called, "the best academic novel in English."


The Light and the Dark is also marvelous. The book was reviewed in the following terms by Sir John Betjeman:  "A novel written with the intuition of a woman and the grasp of broad essentials generally reserved for men . . . As full of life as life itself." The theme is dark (i.e. suicide) but the work is a must read.

The Strangers and Brothers novel that will be of most interest to readers of the blog is the Lord Snow's 1940 novel, Time of Hope.  The book charts the early life of the narrator of the entire Strangers and Brothers series, namely, Mr Lewis Eliot. Lewis eventually becomes a barrister and then a Cambridge law don. Before he becomes a college fellow though he has a rather tumultuous start in life, in the main caused by his father's bankruptcy.

We are given the details of Lewis' father's bankruptcy in the early chapters in Time of Hope. Terms such as 'receiver' (page 24), 'petition' (e.g. pages 22, 24 and 26), and 'bankruptcy' (e.g. page 26) are frequently deployed. I have included here what Lewis' Aunt Milly thinks of bankruptcy and wider familial obligation:

"Your father has gone bankrupt...When you grow up...you ought to feel obliged to pay every penny he owes. You ought to make a resolution now. You oughn't to rest until you've got him discharged and you family can be honest and above board again. Your father will never be able to do it stop. He'll have his work cut out to earn your bread and butter." (at page 26).


Aunt Milly (or the Lord Snow!) may or may not have been aware of the discharge provisions in the Bankruptcy Acts of 1883 and 1914. She does however expound a view of bankruptcy, and in particular credit obligation, which was perhaps common then (1914/1940) and is perhaps still now in some circles (2010)! 


Some commentators have opined that the Strangers and Brothers series is largely autobiographical and that a number of characters closely mirror the Lord Snow's own character and career. Lord Snow was, for example, elected a fellow of Christ's College Cambridge in 1930 following completion of his PhD dissertation, ‘The infra-red spectra of simple diatomic molecules.’ Lord Snow's father, like Lewis Eliot's, was a choir master and a clerk in a shoe factory. In a Time of Hope the insolvency arises because of over-indebtedness associated with a shoe factory. The facts are actually not unlike those in the famous Salomon v. Salomon [1987] AC 22, where Aron Salomon was a leather goods merchant who made, inter alia, boots for the British Army. One final point can be made on this autobiographical theme - the character of Roy Calvert has a well earned reputation amongst his fellows as being somewhat of a ladies man. On this theme the Lord Snow's ODNB biographer notes, "his [Lord Snow's] affairs with women became grist for his novels."


I do not currently know if, like his fellow author John Le-Carre, Lord Snow's father was a bankrupt. A copy of Time of Hope to anyone who finds the answer! 

Picture Credit:http://3.bp.blogspot.com/_rW6QtV-zMlE/TEQaJV3zJqI/AAAAAAAAAQI/71MugRN5yCI/s1600/snow_two_cultures.jpg

Tuesday, 26 October 2010

Sources Ancient and Modern - some thoughts from Professor David Graham QC's latest travels

The origins of the present and several further discussions of aspects of insolvency law are to be found in three recently published books from the United States and from France respectively. The first is Rabbi Joseph Telushkin's 'Hillel-If not now, when?' (Schoken Books) which appeared in September 2010. The second work is Paul D Halliday's 'Habeas Corpus - From England to Empire' (The Bellknapp Press of Harvard University) which also came out earlier this year. The French work is Andre' Jacquemont's 'Droit Des Entreprises en Difficulte.'  The 6th edition was published by Litec in 2009. This work, with its 600 pages costs thirty five euros and deserves to find a place on the shelves of insolvency academics as well as professional practitioners concerned with developments in relation to commerical and business failures accross the channel.

The author is a professor in the University of Borgogne (Burgundy). His manual deals with the process of  'conciliation' and in particular collective procedures for 'Sauvegard, Redressement et Liquidation judiciare.'  The particular significane of this treatise is that it contains an extremely useful bibiliography, as well as, especially, a fascinating historical survey of the relevant French law as well as an important consideration of the underlying principles. The book deals with the important legislative changes in the last decade or so, culminating in new ordinances of 18th December 2008 and 12th February 2009.

Telushkin's book has a fascinating passage dealing with the Jeiwsh concept of 'Prosbul'; this concept involved a declaration made in court, before the execution of a loan that the law requiring the release of a debt upon the entrant of the Sabbatical (or Jubilee) year, should not apply.

Professor Halliday's work is an immensley signifcant scholarly contribution to legal history. A detailed review of it appeared in July in the London Review of Books by the late Lord Bingham; this was almost certainly his final achievement. The book contains a reference to the case of Bisell before Lord Mansfield in 1774 where Habeas Corpus was granted for a child in a custody dispute between a mother and bankrupt father (Lostt 748, 98 English Reports 899, see also: Halliday at page 131 and 388, note 163).

Professor Graham will be returning to these and others sources in due course.

Monday, 25 October 2010

Pre-nuptial agreements and bankruptcy - what is the effect of their validity on creditor interests?

The UK Supreme Court (UKSC - pictured) has handed down its long anticipated judgment in Radmacher (formerly Granatino) (Respondent) v. Granatino (Appellant) [2010] UKSC 42. The case concerns the validity of pre-nuptial marriage agreements in English law. As the UKSC summary notes the UKSC found, inter alia, that "the Court of Appeal was correct to conclude that there were no factors which rendered it unfair to hold the husband to the agreement." Pre-nuptial agreements can therefore take effect in English law.


The case raises an important issue in relation to the bankruptcy jurisdiction, namely, what should the law of insolvency do about pre-nuptial or post-nuptial agreements between husband and wife, the effect of which are to put assets beyond the reach of creditors? Or put another way, if a debtor husband has made a pre or post-nuptial agreement with his wife which has the effect of causing their 'joint assets' to revert to the non-debtor wife so as to put them beyond the reach of his creditors, how should the law of insolvency respond? 


Bankruptcy is mentioned only once in the Radmacher case and that is in the dissenting judgment of the Lady Hale, but her comments are not in this anti-creditor context. At paragraph 175 the learned Baroness (and sometime law professor in the University of Manchester) observes:


"A couple may think that their futures are all mapped out ahead of them when they get married but many things may happen to push them off course – misfortunes such as redundancy, bankruptcy, illness, disability, obligations to other family members and especially to children, but also unexpected opportunities and unexplored avenues."


So how should the law of insolvency respond to pre-nuptial and post-nuptial agreements? (hereafter referred to collectively as nuptial agreements). Some useful guidance may first be found in statutory provisions that regulate transactions in fraud of creditors, transactions at an undervalue, preferences, and associated areas. The now repealed section 42 of the Bankruptcy Act 1914 must be our first port of call. The section noted, inter alia, that:


"42.—( 1) Any settlement of property, not being a settlement made before and in consideration of marriage, or made in favour of a purchaser or incumbrancer in good faith and for valuable consideration, or a settlement made on or for the wife or children of the settlor of which has accrued to the settler after marriage in right of ins wife, shall, if the settlor becomes bankrupt within two years after the date of the settlement, be void against the trustee in the bankruptcy, and shall, if the settlor becomes bankrupt at any subsequent time within ten years after the elate of the settlement, he void against the trustee in the bankruptcy, unless the parties claiming under the settlement can prove that the settlor was, at the time of making the settlement, able to pay all his debts without the aid of the property comprised in the settlement, and that the interest of the settlor in such property passed to the trustee of such settlenmeut on execution thereof."


The modern provision is section 339 of the Insolvency Act 1986 (Transactions at an undervalue) which notes:


"(1) Subject as follows in this section and sections 341 and 342, where an individual is adjudged bankrupt and he has at a relevant time (defined in section 341) entered into a transaction with any person at an undervalue, the trustee of the bankrupt's estate may apply to the court for an order under this section.
(2) 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 that individual had not entered into that transaction.
(3) For the purposes of this section and sections 341 and 342, an individual enters into a transaction with a person at an undervalue if—
(a) he makes a gift to that person or he otherwise enters into a transaction with that person on terms that provide for him to receive no consideration,
(b) he enters into a transaction with that person in consideration of marriage [or the formation of a civil partnership..."


Section 423 of the Insolvency Act 1986 (Transactions defrauding creditors) is also of note. It states:


"(1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if—
(a) he makes a gift to the other person or he otherwise enters into a transaction with the other on terms that provide for him to receive no consideration;
(b) he enters into a transaction with the other in consideration of marriage [ or the formation of a civil partnership]..."


These sections are slightly off point, but they do indicate that there is a legislative willingness to interfere with contracts made between debtors and third parties in the context of insolvency and marriage. A pre-nuptial agreement may therefore be critiqued in a similar manner. There are two points to make at this stage. First, does a transaction in in consideration of marriage in some way relate to nuptial agreements, and if so, can a nuptial agreement be defeated by the provisions cited above? 


Is there any case law guidance that is useful on this area? There are a number of bankruptcy cases that contain discussion of nuptial agreements, but not specifically on the transaction in fraud of creditors context as outlined above. These cases are:


Beach v Beach [1995] 2 FLR 160
As Mrs. Justice Eleanor King has observed ([2008] EWHC 2038 (Fam)) "Beach concerned a husband who went bankrupt after the agreement was made with his wife; this resulted in the family farm, the only significant asset, being sold by the trustee in bankruptcy for a fraction of the sum which it had been anticipated by both parties would be available for distribution."


Brittain v Courtway Estates Holdings SA [2008] EWHC 1791 (ch); [2008] BPIR 1229 
This bankruptcy case was decided on a point concerning beneficial interest. However, My Justice Evans-Lombe found on the facts that "The Bankrupt was married to Yasmin Senft ( “YR”) in 1993 with whom he entered into a prenuptial agreement of 15 July 1993 in which she is described as a “student” then 23 years old...."



Geveran Trading Co Ltd v Skjevesland [2003] B.C.C. 209
Where before Mr Registrar Jaques evidence was adduced in a bankruptcy hearing on COMI that, "Our prenuptial agreement, incidentally, is registered in Zurich, not anywhere else in the world, not in the UK not Norway. It is registered in Switzerland. My wife's family live there all their life. My wife is brought up there. My children are brought up there. All of us speak French fluently." 



Re Eichholz (No.1) [1959] Ch. 708; [1959] 2 W.L.R. 200; [1959] 1 All E.R. 166
In this case a trustee was appointed to administer an insolvent estate in bankruptcy. Under the Bankruptcy Act 1914 s.130 the trustee was entitled to bring an action under the Law of Property Act 1925 s.172 to recover property conveyed with intent to defraud creditors. The trustee in bankruptcy sought a declaration that a dwelling-house which had been conveyed by the deceased to his wife by a deed dated March 15, 1955, was conveyed with intent to defraud the deceased's creditors and was void under the Law of Property Act 1925 s.172 and should be set aside.

The provisions and case law cited above provide a brief flavour of some of the important issues that are raised by the intersection of insolvency law and family law. The search for the answer continues! 



There was an error in this gadget