Recovering costs of litigation as a liquidation expense

The spate of cases dealing with the question of whether a liquidator can treat the costs of any litigation that she initiates or pursues in the exercise of her statutory functions as a liquidation expense payable in priority to other creditors shows no sign of abating. This is hardly surprising bearing in mind that a number of issues were left unresolved by the Court of Appeal in Re Floor Fourteen Ltd, Lewis v Inland Revenue Commissioners. One such case, Re Demaglass Ltd, Lewis v Dempster is the subject of this note. The likely implications of the Insolvency (Amendment) (No. 2) Rules 2002 are also briefly considered

Bankruptcy and hybrid claims

Examines the Court of Appeal ruling in Khan v Trident Safeguards Ltd on whether a bankrupt had standing to appeal the Employment Tribunal's rejection of claims for discrimination and victimisation under the Race Relations Act 1976 and unfair dismissal. Considers whether the claims under the 1976 Act were hybrid and had vested in the trustee in bankruptcy

Unlawful preferences and proprietary rights

Whether payments made to contractors after automatic crystallisation of floating charge had been triggered could be recovered on grounds that they were unlawful preferences

Wrongful trading: two recent cases

The purpose of this short note is to alert readers to two recent cases concerning directors' liability for wrongful trading. By way of reminder, the court's discretion to order a person to contribute personally to the assets of the company is only triggered if the company's liquidator can establish that: (a) the company has gone into insolvent liquidation (meaning that its assets are insufficient for the payment of its debts, other liabilities and the expenses of winding-up); and (b) at some time before the commencement of the winding-up of the company, the defendant knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation; and (c) the defendant was either a director or shadow director of the company at that time.1 If these elements are established the court may make an order, but is not bound to do so. A defence is available if the defendant establishes that having reached the state of knowledge referred to in (b), he or she took every step with a view to minimising the potential loss to the company's creditors that he or she ought to have taken. In practice, the key substantive element is (b) as the matters in (a) and (c) will usually be self-evident

Section 35A and quorum requirements: confusion reigns

Engaged as it is in the Herculean task of drafting the Companies Bill, the DTI would be well advised to consider the implications of Smith v. Henniker-Major & Co. This case has spawned four judgments in the higher courts, each giving a different reading to section 35A of the Companies Act 1985, leaving the law in a highly unsatisfactory state

Re Floor Fourteen Ltd in the Court of Appeal

There is now an extensive literature chronicling the barriers that liquidators face in trying to bring avoidance proceedings under the Insolvency Act 1986. One such barrier is the treatment of the liquidator's legal costs. Broadly speaking, the liquidator is entitled to an indemnity out of the company's assets in relation to the costs incurred should the action fail. However, the value of the indemnity depends on whether the costs are treated as an expense of the liquidation ranking for payment ahead of preferential creditors and any floating charge. In Re MC Bacon (No. 2), Millett J. held that the liquidator could not recoup the costs of an unsuccessful action against the defendant bank as a liquidation expense. The liquidator contended that his costs should be treated as an expense “properly chargeable or incurred by … the liquidator in preserving, realising or getting in any assets of the company” within rule 4.218(1)(a) of the Insolvency Rules 1986

Bare undertakings in directors' disqualification proceedings: the Insolvency Act 2000, Blackspur and beyond

Background to, and key features of, regime of directors' disqualification through undertakings introduced under 2000 Act, possible undermining of objectives of 1986 Act and implications of Blackspur case

Section 236 of the Insolvency Act and directors' disqualification

The question for the House of Lords in Re Pantmaenog Timber Co Ltd, Official Receiver v Wadge Rapps and Hunt was whether the powers conferred by s.236 of the Insolvency Act 1986 (“IA”) can lawfully be exercised solely or principally to obtain evidence for use in disqualification proceedings under the Company Directors' Disqualification Act 1986 (“CDDA”). It is important to stress that the question was simply one of jurisdiction : on the application of an administrator, administrative receiver, liquidator, provisional liquidator or the official receiver does the court have the power to summon any of the categories of person described in s.236(2) to provide the applicant with information and/or documents where the information and/or documents are required solely or principally in connection with disqualification proceedings that are being contemplated or are already pending

Directors' disqualification after the Insolvency Act 2000: the new regime

Scope of amendments to 1986 Act allowing Secretary of State to accept disqualification undertakings from directors instead of resorting to disqualification orders and practical implications of new procedures, including cost incentives