Dividends liable to challenge as transactions defrauding creditors?

Scientist analyze the water of a riverIn the recent case of BTI 2014 LLC v Sequana SA & others [2016] EWHC 1686, the High Court has held for the first time that a dividend can be challenged as a transaction entered into at an undervalue within the meaning of section 423(1) of the Insolvency Act 1986 (the “IA”).

The Facts 

The facts of the case are long and complex but for present purposes the pertinent facts are as follows.

Arjo Wiggins Appleton Limited (now Windward Prospects Limited) (“AWA”) was a wholly owned subsidiary of Sequana SA (“SSA”).

Through a series of corporate acquisitions and asset transfers since the 1950s, BAT Industries PLC (“BAT”), the claimant in this case, became liable to pay for part of the costs of an environmental clean-up relating to the pollution of the Lower Fox River in Wisconsin, USA (the “Lower Fox River Liability”). AWA was liable to indemnify BAT for part of the monies BAT so paid (the “Indemnity”).

In December 2008, AWA’s directors resolved to reduce the company’s capital and pay an interim dividend to SSA (the “December Dividend”). In May 2009, it was resolved the AWA would be sold to a third party and its directors resolved to pay a further interim dividend to SSA (the “May Dividend”). Payment of both dividends was effected by setting off a substantial amount of intra-group debt due from SSA to AWA.

BAT subsequently brought proceedings against AWA and SSA, asserting that the dividends declared by AWA were transactions defrauding creditors in contravention of section 423 of the IA. SSA in response claimed that it had changed its position as a result of the payment of the dividends and that this constituted a defence to the claim under section 425(2) of the IA.

The Law 

The relevant provisions of the IA to be considered were as follows:


  • This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if—
    1. 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;
    2. he enters into a transaction with the other for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by himself. 
  • Where a person has entered into such a transaction, the court may, if satisfied under the next subsection, make such order as it thinks fit for—
    1. restoring the position to what it would have been if the transaction had not been entered into, and
    2. protecting the interests of persons who are victims of the transaction. 
  • In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose—
    1. of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or
    2. of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.’


  • An order under section 423 may affect the property of, or impose any obligation on, any person whether or not he is the person with whom the debtor entered into the transaction; but such an order—
    1. shall not prejudice any interest in property which was acquired from a person other than the debtor and was acquired in good faith, for value and without notice of the relevant circumstances, or prejudice any interest deriving from such an interest, and
    2. shall not require a person who received a benefit from the transaction in good faith, for value and without notice of the relevant circumstances to pay any sum unless he was a party to the transaction.’

The Decision 

The decision turned around three questions:

  • Can the payment of a dividend ever be a transaction between the shareholder and the company on terms that provide for the company to receive no consideration to bring the transaction within section 423(1) of the IA?
  • Did the directors of AWA intend to put assets beyond the reach of a potential claimant or otherwise prejudice the interests of such a person (the “Section 423 Purpose”), in paying the December Dividend or the May Dividend?
  • Did Sequana have a defence that it changed its position in reliance on the transaction?

It was held that:

  • Section 423 was sufficiently widely drafted to include the payment of a dividend
  • The December Dividend did not satisfy the Section 423 Purpose as at the time it was paid there was no settled intention of selling AWA to someone outside the SSA group. There was, accordingly, no intention to put the company’s assets beyond the reach of BAT.
  • The payment of the May Dividend did, however, satisfy the Section 423 Purpose. There was evidence to show that the intention of AWA, through its directors, in declaring the May Dividend was to remove from the SSA group the risk that the indemnity liability to BAT would exceed the amount available to meet such liability.
  • SSA could not avail itself of the defence set out on section 425(2) of the IA. The court relied on the leading case on the scope of the court’s powers under section 425 (4Eng Ltd v Harper [2009] EWHC) and particular emphasis was placed on the comments of Sales J that:

‘the nature of any order and the extent of the relief granted by the court under s.423(2) and s.425 should take into account the mental state of the transferee of property under a relevant transaction (or of any other person against whom an order is sought) and the degree of their involvement in the fraudulent scheme of the debtor/transferor to put assets out of the reach of his creditors.’


‘In choosing what relief is appropriate in a given case, a great deal will depend upon the particular facts. One of the reasons the court is given such a wide jurisdiction as to remedy under this regime is to allow it flexibility in fashioning relief which is carefully tailored to the justice of the particular case. Helpful analogies may be drawn with other areas of the law to guide the court in reaching its conclusion, but given the wide range of situations which the statutory regime is intended to deal with it would be wrong to be unduly prescriptive in trying to lay down hard and fast rules for the application of these provisions.’ 

As such, whilst SSA’s change of position was relevant to the relief to be granted it did not provide a complete defence to a claim under section 423. In any event the 4Eng case was distinguishable on its facts as SSA’s position was very different from the position of the transferee in 4Eng. SSA had fully shared the Section 423 Purpose of AWA declaring the May Dividend and, in fact, was the intended beneficiary of that purpose, since it was SSA which no longer bore the risk under the Indemnity. There was therefore no significant detriment on which SSA could rely. 


This case provides a good summary of the issues a court will take into consideration when faced with a section 423 claim and is the first case to hold that dividends may be liable to challenge as transactions defrauding creditors. Going forward it will be of interest to see in what circumstances a recipient of a dividend may rely upon the defence set out in section 425(2) of the IA as this appears to have been accepted by the High Court in principle.

The UK Court exercises its discretion against making an administration order

The High Court has recently demonstrated its right to exercise discretion as to whether an administration order should be made in relation to a company. In Rowntree Ventures v Oak Property Partners Limited, even though the companies were unable to pay their debts and where the statutory purpose of administration was likely to be achieved, the Court exercised its commercial judgment in determining that it was premature to make an administration order.


The two sister companies sold rooms in two hotels to purchasers (“the Applicants”) on long leases, on terms that enabled the Applicants upon the occurrence of certain events to serve notice upon the companies to repurchase the leases. The conditions enabling the Applicants to require the companies to repurchase the leases were satisfied and notice was served upon the companies requiring them to repurchase. Upon the failure of the companies to do so, the Applicants applied for administration orders in respect of the companies.

In deciding whether an administration order should be made, Mr Justice Purle had to consider whether the conditions set out in Paragraph 11 of Schedule B1 Insolvency Act (“Conditions”) had been met. The Conditions are that (1) the companies are or are likely to become unable to pay their debts and (2) an administration order is reasonably likely to achieve one the statutory purposes of administration – those purposes being (i) a rescue of the company as a going concern, (ii) achieving a better result for creditors than would be likely if the company were wound up without first being in administration, or (iii) realising property to make a distribution to one or more secured or preferential creditors.

Mr Justice Purle held that the Conditions had been met. However, he disagreed that it was necessary for the companies to enter administration or liquidation and that in his commercial judgment on the assessment of the facts, another alternative was to allow the companies time to turn their business around without the implementation and costs of an insolvency procedure. This would ultimately have better prospects for the companies’ creditors as a whole. He noted that the process of repurchasing the leases would not be able to occur for another two years which he believed was a long enough time period to allow the companies to turn around their business.


This judgment has created significant interest as the Courts have traditionally avoided exercising commercial discretion in such matters. One of the concerns is the potential liability of directors of companies that are held to be insolvent but permitted to continue trading, particularly if the company subsequently fails and the Insolvency Practitioner has to determine whether and when they can bring wrongful trading actions against the directors. It will be interesting to see if the Court adopts a similar view in any subsequent administration applications.

Snooze and you lose in Slovakia

Map of SlovakiaA recent decision of the Slovak Courts suggest that if main proceedings have been opened in one member state and the debtor has assets in Slovakia, the insolvency practitioner in the main proceedings must act quickly and sell those assets before secondary proceedings are opened in Slovakia, otherwise he runs the risk of losing the assets to the secondary estate. Legal title to the assets must have passed to the buyer before the secondary proceedings are opened; it is not enough just for contracts to have been exchanged. If title has not passed when the secondary proceedings are opened, then the subsequently appointed Slovak trustee must ratify the transfer to avoid its validity being challenged in the future.


18 November 2008: Restructuring proceedings are opened in France for Key Plastics Slovakia, s.r.o. (“Key Plastics”).

29 May  2009: Decision made to sell all Key Plastics’ assets to Plastique Du Val Loire (“Plastique”). We understand that the parties agreed a framework sale plan but did not actually sign a contract for sale.

1 June 2009: Plastique is granted the right to use Key Plastics’ assets and Key Plastics ceases trading.

17 May 2010: The French court in Alencon orders a court liquidation of Key Plastics and liquidation proceedings are opened in France.

24 May 2010:  Secondary insolvency proceedings are commenced in Slovakia.

19 January 2011: The French liquidator contracts to sell all of Key Plastics assets to Bourbon Automotive Plastics Dolný Kubín s.r.o. (“Bourbon”) and the sale  is duly registered in the local Cadaster Register.

One would think that nothing could deprive Bourbon of its ownership, but the reality is different.

The Slovak insolvency trustee included all movable and immovable assets located in Slovakia in Key Plastic’s secondary estate, including those assets which Bourbon purported to have acquired from the French liquidator. In attempting to defend its title, Bourbon  argued that:

(i) Key Plastics’ assets had been sold to Plastique in 2009 as a going concern under the sale plan which should be recognized in Slovakia under Article 25(1) of the EC Insolvency Regulation 1346/2000 (“Insolvency Regulation”);

(ii) under Article 3(2) of the Insolvency Regulation, secondary proceedings could not be opened in Slovakia as there was no an “establishment” given that Key Plastics had ceased trading in 2009; and

(iii) despite the fact that sale contracts were signed and title was transferred in 2011, Bourbon had already acquired certain proprietary rights to the assets in 2009.

The Court and the Slovak trustee did not share this opinion. Both the first instance and appellate Courts concluded that once secondary proceedings are opened, the insolvency trustee in the main proceedings loses any right to and interest in the assets located in Slovakia and the secondary proceedings  prevail over the main proceedings. Once secondary proceedings have been opened,  only the Slovak trustee can sell the Slovak assets and sign respective agreements.

The Court admitted that Article 31 (3) of the Insolvency Regulation suggests that the trustee in the main proceedings should retain certain control over the secondary proceedings, however, as there is no express obligation on the secondary trustee to comply with the proposals and/or the instructions of the main trustee, the secondary trustee rules. As a result, the Court held that the sale contract signed by the French liquidator on 19 January 2011 was invalid.

They further argued that under Article 8 of the Insolvency Regulation, Slovak law and not French law determines the legal effects of the sale plan adopted in France and once secondary proceedings have been opened, Slovak law governs any disposal of Slovakian assets. In their opinion, Bourbon did not become the owner of the assets based on the decision of the French court on 29 May  2009. Ownership of the assets was  transferred later on 19  January 2011, after the secondary proceedings had been opened.

Unfortunately, the Court did not consider the argument as to whether there was an “establishment” before opening the secondary proceedings. Nor did they properly examine the effects of  the sale plan in 2009 under French law. Had they done so, they might have arrived at a different conclusion.

The decision leaves some unanswered questions. Was the purchase price paid by Bourbon to the French trustees distributed to the creditors in the French proceedings? We would expect so given that back in 2011 there was no Slovak court decision in place and nothing was wrong under French law. Bourbon is still registered as the owner of real estate but the Slovak trustee may now sell the assets again. His fees depend on how much he sells. Hopefully, the Slovak trustee will preserve the existing status quo but there may be issue with redistributing the purchase price again amongst all the creditors. Some Slovak creditors probably did not get anything in the French proceedings, which might actually be the motivation behind this case.

The decision creates uncertainty for the buyer, Bourbon, as well as  Key Plastics’ creditors and we do not believe that this is how the Insolvency Regulation was meant to work. European / local insolvency law should not lead to such uncertainties which are bad for the restructuring business.

This is a complex case and the conclusion does not support the unified processing of cross border insolvency proceedings within the EU. The Insolvency Regulation is based on the principle that  the insolvency practitioner of the country where the company’s centre of main interest is based should lead the process.

All this leads to the necessity for a more globalised approach in cross border cases and the need for communication between the insolvency practitioners of each country. We hope that the Recast EU Regulation, which comes into force in 2017, will help the insolvency practitioners of the various proceedings (main and secondary) to avoid this situation happening again.

To Buy or Not to Buy?

Businessman climbing on wooden ladder to reach cloud houseUnfortunately that is not the question for many young (and even not so young) aspiring UK homeowners who are struggling to get their feet on the property ladder and buy their own home in the current market.

It seems that the UK as a nation is obsessed with home ownership and that first rung on the property ladder symbolises stability, success and achievement (with the small matter of a 25 year mortgage). However, across the country home ownership has seen a sharp decline with the data from the government’s English House Survey showing that the total number of first time buyers has significantly fallen in the last 10 years, because that first rung on the ladder is out of reach for many people. The Resolution Foundation have estimated that English home ownership now sits at just 63.8% – taking home ownership back to levels last seen in 1986.

The decline in home ownership has arrived hand in hand with the rise of the private rental market. The on-going boom in the buy to let market has supported the buoyancy in the house price market which makes it that much harder for aspiring first time buyers.

Following the crash in 2008, when many lenders provided 100% mortgages, the size of the deposit required by a buyer has significantly increased with many lenders requiring deposits of 20% of a property’s value. In a recent study, The Resolution Foundation identified that where people rent this ‘accounts for 30% of net household income compared with 23% associated with mortgages’. Therefore, as rents are exceeding what the same household could expect to pay in mortgage payments, it’s no wonder that many aspiring first time buyers cannot afford to escape this Catch 22 and save for a deposit whilst continuing to pay their rent.

It is not just the price of housing itself that is the problem, but the cost of housing relative to income. With a continuing trend of house price inflation outstripping wage inflation, this affects buyers’ ability to save that all-essential deposit and actually borrow enough by way of mortgage to buy their first home.

Post the Brexit vote, there is much speculation in the market that house prices will drop and at first glance this, together with the recent drop in interest rates, could open up the market for the first time buyer. However, as clearly put by the Resolution Foundation, ‘cheaper houses are of no benefit to people who have less than ever to spend’ and ‘we cannot rely on the (uncertain) house price effect of Brexit to solve the endemic housing affordability problem we have in the UK’.

It seems that those who do manage to buy are increasingly reliant on the good old ‘Bank of Mum and Dad’. Analysis and research by Legal and General Group and the Centre for Economics & Business Research has estimated that homebuyers will receive £5 billion of help from families and friends this year making the ‘Bank of Mum and Dad’ the equivalent of the 10th biggest mortgage lender in the country (and likely the most popular, with no doubt zero interest rates, infinite repayment terms and no guaranteed commitments). And if not fortunate (or favoured!) enough to get credit approval from the Bank of Mum and Dad, it seems that the government’s Help to Buy Schemes are not always the answer as in many areas of the country the average price of a starter home can exceed the maximum purchase price cap on Help to Buy.

But is home ownership the be all and end all?  For an economy where consumer confidence and stability is key, it may not be the lynchpin but it is a very important factor. The shift towards private renting could mean that the younger generation cannot in effect put down ‘roots’, perhaps contributing to the dawn of a new culture and less stable lifestyle. The lack of both consumer confidence and stability in a difficult housing market, particularly within the younger generation, could mean that people are waiting longer and longer to get themselves onto the property ladder, if at all, which could in turn effect savings, financial security and pensions in the long term for that generation. The knock-on effect on the economy is uncertain, to say the least.

Parliament to consider preferential creditor status for consumers

Gift CardsConsumers could be set to jump up the insolvency hierarchy if Parliament backs the latest Law Commission recommendations.

The Law Commission’s report, Consumer Prepayments on Retailer Insolvency, recommends, among other things, that consumers who prepay for goods or services over £250 in the six months prior to a formal insolvency process should be paid out as preferential creditors instead of unsecured creditors.

The report was commissioned by the Department for Business, Innovation and Skills (recently renamed the Department for Business, Energy and Industrial Strategy) and laid before Parliament on 13 July 2016.

The recommendations have been welcomed by consumer rights groups, however questions remain over their wider impact.


The Law Commission recommends that consumers move up the insolvency distribution hierarchy to become preferential creditors if they meet the following criteria:

  • The person is a consumer under section 2(3) of the Consumer Rights Act 2015;
  • There is a prepayment by the consumer i.e. money been paid to an insolvent business and goods or services not received;
  • The prepayment by the consumer amounted to £250 or more in the six months prior to the insolvency; and
  • The consumer did not use a payment method which offers a chargeback remedy, such as a credit card.

The Law Commission initially suggested that the threshold amount be £100 in the three months prior to the insolvency.  However following the consultation process, the final report recommended that a larger amount over a longer period would provide a fairer level of protection for consumers.


Under current insolvency legislation consumers are generally unsecured creditors.  This means they are last in the queue for any distribution of the insolvent estate.  Despite the introduction of the prescribed part concept, in which an amount of floating charge realisations are ring-fenced to provide some distribution to unsecured creditors, in most situations consumers lose out heavily.

By way of example, in the liquidation of Zavvi, unsecured creditors received 25.9 pence in the pound.  This was a positive result when compared to the liquidation of Blockbuster which paid out 14 pence in the pound and JJB Sport where the number of unsecured creditors and the cost of distribution meant that unsecured creditors received just 0.34 pence in the pound.

The Law Commission explained that change is required because consumers are often vulnerable, may not understand risk in the same way as corporate or trade creditors and may suffer hardship as a result. They also suggest that there is a “perverse incentive” for struggling retailers to trade their way out of difficulty by taking more prepayments from consumers with little incentive from secured creditors to prevent this. This “perverse incentive” can lead to consumers effectively funding a last-ditch attempt to rescue the business with little prospect of recovering their money should the rescue attempt fail.  In such cases the consumer carries 100% of the risk while secured and preferential creditors take the benefit.

Further questions

Protecting consumers in an insolvency is clearly important, however changing the insolvency hierarchy raises a number of questions:

  1. How will this affect the position of other creditor groups? For example, floating charge holders would subsequently rank below prepaying consumers in an insolvency.  This may increase the price of lending or reduce the willingness of lenders of provide finance.  The cost of more expensive lending may ultimately be passed onto the very consumers which the change is trying to protect.
  2. Will this change directors’ behaviour in the twilight zone? The period during which a company transitions from being in financial distress to being definitively unable to avoid  insolvency creates significant problems for directors who can find themselves personally liable for the debts of a company if they are found to have deliberately or negligently worsened the position for creditors of the company during that transitional period. A new class of consumer creditor would add a further layer of complexity to a director’s assessment of the company’s ability to continue to trade. This may cause inexperienced directors to take unnecessary action ahead of time, creating potentially avoidable insolvencies.
  3.  Will it add more delays and costs to the insolvency process? In their response to the consultation paper R3 note that “the need to scrutinise a large number of small claims” would add cost and delay to the process.  The Law Commission respond that this scrutiny would happen in any case and a liquidator or administrator would simply have to carry out this assessment at an earlier stage. However the delays and costs will be felt by secured creditors who often finance the business.  Again this may lead to an increase the cost of borrowing for the retailer.
  4. How many consumers will actually benefit? While liquidators and administrators will have to scrutinise a large number of claims, it is unclear how many consumers will actually benefit from the changes.  The credit card chargeback remedy will cover a large number of consumers and many may not meet the £250 threshold (such as holders of gift cards and vouchers).  It is unclear that additional legislation and complexity in the insolvency process will make a significant difference to consumers.

 The changes to the Insolvency Act 1986 brought in by the Enterprise Act 2002 helped to create a better outcome for unsecured creditors than had previously been available. However the number of large scale retail insolvencies in recent years, where many consumers have been affected, has raised the question as to whether those changes went far enough. Whilst this suggested change provides a perceived positive message to consumers, changing the pari passu principle of all unsecured creditors ranking equally could have a negative impact. If the amount available to other non-consumer unsecured creditors is to be reduced further, those creditors may adjust their own business practises by reducing credit terms or insisting on cash on delivery before supplying to a company which could weaken the ability to trade. It could also see HM Revenue and Customs become even more aggressive as they see their chances of financial recovery weaken further. It will be interesting to see how Parliament balances the desire to provide some comfort to consumers against the potential consequences of providing that comfort to businesses suffering distress.

“But Sometimes You Get What You Need” – – Another Decision on Annuity Exemptions

Relieved Businessman Getting Hot Under the CollarLast week, our post “You Can’t Always Get What You Want” discussed a Texas bankruptcy court decision rejecting efforts by debtor Sam Wyly to claim as exempt a number of offshore private annuities. In denying the exemptions, the bankruptcy judge rejected the debtor’s arguments that the principle of liberal application of exemptions and the policy of plain language construction required that the Wyly annuities be found exempt.

In a timely counterpoint, the Seventh Circuit issued its ruling last week in Wittman v. Koenig, a case involving the Wisconsin exemption statutes. Under Wisconsin law, an annuity can qualify as exempt if, among other requirements, it “complies with the provisions of the Internal Revenue Code.” However, the statute does not specify which provisions of the Internal Revenue Code (IRC) an annuity must comply with in order to qualify for an exemption.

In Wittman, the trustee challenged the debtors’ claimed exemption of several annuities. The trustee contended that, in order to qualify as exempt, the annuities had to comply with IRC §§ 401-409, dealing with tax-deferred qualified retirement plans. In response, the debtors argued that annuity would qualify as exempt if it met the standards for favorable tax treatment under § 72 of the IRC, which deals with annuities more generally.

The Seventh Circuit’s review began with an analysis of the language of the statute, as well as its structure and purpose, the latter as a means of informing its statutory analysis. The court also noted that, “with suitable caution,” it could consider external sources such as legislative history to deal with ambiguous language.

First, the Seventh Circuit found that for an annuity to “comply with” the IRC, the annuity should be eligible under IRC § 72 to receive the tax deferral applicable to annuities under the tax laws. The court rejected the trustee’s argument that, in order to “comply with” the tax code, an annuity must comply with ALL annuity‑related provisions of the IRC. In support, the court noted that, for example, it would not make sense to require an individual retirement annuity to comply with tax code provisions in IRC §§ 401-409 applicable to employer-sponsored annuities. The court also rejected the trustee’s argument that the exemption was designed to apply only to annuities intended for retirement purposes. The court noted that the statute supports no such limitation.

Second, the court found that the more liberal application of the exemption urged by the debtors would not frustrate the purpose of the Wisconsin and federal bankruptcy statutes. The court noted that “there is nothing unlawful about structuring one’s assets to take advantage of the bankruptcy laws as Congress and the Wisconsin Legislature have seen fit to write them.” Similarly, the court said that “no debtor owes [their] creditors more than the law demands”

Finally, the court examined legislative history argued by both parties in support of their positions. After review, the court found that the legislative history was “not inconsistent with our conclusion based on the statute’s language, structure and purpose.”

So how does one reconcile these two recent decisions on annuity exemptions? Could it not also be said that Sam Wyly was “structuring one’s assets to take advantage of the bankruptcy laws?” Perhaps, as mentioned in our earlier post, the controlling factor in the Wyly decision was the sense that the debtor was attempting to “have his cake and eat it too.” The Wyly bankruptcy court found that the transactions in question did not meet the definition of an “annuity” because the debtor had never relinquished control over the assets allegedly transferred to the offshore entities providing the annuity promises.

In Wittman, the annuities in question were more typical of a traditional annuity: a third‑party investment where cash is exchanged for a promise of future payments. Since the debtors had complied with the requirements to establish an annuity recognized as such by the tax laws, the court was more prepared to give the transaction the legal effect of the annuity exemption. All this would suggest that if one wishes to engage in some “bankruptcy planning,” one should stay carefully within the boundaries of the exemptions that one is seeking to utilize.

Is it possible to Restructure in Russia?

Arch of Constitutional Court building in St. PetersburgTheoretically, a Russian debtor is able to reorganize. In practice, the law currently does not encourage voluntary restructuring of debt in a way designed to preserve the continued operation of business and jobs.  The interests of debtors and creditors are not appropriately balanced at present to achieve the best results.  Creditors currently have a strong incentive to aggressively pursue legal action against distressed businesses, to secure their vote at creditors’ meetings and the right to propose their own candidate to serve as an interim trustee.

An article outlining the main insolvency law in Russia, the Federal Law No. 127-FZ of October 26, 2002 “On Insolvency” (the “Law”) which deals with pre-insolvency re-organization and formal insolvency procedures including re-organization, has recently been published in Eurofenix, the official quarterly journal of INSOL Europe and examined this question. Click below to read the article.

Is it possible to Restructuring in Russia

Insolvency Service Fees Overhaul – Good News or Bad?

Coin stacks with letter dice - FeesA new fee structure in respect of insolvency fees payable to the Insolvency Service came into force on 21 July 2016, pursuant to The Insolvency Proceedings (Fees) Order 2016 (SI 2016/692) (the “Order”), which revokes The Insolvency Proceedings (Fees) Order 2004 (SI 2004/593) and all ten subsequent amendment orders.

The Order increases the deposits and case administration fee payable in creditor’s petition bankruptcy proceedings (deposit increasing from £825 to £990 and case administration fee increasing from £1,990 to £2,775) and compulsory liquidations (deposit increasing from £1,350 to £1,600 and case administration fee moving from £2520 to £5000) in England and Wales. The case administration fee for debtor’s bankruptcy applications does not increase.

The Order also introduces a new general fixed fee, payable to the Official Receiver (“OR”) on the making of the insolvency order. This replaces the Secretary of State fee, which was dependent on the value of asset realisations and increased in bands with the amount paid into the Insolvency Service Account, being capped at £80,000. This new general fixed fee is £6,000 and is payable at the beginning of the insolvency, not at the end, ensuring the OR gets paid first.

Just last week, our Birmingham Restructuring & Insolvency team acted in respect of an administration application heard in the High Court where this fixed fee was considered in detail. One of the ancillary arguments advanced by Counsel during the hearing was that if the assets of the company were realised in a compulsory liquidation, rather than in an administration, fees of up to £80,000 would be payable to the Secretary of State thereby reducing the amount available for creditors. The Judge made the observation, however, that just a couple of days after the hearing, this fee would be reducing to a flat fee of £6,000. This was clearly a significant reduction and the advantages of proceeding via an administration rather than a compulsory liquidation, considered in respect of this ground alone, looked marginal. Fortunately, this was not the only argument in favour of an administration order over a compulsory liquidation.

This significant reduction in “ad valorem duty” will factor into long running administrations where one of the reasons for keeping the administration open and not moving into compulsory liquidation is to prevent ad valorem duty from being payable on assets yet to be realised. This new fee applies to any compulsory liquidation orders made after 21 July 2016.  With the fee having been potentially reduced so drastically, future estimated outcome statements prepared in support of applications to extend administrations will need to show (other) clear advantages to keeping such administrations open. In asset-rich cases, this may now prove more difficult to demonstrate.  That said, where assets left to be realised within the estate are of little value, a fixed fee of £6,000 will very quickly impact upon the already limited pot available for creditors. A move into creditors’ voluntary liquidation via paragraph 83 of Schedule B1 of the Insolvency Act 1986 is only possible if the administrator thinks a distribution will be made to unsecured creditors and, in circumstances where there is little left to be realised, this is unlikely to be a viable option.

Apart from the effect the Order will have on possible exit routes from administration, it is possible that the new fixed fee could deter insolvency practitioners from taking on smaller cases “off the OR’s rota”, knowing that the first £6,000 realised will have to be paid to the OR.  The aim of the new fees and deposits is to reflect the work the OR carries out and this general fee, payable at the outset of the bankruptcy or liquidation, ensures the OR is paid first. Conversely, however, for those practitioners dealing with asset-rich insolvencies, this has the potential of being a huge saving and increasing the ultimate pot available for distribution to unsecured creditors. The new fee could also be attractive to insolvency practitioners who are pursuing substantial claims against former directors or third parties. They could do so safe in the knowledge that regardless of the amount recovered in any claim, only £6,000 (and not potentially up to £80,000) has to be paid to the OR.

“You Can’t Always Get What You Want” – – Denial of Claimed Exemptions for Offshore Annuities

economy-stock-marketThe bankruptcy courts have a long history of being willing to use their judicial power under the Bankruptcy Code to prevent perceived efforts by debtors to inappropriately shield their assets from creditors. This is true even when the debtors employ structures and devices that are complex and crafted in seeming compliance with applicable law. A recent example of this judicial scrutiny is reflected in Bankruptcy Judge Barbara Houser’s June 29, 2016 decision regarding the claimed exemption of offshore annuities by Samuel Evans Wyly.

Wyly commenced his bankruptcy case after a $123 million judgment was rendered against him in a securities fraud action brought by the SEC. The alleged securities fraud involved transactions undertaken by a variety of offshore trusts and offshore corporations controlled by Mr. Wyly and his brother (since deceased).

Wyly’s offshore entities were also the subject of litigation in the bankruptcy court regarding IRS claims for alleged tax evasion. Wyly’s objections to the IRS tax claims became the subject of a lengthy trial and a 400+ page decision by the bankruptcy court in May 2016.

Judge Houser’s most recent decision involves litigation over several exemptions claimed by Mr. Wyly under Texas law. In particular, Wyly asserted that future payments due him under a series of private annuities from the offshore corporations were exempt under Texas law. These claims of exemption were disputed by the SEC and the Official Unsecured Creditors Committee.

The structure of the various annuity transactions was quite complex. Beginning in 1992, Wyly and his brother established 16 offshore trusts and 38 offshore corporations owned by those trusts. Both the trusts and the corporations were created predominately in the tax haven jurisdiction of the Isle of Man. Wyly transferred assets of substantial value, directly or indirectly, into those offshore corporations in return for private annuities promising a series of future payments to Wyly.

As of the date of his bankruptcy petition, Wyly had received more than $282 million in annuity payments. However, he had also forgiven an additional $61 million in annuity payments and did not expect to receive a further $76 million in payments due to him because the obligated offshore corporations had become insolvent as a result of financing Wyly family lifestyle expenses.

In his motion for summary judgment, Wyly argued that the policy for liberal application of exemption statutes and the doctrine of plain meaning construction required a decision that the offshore annuities were fully exempt under Texas law. The SEC, on the other hand, argued in its cross-motion for summary judgment that, as “self-settled” instruments, the annuities were non-exempt. And the Creditors Committee argued that Wyly’s continuing control over the offshore annuity obligor’s prevented the exemption.

The court began by taking judicial notice of the various findings of fact and conclusions of law contained in its earlier decision on the IRS tax claims. The Court then framed the question at issue as “whether the Offshore Annuity payments are ‘benefits … to be provided to [a] … beneficiary under … an annuity … used by an … individual’ that is exempt in an unlimited amount under Texas law.” And paraphrasing, the Court then asked “are the Offshore Annuity Payments the type of benefit that the Texas legislature intended to exempt from the claims of [Wyly’s] creditors?”

At the outset, the court noted that no party had identified a controlling precedent and the court had likewise not found one. The court rejected Wyly’s position that “the very unique circumstances surrounding his establishment of, control over, and manipulation of the relevant IOM trusts, Annuity Obligor’s, and Nevada corporations are irrelevant.” The court also rejected the SEC’s notion that all self-settled instruments are non-exempt.

The issue that ultimately seemed to drive the court’s decision to reject the claimed exemption was Wyly’s continued control over the annuity obligors. While the agreements provided that Wyly, as the annuitant, would retain no ongoing control, that is not in fact the way the transactions operated. Management of the offshore corporations that were annuity obligors conducted the operations of those corporations in accordance with the expressed “wishes” of Mr. Wyly. The court found that Wyly continued to control the assets purchased by the various annuity obligors and decided which members of Wyly’s family got to use or enjoy possession of those assets.

The court found that the annuities actually served as a means to accumulate substantial wealth offshore and to support the lavish lifestyle of Wyly’s family, with little regard for the long-term impact on the annuity obligor’s duty to honor their contractual promises of annuity payments.

Finally the court held that the annuities did not meet the statutory requirements of Texas law in that they were never expected to honor their alleged obligation to pay fixed sums to Wyly. The court found that fact was demonstrated by, among other things, Wyly’s willingness to forgive substantial annuity obligations and to render annuity obligors insolvent through actions he directed.

As the court concluded, debtors should not be permitted to manipulate their assets in such a way that they continue to enjoy the benefits of the assets while simultaneously shielding those assets from creditors. Thus, even with carefully crafted instruments, a debtor’s designs can be frustrated when those instruments operate to wrongfully place assets beyond the reach of creditors.

US and English Courts welcome most- but not all- foreign debtors

JCRCoverTMA’s Journal for Corporate Renewal July/August 2016 published an article written by Nava Hazan, Mark Salzberg and Susan Kelly, which discusses how the US Bankruptcy Courts have been open to foreign debtors, as well as the limits to such availability, which was the subject of the recent Baha Mar decision in Delaware.

The article further describes how it is increasingly common for foreign companies to use the English scheme of arrangement in cross-border restructuring matters. Several recent cases show the English judiciary, much like its counterpart in the US, has welcomed this type of cross-border restructuring, even where the nexus of the foreign debtor to the UK is minimal.