Risky Business - Pinsent Masons

Transcription

Restructuring Business
Summer 2012
Too much red tape!
Is regulation killing restructuring?
Foreword
We are delighted to launch the first issue of Restructuring Business at an exciting time for Pinsent Masons and our Restructuring
team.
Our national team – already one of the UK's largest - just became a lot bigger. Steven Cottee, Nick Pike, Tom Withyman, Bhal
Mander and Serena McAllister have all joined our London team. Also, following Pinsent Masons' merger with McGrigors on
1 May 2012, Pamela Muir and Laurence Spencer join the team to lead our offering in Scotland and Northern Ireland. All are
highly experienced Restructuring specialists and clients have already commented that they consider these developments to be a
"game-changer" for us.
We are really excited about these developments, which will significantly enhance our ability to support our clients, working on
assignments across the UK. Indeed, following our merger, we are the only major law firm in the UK with offices in all three UK
legal jurisdictions.
We are pleased to welcome all of the new members of our team and look forward to introducing them to friends old and new.
You will find further details on all of them in our opening New Faces article. Further news (and some revealing material from
Bhal and Pamela) appears in our regular Team News and Diary Room features in the concluding sections of this edition.
The theme for our Summer 2012 edition is regulation. There is no doubt that we are facing a prolonged period of regulatory
change – much of it seeking to address the sins of the recent past. Following the government's recent – and welcome –
abandonment of pre-pack legislation, the focus has shifted to regulation of the insolvency profession. This is just one example of
how we are seeing moves to regulate in all areas of the restructuring market. From financial services to health and safety issues,
the regulators are here to stay. With this in mind, our opinion pieces comprise a series of articles on the hot topics for
restructuring professionals working in a highly-regulated environment.
For those to whom it is relevant, we have included in our Brief Case feature a summary of key
legal developments from the past few months. Looking forward, against a backdrop of
continued concern as regards the impact of the so-called "refinancing wall", in our
Horizon-Watch graphic we have highlighted what is coming down the line for the
remainder of 2012.
We hope you enjoy this first edition and would welcome your feedback on the issues
covered and suggestions for future articles. We also look forward to working with
you over the coming months.
Jamie White
Partner
Head of Restructuring
T: +44 (0) 207 418 9550
M: +44 (0) 7900 823400
E: [email protected]
I Restructuring Business
New Faces for Summer 2012
Contents
Introducing the new members of our team.
It’s a Wrap!
James Cameron looks at the techniques being used to deliver sales at best value
in situations where a pre-pack is not an option
An Inconvenient Truth
Richard Williams explores the fall-out from October's Court of Appeal ruling on
Pensions Regulator claims in the Nortel and Lehman administrations.
Aardvarks and Slotting
Michael Lewis and Alastair Lomax explain the finer points of financial services
regulation and why we all need to know about it.
Risky Business
Dr Simon Joyston-Bechal dispels the myths about health and safety issues for IPs
and explains why the restructuring market needs a wake-up call.
Brief Case
The team examines recent legal developments in the restructuring arena and
their implications.
Horizon Watch
Our projections for legal developments in the restructuring market and beyond
for 2012.
Horizon
Horiz
zon
o Watch
Wat
a ch
Banking & R
Restructuring
estructuring
Insurance
Insurance
Commercial
C
ommercial and IP
Litigation
Litigation
Jan
Jan 2012
Future
Future of
of UK GAAP
second consultation
consultation
Jan - Apr
Apr 2012
Jan
Public sector duty to
publish inf
o on
info
eliminating
discr
imination
discrimination
Jan
Jan 2012
New European
European data
protection
protection proposals
proposals
due out
31 Jan
Jan 2012
Proposals include
Proposals
changes to
sweeping changes
procedures for
for
the procedures
company winding up
company
petitions including
electronic
electronic
applications
Diary Room
EEarly
arly 2012
- New form
form of
of LMA
rrecommended
ecommended ffacilities
acilities
agr
agreement
eement ffor
or rreal
eal estate
finance tr
transactions.
ansactions.
Expected to encour
age
encourage
gr
greater
eater standar
standardisation
disation
of terms ffor
or rreal
of
eal estate
finance loans
Proposals may
may include
- Proposals
reforms to protect
protect the
reforms
interests of
of cr
editors on
interests
creditors
pre-pack
a pre-pack
administration
administration
FFeb
eb 2012
Inter
im K
ay rreport
eport on
Interim
Kay
UK equity markets
and long term
planning
Apr
Apr 2012
Abolition of
of
Infrastructure
Infrastructure
Planning Commission
Commission
transfer
transfer to MPU
(Major Infrastructure
Infrastructure
Planning Unit
Corporate
Corporate
Regulatory
Regulatory
Employment
Employment & Pensions
Pensions
Spr
Spring
ing 2012
La
Law
wC
Commission
ommission
PPaper
aper due on pr
pree
contr
contract
act disclosur
disclosure,
e,
misr
misrep
ep and w
warranties
arranties
in business insur
insurance
ance
Construction
Construction
Tax
Tax
Mid 2012
FFinancial
inancial Services
rregulatory
egulatory
ar
chitecture reform
architecture
reform Bill likel
likelyy to be passed
Jul 2012
Jul
Kay review
review final
Kay
report in equity
report
markets and long
term decision making
Property,
Property, Planning & Environment
Environment
Autumn
Autumn 2012
Market Abuse R
Reg
eg
expected to be
passed.
Autumn 2012
Autumn
Flexible funding damage based
damage
agreements (aka
agreements
contingency fees)
fees)
contingency
Sep 2012
infrastrucAccess to infrastrucAccess
ture on land: comms
ture
code paper due
End 2012
Inter
Interest
hedging
est rrate
ate hedg
ing
potentiall
potentiallyy mor
moree
expensiv
expensivee due to
centr
al clear
ing
central
clearing
Jul 2012
09 Jul
Changes to regime
regime for
for
Changes
Energy Performance
Performance
Energy
Certificates –
Certificates
of
enactment of
Directive due
Directive
Jul 2012
31 Jul
Prospectus Directive
Directive
Prospectus
changes: deadline for
for
changes:
implementation.
2012
Chang
es to rregulation
egulation
Changes
o
off Settlement and
clear
ing pr
ocesses
clearing
processes
2012
Thir
d par
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Third
party
recover fr
om
recover
from
bankr
upt's insur
er
bankrupt's
insurer
Apr 2012
Apr
gy EEfficiency
fficiency
CRC Ener
Energy
Scheme – first
first sale of
of
Scheme
allowances
allowances
Oct 2012
star
of auto
startt of
enr
olment of
of worker
enrolment
workerss
into sc
hemes fr
om
schemes
from
10/12
Dec 2012 - Sep 2016
A
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olment
Automatic
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in pension sc
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scheme
star
ts.
starts.
01 Oct 2012
New rregime
egime on
rregistering
egistering ccharges
harges
2012
www.pinsentmasons.com © Pinsent Masons LLP 2012
Restructuring Business is delighted to start a series of in-depth interviews with
members of the team.
Team Update
Pinsent Masons' Restructuring Team news and developments.
Restructuring Business I
New Faces for
Summer 2012
Before getting into the really serious
business of regulation and legal updates,
we thought that you might like to meet
the new members of our team.
1
Introducing our new starters
Pinsent Masons' Restructuring team is going through the largest expansion in its history. With three new partners and two senior
associates in London and new teams in Scotland and Belfast, we are delighted that we have been joined by some of the finest
lawyers in the industry.
Steven Cottee has experience in advisory transactional and contentious aspects of restructuring work and
acts for banks and financial institutions, creditors and officeholders. Recent assignments have included the
administrations of Nevada Bob and gaming chain Agora group and he has developed a niche in advising
stakeholders in distressed professional partnerships, including Halliwells and Hextalls LLP. Steve speaks at
restructuring seminars throughout the UK and has spent two spells on secondment to major banks.
Nick Pike has twenty-five years experience of restructuring and insolvency work, specialising in contentious
work, (including fraud and asset tracing) directors' advisory assignments and regulatory issues. He is
recommended as a leading individual in both Chambers' Guide to the Legal Profession and the Legal 500 and is
listed as one of the World's Leading Restructuring Lawyers in the International Financial Law Review.
He brings a wealth of knowledge to the team and is working on the receivership and administration of
environmental land investor Sustainable Group, with investigations in the UK, Cambodia, USA, Senegal and
Philippines. He is a frequent speaker and commentator on restructuring and insolvency issues and is on the
editorial board of Finance and Credit Law.
Tom Withyman is another very well known restructuring and insolvency lawyer with 20 years experience.
He acts for banks, officeholders, underperforming companies, directors and creditors. Tom's recent experience
includes advising banks on recovery strategies in the real estate, retail and education sectors. He also regularly
provides advice to directors of distressed companies. Tom is currently acting for the interim manager on one of
the Charity Commission's most high value appointments.
Bhaljinder Mander is a senior associate. He has extensive experience of restructuring transactions and
corporate and personal insolvency, advising not only banks and officeholders but also creditors (secured and
unsecured) and directors of distressed companies. Recent assignments include Halliwells LLP, Agora group and
High and Mighty.
Serena McAllister is a senior associate.
She specialises in transactional work for banks and officeholders.
Her career as a solicitor has included two secondments at a major clearing bank and two years as an in-house
lawyer at a boutique turnaround investment house.
Pamela Muir is a legal director.
Pamela has spent the last 15 years specialising in restructuring matters.
Pamela's primary expertise is in the sale and purchase distressed businesses. She also advises clients on wider
asset protection, reorganisation and restructuring matters.
Laurence Spencer is a senior associate.
Laurence has been dealing with corporate recovery and
restructuring work in Northern Ireland and England for over 10 years. He is also qualified to practice in the
Republic of Ireland. He regularly acts for insolvency practitioners and for creditors and directors of insolvent
companies. He has particular expertise advising on business disposals. Recent high-profile assignments
including Pizza Hut (Ireland/Northern Ireland), PT McWilliams and Future Residential Developments.
2
It's a Wrap!
Pre-Packs, Post-Packs and the future of
insolvency M&A
In a move which has been widely welcomed by the restructuring market, the Government has
now abandoned plans to introduce legislation aimed at further regulating pre-packaged
insolvency sales. While the Insolvency Service was proposing a regime of prior notice to
creditors, the restructuring market was trying to develop other ways to allow IPs to maximise
value through the use of conditional sale arrangements. Bearing some similarities to the US
Chapter 11 Stalking Horse process, in the UK such deals are generally referred to as Post-Packs.
James Cameron looks at the techniques being used to deliver sales at best value in situations where a
pre-pack is not an option
3
The good old days
Back in the day, many IPs could expect
to earn their keep executing a steady
stream of trading receiverships and
administrations. The plan was simple:
get appointed, run the business for a
period, find a buyer, keep creditors in the
loop and sell when ready.
The rise of the pre-pack
Some years ago – nobody is exactly sure
when – trading insolvencies went out of
fashion. It was a bit like the guest at a
party turning up with four tins of mild
only to find everyone is drinking
Jägerbombs. Pre-packs were the new big
thing. If you were not doing them,
preferably with a dose of accelerated
M&A on top, you were not "in".
It started with administrative
receiverships and, with the blessing of
the courts, pre-packs found their way
into administrations. Businesses which
conventional wisdom suggested were
fine to trade in insolvency were
suddenly vulnerable, needed protection
and most of all needed a pre-pack.
With a few notable exceptions, classic
trading insolvencies became a rarity.
Pre-packs are the norm.
Image problems
However, like many who have success
thrust upon them, pre-packs have found
it very difficult to adjust to the trappings
of fame and to shake off the perception
that they are a bit gauche. Still worse,
they have always carried with them a
whiff of something slightly unpleasant.
Unfairly but understandably, many
affected by them but not involved in
negotiating them (usually the unsecured
creditors) regard them with profound
suspicion.
The reality is that the only practical
difference between a pre-pack and any
other sale undertaken by an IP should be
that, with a pre-pack, the terms are
negotiated pre-appointment and
executed immediately after it, rather
than during a period of trading in the
hands of the IP after their appointment.
However, where trading insolvencies
gave IPs plenty of time for an open and
thorough marketing process, pre-packs
have often been executed without any
prior marketing, often to existing owners
or management. Indeed, for many in
business the word "pre-pack" has come
to mean "a dodgy sale back to directors
who created the mess, leaving creditors
to suffer".
The introduction of SIP16 went some
way towards addressing those concerns
by requiring that IPs disclose marketing
activity and valuation advice in relation
to every pre-pack administration.
The search for an alternative
To their credit, the restructuring
community have recognised the prepack problem and are increasingly
seeking to resolve it. There was
considerable opposition – and rightly so
– to the government's proposals to
introduce a three-day notice period to
the pre-pack process (to what end other
than value destruction?!). However, the
response to plans to raise the bar for
sales to connected parties (for example
by requiring an exit through compulsory
liquidation with a requirement for a new
IP to be appointed) was more moderate
and an indication that the restructuring
community is open to looking at the
issue seriously, particularly if a viable
alternative to the pre-pack might be
found.
IPs are in an invidious position. Tasked
with finding a party who is prepared to
offer the best price to buy the insolvent
business or its assets (and thereby
optimise returns to creditors), IPs know
that in many cases a period of trading
post-appointment could be destructive
of value. The risk is that, as soon as they
know that an entity is insolvent,
stakeholders (who are not bound to act
collectively) take action to protect their
individual exposures: customers
terminate or re-source; suppliers refuse
to supply and seek to recover stock; and
high value staff leave to find alternative
employment before it is too late. Many,
including R3, have argued that a change
in the law (similar to the provisions of
Chapter 11 in the US) which locks in
suppliers or at least prevents them from
holding insolvent companies and IPs to
ransom could play a key part in reducing
the number of pre-packs. While this
might help, it would be a significant shift
from the current position. Realistically,
it would not provide a complete
solution.
As matters stand, pre-packs have been
the best solution available to IPs to
achieve sell and restore stability to
businesses for the optimal price, using a
seamless transfer into new ownership
such that reassuring words from the
buyer effectively accompany the bad
news from the administrators.
IPs have also worked more closely with
their Corporate Finance colleagues to
develop more sophisticated preinsolvency marketing procedures,
adopting teasers, confidentiality
agreements and online data rooms
amongst other tools.
But what if the very search for a buyer
itself could be destructive of value? For
instance if the only likely buyers are the
very suppliers or customers who can
damage the business with their
decisions? Is it possible to combine the
value-protecting "quick solution"
characteristics of a pre-pack with the
visible market-testing of the traditional
trading insolvency? A solution of sorts
may lie in the post-pack.
4
sale is structured, negotiated and agreed
upon by an "administrator in waiting"
and the buyer before the appointment
of the administrator takes place. Once
terms are agreed, the administrator is
appointed, the sale contract is executed,
money changes hands and the buyer
takes control of the business or assets.
This follows the tried and tested prepack formula.
Post-packs explained
In a post-pack transaction, a buyer is
identified who proposes to pay a price
which the IP considers good value. The
What happens next is different. The sale
contract contains special provisions
which make the sale conditional upon a
hardening period post-signature during
which the sale to the buyer (A) falls
away if a better offer is forthcoming
from buyer B (or C, D etc) and buyer A is
unable to match or better it. Typically,
in our experience, the hardening period
comes out at about 28 days. In some
deals, the IP is restrained from actively
marketing the business, although it is
hard to see the benefits of this and,
more commonly, the arrangement is
predicated on the IP's ability properly to
test the market. As such a post-pack is
not a way around SIP 16; rather it is a
way to demonstrate that the sale
process was robust and obtained the
best value possible.
The mechanism for effecting the postpack will vary from a split exchange and
completion (with the buyer allowed in
under licence) to rights to rescind or
novate. The differences between the
different models are perhaps best
explained by reference to the chart
below.
Trading Administration Sale
Appoint
Market Test
Negotiate
Complete sale
Pre-pack Administration Sale
Market Test
Negotiate
Appoint
Complete sale
and pay
Post-Pack Administration Sale – Conditional Sale
Negotiate
Appoint
Exchange and
Licence
Market Test
Complete sale
and pay
Market Test
Rescind or
Release
Market Test
Novate or
Release
Post-Pack Administration Sale – Complete and Rescind
Negotiate
Appoint
Complete sale
and pay
Post-Pack Administration Sale – Complete and Novate
Negotiate
5
Appoint
Complete sale
and pay
Underlying these basic structures are
detailed provisions in the sale contract
providing among other things for:
•
What the buyer can do with the
business or assets during the
hardening period.
•
What the administrators can do visà-vis marketing in the hardening
period.
•
What the IP can or must do in the
event of an approach.
•
The rival bidder's rights to undertake
due diligence.
•
The buyer's rights to match or better
a rival bid.
•
The mechanics for unpicking the sale
to the buyer (release/repayment of
the price and transfer of control of
the business and assets).
•
Apportionment of the
administrators' costs and the trading
receipts and losses in the meantime.
Post-Packs – the risks
Post-packs carry with them potentially
significant risks. Every deal will be
different and the terms and mechanics
used will often require very careful
consideration so as to ensure that all
eventualities are covered.
The biggest risk to the IP in deploying
this process is the loss of control over
the underlying business and assets,
particularly if the contractual
arrangements include loopholes or are
otherwise inadequate to recover control
when required – a real risk despite the
best efforts of the parties to anticipate
all outcomes. This is particularly an
issue in the case of a split exchange and
completion where less than the full price
may have been paid by way of deposit at
completion.
In all cases there is a practical concern
about what happens if the original buyer
refuses to relinquish control. Once in
situ, the capacity is great for the
incumbent buyer to delay and damage
value or take steps which act as a
disincentive to rival bidders.
Consideration needs to be given to how
to prevent this and to mitigate the risk
(perhaps through collateral or
guarantees) if problems arise. Indeed, it
has been argued that these risks are so
serious that they could have the effect
of discouraging alternative bidders
altogether. Most turnaround investors
would think twice about bidding for a
business which has just been put into
the hands or a rival investor.
For these reasons, as the law currently
stands (i.e. without a statutory
framework to support a post-pack
methodology), the post-pack approach
perhaps is best suited to share sales and
sales to connected parties, in both cases
because there is unlikely to be
significant change in the day-to-day
management and operation of the
business during the hardening period.
Legislative reform
stalk·ing-horse (stô k ng-hôrs ) n.
1. Something used to cover one's true
purpose; a decoy.
2. A sham candidate put forward to
conceal the candidacy of another or
to divide the opposition.
3.
a. A horse trained to conceal the hunter
while stalking.
b. A canvas screen made in the figure of
a horse, used for similar concealment.
Post-packs share a number of
characteristics with the Chapter 11
"stalking horse" process; which involves
a binding contract with a preferred
bidder – the stalking horse – who sets
the base price in a court-sanctioned
auction. The procedure offers stability
to the business and protects value
because third parties recognise that a
buyer is waiting. They are more likely to
be supportive as a result. An additional
incentive is provided to the stalking
horse, who is entitled to a break-up fee if
they are outbid.
Post-packs are far from a panacea but in
the right circumstances could help to
restore the faith of creditors in
insolvency M&A. As such they are
worthy of further consideration by IPs
and investors, as well as by the
Insolvency Service who have the means
to look at the possibility of introducing
legislative reforms which might provide
greater protection against the downside
risks to this approach. Although, in light
of the government's recent decision, the
pressure appears to be off. For now. n
James Cameron is a Senior Associate in our Restructuring team and has led a number of assignments involving the
innovative use of post-pack procedures.
James Cameron
Senior Associate
T: +44 (0) 161 250 0152
M: +44 (0) 7711 070206
6
An inconvenient
truth:
pensions in the UK have priority ranking
Defined benefit pension schemes in deficit have long been a matter of concern. The outcome in
October 2011 of linked appeals by the administrators of the groups of both Nortel and Lehman
Brothers were a notable triumph for the UK Pensions Regulator and scheme trustees. However,
the adverse consequences of these cases on lenders and insolvency practitioners, created by the
"oddities, anomalies and inconveniences" of a "legislative mess" are also likely to generate
important knock-on effects for corporates and scheme trustees.
Richard Williams and Alastair Lomax explore the fall-out from October's Court of Appeal ruling on Pensions
Regulator claims in the Nortel and Lehman administrations.
7
The problem with pensions
Unfortunately, as we live longer and the
markets are in turmoil, the UK's private
sector defined benefit (DB) schemes will
remain, stubbornly, in aggregate deficit.
£217bn and counting.
Meaningful state regulation of the
pensions problem in the private sector
only began with the Pensions Act 1995,
which arrived in the wake of the death
of Robert Maxwell. In the context of the
recent Nortel/Lehman cases, most
notable of the surviving aspects of that
regime is the triggering of a debt which
the employer of a DB scheme is liable to
pay in the event of its insolvency. This is
calculated on the basis of the
employer's responsibility to meet the
buy-out cost of the scheme (i.e. the cost
of securing members' benefits by
purchasing annuities from an insurance
company). It has come to be known as a
Section 75 debt.
Parliament passed the Pensions Act 2004
in order to address the deficiencies of
the 1995 regime. In so doing, it
dramatically ramped up protections for
DB scheme members. The 2004 Act (as
amended in 2008) created the PPF; a
"lifeboat" scheme which guarantees a
minimum level of pension for members
of DB schemes whose employer has
gone bust; and which is funded,
controversially, by a levy on other UK DB
scheme employers. The Act also created
the office of the Pensions Regulator,
with a remit actively to police
compliance of employers' obligations to
fund their schemes. Recognising the
“moral hazard” of giving unscrupulous
employers a way out by dumping their
DB schemes on the PPF, Parliament gave
the Pensions Regulator powers to
impose either:
•
Financial support directions (FSD)
– a requirement to provide financial
support to an under-funded DB
scheme (which might be anything
from cash to a parent company
guarantee) in circumstances where
the employer is either a “service
company” for other companies in its
group or if it has insufficient net
assets to meet at least 50% of its
obligation to pay a Section 75 debt;
or
•
Contribution notices (CN) – a
requirement to pay immediately
anything up to the full amount of
the employer's Section 75 debt
obligations where there has been an
act or a failure to act: (i) which has
been "materially detrimental" to the
likelihood of accrued scheme
benefits being received; or (ii) where
one of its main purposes was to
reduce the amount of any Section 75
debt (or prevent it from becoming
due). A CN can also be issued for
non-compliance with a FSD.
Of critical importance for lenders to
corporate groups is the fact that these
powers can be exercised not only
against defaulting employers but against
entire corporate groups and others,
simply by virtue of their connection or
association with the employer.
The Lehman and Nortel
administrations
Lehman collapsed in September 2008.
Its UK arm entered administration.
Among those companies was the
principal employer in the Lehman
Brothers Pensions Scheme. The
administration triggered both a £140m
Section 75 debt on the scheme's
employer and an assessment period for
the scheme's entry into the PPF. The
Regulator began to investigate and
identified that the employer was a
service company, providing employees
on secondment for most of the group's
European activities. Eventually, its
Determinations Panel confirmed in
September 2010 that an FSD should be
issued against several group companies.
Nortel, a Canadian-owned telecoms
giant, went bust in early January 2009.
At that time, Nortel's principal operating
company in the UK was placed into
administration, along with its UK
subsidiaries and various European
entities (on the basis that their centre of
main interest (COMI) was in England).
That company was also the principal
employer in the group's DB scheme for
UK employees. The scheme had 42,000
members and a buy-out deficit of
£2.1 bn. The Regulator began to
investigate around the time of the
group's collapse and matters followed a
similar course to the Lehman case,
culminating in a determination issued in
June 2010 that an FSD should be issued
against various companies, including the
European entities in administration.
The priority ranking of “moral
hazard” claims
The administrators in both cases were
faced with the question of how an FSD
(and any subsequent CN) should be
treated in the waterfall of distributions
from the administration. They applied
to the High Court for directions on the
point. The Regulator, the PPF and the
scheme trustees were respondents. In
broad terms, the options put to the
court were that the FSDs should be
treated as follows:
•
Administration expenses – a
special category of super-priority
claim, ranking ahead of any floating
charge, preferential debts and (within
the expenses category) ahead even
of the administrators' remuneration.
Such claims only rank behind debts
secured by fixed charges;
•
Provable unsecured debts – a low
priority debt category, ranking
behind any secured claims, save to
the extent of any ring-fenced
Prescribed Part fund set aside from
floating charge realisations; or
8
•
Non-provable claims – a rather
nebulous "black hole" category of
claim, ranking for payment only out
of any (very unlikely) surplus after
payment of provable debts.
The administrators contended that the
FSDs were non-provable claims. The
respondents argued that the claims were
administration expenses, with a fallback
that they were provable debts.
With evident reluctance, Briggs J, in a
judgment delivered in December 2010,
held that, on the facts of these cases,
the FSDs were administration expenses.
In essence, the issue was a matter of
timing. He noted that the FSDs (and
CNs) were statutory liabilities and were
imposed after the administrations had
commenced. In such a case, he held
that he was bound to follow the
principle, laid down by the House of
Lords In Re Toshuko Finance UK plc
[2002] 1 WLR 671, that such liabilities
were administration expenses. He went
on to note that, had the FSDs been
issued before the commencement of the
administrations, they would have ranked
as provable unsecured debts.
Briggs J went on to criticise what he
described as a "legislative mess" created
by the conflicting regimes under
pensions and insolvency legislation. One
particularly curious consequence of the
ruling was that, through a mere accident
of timing, Section 75 claims which
would rank only as provable unsecured
debts in an employer's administration,
would effectively have super-priority as
an FSD or CN in a connected-party
insolvency if they arose after the
administration had been commenced.
Unsurprisingly, the administrators
appealed to the Court of Appeal on
essentially the same issues. On 14
October 2011, the Court of Appeal
unanimously upheld the decision of the
High Court (despite the "oddities,
anomalies and inconveniences to which
this gives rise") and, in large part, the
judge's reasons, although without the
same degree of reservation.
The Court of Appeal has now granted to
the administrators permission to appeal
the matter to the Supreme Court. In so
doing, it recognised the implications of
this case and the fact that the Supreme
9
Court would not be bound by the
Toshuko principle in the same manner as
the junior courts.
•
Lenders will need to factor
insolvency practitioners’ concerns
into any insolvency strategy –
Before accepting a formal
appointment in respect of a group
which is at risk of claims from the
Regulator, insolvency practitioners
will require comfort that they can
make distributions to creditors and
draw payment from available asset
realisations.
•
There might be clarity but there is
no certainty – The appeal process is
likely to take at least a year with
little comfort that the Supreme
Court will reach a different
conclusion. Alternatively, Parliament
might reverse the effect of these
rulings through amendments to
primary or secondary legislation but
politicians will be reluctant to be
portrayed as choosing banks ahead
of pensioners!
Implications for lenders and
insolvency practitioners
While welcoming the "clarity" of the
result, the UK Pensions Regulator has
been at pains to play down the
consequences. Despite the Regulator's
good intentions, pending a reversal on
appeal, the outcome is of serious
concern to lenders and advisers when
dealing with cases involving a DB
scheme in deficit, for the following
reasons:
•
Lenders with inadequate fixed
charge security risk a shortfall in
recoveries on insolvency – Section
75 debts, and therefore Regulator
claims, are potentially large enough
to wipe out any value in the floating
charge.
•
In practice many (if not most)
FSDs and CNs are likely to be
issued after the commencement of
an insolvency process – The
Regulator has the duty and power to
use these powers but has limited
resources to do so. In practice,
insolvency is the most likely trigger
for an investigation by the Regulator
and the process is time-consuming.
•
Protections for lenders in facility
documentation offer little
assistance and might in fact
crystallise the problem – The
ability for lenders to intervene
quickly is often vital. The difficulty is
that, the very act of enforcement
could be the catalyst which “flips”
the priority of putative Regulator
claims from unsecured to
super-priority.
Wider implications
Unless and until the position is reversed,
the consequences highlighted above will
inevitably drive lender behaviours with a
knock-on effect for corporates and
trustees dealing with UK DB schemes in
deficit.
•
Due diligence – Prevention being
better than cure, the outcome of this
case highlights the importance to
lenders of robust due diligence on DB
schemes, both before and after a
commitment to lend is made.
Corporates can expect lenders to
look harder than ever at the risks
posed by this issue before
committing funds.
•
•
•
•
Documentation – It is only human
nature that, despite the “trigger
problems” highlighted above, credit
committees will demand more
stringent terms to ensure that early
intervention (where sensible) is
possible.
Pricing – Where lenders are unhappy
with the risk and the available
solutions, the outcome in these cases
is likely to push up the cost of
finance for corporates associated
with DB schemes in deficit – and in
the worst cases, corporates will
struggle to find finance on
acceptable terms.
Fixed charges – Realisations made
under valid fixed charge security rank
ahead of administration expenses.
The pressure on lenders to procure
effective fixed charge security from
corporates over a wider range of
assets will doubtless increase.
Trustees and the Regulator may have
concerns over such activity, to the
extent that this impacts on the
strength of the employer covenant
and their outcomes in insolvency.
Asset based lending – Assets owned
by or validly assigned to lenders by
way of outright sale are not security
and therefore are not subject to
deduction of administration or
liquidation expenses. The decision is
likely to stimulate a push from
lenders for these forms of funding.
•
•
•
Assets overseas – Questions remain
(particularly in Nortel) over the
enforceability of the Regulator's
powers outside of the UK but the
outcome in other cases might be
quite different where the COMI is
outside of the UK. One consequence
of these cases might be to promote
"forum shopping" amongst
corporates to satisfy lenders that the
risks to them are remote.
Receiverships – Where available,
administrative receiverships might be
a preferred alternative because of
the lack of an equivalent expenses
regime under that process. Lenders
will, however, need to be careful; an
FSD or CN issued pursuant to a
liquidation of the same entities
(running concurrently with or
subsequent to the receivership)
would still give rise to the same issue
and could prevent (or even result in
clawback of) floating charge
distributions made by the receivers.
Clearance – It is highly likely that
this case will reinvigorate the process
of engagement between corporates,
their lenders, the Regulator and
trustees prior to completion of any
round of financing or a disposal,
particularly in the context of a
restructuring. Such discussions are
likely to represent an opportunity for
trustees and the Regulator to
demand improved terms for the
scheme (in effect the provision by
the corporate of the sort of support
which might otherwise be required
under an FSD). Given the strategic
importance of timing, it is likely that
the parties will seek to use this to
their advantage in any engagement
pre-insolvency.
•
Application to court – As pointed
out by the Regulator and the courts,
administrators (but, curiously, not
liquidators) have the right to apply
to court to vary the order of priority
of payment of expenses out of the
available assets. This will certainly
not convince a wary lender to
commit funds but it is foreseeable
that the court appointment route
might become the mode of choice
for administrators seeking an
appointment conditional on the
court's approval of a variation of the
priorities.
The options available to parties will vary
significantly from one case to the next
and the risk can be driven as much by
the timing of events as any other factor.
Regrettably, we are in the hands of the
Supreme Court and, potentially,
Parliament. In truth, clarity and
certainty are unlikely to be achieved any
time soon. n
In the matter of Nortel GmbH (In administration) & Others, sub nom Bloom & Others v The Pensions Regulator &
Others and In the matter of Lehman Brothers International (Europe) (In Administration) & Others, sub nom Lomas &
Others v The Pensions Regulator & Others [2011] EWHC 3010 (14 October 2011).
Richard Williams is a Partner and head of our London team. He is also a member of Pinsent Masons joint pensions
restructuring group, REACT.
Richard Williams
Partner
T: +44 (0) 207 490 6246
M: +44 (0) 7879 486291
10
Aardvarks, Slotting,
Financial Services
Regulation
and why they matter to us
Regulatory change in the financial services sector is already driving activity in the restructuring
market. Here we look at the impact of slotting – a phenomenon with which the banks have
been wrestling for some time and which is only now coming to the attention of a broader range
of restructuring professionals.
Michael Lewis and Alastair Lomax explain the finer points of financial services regulation and why we all
need to know about it.
11
R
egulatory change in the financial
services sector is already driving
activity in the restructuring
market. Here we look at the impact of
slotting – a phenomenon with which the
banks have been wrestling for some
time and which is only now coming to
the attention of a broader range of
restructuring professionals.
Have you ever sat in a meeting when
something – let's call it the "Aardvark
Principle" – was raised and you sat there
nodding sagely and praying that nobody
suggested you give a view on it? On an
intellectual level we realise that the
Aardvark Principle is very important and
we really should swot up on it. On an
emotional level we would far rather talk
about the weather or the football. The
Aardvark Principle remains a mystery to
all but the most ardent aardvark
specialist.
Slotting, it seems, has knocked tax and
pensions off their perch as the new
Aardvark. So what is slotting and why
does it matter to us in the restructuring
market? To answer that, we need to
hold our breath and get to grips with the
thorny aardvark of financial services
regulation.
Financial Services Regulation
for dummies
Banks work on the basis of trust and
confidence – As we all know, banks
accept deposits and make loans and
derive a profit from the difference in the
interest rates charged and paid
respectively. Now for the tricky part;
banks effectively create money (which is
perhaps different from creating wealth!)
in the economy by making loans. For
example, of £100 deposited with a bank,
although it is credited to the customer's
account (and therefore “owed” by the
bank to the customer), the bank might
typically loan £90 to its other customers
who might deposit it with another bank
until it is required and in turn that bank
might loan £80 to its customers and so
on. In so doing, banks help to facilitate
the flow of money through the business
and wider community more rapidly and
in greater amounts than actually exists.
Of course, trust is an essential ingredient
of this process; depositors and investors
must trust banks that they will lend
their money responsibly and will
therefore be able to repay it when the
depositors and investors want it back.
What happens when the
trust goes
As any fan of the movie It's a Wonderful
Life will appreciate, the fundamental
flaw in the system is that if everyone
went to the bank at the same time to
demand repayment – which might
happen if trust in the bank had
evaporated – the bank would only be
able to repay a fraction of what it owed
to its depositors. The results are
worryingly familiar to us. Only the state
has the capacity to bail out problems on
that scale and in an age of global
banking, sovereign debt crises and
austerity cuts, even the state is having
to check its back pockets for loose
change. Passing the burden of a failed
bank on to the tax payer is not a votewinner. Arguably, it is this rather than
anything more noble that has driven
regulation of the financial services
sector and of banks in particular.
economies worldwide, including the UK.
Changes to Basel and related best
practice guidance – and there have been
many, particularly after the horse had
bolted in 2008 – are led by an
international body of banking
supervisors called the Basel Committee
on Banking Supervision, or BCBS. Within
the EU, the Basel principles have largely
been adopted into national law by
member states under the terms of the
Capital Requirements Directive or CRD.
Every time that there has been a change
to the Basel principles, there have been
consequent changes to the CRD. We are
now in the process of adopting Basel III
under the guise of CRD IV! No doubt
concerned about the size of the EU
acronym mountain, CRD IV is also
known as the CRR, short for Capital
Requirements Regulation – with
reference to that part of CRD IV which
will have direct effect in EU member
states without the need for enabling
national legislation. The majority of the
rules implementing the CRD (and
therefore Basel) insofar as they relate to
banks and other credit institutions and
investment firms are set out in the FSA's
handbook, snappily entitled The
Prudential sourcebook for Banks,
Building Societies and Investment Firms
or (confusingly) BIPRU for short.
The regulatory principles
The regulatory framework
Globally, the regulatory framework for
banks and other financial institutions is
founded on the principles of the Basel
Accord; a non-binding set of principles
now adhered to by most developed
The whole point of banking regulation is
to avoid or at least mitigate future crises
by ensuring that banks have enough
assets to stay afloat in stormy waters so
that depositors and investors (and
ultimately the tax payer) are protected.
The regulatory framework therefore
provides for the following:
•
Eligible regulatory capital – Rules
setting out what constitutes the
12
capital (such as cash reserves, equity
and so forth) that banks can take
into account when assessing the
strength of their balance sheet
(based on its loss-absorbing
characteristics).
•
•
Risk weighted assets (or RWAs) –
The total assets held by a bank
(principally rights to payment under
loans and other financial
instruments), where their value has
been adjusted according to
prescribed rules to reflect the risks to
those assets.
Minimum capital ratio – Rules
setting the minimum level of capital
that banks must hold as a proportion
of their assets whose value has been
adjusted to reflect risk. The current
minimum level of capital is 8% of
the bank's RWA.
capital ratio) and must intervene
where necessary.
•
The risks to which the banks are
exposed – Understanding risk is vital to
understanding slotting and its
implications for the restructuring
market. For the purposes of assessing
the value of RWAs the following risks are
the most important:
•
Credit risk – the risk to banks that
counterparties to the transactions it
has entered into will default (most
obviously its borrowers under loan
agreements).
•
Market risk – the risk to banks of
losses arising due to price
fluctuations of financial instruments
(such as exchange rate swaps) in
their trading books.
•
Operational risk – the risk of losses
resulting from inadequate or failed
internal controls or from external
events.
In other words the formula is:
Minimum capital ratio = Eligible Capital
RWA
Under the existing regulatory
framework, banks are required to hold
capital equivalent to 8% of RWAs. To
use an example, Aardvark Bank has £100
of capital and other reserves which are
eligible to be included as regulatory
capital and £1000 of value in its loan
book, having taken into account the
various risks to those loans. Aardvark's
capital ratio is 10% (100 ÷ 1000) and,
having (very simplistically and assuming
operational and market risk thresholds
are met or ignored) followed the current
rules, it is adequately resourced.
Pillar 3 – Banks must disclose key
information to market participants
who deal with them in order to
achieve market discipline.
Of these, it is to credit risk that we have
to look to understand the significance of
slotting.
Measuring credit risk
Taking this into account, the regulatory
framework is based on three principles,
called the Three Pillars:
13
•
Pillar 1 – Banks must calculate their
eligible regulatory capital and
minimum capital requirements by
reference to credit risk, operational
risk and market risk (see below).
•
Pillar 2 – Supervisors (currently the
FSA in the UK – although that is
changing) must assess how well
banks are assessing their capital
requirements relative to the risks to
which they are exposed (i.e. their
Now for the really technical bit. Stay
with us and you will really know your
aardvarks. Banks can choose to calculate
the credit risk to their assets using one
of two methods:
•
The standardised approach – As the
name suggests this method follows a
standard approach to categorising
assets (such as exposures to
corporates, sovereign states or
banks) and applying risk weights
(discounts to value, basically) which
•
in the UK are set by the FSA, broadly
on the basis of credit ratings
provided by External Credit
Assessment Institutions.
The internal ratings based (or IRB)
approach – This method permits
banks to make their own assessment
of credit risk exposures on the basis
of their internal models and methods
for assessing and managing risk.
Banks must satisfy their national
supervisor that their application of
the IRB approach meets minimum
requirements and that their credit
risk management practices are
consistent with guidelines from the
BCBS or the supervisor.
The Basel II text states that "subject to
certain minimum conditions and
disclosure requirements, banks that have
received supervisory approval to use the
IRB approach may rely on their own
internal estimates of risk components in
determining the capital requirement for
a given exposure".
It further states that: "The IRB
calculation of risk-weighted assets for
exposures to sovereigns, banks, or
corporate entities uses the same basic
approach [as the standardised
approach]. It relies on four quantitative
inputs: (1) Probability of default (PD),
which measures the likelihood that the
borrower will default over a given time
horizon; (2) Loss given default (LGD),
which measures the proportion of the
exposure that will be lost if a default
occurs; (3) Exposure at default (EAD),
which for loan commitments measures
the amount of the facility that is likely
to be drawn if a default occurs; and (4)
Maturity (M), which measures the
remaining economic maturity of the
exposure."
A foundation IRB approach is available
to banks who pass the basic measures
required to use IRB and allow banks to
use their own risk assessment models to
calculate PD, leaving the supervisor to
determine LGD and EAD. Banks who
satisfy supervisors that they operate
particularly strong internal measures
can input their own data for all of these
factors to derive risk weights for assets
with minimal supervisor involvement
under the advanced IRB approach. The
larger UK banks generally have
finance and/or operate physical
assets;
sophisticated internal systems which
allow them to follow the advanced
approach.
•
Under both the standardised and IRB
approaches, in order to calculate their
minimum capital requirements, banks
are required to categorise their assets
into pre-determined assets classes with
different risk profiles and to which
defined risk weights must be attached.
We will confine ourselves to the IRB
asset classes (which tend to follow
accepted market practice) and, more
particularly the asset class comprising
exposures to Corporate counterparties.
Corporate exposures are divided into five
sub-classes of "specialised lending".
•
•
The exposure is typically to an entity
(often a special purpose entity (SPE))
which was created specifically to
Slotting and the art of
balance sheet maintenance
Banks are required by regulation to
play the slots – Banks that do not
meet the requirements for the
estimation of PD under the IRB
foundation approach for their corporate
specialised lending assets must map
their internal risk grades to five
supervisory risk categories. These
categories are associated with a specific
risk weight (i.e. discount to value) which
increases with the level of risk
associated with the asset, broadly in line
with external credit rating agency
assessments, as follows (with some
flexibility for particularly strong assets):
BIPRU requires that banks “slot” assets
in these categories on the basis of five
criteria comprising: financial strength,
As a result of the preceding factors,
the primary source of repayment of
the obligation is the income
generated by the asset(s), rather than
the independent capacity of a
broader commercial enterprise.
Object finance – funding the
purchase of physical assets (such as
ships and aircraft).
•
Commodities finance – structured
short-term lending to finance
reserves, inventories and receivables
of exchange traded commodities
(metals, crops, oil and the like).
•
Income-producing real-estate
(IPRE) – funding for incomeproducing real estate (such as
offices, industrial or retail space)
where repayment of the funding
comes from the income derived from
the underlying asset (typically, rent
under a lease);
The four sub-classes of specialised
lending identified in BIPRU are:
•
Specialised lending is termed in BIPRU as
lending where:
The terms of the obligation give the
lender a substantial degree of control
over the asset(s) and the income
that it generates; and
•
Project finance – these are large
projects where repayment will be
derived from completion of the
project and operation of the
underlying asset (such as funding for
power plants, transport
infrastructure and mine).
SL Asset Class
Basel II identified a 5th category of
(effectively speculative) "High
volatility commercial real estate"
(HVCRE) lending. The FSA determined
that it was not necessary to include this
in BIPRU as it was not relevant to the
UK market.
Strong
Good
Satisfactory
Weak
Default
≥2.5yrs to maturity
70%
90%
115%
250%
0%
<2.5yrs to maturity
50%
70%
115%
250%
0%
political and legal environment,
transaction characteristics, strength of
sponsor and security package. Full
details of what these criteria mean for
each of the specialised lending asset
categories are set out in an annex to the
Basel text. These are the slotting
criteria and the process of assessing
them is called the “supervisory slotting
criteria approach”.
As noted above, banks that meet the
requirements for PD can use the
foundation IRB approach for the
corporate asset class to derive risk
weights for specialised lending assets.
Similarly, banks that meet the
requirements for PD, LGD and EAD can
use the advanced IRB approach. Under
BIPRU, banks seeking to apply risk
weights that are more favourable that
those in the table above must
demonstrate to the FSA that their
internal standards exceed the slotting
criteria.
In December 2010 the FSA published
guidance on the PD models used by
banks using the IRB approach for IPRE
portfolios. The guidance casts doubt on
the suitability of the models used by
those banks because, according to the
FSA, there was an "observed disconnect"
between the banking industry and the
14
FSA as to what constitutes a compliant
rating system for IPRE. This is an
obvious flaw in the IRB approach for all
specialised lending classes, not just IPRE;
banks looking to reduce the level of
capital “tied up” by the regulations, may
have an interest in slotting assets more
optimistically than the FSA thinks
should be the case. The guidance acted
as an alert to banks that in cases of
unremedied material non-compliance
with the regulations the FSA would act
to require a compliant approach – most
likely using the supervisory slotting
approach.
Why does slotting matter to
the restructuring market?
Most recently, the UK has pushed to
implement measures which go above
and beyond those required in the EU
under existing law. The process of
implementing Basel III (and CRD IV)
begins on 1 January 2013 and will
further ramp up the level of pressure on
banks.
In a climate of toughening regulation it
is becoming increasingly difficult (or at
least more expensive) for banks to
leverage off the assets in their portfolios
where those assets are "risky" – at least
by the measures imposed by regulation.
In the language of Basel, the CRD and
BIPRU, the minimum levels of capital
that banks are required to hold are going
up because: the definition of what
constitutes eligible capital is narrowing;
and the amounts that banks are required
to hold against their exposures is
ratcheting up. This may or may not be a
good thing, depending on your view of
whether banks need the means to fund
our economy out of the crisis or
(not without pain) lending to return
to acceptable levels against asset
value and, potentially, may facilitate
a refinance;
whether lax banking regulation was a
significant cause of the state in which
we now find ourselves.
Either way, from the perspective of the
restructuring community all of this is
highly relevant because these pressures
are forcing banks to consider whether
the possible returns on their riskier
assets are truly worth their while tying
up significant amounts of capital in the
meantime – capital which might be
more productively employed in other
areas. This factor as much as anything
coming down the line in the wake of the
Vickers report may force a divergence of
the so-called retail and casino banks.
Many lenders have found it attractive in
an illiquid market and with depressed
asset values to leave the sleeping dogs
in their portfolios well alone. Quite
apart from the implications of
regulation on how banks structure their
businesses, increased regulation makes a
“do nothing” approach to particular
problem exposures less and less
attractive to lenders even if it is
available as an option. Heightened
regulation (particularly the impact of
having to slot assets into higher riskweight categories), is likely to push
some lenders (banks and asset funders)
towards an exit strategy on their higher
risk assets through:
•
•
Debt sales – disposing of these
assets outright (at portfolio or an
individual customer level) – provided
that buyers are not themselves put
off by the cost to their own balance
sheets of hold such assets;
Debt restructuring – debt
forgiveness, whether through
capitalisation or waiver which allows
•
Realisation on enforcement – in
certain cases in the real estate sector
it has made sense to do this on a
portfolio basis but the lack of
options and the hold cost to lenders
with such assets makes formal
insolvency more likely;
•
Gradual withdrawal – allowing a
run-off of the portfolio (no doubt
making use of the above strategies
where appropriate).
Continued weaknesses in the UK
economy generally suggest that assets
in all categories of specialised lending
are potentially exposed to such activity.
The real estate sector in particular
appears vulnerable, in large part because
of the additional levels of risk weighting
to which such assets are potentially
subject.
These factors undoubtedly present
challenges for corporates and
turnaround executives operating in
these sectors and businesses – not to
say real headaches for the incumbent
lenders. Nonetheless they are likely to
provide interesting opportunities for
investors, secondary lenders and cashrich corporates and their advisers.
Coinciding with the so-called
“refinancing wall”, the effects of slotting
in a highly regulated environment, while
undoubtedly painful for incumbent
lenders in the short-term, may be
attractive to buyers, new investors and
secondary lenders and might be just the
stimulus that a moribund market needs. n
Michael Lewis is a Partner in our Financial Services team and Alastair Lomax is a Legal Director in our
Restructuring team.
15
Michael Lewis
Partner
Alastair Lomax
Legal Director
T: +44 (0) 207 490 6549
M: +44 (0) 7585 996254
T: +44 (0) 121 260 4007
M: +44 (0) 7721 648454
Risky Business –
Health & Safety for Insolvency
Practitioners
There are Health & Safety risks associated with any insolvency appointment. In many cases
chronic lack of investment in the period prior to appointment can dramatically exacerbate the
H&S risks that the IP will inherit. IPs understand the potential exposure to personal injury
compensation claims and protect themselves accordingly. What is far less well understood by
the restructuring market is the risk that the IP might face criminal prosecution in a personal
capacity for breach of a H&S duty. Fortunately, there are steps that can be taken to reduce the
likelihood of prosecution.
Dr Simon Joyston-Bechal dispels the myths about health and safety issues for IPs and explains why the
restructuring market needs a wake-up call.
16
Why do IPs need to be
concerned about criminal
H&S liabilities?
Our specialist insolvency regulatory team
has handled a variety of cases in which
appointed insolvency practitioners (IPs) and
agents have faced criminal investigation
and potential prosecution, whether acting
as administrators or LPA receivers. In each
case, they have been in control of a
business or a portfolio of properties at a
time when alleged H&S failings occurred.
Exploding the myths
Our experience is that awareness of
these issues is low among firms and IPs
at both a risk and compliance level. The
following are some of the more
common misconceptions that we have
encountered in the restructuring market:
Administrators have a statutory agency
which protects them against personal
liability for H&S claims. Any liability will
fall on the company or the former
directors – Wrong. Administrators take
over from the directors and are subject
to the same responsibilities under H&S
legislation regardless of the statutory
agency. They can and will be held liable
for breaches committed while in office.
In many ways IPs are a more attractive
target for the authorities than the former
management or an insolvent company.
IPs have special dispensation under H&S
laws because they simply inherit the
problems caused by the directors and have
inadequate financial resource or
opportunity to comply with H&S law –
Wrong. There is no special exception for
IPs. They have a duty to ensure safety and
the prosecutor's view is that if an activity
(or the occupation of premises) can't be
done safely, then it shouldn't be done at all.
This is all covered by insurance anyway
– Wrong. Insurance covers against civil
compensation claims by individuals for
death or injury. It is not possible to
insure against the criminal penalties
which can result from a breach of H&S
law; nor will insurance ameliorate the
damage to reputation or the potential
for disqualification from acting as an IP.
The buyer, not the IPs, will be liable
where second-hand work equipment is
sold “as seen” in the normal way –
Wrong. The usual exclusions might
prevent contractual claims on the part of
the buyer but selling second-hand work
equipment "as seen" in the normal way
does not prevent criminal claims against
the IP if such equipment was unsafe. In
practice most assets (other than
property and stock) sold by IPs could fall
into this category. It is possible to pass
responsibility to the buyer but only if
very specific steps are taken.
There can't be H&S exposure with Prepacks – Wrong. Certainly a trading
administration is more likely to present
new risks which will not be present with
a pre-pack. However, whether the sale
is a pre-pack or undertaken after a
period of trading, the IP can be
responsible alongside the insolvent
company for compliance with H&S law
in connection with the sale. In one of
our cases, the prosecutors wanted to
hold the IP responsible for selling unsafe
plant in a pre-pack.
There has to be an accident and injury for
a H&S prosecution to be brought –
Wrong. A key focus of H&S law is
prevention, so it is an offence if
everything reasonably practicable isn't
done to prevent exposure to risk for
employees, visitors and members of the
public affected by the activity. Many
prosecutions are brought as a result of
instances of non-compliance found
following an inspection by the relevant
authority. Fire safety in large real estate
portfolios is a typical example of this and
something to which IPs and agents acting
as LPA receivers are particularly exposed
even when there hasn't been a fire.
Administrators are off the hook when
they secure their discharge at the end of
a job – Wrong. The statutory discharge
specifically excludes misfeasance, so it is
unlikely to guard against a criminal
conviction.
We know the demands that IPs face,
including the very fluid nature of events
and information flows postappointment.
Dr Simon Joyston-Bechal is Head of Pinsent Masons'
national Health & Safety Team and has acted on a
number of assignments for insolvency practitioners in defence
to health and safety claims. He presented on the topic at this
year's R3 Annual Conference in Barcelona in May.
17
IPs can be appointed to businesses with
the full range of H&S risks, including
exposure to liability to claims relating to
death and serious injury. Our specialist
insolvency regulatory team has
extensive experience of advising and
defending IPs in respect of both. The
concerns for IPs, their firms and those
around them in such situations can be
very great. Quite apart from the
personal stresses and reputational
impact borne by the IP, the penalties and
other consequences of a successful
prosecution can include fines,
imprisonment and the suspension or
disqualification of the IP from practice.
The solutions
Our experience is that merely seeking to
deflect responsibility on to others (such as
directors) is not likely to be a successful
strategy given the officeholder's statutory
or contractual functions and, more
generally, the way IPs have to operate in
the market. Instead, we have been
speaking to IPs and providing training and
related support to them and their teams.
This gives IPs a greater understanding of
the risks, how to mitigate them through
employing best practice (documentation,
policies and procedures) and understanding
how to respond to an incident (including
an approach from the regulatory
authorities) if the worst happens. Our
team is also familiar with the most recent
restructuring market developments,
including broker risk and compliance audits
and pre-appointment H&S reviews.
Conclusion
The direction of travel is towards stricter
regulation of IPs in this area, including a
greater focus on enforcement. It may
only be a matter of time before the
authorities claim a high profile scalp in
our market. It is never going to be
possible for IPs to eliminate all risks when
taking on an appointment to run or sell a
financially stressed business. The good
news is that IPs can take steps which will
dramatically reduce their exposure and
allow them and their staff to focus on the
job they were appointed to do. n
Dr Simon Joyston-Bechal
Partner
T: +44 (0) 207 490 6262
M: +44 (0) 7880 684781
Brief Case
Winter 2011 – Spring 2012
Here various members of the team look at the key legal developments in the restructuring
market over the past few months, focussing on the implications for restructuring professionals.
18
The party's over for landlords
Leisure Norwich (II) Ltd and others v Luminar Lava Ignite Ltd (in administration) and
others [2012] EWHC 951 (Ch)
Alastair Lomax explains how a controversial decision on the payment of rent in administration which was
lauded by landlords has become something of a double-edged sword.
What has happened?
In a case involving the collapsed Luminar
leisure group, the High Court ruled on 28
March 2012 that rent payable in advance
and falling due for payment prior to the
appointment of administrators is simply a
provable unsecured claim and does not rank
for priority payment ahead of other creditor
claims as an administration expense. This is
the case even if the tenant, at the direction
of the administrators, continues to use or
occupy the leased premises during the
relevant rent period in reliance on the
administration moratorium and
notwithstanding the landlord's desire to
forfeit the lease.
Who does this affect?
Landlords caught unawares could
effectively lose the benefit of unpaid preappointment rent except to the extent that
any distributions are available to ordinary
unsecured creditors. In such circumstances
landlords can still apply to court to forfeit
the lease and recover possession of the
premises, provided that the court is
satisfied that their interest in the property
should take precedence – the judge in
Luminar confirmed that he would have
granted permission to forfeit and awarded
the landlords their costs had the
administrators not given permission the
day before the hearing.
The ruling is significant for tenant
businesses which are facing formal
insolvency and their landlords. The impact
is likely to be most noticeable in multi-site
businesses operating in the retail and
leisure sectors as well as other propertybased businesses in difficulty, such as care
home operators. It will also directly affect
banks and other creditors with an
economic interest in the outcome of the
tenant's insolvency. Insolvency
practitioners (IPs) will also need to focus
on this issue at the planning and
implementation phases of relevant
assignments.
Next steps?
How does the ruling affect
them?
While the outcome in this case may assist
tenants, banks and IPs planning an
appointment, in reality it highlights the
downside risks for all parties of the
Goldacre decision. Insolvency practitioners
will need to continue to ensure that
purchasers in occupation under licence
provide adequate cash and contractual
commitments to cover
the cost of the
tenant's rent and
other obligations
falling due under the
lease during the
lifetime of the
licence. It would also
be prudent for IPs to
The decision clarifies rather than changes
the law but it highlights the flip-side
corollary of the “victory” achieved by
landlords in the notorious Goldacre case
(see below). It confirms that, in applying
the Goldacre approach, the timing of
appointment of administrators (whether by
accident or design) can have a strategically
significant impact on the outcomes for
landlords and other creditors. In practical
terms, it means that a struggling tenant
business (and a lender to it with qualifying
security) can effectively secure the benefit
19
of a rent-free period if the appointment of
administrators occurs after the due date for
an advance rent payment – potentially
making administration more attractive.
It is possible that the effect of this ruling
may be reversed on appeal but in the
meantime, it highlights the importance to
landlords of proactive management of their
exposures to tenant default. All parties
should pay particular attention to the
terms on which any move is agreed from
quarterly to monthly advance rent
payments, anticipating the possibility of an
administrator being appointed shortly after
a payment date (for example by requiring
payment of a deposit).
include provision for all periods of use
notwithstanding the outcome in Luminar
to provide against the possibility that the
decision may be overturned. Of course,
commercial considerations could mean
that administrators and landlords, seeking
to avoid a contested court application,
reach agreement resembling a preGoldacre "pay as you go" arrangement.
Relevant background
In December 2009, the High Court in the
case of Goldacre (Offices) Limited v Nortel
Networks (UK) Ltd held that the
administrators in that case were liable to
pay to the landlord as an administration
expense the full amount of rent which fell
due under the insolvent tenant's lease after
their appointment for the period of their
use of the premises for the purposes of the
administration. The decision applied
principles set down by the House of Lords
in an earlier liquidation case. Goldacre was
controversial as it was contrary to accepted
practice deemed necessary to the rescue
culture under which administrators paid
rent as an administration expense pro rata
for the period of use and to the extent the
of premises occupied and used by them.
Previous practice was based largely on the
principles laid down in the landmark
decision of the Court of Appeal in the Re
Atlantic Computer Systems case. While
welcomed by landlords, the Goldacre
decision has been the subject of excoriating
criticism from certain quarters and it is
questionable whether it would survive an
appeal. Although landlords have
subsequently sought to extent the
principles laid down in Goldacre, the
Luminar case is the first time in which the
wider implications of Goldacre have been
confirmed. n
Alastair Lomax
Legal Director
T: +44 (0) 121 260 4007
M: +44 (0) 7721 648454
Minmar – Still no solution
Re MF Global Overseas Ltd [2012] EWHC 1091 (Ch)
Andrew Robertson attempts to pick a path through the growing list of cases dealing with the "right" way for
directors validly to appoint administrators out of court.
What has happened?
In a series of High Court decisions (the
latest delivered on 23 March 2012),
involving cases where directors have
purported to appoint administrators to
their company via the out-of-court
route, the courts have wrestled with the
question of:
• whether the directors must always
give notice to the company of their
intention to appoint (i.e. even if there
is no qualifying floating charge
involved); and
• if they must give notice in all cases,
how this must be given (i.e. because
the existing official insolvency forms
– let alone the legislation –
apparently did not anticipate this).
While a robing-room bust-up appears
unlikely, all judges are not of a like mind,
with decisions on the same points (two
of which were delivered on the same
day!) in direct conflict with one another,
apparently (although not always
explicitly) depending on whether the
judge favours a literal or purposive
application of the legislation.
The Bezier case (reviewed elsewhere in
this update) suggests a preference
among some judges for a pragmatic
solution to the various issues at stake.
The latest decision in the MF Global
insolvency adopts a similar approach:
while acknowledging the uncertainty
over the obligation always to notify the
company (and thereby dodging the main
issue! – albeit indicating that he
preferred the more purposive line of
authority) the judge endorsed the
directors' decision, acting out of an
abundance of caution in that case, to
serve a notice of intention on the
company. Helpfully, the court then
went on to confirm that, having issued
notice of intention on insolvency form
2.8B, the correct form for the directors
to use to complete the appointment
validly was insolvency form 2.9B.
Who does this affect and
how?
The issues are of immediate importance
to directors seeking to make an
appointment but, more acutely, to
insolvency practitioners who risk
personal liability if the wrong procedure
is followed such that they are appointed
invalidly and subsequently take steps
which cause loss to the insolvent
company or those dealing with it.
While the strict interpretation applied in
the Minmar and Msaada decisions was
contrary to existing market practice and
may appear pedantic to many
practitioners, any judicial endorsement
of appointments which do not comply
with the statutory safeguards could be
extremely prejudicial to directors and
shareholders who are not 'in the loop'
on the process.
Next steps?
The situation is a mess. Conflicting
decisions have thrown practitioners and
advisers into confusion on best practice.
The MF Global Overseas case appears to
suggest that the courts may be coming
closer to determining this issue one way
or the other. However, ultimately it will
require a clear ruling from an appeal
court or amending legislation to resolve
the uncertainty. Practitioners should
watch developments closely.
In the meantime it is difficult to identify
what constitutes the new “best practice”
in the knowledge that future events may
reverse the position. The following is a
summary of the alternatives:
• The least risky approach is for the
directors to make an application to
court to effect an appointment. This
avoids the issue altogether but, as
against the out of court appointment
route, it suffers from likely greater
cost and delay as well as a degree of
uncertainty as to whether the court
will grant the order sought.
• At the other end of the spectrum, the
high risk approach is to proceed on
the basis of the former best practice
of appointing administrators using
form 2.10B (because there is no QFC)
and providing no formal notice to the
company. This is a speedier means to
an appointment and may ultimately
prove to be the legally correct course
to effecting one validly (at least if the
Hill v Stokes and Virtual Purple line of
authority is followed) in the absence
of a QFC. Nonetheless, this course is
unattractive at present because, in the
current climate, it carries with it an
unacceptable level of uncertainty in
the minds not just of the purported
administrators but anyone dealing
with them (for example a purchaser)
requiring assurance that the
appointees have the authority to act
on behalf of the company.
• The middle course favoured by many
is that followed in the MF Global
Overseas case; serving a notice of
intention in form 2.8B in all cases
(following the Minmar and Msaada
decisions) and, in reliance on the
ruling in that case, using form 2.9B to
effect the appointment. The judge in
MF Global suggested that it might be
possible for parties to hedge their
bets by serving both forms 2.9B and
2.10B. We have seen this done but
have concerns that this might give
rise to further legal difficulties and
confusion!
While the last of these options is the
most attractive, it is difficult to feel
comfortable that it offers a panacea
solution in the face of conflicting
judicial opinion. In cases where the
validity of an existing appointment is
questionable it may also be possible to
apply for retrospective relief from the
court.
Other issues remain unresolved. For
example, if form 2.8B is required in all
20
cases, how long following service of that
form on the company should the
directors allow before effecting the
appointment? The court in Minmar
favoured the application of a
"reasonable" notice period (which was
something in the region of 5-10 days
depending on the facts of each case).
The court in Msaada preferred a five day
period equivalent to that enjoyed by the
holder of a QFC. Most practitioners
would view either option as wholly
unrealistic and creating further
uncertainty where previously there was
none.
Comparisons with the position of the
holder of a QFC appear particularly
inappropriate given that the company
does not have the same rights to step in
and make an appointment in the same
way during the notice period. Of course,
form 2.8B permits a QFC to consent to
short notice in order to accelerate the
appointment. Should this option also be
available to the company? We simply
do not know.
Again the prudent course would appear
to be to allow at least five days' notice
so as to minimise the risk that any other
party could allege that somehow their
position was prejudiced by a failure to
follow the correct procedure. Those
appointing on the back of a shorter
period of notice should have clear
reasons on file for why this was
appropriate in the circumstances –
although even that may not be enough.
Relevant background – the
story so far...
Hill and another v Stokes [2010] EWHC
3726 (Ch) (23 November 2010) – The
High Court held that a directors' out of
court appointment was valid, despite the
directors' failure to notify a distraining
landlord of their intention to appoint
administrators to the company as
required under the same insolvency rule
dealing with notice to the company.
This was in line with the approach
endorsed by the Insolvency Service (see
Dear IP, October 2010 p.1.36).
Minmar (929) Ltd v Khalastchi and
another [2011] EWHC 1159 (Ch) (8 April
2011) – In a decision which also focussed
on the need for directors to comply with
the company's articles of association
when seeking to effect an out of court
21
appointment of administrators, the
Chancellor of the High Court held that
the directors of a company must give
notice of their intention to appoint
administrators to the company in all
cases, even if there is no qualifying
floating chargeholder. The court in
Minmar was not referred to Hill v Stokes.
Re Derfshaw Ltd and others [2011]
EWHC 1565 (Ch) (2 June 2011) –
Following a 2007 decision (in the G-Tech
case), the High Court granted
retrospective relief to administrators
whose appointment had not complied
with the Minmar approach, effectively
by back-dating the administration order
to the original date of appointment.
Re Care Matters Partnership Ltd [2011]
EWHC 2543 (Ch) (7 October 2011) – In
another Minmar-related case, the High
Court declined to make a retrospective
order appointing the administrators on
the basis that, as at the date of the
hearing, the order was not "reasonably
likely to achieve the purpose of
administration", as required by
legislation. The judge suggested that it
may be more appropriate to seek relief
on the basis of the general statutory
provision that acts of an administrator
are valid in spite of a defect in his
appointment – although it may be of no
help if the defect rendered the
appointment a nullity.
Adjei and others v Law For All [2011]
EWHC (Ch) 2672 (19 October 2011) –
The High Court followed the Minmar
ruling in holding that the appointment
of administrators in this case was invalid
because the appointing directors had
failed to notify a qualifying floating
chargeholder (QFCH) – even though the
QFCH was no longer owed any money.
Helpfully, however, the court also
applied the decision in Care Matters but
reached the opposite outcome; it made
a retrospective order effective from the
date of the original filing because the
purpose of administration was still
capable of being achieved.
Re Bezier Acquisitions
Ltd [2011] EWHC
3299 (Ch) (12
December 2011) – In
this case, reviewed
elsewhere in this
update, the High
Court confirmed that
an appointment was not invalidated
although notice of intention had not
been served directly on the company; it
was sufficient for it to be served on duly
authorised solicitors acting on behalf of
the company.
National Westminster Bank plc v
Msaada Group (a firm) and others [2011]
EWHC 3423 (Ch) (21 December 2011) –
Here the High Court considered the
validity of an out of court
administration appointment, made by
the members of an insolvent
partnership. It reached the same
conclusion as the court in Minmar as to
the obligation on the directors to serve
notice on the company in all cases, for
similar reasons. It expressly disapproved
of the reasoning in Hill v Stokes.
Re Virtualpurple Professional Services
Ltd [2011] EWHC 3487 (Ch)
(21 December 2011) – On the same day
as the Msaada decision the High Court
judge responsible for the Bezier decision
reached the opposite conclusion to the
court in Msaada on substantially the
same issues, following Hill v Stokes and
disapproving of Minmar.
Re MF Global Overseas Ltd [2012] EWHC
1091 (Ch) (23 March 2012) – While
dodging the key issue, the High Court has
most recently given welcome guidance
as to which forms may be used to effect
an out of court directors' appointment
without falling foul of Minmar and the
obvious shortcomings both in the forms
and the underlying legislation.
Peter Lloyd Bootes and others v Ceart
Risk Services Ltd [2012] EWHC 1178
(Ch) (3 May 2012) – The High Court
confirmed that an out of court
appointment was valid despite the
directors' failure to notify the FSA and
that, although the appointment only
took effect from the date of filing of the
FSA's consent and despite the defects in
their appointment, the administrators'
acts in the meantime were valid under
the general statutory provision referred
to in the Care Matters case. n
Andrew Robertson
Solicitor
T: +44 (0) 207 490 6172
M: +44 (0) 7585 996067
Costs protection
Rohl v Bickland Limited (in administration) [2012] EWHC 706 (Ch) (22 March 2012)
Emma Reece looks at a High Court decision which provides comfort, using the administration expenses
regime, to parties seeking to appoint administrators but who risk having the rug pulled from under them.
What has happened?
On 22 March 2012, the High Court
confirmed that it can make an order
requiring administrators to treat the
costs of an abortive court application to
appoint administrators as if they were
an expense of the administration
(ranking on a par with the costs of an
out of court appointment) even though:
• such costs do not fall within the strict
statutory definition of administration
expenses; and
• the application did not result in an
appointment because it was
superseded by an out of court
appointment of administrators by a
qualifying floating chargeholder
(QFCH).
them?
look to base its decision on what is fair
in all the circumstances of the debtor's
insolvency.
A court dealing with an administration
application has a statutory discretion to
make any order which it "thinks
appropriate". The decision in this case
focuses specifically on how the court
will exercise its discretion as regards a
party whose administration application
is superseded by an out of court
appointment and whose costs will
otherwise have to be met from their
own pocket.
The factors which influenced the court
in this case and which parties in a
similar position in future should bear in
mind, included:
The case concerned a company, Bickland
Limited, which operated a restaurant
business. The QFCH was a creditor and
joint shareholder of the company. The
preceding application was brought by
another creditor/joint shareholder. The
court was heavily influenced by
evidence that an appointment (and
proposed pre-pack sale) pursuant to the
application would have been in the best
interests of creditors and a lack of
evidence that they would be materially
better off pursuant to the QFCH
appointment.
While the specifics of this case may be
unusual, it is common for parties to be
exposed to the risk of irrecoverable costs
when seeking to appoint administrators.
In that regard, the ruling provides
welcome confirmation, of wider
application, that the court has the
discretion, in deserving cases, to look
beyond the narrow framework of
"administration expenses" listed in
insolvency legislation and to require
administrators to treat certain liabilities
"as if" they were administration
expenses included in that list. Similar
principles apply in liquidations. In cases
where liabilities are to be treated as
administration expenses, the court must
also specify the expenses category to
which the liability should be allocated
for the purposes of priority ranking.
Next steps?
This ruling affords some comfort to
those (most obviously creditors) who
are considering making an application to
court to appoint administrators when an
out of court appointment could trump
the application, resulting in the risk of
costs being “thrown away” in the failed
bid to appoint. The decision is based on
principles of wider application in
administration and liquidation of which
creditors and insolvency practitioners
need to be aware.
Careful thought needs to be given to the
benefits and risks of proceeding with an
appointment. While the applicants were
successful in this case, the remedy is
discretionary and the court will normally
• that the application was capable of
being successful had an out of court
appointment not been made;
• the applicant's awareness that the
application could be superseded by an
out of court appointment did not
necessarily result in an assumption by
the applicant of responsibility for the
costs of a superseded application; and
• the applicant bears the burden of
persuading the court that the costs
ought to be treated as if they were
administration expenses – essentially,
the applicant was able to
demonstrate that the application and
supporting administrators' proposals
were made in good faith for the
benefit of creditors and in line with
the statutory purpose of
administration, rather than simply a
means of securing the applicant's
interests.
Relevant background
The leading cases in this area are the
2002 House of Lords decision in Re
Toshoku and the 1991 Court of Appeal
decision in Re Atlantic Computer
Systems. You may recall that these are
also the cases and similar issues
reviewed in the context of the (now
notorious) Goldacre case on payment of
rent as an administration expense. n
Emma Reece
Solicitor
T: +44 (0) 161 250 0134
M: +44 (0) 7795 801 210
22
Pools News
In the matter of Lehman Brothers International (Europe) (in administration)
[2012] UKSC 6
Bryan Faulkner considers the implications for all parties of the latest Supreme Court ruling in Lehman
Brothers which adopted the broadest possible view of the client money pool.
What has happened?
On 29 February 2012, the Supreme
Court upheld the decision of the Court
of Appeal in Lehman Brothers client
money case. In summary the court
decided that:
• the statutory trust that applies to
client money under CASS 7 (the FSA
rules which attempt to safeguard
client monies) arises from the time
of receipt by the institution;
• the client money pool available for
distribution to clients on insolvency
comprises of funds which can be
identified as client money, whether
segregated or not; and
• clients whose monies should have
been segregated have a claim against
the client money pool to the extent
of the amount which ought to have
been segregated (rather than what
was actually segregated) when
pooling occurred (in this case on
Lehman's administration).
While the court was unanimous on the
issue of the timing of the creation of the
statutory trust, there was considerable
dissent amongst their Lordships as
regards the impact of segregation. The
majority view was essentially that: the
guiding principle was one of affording
the widest protection to all affected
clients; that there should be a rateable
sharing of loss across clients in
circumstances of insolvency; and that
the CASS wording supported this. The
dissenting views recognised the
apparent injustice done to those clients
who may have adopted a more prudent
approach to segregation pre-insolvency.
This is a significant case for financial
institutions and their clients involved in
the Lehmans and MF Global insolvencies
and who might be affected by similar
future events. The ruling impacts on
how insolvency practitioners are
obliged to handle client monies in such
cases.
them?
In overview, by endorsing a "claims
based" rather than "contributions based"
approach, the court's decision has a
number of implications in any given
case:
• the number of clients with claims
against the client money pool is likely
to increase;
• the size and value of the pool is likely
to increase as and when client monies
are identified;
• there are likely to be additional delays
and costs in the distribution process;
• given the above, this could become an
even more contentious issue in an
insolvency of a financial institution.
This decision will directly impact upon
the complex insolvency of MF Global UK
Limited, the first company to enter the
special administration regime.
The special administrators have recently
indicated that there are approximately
1,200 claims from clients claiming to be
segregated clients but where MFG UK’s
systems recognise them as nonsegregated clients (representing 25% of
total claims). Given this backdrop, and
the prospects of a shortfall in the client
money pool, it would seem inevitable
that the court's assistance will be
required to determine the status of
some of these claims.
Next steps?
In light of the decision, firms operating
under CASS 7 and their clients will want
to understand whether the firm's
systems and controls comply with the
ruling as regards application, monitoring
and segregation of funds. Clients in
particular will be concerned about the
likely impact of future insolvency events
on the prospects of recovery. n
• clients with claims against the pool
could well face a shortfall;
Bryan Faulkner
Associate
T: +44 (0) 207 490 6503
23
Agents in the line of fire
In Wright Hassall LLP v Morris [2012] EWHC 188 (Ch)
Carl Allen reflects on some good news for insolvency practitioners who are faced with personal claims
arising out of contracts entered into while in office.
What has happened?
On 9 February 2012, the High Court
rejected an attempt by a firm of
solicitors to make an administrator, their
former client, personally liable for
amounts due under conditional fee
agreements entered into with the
administrator. The agreements governed
litigation conducted by the solicitors on
behalf of the administrator in defence to
claims brought by a third party in
relation to funds under the
administrator's control. The court held
that, where litigation is brought against
an administrator, which arises out of
contractual obligations entered into by
him as administrator, the cause of action
will, in general, be against the company
(or other entity to which he has been
appointed administrator) rather than the
administrator personally.
The High Court’s decision will be
welcomed by insolvency practitioners
who commonly risk claims against them
arising from contractual commitments
entered into while in office as
administrators or liquidators. There can
be little doubt that the case was brought
because there were insufficient funds in
the insolvent estate out of which to pay
the solicitors. It is therefore also a
valuable reminder of the payment risks
to counterparties to contracts with
administrators and liquidators.
them?
The ruling should reassure IPs that the
administrator's statutory agency will
normally prevent personal liability under
contracts commenced or continued by
them in performance of their duties –
even if personal liability is not
specifically excluded and there are
insufficient assets in the insolvent estate
out of which to pay such claims. It is
worth noting that the court also
reaffirmed the rule that officeholders
can be held personally liable for the
other party's costs in proceedings
initiated by the officeholder and,
exceptionally, in other cases – albeit
generally having the right to indemnify
themselves out of the assets in the
insolvent estate.
On the other hand, while such liabilities
often qualify for super-priority as
administration or liquidation expenses,
without specific protections for
counterparties to such contracts, there
is a real risk that they will be out of
pocket if there are insufficient assets in
the insolvent estate, to pay out even
those expenses.
Next steps?
The current case turned on whether the
solicitors knew that the administrator
was contracting without personal
liability. In the circumstances (which
included no exclusion of personal
liability in the CFAs but various
references in the CFAs and other key
documents to the officeholders as
administrators of the company), the
court found that the solicitors were
aware. The opposite conclusion might
easily have been reached had the
evidence indicated an intention to admit
personal liability.
In order to avoid any nasty surprises, it is
incumbent on officeholders and parties
to contracts with them to make clear
who bears the risk of any claims arising
out of the contract. Even with the
benefit of the statutory agency, this case
emphasises the importance to
officeholders of avoiding inadvertent
exposure to personal liability by
ensuring that, while in office, all
contracts and correspondence explicitly
exclude it while making clear the
capacity in which they are dealing with
third parties. n
Carl Allen
Senior Associate
T: +44 (0) 207 418 8257
M: +44 (0) 7795 427140
24
A reprieve for pre-packs
Pamela Muir reflects on the Government's decision to abandon proposals to reform the law relating to
pre-packs.
What has happened?
On 26 January, Ed Davey, then the
Government Minister responsible for
insolvency matters, announced that,
following a period of consultation with
interested stakeholders, the Government
would not be seeking to introduce new
legislative controls on pre-packaged
sales out of insolvency. The Government
would instead look into the possibility of
introducing relevant regulatory reforms
to the insolvency profession.
Who does it affect and how?
The Government's announcement was
criticised by insurers, landlords and other
creditor groups who are opposed to the
current system of pre-packs which they
consider is far too opaque and puts
existing management and shareholders
at an unfair advantage in any proposed
sale, to the detriment of creditor
interests.
However, the move has been warmly
welcomed by the restructuring
community who regard pre-packs as a
vital part of the insolvency practitioner's
armoury. There is a widespread view
among restructuring professionals that
pre-packs are unfairly maligned and that
adequate legal and regulatory controls
already exist to prevent and punish
abuse.
It would appear that the Government's
decision was prompted by concerns
voiced by practitioners and other
creditor groups that the proposed
legislation, which had already been put
forward in draft form, was misguided
and potentially damaging to the rescue
culture, particularly as regards the
proposed three day notice period – a
period during which, it was alleged, with
the insolvent company's problems in the
public domain, confidence in the
business would rapidly leak away,
dramatically increasing the level of
losses to creditors as creditor pressure
rises, customers re-source and the most
valuable employees jump ship.
It is unclear what shape further
regulatory reform – presumably to
Statement of Insolvency Practice 16 –
might take.
Relevant background
Pre-packaged sales in insolvency allow a
company to negotiate, structure, and
agree terms for the sale of some or all of
its assets or business before entering
into formal insolvency proceedings. This
enables the sale to be executed as soon
as an administrator is appointed.
Pre-pack sales can provide a swift,
efficient means of business rescue which
minimises damage to the business,
preserves employment and ensures
maximum returns for creditors.
Detractors claim that pre-pack sales lack
transparency and fairness, as the
business is often sold to a connected
party. Critics also fear that businesses
may be hastily sold at undervalue
without the need for consultation with
any unsecured creditors,
who may ultimately be unable to
recover their debts.
In a bid to address these concerns, Ed
Davey announced in March last year
that the Government intended to take
steps to "improve the transparency and
confidence" of pre-pack sales. A
consultation period on proposals for
reform was led by the Insolvency Service
in June 2011. The most significant of
the planned changes was the
introduction of a requirement for
creditors to be given three days' notice
of any intention to sell the business to
connected parties. Despite expectations
that the new laws would be introduced
in October 2011, the planned regulatory
changes were postponed until April
2012.
Ed Davey's about-turn in January,
scrapping legislative reform, was a
surprising, but nonetheless welcome
move. The speedy sale of a business
ensures continuity of supply and can
secure its survival. Whether a pre-pack
is appropriate depends on the
circumstances and sectors involved.
Insolvency practitioners are already
required by their regulatory standards to
provide creditors promptly with details
of any pre-packaged sale, including the
rationale for pursuing it as being in the
best interests of creditors against any
alternatives. Compliance with these
regulations (known as SIP16) is
monitored by the Insolvency Service and
professional penalties (such as
suspension or withdrawal of an IP's
licence to practice) can be incurred for
any misdemeanour. n
Pamela Muir
Legal Director
T: +44 (0) 141 567 8547
25
Clarity on employee protection
Key2Law (Surrey) Ltd v De'Antiquis [2011] EWCA Civ 1567
James Cameron considers whether a business sale out of administration can ever avoid the transfer of
employee costs to the buyer.
What has happened?
In this case decided in late December
2011 the Court of Appeal has affirmed
what it calls the “absolute” approach
when considering the impact on
employees of the transfer of the
undertaking or business of a company in
administration under the employment
protection regulation known as TUPE
(see below). It decided that:
• on the "relevant transfer" of a
business or undertaking by
administrators TUPE will always apply
to transfer to the purchaser the
contracts of employment and all
rights and responsibilities under or in
connection with them;
• there is no "terminal proceedings
exception" to avoid the impact of
TUPE in the context of administration
sales (pre-packaged or otherwise),
regardless of the factual
circumstances leading to the
appointment;
• previous case law in the employment
tribunal was wrongly decided on this
point.
them?
The ruling is particularly helpful for
employees. It removes the threat
created by previous case law that there
might be a legal loophole through which
administrators and buyers could avoid
TUPE, transferring undertakings to a
buyer free of unwanted employee
liabilities – something that TUPE was
specifically designed to prevent.
For most IPs this ruling simply confirms
what they had assumed was always the
case. The market has been comfortable
for many years with the policy of
protecting employees in these
circumstances, albeit that the transfer of
such liabilities is often the single biggest
factor in negotiations over price – if not
an outright deal-breaker.
For those looking to purchase a business
out of administration, the judgment in
this case demonstrates that there is no
easy means of snapping up a bargain
simply by avoiding the impact of TUPE.
Next steps?
A relevant transfer occurs upon the
transfer of a business, undertaking or
part of a business or undertaking where
there is a transfer of an economic entity
that retains its identity.
The ruling has resolved the uncertainty
arising from previous case law (notably
the Employment Appeal Tribunal
decision in Oakland v Wellswood
(Yorkshire) Limited), which had
suggested that a “fact-based” enquiry
into the purpose of the administration of
the transferor should determine whether
TUPE applied.
This decision affects all parties
involved in business sales by
administrators, including the
employees concerned.
This case simply confirms that it is in all
parties' interests when negotiating a sale
from administration which is (or risks
being) a relevant transfer to focus carefully
on the scope of the TUPE risk, the value of
claims which may transfer to the buyer
and how these might be mitigated.
Careful planning and advice could be
vital even in the case of fast-moving
pre-pack sales. Insolvency practitioners
and directors considering redundancies
pre-transfer need to understand whether
such activity will simply crystallise
claims which might be mitigated
through information and consultation or
avoided altogether by
pursuing alternative
courses of action.
Ultimately, subject to
any compromises
validly reached with
employees,
purchasers (and their
funders) who wish
to proceed must be prepared to assume
all relevant transferring employee
related liabilities of a target business
which has gone into administration and
factor this into their plans.
Relevant background
The Transfer of Undertakings (Protection
of Employment) Regulations 2006 (TUPE)
provide that, where there is a "relevant
transfer" of an undertaking, the
employees employed in that undertaking,
together with all rights and liabilities in
connection with their employment, will
automatically transfer from the
transferor employer to the transferee.
In 2009 the Employment Appeal Tribunal
surprised practitioners by ruling in the
case of Oakland v Wellswood (Yorkshire)
Ltd that whether or not TUPE applies to
transfers from companies in
administration is a question of fact, the
determinative factor being the intention
of the administrator at the beginning of
insolvency proceedings.
In an earlier hearing of the Key2Law case
in 2011 (under the name of OTG Ltd v
Barke as it was consolidated with other
appealed cases) the tribunal reached the
opposite conclusion. The Court of
Appeal has now upheld that outcome
and endorsed the "absolute approach"
that administration proceedings can
never be regarded as terminal
proceedings for the purposes of avoiding
the transfer of liabilities under TUPE.
Whilst there are those who question
how the application of TUPE in
accordance with this case correlates
with the "rescue culture", the decision
should be welcomed for bringing back
certainty for purchasers, administrators
and employees alike. n
James Cameron
Senior Associate
T: +44 (0) 161 250 0152
M: +44 (0) 7711 070206
26
Making the connection
Spaceright Europe Ltd v Baillavoine and another [2011] EWCA Civ 1565
Lucy Robinson reviews a case which demonstrates the breadth of employment liabilities which can pass to
a buyer and which has important implications for how administrators deal with dismissals prior to a sale.
What has happened?
In mid-December the Court Appeal ruled
that the dismissal of an employee by a
company in administration can be
connected with the transfer of a
business or undertaking and is therefore
automatically unfair, with the resulting
liability passing to the transferee under
TUPE even though no transferee was
"known, identified or contemplated at
the date of dismissal".
Clearly, the decision is good news for
employees who are dismissed by
administrators before their employer's
business is sold. The decision is less
positive for buyers of businesses from
administrators and consequently it will
have important knock-on effects for
administrators who are considering
dismissals and a business sale.
them?
This decision clarifies an issue on which
there were conflicting tribunal decisions.
It has come as some surprise to the
restructuring market. The scope of TUPE
protection is broader than had
previously been thought in some
quarters; including classes of employees
who many had thought to have no claim
against a purchaser and little more than
a provable claim in their employer's
insolvency.
The decision will throw into doubt the
benefits to administrators of effecting
redundancies post-appointment where
the purpose either is or could be
construed to be to make the business
more attractive to purchasers. This is
not an economic, technical or
organisational reason (the so-called ETO
defence) capable of preventing the
application of TUPE. For an ETO reason
to exist there must be “an intention to
change the workforce and to continue to
27
conduct the business, as distinct from
the purpose of selling it”. It is now clear
that TUPE applies even if there is no
prospective purchaser on the scene,
although the problem is likely to be
more acute the closer in time that the
dismissals occur to a sale.
is to ensure that they have a robust
audit trail demonstrating that they have
followed appropriate processes in
connection with any dismissals, have
taken professional advice when
necessary and maintained detailed
records of the fair reasons for dismissals.
The outcome increases the TUPE risk to
prospective purchasers. As a
consequence, administrators are likely to
face greater pricing pressure and
demands for price retentions as a result
of this decision as well as greater
scrutiny from buyers as to any job cuts
effected prior to their involvement and
how these were handled.
Relevant background
Next steps?
It is widely recognised that the parties
to a sale and purchase agreement
cannot contract out of the TUPE regime.
Consequently, in insolvency sales
(because there are no vendor warranties
or indemnities) the TUPE risk is
invariably passed by the buyer to the
seller by means of a reduction in or a
retention from the price. To be adequate
from the buyer's perspective these
adjustments need to factor in the type
and level of claims as well as the cost of
dealing with them. Administrators
should expect buyers to make greater
enquiry into and insist on more explicit
wording relating to pre-completion
dismissals.
In many cases, the simple timing of
events makes it hard for administrators
to deflect the suspicion that dismissals
were effected to 'clean up' the business
for sale. The best practical means of
administrators mitigating the TUPE risk
When there is a relevant transfer under
the Transfer of Undertakings (Protection
of Employment) Regulations 2006
("TUPE"), affected employees are
protected against dismissal through the
transfer of their contracts and related
claims to a buyer. This includes both
employees who were engaged in the
undertaking at the time of the transfer
as well as those who would have been
engaged in the undertaking but for a
dismissal connected with the transfer.
In this case, Mr Baillavoine had been
Chief Executive of Ultralon Holdings
Limited, a company which went into
administration on 23 May 2008.
Mr Baillavoine was dismissed along with
43 other employees on the same day.
On 25 June the administrators sold the
business and assets of Ultralon to
Spaceright Europe Limited.
The Court of Appeal rejected
Spaceright’s appeal, holding that nothing
in TUPE required a particular transfer or
transferee to be in existence or
contemplation at the time of the
dismissal for that dismissal to be
"connected with the transfer". It made
clear that the ETO reason defence is not
available to enable administrators to
make businesses more attractive to
prospective buyers. n
Lucy Robinson
Solicitor
T: +44 (0) 207 490 6432
Substituted service
Re Bezier Acquisitions Ltd [2011] EWHC 3299 (Ch)
Richard Buckley offers up some good news (sort of!) for practitioners arising from a case concerning the
validity of an out of court appointment of administrators.
What has happened?
On 12 December, Mr Justice Norris
handed down a judgment which should
make life a little easier for directors and
their advisers who are seeking to
appoint administrators out of court but
are daunted by the legal and logistical
wrangles over the service of the notices
required to effect the administrators'
appointment.
While, regrettably, the judge dodged the
hot topic of whether a notice of
intention has to be served on the
insolvent company in all cases (see
elsewhere in this update), he did provide
a pragmatic solution to the question of
how service of notices can be validly
effected. In reliance on existing
insolvency legislation, the judge
confirmed that if solicitors acting for the
company are duly authorised to accept
service then service of the notice of
intention on the solicitors will be
sufficient for a valid appointment.
Interestingly, he also ruled that it was
not appropriate to hold the appointment
to be invalid simply because the
directors did not comply with the strict
requirements of insolvency legislation
concerning service in circumstances
"where at a valid meeting of the
directors of the company (a) it was
resolved that the company enter
administration and that Notice of
Intention to Appoint be given and (b) an
agent was appointed to act on behalf of
the company in respect of the
appointment of the administrators (that
engagement to include the taking
receipt of, and dealing on the company's
behalf with, all relevant notices and
formal documentation)."
The ruling is a pragmatic outcome and
positive news for all concerned in
effecting an out of court appointment of
administrators by directors in
circumstances where time to effect
service on the company may be very
limited and there may not have been
strict compliance with the rules.
them?
This is a rapidly developing area of case
law with a series of first-instance
decisions which are fact-sensitive and
conflict in many ways depending on
whether the court prefers a strict
interpretation of the legislation or (as in
this case) a "purposive approach" to the
law of administration. For that reason it
is difficult and perhaps unwise to draw
too many universal truths from a case of
this sort. This is particularly the case as
regards the implications for the validity
of an appointment made without strict
compliance with the letter of legislation.
Nonetheless, it demonstrates that as
long as the solicitors acting for the
insolvent company have a sufficiently
clear authority to accept service on
behalf of the company for the purposes
of the appointment, service of papers on
the company's solicitors can form part
of a valid appointment process.
Next steps?
Given the ongoing judicial debate and
the lack of appeal court authority on
these fundamental issues, the prudent
view is to adopt the strict approach and
ensure that service on the company is
made in all cases in a manner which
complies with the legislation (see
elsewhere in this update).
Using the company's solicitors to accept
service appears to be a neat solution to
the logistical difficulties often thrown up
when executing, filing and serving forms
urgently in circumstances of financial
distress.
Those seeking to follow this route
should do so cautiously, however. To
minimise the risk of challenge, it would
appear to be safer to have clear written
instructions from the company to the
solicitors, authorising them to accept
service of the appointment documents
on behalf of the company.
Relevant background
See the earlier update on the Virtual
Purple, Msaada and MF Global cases for
a summary of the underlying (and
conflicting!) case law in this area. n
Richard Buckley
Solicitor
T: +44 (0) 207 667 0022
M: +44 (0) 7795 223409
28
Centre of attention
Rastelli Davide e C. Snc v Jean-Charles Hidoux [2011] EUECJ C-191/10
Bhaljinder Mander considers the latest case in the ongoing saga to define what constitutes a company's centre
of main interest for the purposes of the location of main proceedings under the European insolvency regulation.
What has happened?
In December 2011, the Court of Justice
of the European Union reaffirmed the
principle that every company has its
own centre of main interests (COMI),
the location of which depends upon
factors specific to that company. In this
case, although the property of an Italian
company and a French company was
intermixed and the two companies
carried on a single enterprise operated
and managed from France, the court
ruled that was not enough, by itself, to
rebut the presumption that the COMI of
the Italian company was at its registered
office in Italy.
The ruling is significant for banks and
other creditors who will have an
interest in the location where a debtor's
insolvency proceedings are opened.
Insolvency practitioners will also need
to consider this case when accepting
appointments and/or dealing with
multi-jurisdiction corporate groups.
them?
At the heart of the Insolvency
Regulation is the principle that
insolvency proceedings for a company
should take place under the jurisdiction
of the state in which the company has
its COMI.
The case endorses the decision in Re
Eurofood IFSC – that a COMI must be
identified by reference to criteria that
are “both objective and ascertainable by
third parties”.
The Insolvency Regulation creates a
presumption that a company's COMI is
at the place of its registered office.
However, if there are objective factors,
which are ascertainable to third parties,
that indicate that the company's COMI
is elsewhere, that presumption is
rebutted.
This decision will make it harder, in future
cases, to rebut the presumption that
COMI is in the jurisdiction of a company’s
registered office, and therefore will make
it more difficult to centralise the COMIs
of a number of companies incorporated
in different jurisdictions in one EU
jurisdiction. This comes in the wake of
certain high profile insolvencies of nonUK entities which had re-registered in the
UK pre-appointment, thereby taking the
benefit of the UK's more flexible
insolvency regime.
Relevant background
Mediasucre International had its COMI
in Marseilles, France. On 7 May 2007,
the Tribunal de Commerce de Marseilles
made an order placing Mediasucre in
liquidation. Mr Jean-Charles Hidoux was
appointed as the liquidator of
Mediasucre.
Rastelli was a company incorporated in
Italy and had its registered office in
Robbio, Italy. There was apparently no
suggestion of Rastelli having an
establishment in France. However, Mr
Hidoux applied to the Tribunal de
Commerce de Marseilles to open
insolvency proceedings against Rastelli
on the basis that the property of Rastelli
and Mediasucre was intermixed. They
shared common bank accounts and
assets were, on occasion, transferred
from one company to the other for no
consideration.
The issue was referred to the Court of
Justice of the European Union which
decided that the French courts did not
have jurisdiction to open insolvency
proceedings in respect of Rastelli. The
fact that the assets of Mediasucre and
Rastelli were mixed did not necessarily
mean that Rastelli's COMI was in the
jurisdiction in which those assets were
managed.
While it was possible that, in the case of
a group of companies, the COMI of all
the companies might be located at the
group's head office, that was only the
case if, objectively and on the facts of
the particular case, third parties would
regard the head office as each
company's COMI.
In this case, the court decided that there
was no evidence to rebut the
presumption that Rastelli's COMI was in
Italy. Indeed, the court noted that it was
unlikely that the mixing of the property
of Mediasucre and Rastelli would be
apparent to third parties in any case. n
Bhal Mander
Senior Associate
T: +44 (0) 207 490 6670
M: +44 (0) 7795 021363
29
Winds of change
Re Hellas Telecommunications (Luxembourg) II SCA (in administration) [2011] EWHC
3176 (Ch)
Claire Sharf reviews a case in which the court denied an administrators' application to move from
administration to dissolution on the grounds that there remained distributable assets, ordering instead that
the company be placed into compulsory liquidation and the liquidators have access to the balance of a third
party fighting fund which was originally set up to cover the administrators' costs.
What has happened?
In a case involving the WIND Hellas
telecoms group, in November 2011 the
High Court ordered that the company be
placed into compulsory liquidation in
line with the wishes of unsecured
creditors and, absent evidence of a
contrary intention, a substantial fighting
fund provided to the administrators
must be made available to subsequently
appointed liquidators (i.e. not the same
individuals as the administrators).
The ruling is significant in the context of
this high profile and contentious
restructuring. It is of wider significance
both for parties who provide funding of
this kind to aid recoveries in an
insolvency process and for those
insolvency practitioners who are in
receipt of such funds.
them?
The ruling indicates that, in the absence
of clear agreement on the point, the
court may infer, objectively, from the
available evidence the parties' natural
intentions as to the use of third party
funding. In this case the court
concluded that the parties intended the
funds to be utilised not just in the
context of the insolvency process in
which they were provided but also any
subsequent process. Of course the
parties' true intentions, had they been
fully articulated at the time, may have
been very different from the inferences
drawn by the court on the available
evidence.
Next steps?
Matters are always clearer with the
benefit of hindsight. Any third party
providing funding, and the insolvency
practitioner in receipt of the same, will
be keen to ensure in light of this case
that funding has a clear, agreed and
documented purpose and that there is
certainty around the intended
beneficiaries of the funds (including
provision for how the funding should be
applied during and at the end of the
subsisting insolvency process).
Relevant background
The administrators of Hellas
Telecommunications ("HT") applied to
the court for directions on how to
proceed in circumstances where the
administration of the company was
drawing to a conclusion, but there was a
considerable “fighting fund” still in
existence. The fund was provided by a
third party, to be held on trust, to meet
the costs of the administration.
liquidation and its affairs investigated
further, yet the administrators were
applying for HT to be dissolved. The
court acknowledged that the fund was
set up for the purpose of satisfying the
costs of the administration (as per the
terms of a share sale agreement entered
into by HT), yet taking into account the
size of the fund (€10m initially) it
determined that the funds could be used
beyond the administration as it was an
amount in excess of the costs
anticipated to be incurred in the
administration alone. The court decided
that HT should enter compulsory
liquidation and the administration cease.
The administrators' request to proceed
to dissolution was based on the
assurance that there were no further
distributable assets, which on
examination was found not to be the
case. The court deemed there was scope
for HT's affairs and potential claims
against third parties to be investigated
further, and that the fund could be used
for this purpose.
The court concluded that the fund
should continue to be used as there
"remain(ed) a similar level of
uncertainty and contingency" to future
costs as at the date on which the
administrators initially projected their
future costs in October 2010, compared
to the time of this decision. n
The court was asked to consider
whether the fund could continue to be
used if HT was to proceed into
Claire Sharf
Senior Associate
T: +44 (0) 113 368 6522
M: +44 (0) 7770 276126
30
Protection racket
USDAW and others v WW Realisation 1 Limited (in Liquidation) and another
ET 3201156/2010
Dawn Allen examines the treatment of claims relating to collective redundancies in administration.
What has happened?
The employment tribunal has made
protective awards equivalent to 60 days
gross pay in favour of former
Woolworths employees who were made
redundant following the appointment of
administrators. The tribunal made some
concession (down from 90 days' pay) in
the level of award to take account of
limited steps. In line with previous
cases, the tribunal also found that
Woolworths’ financial circumstances
and the fact that it was in
administration did not, of themselves,
constitute “special circumstances” which
could have allowed Woolworths not to
comply with its duties.
Interestingly, the tribunal decided that
each store was an establishment. The
unions involved had tried to argue that
Woolworths' nationwide retail
operations constituted one
establishment overall, in line with the
European legislation from which the UK
legislation derives. While recognising the
discrepancy between the regimes, the
court declined to follow that course or to
refer the matter to the European Court.
This ensured that only employees in
establishments/stores with over 20
employees could benefit from the award.
The ruling is significant for multi-site
employers (distressed and solvent) who
are considering a redundancy
programme. It is also relevant to
administrators appointed to such
businesses, particularly if they are
contemplating a sale of its business.
them?
The ruling clarifies the likely cost and
scale of the process required for
employers to comply with collective
consultation obligations when dealing
with operations spread across multiple
sites. It seems as if tribunals will
interpret the term “establishment” not
purely in terms of geographical location
as it was originally intended, but also
taking into account the organisational
structure of individual sites. In this case
the fact that the stores had differing
management structures and operated
for distinct purposes contributed
towards the court's determination that
each was a separate establishment.
The case further demonstrates the
court’s determination to set the bar high
for businesses engaged in redundancies,
even if they are subject to formal
insolvency. To many restructuring
professionals this approach sets
unattainable standards when time and
financial resources are critical and the
outcome is potentially damaging to
creditors' interests. Non-preferential
employee claims will often simply rank
as unsecured claims in the employer's
insolvency. However, where a going
concern sale is mooted, there is a very
real risk that the liabilities triggered by a
non-compliant redundancy programme
pre-disposal could pass through to the
buyer with a £1 for £1 reduction in the
price achieved on a sale. The Spaceright
decision, reported elsewhere in this
update, is a recent example of this issue.
Next steps?
As well as giving cause for employers
and appointed insolvency practitioners
to revisit their plans and costings in
connection with a proposed multi-site
redundancy programme, the case more
generally underlines the importance of
taking appropriate advice and creating
an audit trail of meaningful engagement
with employees and their
representatives as a means of reducing
the level of future claims.
Relevant background
Woolworths Plc went into
administration in November 2008 and
into liquidation two years later.
Although considerable work was
undertaken by the administrators to
effect a going concern sale, this came to
nothing and all of the employees of
Woolworths were made redundant
following the administrators'
appointment. n
Dawn Allen
Senior Associate
T: +44 (0) 113 368 2054
31
32
Our innovative forecasts help you to keep an eye on the legal developments in store for 2012.
Diary Room
Restructuring Business is delighted to start a series of in-depth interviews with members of the
team. First into the Diary Room are new joiners Bhal Mander and Pamela Muir.
33
Bhal (aka “Knuckles”!) Mander on...
joyriding and MLK
What important words of wisdom do you intend to pass on to your children?
The happiest of people don't necessarily have the best of everything; they just make the most of everything that comes along
their way.
If you were not a lawyer what would you be?
Unemployed.
If you could change one thing about yourself, what would it be?
Nothing – I am what I am...
What is your most prized possession?
My (wife’s) iPad.
What is the book that has most changed your life?
Sealy & Milman – Annotated guide to the insolvency legislation – eighth
edition. A real life changer.
What is your worst habit?
Knuckle cracking – eight years of karate are to blame.
Which person(s) has influenced you the most?
My parents.
If you could have a drink with someone from history, who would it be?
Martin Luther King.
What crime would you commit if you knew you could get away with it?
Joyriding in Nick Pike’s Aston Martin.
If you could spend 24 hours doing only one activity, what would it be?
See my answer to the last question.
Which film can you watch over and over?
Scarface.
Which person would you happily swap lives with?
My son. Sleep, eat, play – that’s the life.
What would be your specialist subject if you were on Mastermind?
Tottenham Hotspur – the glory years...
What would be your entry music if you were a boxer?
"Mama Said Knock You Out" is about as perfect as you can get for a boxing intro.
34
Pamela Muir on...
whisky, mostly
In addition to having practised in the area of insolvency and restructuring for over 15 years, the three main passions in my
life are family, sailing and whisky.
Before you think that it is too much of a cliché for a Scots person to have an overwhelming interest in the water of life or uisge
beatha, I like to think my hobby goes a little further than that.
Whether or not it is a clean, sweet, heathery Highland Park from Orkney or a salty Talisker from the Isle of Skye or a real "peat
freak", from some of the 10 distinct distilleries on Islay, I am a huge whisky fan (with a soft spot for those of the peat addicted
persuasion!).
The whisky industry in modern Scotland, in addition to providing a rather fine product for any taste, really shows you the best of
our entrepreneurial spirit (pardon the pun!).
Take for instance the story behind my favourite distillery Bruichladdich on Islay.
Bruichladdich had been mothballed during the dark days of Scottish whisky production of the 70s and 80s and had lain dormant
for some time. The impact of a mothballed distillery on a village in Islay is something that is felt throughout the community.
One of the current directors visited Islay on holiday (having been a fan of the Bruichladdich anyway) and in an attempt to visit
the distillery was astounded to see it closed. He spent the next 10 years bidding or trying to persuade one conglomerate after
another to sell him the small distillery and after 10 years of trying and with a lot of personal, family, friends and island
investment, successfully re-opened Bruichladdich. It has since gone from strength to strength producing not only all the fantastic
spirits but an amazing enthusiasm for the local economy, driven by a true passion for their "day job".
If you're ever visiting Islay, be sure to stop by and ask them about the time the US Department of Homeland Security thought
they were helping out terrorists, an event commemorated by them releasing a bottling called, "weapon of mass destruction", or
maybe about the time they tried to give the MOD back their mini yellow submarine…
If you travel less than 6 miles up the road from Bruichladdich you will stumble across Kilchoman Distillery celebrating its 7th
birthday this year. An ambitious project to add another distillery to a small island already stuffed full with distilleries, but again
producing a distinctive product, carving out a niche in a crowded market.
I think if you look at the whiskey industry, even just on Islay, you can apply the same lessons to our crowded market place –
tenaciousness, inspiration, innovation, striving for excellence and customer service.
It is probably no coincidence that I developed a love of the Island malts given my second largest passion is sailing. There is
nothing quite like a small boat, moored off a beautiful setting with a fabulous malt as a reward for a day's hard work. Now if we
could only guarantee decent weather!
Of course, there is no truth in the rumour that insolvency law drove me to whisky in the first place!
35
Team Update
Spring promises to be an exciting time
for our team with a number of high
profile hires and significant growth in
our wider business in the UK and
internationally.
London hires
We are delighted to confirm that
partners Nick Pike, Tom Withyman and
Steven Cottee as well as senior
associates Bhal Mander and Serena
McAllister have now joined our London
team. All are experienced restructuring
specialists. Feedback from clients and
the legal press confirms that they are
excellent additions to our team and will
provide a tremendous boost to our
growing London business.
Merger – Pinsent Masons and
McGrigors
You may already have read about the
merger between Pinsent Masons and
McGrigors, a deal which will create a
business with over 2,500 staff, including
1,500 lawyers based in offices across the
UK, the Middle East and the Far East.
The merger took effect from 1 May 2012
and has dramatically increased our
capacity to deliver great service to our
Restructuring clients whatever their
needs and wherever they may be. As a
consequence we are pleased to welcome
Legal Director Pamela Muir (based in
Glasgow) and Senior Associate Lawrence
Spencer to the expanded team.
Office launches
Pinsent Masons has also announced
plans to open two new offices in
mainland Europe in 2012. Further
details for our Paris and Munich offices
will be announced in due course but the
demand from our clients to be present
in those locations is strong and you can
expect the Restructuring team to play a
leading role in building these important
new parts of our business.
London and Regional
Round-Up
London – Teams led by Richard Williams,
Nick Gavin-Brown and Carl Allen
37
continue to take a leading role in
advising creditors on some of the largest
exposures in the Lehman Brothers and
MF Global insolvencies. Lucy Robinson
is also advising PwC as administrators of
the FSA-regulated Target accountancy
practice.
Belfast – Laurence Spencer recently led
a cross-practice group team in the
successful disposal (by pre-pack
administration) of the Pizza Hut
franchise in Northern Ireland and the
Republic of Ireland. The MBO
safeguarded more than 200 jobs and
ensured that the public on both sides of
the border continue to be able to enjoy
Pizza Hut products!
Birmingham – Our Birmingham team,
led by Alastair Lomax has advised the
£100m turnover Nightfreight logistics
group on its restructuring and disposal
to the DX group.
Glasgow – Having acted for the
purchaser from administrators of a
popular soft drinks business, Pamela
Muir is currently leading our team acting
for one of our UK clearing bank clients
on a significant UK-wide real estate
sector restructuring.
Leeds – As well as acting for BDO on
various disposals from the Dukedom pub
chain, Claire Sharf and Ben Thornton in
our Leeds team are advising Pumpkin
Patch Limited, a company listed on the
New Zealand Stock Exchange on the
purchase of various assets of its £24m
turnover UK subsidiary of the same
name from its administrators Deloitte.
Hannah Pinsent is currently on
secondment to Lloyds BSU Legal.
Manchester – James Cameron took a
lead role in the team which advised the
board of Davenham Group Plc prior to
its administration. Alex Darbyshire led
the team advising the bank and its
appointed receivers, Grant Thornton, on
the disposal of the 5* Radisson
Edwardian Hotel at the Free Trade Hall.
Alex is now on secondment with the
Corporate and Commercial teams at
HSBC LMU.
Welcome back also to Jenna Bartlett
who rejoins the team following her
return from sabbatical.
Key Contacts
Jamie White
Partner (London)
Head of Restructuring
Jonathan Jeffries
Partner (Leeds)
T: +44 (0) 207 418 9550
M:+44 (0) 7900 823400
T: +44 (0) 113 294 5281
M:+44 (0) 7767 224101
Richard Williams
Partner (London)
Alastair Lomax
Legal Director (Birmingham)
T: +44 (0) 207 490 6246
M: +44 (0) 7879 486291
T: +44 (0) 121 260 4007
M: +44 (0) 7721 648454
Nick Pike
Partner (London)
James Cameron
Senior Associate (Manchester)
T: +44 (0) 207 490 6469
M: +44 (0) 7973 176826
T: +44 (0) 161 250 0152
M: +44 (0) 7711 070206
Tom Withyman
Partner (London)
Pamela Muir
Legal Director (Glasgow)
T: +44 (0) 207 490 6941
M:+44 (0) 7974 170983
T: +44 (0) 141 567 8547
Steven Cottee
Partner (London)
Lawrence Spencer
Senior Associate (Belfast)
T: +44 (0) 207 490 6940
M: +44 (0) 7771 978341
T: +44 (0) 289 089 4935
M: +44 (0) 7711 047092
Restructuring helpline
For urgent queries call our 24 hour helpline in order to speak to one of our partners: +44 (0) 207 418 8280.
For more general or technical and legal queries email us at: [email protected]
While we take every care to confirm the accuracy of the content in this edition, it is not legal advice.
Specific legal advice should be taken before acting on any of the topics covered.
38
Combining the experience, resources and international reach
of McGrigors and Pinsent Masons
Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority, and by the appropriate regulatory
body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm who is a lawyer with
equivalent standing and qualifications. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES,
United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP and affiliated entities that practise under the name ‘Pinsent Masons’ or a name that incorporates those words.
Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those affiliated entities as the context requires. © Pinsent Masons LLP 2012
For a full list of our locations around the globe please visit our websites:
www.pinsentmasons.com
www.Out-Law.com

Risky Business - Pinsent Masons

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