Recent case law - Insolvency law update

Jonathan Gorman, Associate in the Russell-Cooke Solicitors, restructuring and insolvency team.
Jonathan Gorman
4 min Read

Bankruptcy Restrictions Orders: Kennedy v Official Receiver [2022] EWHC 1973 (Ch)

This judgment clarifies the principles that a judge should apply in determining the length of a Bankruptcy Restrictions Order.

Bankruptcy Restrictions Orders (BRO) under s.281A and Schedule 4A Insolvency Act 1986, can impose a number of restrictions on a bankrupt for up to 15 years. Previous case law (Sevenoaks Stationers (Retail) Ltd [1991] Ch 164) regarding the length of BROs established the use of three brackets: (i) over ten years for particularly serious cases; (ii) six to ten years for serious cases which do not merit the top bracket; and (iii) two to five years where the case is, relatively, not very serious.

The bankrupt, Mr Kennedy, appealed to the High Court after the first instance judge imposed an eight-year BRO on him, placing his conduct in the middle bracket established in Sevenoaks. The basis of Mr Kennedy’s appeal was that his conduct, when considered against previous decisions involving comparable or a greater degree of misconduct, should have been regarded as falling into the lowest bracket.

The Judge accepted Mr Kennedy’s arguments agreeing the case should fall within the lowest bracket and reduced the length of the eight years to four years. A copy of the full judgment can be found here. 

Restructuring plans: recent decisions

There has been a flurry of recent decisions regarding restructuring plans under Part 26A Companies Act 2006 (CA 2006).

In the case of Re Smile Telecoms Holdings Ltd [2022] EWHC 740 (Ch) the High Court sanctioned a restructuring plan that would give full ownership of a Mauritian scheme company to a single lender creditor, free from any debt owed to the other major creditors. In addition, the scheme excluded all creditors and shareholders who did not have an economic interest in the company from voting on the plan. A copy of the full judgment can be found here

Another High Court decision, Re Houst Limited [2022] EWHC 1941 (Ch) saw the Court sanction a restructuring plan for a property management company that ran short term/holiday lets.

Houst Ltd was severely affected by the Covid-19 pandemic, which resulted in it becoming both cash flow and balance sheet insolvent. Multiple creditors had threatened winding-up petitions.

If the restructuring plan had not been approved then it would most likely have entered into a pre-pack administration. The Court held that if it refused to sanction the plan, then the evidence indicated that all creditors, including HMRC, would be in a worse off position. 

In Oceanfill Ltd v Nuffield Health Wellbeing Ltd [2022] EWHC 2178 (Ch) Deputy Master Arkush considered whether a restructuring plan would release a third-party guarantor from liabilities which arose from a guarantee  agreement entered into when the lease was first assigned.

The Judge rejected the defences brought by Nuffield and Cannons, and found in favour of the landlord, Oceanfill Ltd. In doing so the Court confirmed that the scheme under Part 26A CA 2006 did not rewrite the lease; rather, it effected a compromise between the tenant and the landlord.

Alternatively, he held that to the extent it did rewrite the lease, it did so only between the landlord and the tenant; the Restructuring Plan did not alter, or compromise, Oceanfill's rights against third-party guarantors.

Duty to creditors: BTI 2014 LLC v Sequana SA [2022] UKSC 25

On 5 October 2022 the Supreme Court handed down its long-awaited judgment in this case, which considered, amongst other things, when the duty to creditors (the 'creditor duty') arises in a corporate insolvency context.

The claim related to a decision by the directors of the debtor company to pay a €135m dividend to its sole shareholder, at a time when the debtor was solvent on both a cash-flow and balance sheet basis, but where it had potential long term, contingent liabilities of an uncertain value that would, if taken into account, have rendered the debtor insolvent. The debtor company entered insolvent administration 10 years after the dividend payment, and a challenge was subsequently brought seeking to recover those monies, on the basis that the decision to pay the dividend was made in breach of the creditor duty because insolvency was a possibility at the time.

Both the High Court and the Court of Appeal rejected the claimant’s assertion that the creditor duty arose in this case, and those decisions were upheld by the Supreme Court. In relation to the creditor duty generally the Supreme Court found that:   

  • Directors owe their duties to the company, rather than directly to shareholders or to creditors, and the creditor duty is not a free-standing duty that is owed to creditors.
  • The creditor duty can apply to the directors’ decision to pay a dividend which is otherwise lawful.
  • Where a company is insolvent, or bordering on insolvency, but is not faced with an inevitable insolvent liquidation or administration, the directors must balance the interests of both creditors and shareholders where they may conflict. The greater the company’s financial difficulties, the more the directors should prioritise the interests of creditors.
  • The creditor duty is engaged when the directors know, or ought to know, the company is insolvent or bordering on insolvency, or that an insolvent liquidation or administration is probable. Where an insolvent liquidation or administration is inevitable, the creditors’ interests become paramount as the shareholders cease to retain any valuable interest in the company.

A copy of the Supreme Court’s judgment can be found here.

Briefings Restructuring and insolvency