Insolvency treble trouble

Chief Bankruptcy Registrar William James looks at three areas of law which can cause problems for practitioners

Liquidator liquidated

The court has recently reviewed the circumstances in which it is appropriate to replace a liquidator (AMP Enterprises Ltd v Hoffman and another (2002) The Times, 13 August Ch D).

Section 108(2) of the Insolvency Act 1986 provides that the court may, on cause shown, remove a liquidator and appoint another.

Mr Justice Neuberger concluded that the section gives the court a discretion whether to remove a liquidator or not; that it should do so on good grounds being shown; that the burden falls on the applicant to establish such grounds; that it is inappropriate for the court to prescribe what facts would establish such grounds; and that each case will depend on its own facts.

The court has to perform a balancing exercise.

On the one hand, it is entitled to expect a liquidator to be efficient, vigorous and unbiased, and if it is satisfied that his conduct falls short in any of these respects it should not hesitate to remove him.

On the other hand, if the liquidator is independent and honest the court will be slow to remove him simply because his conduct has fallen short of the ideal.

To remove him in such circumstances would be likely to encourage applications by creditors whose preferred office holder had not been appointed or those who had some other grievance.

The court has also to bear in mind that the replacement of a liquidator would be likely both to increase the costs of the administration and to delay the conclusion of the winding up.

Failure to register

All is not lost when the practitioner forgets that a fixed or floating charge by a company over its assets is void against a liquidator, administrator or creditor of the company unless it has been registered with the Registrar of Companies within 21days of the creation of the charge.

An application for an extension of the period of time for registration may be made to the court in the circumstances described in section 404 of the Companies Act 1985.

It provides, at section 404(2), that the court may extend the time for registration on such terms and conditions as it thinks fit.

Before it can make such an order the court is required by section 404(1) to be satisfied that the omission to register the charge in time was accidental, caused by inadvertence or to some other sufficient cause, or is not of a nature to prejudice the position of creditors or shareholders of the company, or that on other grounds it is just and equitable to grant relief.

The application proceeds by way of a Civil Procedure Rules 1998 (CPR) part 8 claim and must be supported by written evidence.

Either a director or the company secretary must provide evidence of the company's solvency (see form 208 Atkin's Court Forms, 2nd edition, 1992 issue, vol 9).

If evidence of the company's solvency cannot be provided then an order may still be made if the applicant gives a satisfactory undertaking which is normally recorded in the order.

The applicant will be required to undertake that it will abide by the decision of the court, which may include an order for the removal of the registration of the charge from the register, if a resolution for winding up is passed within 28 days from the date of the order or a petition for the company's winding up is presented within that period on which a winding-up order is subsequently made and, in either case, the liquidator or a creditor applies to the court to discharge the order.

Deadly insolvent

When a person dies in circumstances where his estate is, or is likely to be, insolvent, the estate must be administered for the benefit of his creditors.

Insolvent estates are regulated by way of the Administration of Insolvent Estates of Deceased Persons Order 1986 (the order), as amended by SI 2002/1309, which provides for an 'insolvency administration order' (IAO) to be made by the court for the administration in bankruptcy of the insolvent estate of a deceased debtor.

The general effect of an IAO is that the deceased's estate is administered in the same manner as is a bankrupt's estate and the administration is subject to the control of the bankruptcy court.

Where the debtor dies before a bankruptcy petition is presented, a petition for an IAO may be presented to the court by the deceased's personal representatives, by one or more of his creditors to whom a liquidated debt or debts exceeding 750 is owed, or by the supervisor of, or a person bound by, his voluntary arrangement.

The court may make an IAO on the petition of the personal representatives if it is satisfied that the estate is insolvent.

It may make an IAO on a creditor's petition if it is satisfied that the debt, or one of the debts, in respect of which the petition is presented is a debt which, having been payable at the date of the petition or having since become payable, has neither been paid, secured nor compounded for, or has no reasonable prospect of being paid when it falls due, and there is a reasonable probability that the estate will be insolvent.

Finally, it may make an order on the petition of a supervisor of, or person bound by, the deceased's voluntary arrangement if it is satisfied that the conditions set out in section 276 of the Insolvency Act 1986 have been met.

If a debtor by or against whom a bankruptcy petition has already been presented dies before the hearing of the petition is determined by the court, then the proceedings continue as if he were alive, unless the court otherwise orders.

If he dies before service of the petition, the court may order service to be effected on his personal representatives or such other person as it thinks fit.

In the recent case of Berti v Steele Raymond [2002] BPIR 683, the Court of Appeal decided that under CPR rule 19.8 (imported by rule 7.51 of the Insolvency Rules 1986) the court should exercise its discretion to appoint an appropriate person to represent the deceased's estate even though no formal grant of representation of the deceased estate had been made by the Probate Registry.

The provisions of the Act which define the nature of the bankrupt's estate and place restrictions on the disposition of property and on remedies against the property of the bankrupt are modified by the order so that they take effect as if the petition had been presented and the IAO had been made on the date of the death of the deceased debtor.

One significant consequence of this modification is that dispositions of property and payments made by the personal representatives after the debtor's death are void under section 284(1) of the Act except to the extent that they were made with the consent of the court or are subsequently ratified by it.

However, a recent decision in a Northern Ireland case, McAteer v Lismore [2002] BPIR 804, demonstrated that the operation of this provision may, in certain cases, be contrary to the guarantee of peaceable enjoyment of possession of property enshrined in the Human Rights Act 1998.

An IAO has the same effect on prior rights and transactions as a bankruptcy order.

An IAO does not prevent the severance of a joint tenancy held by the deceased immediately prior to his death.

However, section 12 of the Insolvency Act 2000 provides that the court may make an order requiring the survivor to pay to the trustee in bankruptcy an amount which would, in the court's opinion, restore the position to what it would have been if the deceased had been adjudged bankrupt just before his death.

The death of a debtor has consequences for any voluntary arrangement into which he has entered.

The creditors cease to be bound by it.

The supervisor continues in office for so long as is necessary to wind up the arrangement.

How the assets in the hands of the supervisor are to be administered will depend on a construction of the arrangement itself.

Chief Bankruptcy Registrar William James sits at the Royal Courts of Justice and is a member of the Association of District Judges