Toone v Ross

13 November, 2019

[2019] EWHC 2855 (Ch)

Summary

This decision of Chief Insolvency and Companies Court Judge Briggs deals with a challenge to the use of employee benefit trusts (EBTs) and an interest in possession fund (IIP). The company entered into two EBTs and one IIP. They were challenged by the company’s liquidators as being, in substance, distributions of capital which were made without the company having complied with the relevant formalities required by Part 23 of the Companies Act 2006. Allegations of breach of duty and that the transactions defrauded creditors were also made.

The court concluded that, looking through the eyes of the company, the payments made under the EBTs and the IIP were to be characterised as returns of capital to shareholders. The formalities not having been complied with, they were unlawful. The allegation of breach of duty also succeeded. The directors were required to account to the company for the sums paid away.

Comment

This is one of the first decisions directly concerning challenges by liquidators to the actions of directors (who are also shareholders) in causing their company to enter into EBTs and other arrangements perceived to have advantageous taxation consequences. It addressed how payments made in pursuance of such arrangements are properly to be characterised (although future cases will turn on their own facts). It involved consideration of the trigger for the creditors’ interests duty as explained in BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112. This decision should be considered alongside that of Insolvency and Companies Court Judge Jones in Re Vining Sparks UK Limited; Allen v Bernard [2019] EWHC 2885 (Ch).

David Mohyuddin QC

dmohyuddin@threestone.law


Avon Ground Rents Limited v (1) Cowley & others (2) Metropolitan Housing Trust

29 October, 2019

Avon Ground Rents Limited v (1) Cowley & others (2) Metropolitan Housing Trust (3) Advance (4) May Hempstead Partnership

[2019] EWCA Civ 1827

The question raised in this appeal was whether, when a landlord proposes to carry out works, the total cost of which is reasonable, but there is the possibility that a third party will contribute to those costs, in assessing the residential service charge payable in advance, does section 19(2) of the Landlord and Tenant Act 1985 require the landlord (depending on the facts of the case) to give credit for the anticipated third party contribution when assessing a reasonable advance payment or are third party contributions only to be taken into account once they are actually received ?

In this case, which related to major repairs required to a mixed-use commercial/residential development, a claim had been made under NHBC insurance schemes. Liability in principle was admitted prior to the issue of service charge demands, however the service charge demands issued to the tenants, both residential and commercial, were based on the full cost of the works.

The First Tier Tribunal concluded that the landlord should give credit for the anticipated receipt of insurance monies and determined that a reasonable advance payment would be the amount of the excess payable by the tenants under the policies. The Upper Tribunal upheld the decision.

The Court of Appeal (McCombe LJ, Coulson LJ, Nicola Davies LJ), dismissing the further appeal, held that the Upper Tribunal had been correct to conclude that whether an amount is payable in advance is not generally to be determined by the application of rigid rules but must be assessed in the light of the specific facts of the case. The wording of section 19(2) of the 1985 Act is intended to allow for flexibility. What is reasonable is a question for the relevant tribunal to determine, taking into account all relevant circumstances as they exist at the date of the hearing giving such weight to the various factors as it considers just and reasonable. The question as to whether the possibility of third-party payments can be taken into account in deciding what might reasonably be demanded on account will depend on the facts of the individual case. If certainty were to be required, this would constrain the discretion of the tribunal. The purpose of the statutory provision is to protect tenants from unreasonable demands. Where, as here, there exists an anticipated schedule of works, the total cost of which is reasonable and there is a possibility of a third party making a contribution to those costs, in assessing the residential service charge payable in advance of those works, the landlord does have to give credit for the anticipated third party payment.

Timothy Clarke of Three Stone appeared for the Second Respondent, Metropolitan Housing Trust.

Timothy Clarke

timclarke@threestone.law


Mark Watson-Gandy named as new chair of the Biometrics and Forensics Ethics Group

14 October, 2019

Mark Watson-Gandy has been named as the new chair of the Biometrics and Forensics Ethics Group.

Professor Mark Watson-Gandy is a practising barrister, author and company chairman. Mark is experienced in advising government having been a former junior counsel to the crown.

Mark has considerable experience of chairing committees. Since 2014 he has been chair of Mental Health First Aid England, a community interest company launched under the Department of Health: National Institute of Mental Health in England (NIMHE) as part of a national approach to improving public mental health. Mark also chairs the Disciplinary Appeals Committee of the Institute of Financial Accountants and is Head of Professional Standards for the Institute of Certified Bookkeepers, a statutory supervisory body.

The author of several legal text books Mark is also a special lecturer at Cass Business School, a visiting professor at the University of Westminster and a member of court at the University of Essex.

Mark takes over from Christopher Hughes, OBE who has been the BFEG Chair since 2009.

As chair, Mark will provide leadership and support, working with the BFEG committee members and the secretariat to ensure provision of impartial, balanced, objective advice and guidance to ministers within the remit of the BFEG.

Mark Watson-Gandy said:

“I am thrilled to join the Biometrics and Forensics Ethics Group as its chair and to have the chance to work with such an amazing and inspirational team. This is an enormously exciting time to join the group and – particularly in the area of big data – there are some challenging issues that need to be wrestled with”.

Mark Watson-Gandy took up his appointment on 27 September 2019.

Mark Watson-Gandy

mwg@threestone.law


Menon & Anor v Pask & Ors

10 October, 2019

In Menon & Anor v Pask & Ors [2019] EWHC 2611 (Ch) (07 October 2019), Mann J held that fixed charge receiver with the benefit of a power to take possession, under the usual modern form of mortgage providing for receivership and for receivers to be the agents of the mortgagor, was entitled to sue in his own name for possession against an individual (non-corporate) mortgagor-occupier.

Francis Collaço Moraes

fmoraes@threestone.law


Hood v Revenue and Customs Commissioners

29 September, 2019

In Derek Thomas Hood v The Commissioners for Her Majesty’s Revenue and Customs v JD Classics Limited (In Administration) [2019] EWHC 2236 (Ch), 2019 the court held that in a validation application pursuant to s.284 of the Insolvency Act 1986 (“the Act”) only debts satisfying the requirements and conditions of ss. 267 and 268 of the Act fall to be considered on the issue of solvency required by Practice Direction, Insolvency Proceedings [2018] B.C.C. 241.

Consequently the court correctly concluded that creditors who may be able to prove in the bankruptcy, but cannot satisfy the requirements and conditions of sections 267 and 268, has no standing to oppose a validation application.

The court further confirmed that only creditors who can satisfy the requirements and conditions of ss. 267 and 268 can take carriage of a petition.

Francis Collaço Moraes

fmoraes@threestone.law

 


David Mohyuddin QC appointed a Recorder

22 September, 2019

Three Stone are delighted to announce that David Mohyuddin QC has been appointed a Recorder. He will be deployed to sit in civil on the North Eastern Circuit.

A full list of those appointed can be found here.

David Mohyuddin QC

DMohyuddin@threestone.law

 

 


James Woolrich joins Three Stone as a tenant

19 September, 2019

We are delighted to announce that James Woolrich joined Three Stone as a tenant on 9 September 2019.

James originally qualified as a solicitor in 2006 and a solicitor advocate in 2010. During his career in private practice, he has worked at 3 major international law firms, most recently at Jenner & Block LLP, where he was a partner in its London office.

James has a broad commercial practice working for corporate and banking clients, encompassing international arbitration and complex commercial disputes, often with cross-border elements. He has gained substantial experience of applying for post-arbitration award/judgment enforcement measures, and in that connection has dealt with a wide range of applications for relief and related jurisdictional issues.

Prior to being called to the Bar (in July 2019), James was identified in the 2018/19 edition of The Legal 500 as one of its ‘Next Generation Lawyers’ in the Commercial Disputes category and was described as a “great strategist” in its practice write-up for Jenner & Block’s International Arbitration group.

His recent engagements at Jenner & Block included:

  • Acting in ongoing multi-jurisdiction enforcement proceedings on behalf of the award creditor (in England, Cyprus, India and the Isle of Man) in respect of two LCIA arbitration awards now worth over $500m (numerous decisions, including: [2013] EWHC 1323 (Comm), [2013] 2 All ER (Comm) 1137; [2013] EWCA Civ 1512; [2014] EWHC 1323 (Comm); [2014] EWHC 3131 (Comm), [2015] 1 All ER (Comm) 336; [2015] EWHC 467 (Comm); [2014] EWHC 3704, [2015] 1 All ER (Comm) 305; [2015] EWHC 86 (Comm); [2015] EWHC 597 (Comm); Ex.P.132/2014 11 April 2017 (Delhi High Court); CHP/2013/66 4 July 2018 and 4 February 2019 (Isle of Man High Court);
  • Representing an investor in a significant investment treaty claim against an Eastern European State in relation to real estate projects;
  • Advising an Eastern European bank on complex conflict of laws issues arising in relation to a dispute connected to a finance agreement and an apparent fraud;
  • Advising individual defendants to civil claims brought against them by a foreign tax authority in relation to an alleged £1bn withholding tax fraud;
  • Representing an investor in a BVI mining company in relation to:
    • (i) a dispute concerning information-provision obligations and repayment covenants in an Investment Agreement (LCIA Rules, London seat) and
    • (ii) a dispute concerning shareholder rights (BVI Commercial Court);
  • Advising a US defence contractor in relation to a high-value breach of contract dispute (LCIA Rules, London seat).

James said “I am delighted to be joining Three Stone following my transfer to the Bar. The clerking team here is second to none and I look forward to working alongside chambers’ high-quality members.”

Justin Brown (senior clerk) said “I am very pleased that James accepted John McDonnell’s invitation to join us. He has an outstanding reputation, and his existing expertise will be a perfect fit with the work of chambers. I am sure he will be very successful. James joins us shortly after Stephen Woodward, also formerly a partner in a very well-respected firm. We are continuing to receive some excellent applications to join chambers and all I can say is watch this space ….”

James Woolrich

jwoolrich@threestone.law

 


Skandinaviska Enskilda Banken AB v Conway & Anor

22 August, 2019

Skandinaviska Enskilda Banken AB v Conway & Anor (as joint official  liquidators of Weavering Macro Fixed Income Fund Ltd) [2019] UKPC 36 

The Privy Council decision (on appeal from the Court of Appeal, Grand Cayman) that Liquidators of an insolvent open-ended investment company were entitled to recover from a bank those share redemption payments which were unlawful preferences over other creditors pursuant to the Companies Law (2013 Revision) 2013 (Cayman Islands) s.145(1) notwithstanding that the bank had not been enriched but, as a bare trustee, had paid away the money to its beneficiaries.

David Lord Q.C. of ThreeStone appeared (along with Shaun Folpp of Mourants) for the successful Liquidators.

What was the background?

In short, Weavering collapsed in March 2009 when the directors uncovered the fraudulent activities of the Fund’s principal investment manager, Magnus Peterson. At the heart of his fraud, Mr Peterson used fictitious interest rate swaps to give the impression that the Fund was returning steady profits when in reality the swaps had the effect of masking huge trading losses. This was done by attributing significant value to the swaps notwithstanding the fact that they were worthless. Following the collapse of Lehman Brothers in September 2008, a significant number of Weavering’s investors sought to redeem their shares. As a consequence, redemptions totalling US$138.4m, US$54.7m and US$30m became due on each of the 1 December 2008, 2 January 2009 and 2 February 2009 redemption days. As a result of Mr Peterson’s fraud, Weavering was never in a position to meet these redemption obligations, and was rendered hopelessly insolvent. However, rather than suspending redemptions, or otherwise taking steps to cease the Fund’s business, Mr Peterson implemented a policy for the payment of redemptions – albeit only to those investors who redeemed their shares on 1 December 2008, leaving those investors who redeemed on 2 January and 2 February 2009 unpaid. The defendant in these proceedings, SEB, was one of the investors who redeemed their shares on 1 December and who was paid their redemption sums in full.

What did the court decide?

The Board confirmed both decisions below that the redemption sums received by SEB were preference payments, and ought to be repaid to the Fund’s liquidators. In doing so, the Board held:

  1. While Net Asset Values (NAVs) struck prior to a company’s liquidation ordinarily cannot be disturbed or set aside once a company is in liquidation (following the Privy Council’s decision in Fairfield Sentry v Migani [2014] UKPC 9), where those NAVs have been struck as a result of an “internal” fraud they may not be binding and may be liable to be set aside. This is to be contrasted with the position of an “external fraud” where, even if the NAVs are affected by fraud, they will nonetheless be binding. Here, given Magnus Peterson was found to be the controlling mind of the Fund (although he was not a director), the fraud was found to be “internal”.
  2. Where a company’s articles provide that redemption sums are to be paid within a set period of time following a redemption day, the obligation to pay those sums still arises on the redemption day. Reference to a payment period (in this case, a period of 30 days from the relevant redemption day) is simply a reference to a supplementary procedure which does not affect the liability from accruing on the redemption day.
  3. In a preference action, the required “dominant intention to prefer” can be inferred from the evidence by applying general principles of inference.
  4. The relevant provision within the Cayman Island statute in relation to preference only has the effect of avoiding the relevant payment. The cause of action which then accrues is not based on the statute, but rather restitution on the ground of unjust enrichment. However, as a matter of public policy, there can be no change of position defence to a claim brought for the recovery of preference payments.

As an aside, in the Court of Appeal’s decision, below, it held that the cash flow test for insolvency in the Cayman Islands is not confined to consideration of debts that are immediately due and payable, and that it also permits consideration of debts that will become due in the reasonably near future. Given the Board’s conclusion in relation to issue 2 above it was not necessary for the Board to go on to consider this point. The Court of Appeal’s decision thus remains the position as a matter of Cayman Islands law.

What are the practical implications of this decision?

The Board’s decision deals with a number of important principles which have a far reaching affect beyond mere preference payments. However, the two most obvious implications are:

First, given the propensity for investors to invest in Cayman Islands investment funds via custodians or nominees, the lack of a change of position defence will require those who provide these services to ensure the arrangements they have in place with their underlying investors include an ability to recover redemption sums which they receive on behalf of those investors and, in turn, which they pay to them. The defendant in these proceedings, SEB, was itself a custodian. It received the redemption sums from the Fund and, in turn, paid them out to its investors. Unfortunately, the indemnities it had in place with those investors were worthless, meaning SEB, having paid the redemption sums away and being unable to now recover them, will need to re-pay these sums from its own monies.

Second, the Board’s decision to draw a distinction between “internal” and “external” fraud may result in aggrieved investors in funds which have been subject to an internal fraud taking steps to try and set aside previously binding NAVs, with a view to all investors, regardless of whether they sought to redeem their shares or not prior to liquidation, sharing equally in the fund’s available assets.

Ultimately, the decision reinforces the policy behind much of the Cayman Islands’ insolvency regime, which is to restore value to a company for the benefit of its creditors who, in turn, ought to share equally in the distribution of the company’s assets

David Lord Q.C.

dlord@threestone.law

 


Charlotte St Properities Ltd (In Administration), Re Also known as: Conn v Ezair

18 July, 2019

Stephen Leonard Conn, Jonathan Avery-Gee (Joint Administrators of Charlotte Street Properties Limited) v Jacob Azouri Ezair [2019] EWHC 1722 (Ch)

Introduction

The court considered whether admissions made in an earlier witness statement could amount to admissions for the purposes of CPR 14.1, and the circumstances in which such admissions might be withdrawn pursuant to CPR 14.1(5), and PD14, paras 7.1 and 7.2.

Further, the court considered the nature of a purchaser’s and sub-purchaser’s rights under contracts for the sale of land, and the operation of the equitable doctrines of conversion and proprietary estoppel in favour of a sub-purchaser in the light of the decision of the Supreme Court in Southern Pacific Mortgages Ltd v Scott (Mortgage Business plc intervening) [2015] AC 385.

In particular, the court considered the circumstances in which a sub-purchaser might enforce the original contract against the original seller, and thereby secure performance of the sub-contract.

Background

In 1999 the Respondent entered into a contract of sale of his business, including number of properties, to a company that he controlled (NEL). The contract was completed save for the transfer of the properties to NEL which remained in his name to save stamp duty, with the contract providing that NEL could call for a transfer on giving 7 days’ notice.

In 2003 NEL agreed to sell 8 of the properties (“the Properties”) to a company belonging to an off-shore family trust (CSPL) for tax reasons. Again, the contract was completed and the purchase price was paid, save that, again, the Properties remained in the name of the Respondent as legal owner. Thereafter, the Properties were treated as an asset of CSPL in its accounts, and the rents received and expenses incurred in connection went through CSPL’s accounts.

NEL entered into liquidation in 2016, and CSPL entered into administration in 2017. The joint liquidators of NEL and the joint administrators of CSPL are the same individual insolvency practitioners.

The joint administrators of CSPL issue an application against the Respondent under ss. 234 and 236 seeking an order that he execute transfers of the Properties in favour of CSPL. In witness evidence in response, the Respondent admitted that he had held the Properties upon trust for CSPL and that CSPL had been entitled to enforce the 1999 contract, but alleged that he had entered into an agreement with the directors of CSPL in 2016 to acquire the beneficial interest in the Properties – an allegation hotly contested by the joint administrators of CSPL.

It was determined at an earlier hearing of a preliminary issue that the ss.234/236 procedure was potentially available to the joint administrators and not inappropriate.

Shortly before trial, the Respondent abandoned his case with regard to the agreement to acquire the beneficial interest in the Properties, but also sought to resile from his admission that he held the Properties upon trust for CSPL. Relying on Southern Pacific Mortgages v Scott, he argued that NEL had not acquired any proprietary rights under the 1999 contract, and so had not been able to grant any proprietary rights in favour of CSPL that the latter could enforce. On this basis, so he argued, CSPL had no right to specific performance as against the Respondent, and thus no trust in respect of the Properties could arise in favour of CSPL. Further there was no privity of contract as between the Respondent and CSPL. Thus, as the joint administrators could be in no better position CSPL, the joint administrators were not entitled to the relief that they sought.

Decision

The admissions made in the earlier witness statement were admissions falling within CPR 14.1, and applying the criteria in PD14, para 7(2), and it would not be right to allow the Respondent to withdraw his admissions that he held the Properties upon trust for CSPL and that there was a contractual relationship between CSPL and the Respondent following the entry into the 2003 contract. The joint administrators of CSPL would be prejudiced by the Respondent being allowed to withdraw his admission, not least because they would otherwise have easily obtained an assignment from NEL of the latter’s rights under the 1999 contract.

In any event, the effect of the 1999 contract being completed, apart from the transfer of the relevant properties to NEL, was to constitute the Respondent as a bare trustee of the properties the subject matter of the 1999 contract. Likewise, once the 2003 contract was completed apart from the transfer of the legal estate, NEL held on bare sub-trust for CSPL as sub-purchaser with the result that the Respondent, as original seller, could and should act on the directions of CSPL as sub- purchaser in accordance with the principle in Re Lashmar [1891] 1 Ch 258. On this basis CSPL was entitled to call for a transfer of the Properties.

Analysing it slightly different, the authorities demonstrated that a sub-purchaser would be entitled to seek specific performance as against the original seller, essentially stepping the shoes of the original buyer where both the original contract and the sub-contract were specifically enforceable – see e.g. Snell’s equity (33rd edn) 24-003 and Shaw v Foster (1872) LR 5HL 321. Whilst there may be circumstances where it was necessary for the sub-purchaser to join the original purchaser, a claim would not generally fail over the non-joinder of the intermediate party, particularly in a case such as the present where the intermediate party was in support of the claim, and the original seller and the intermediate seller were both bare trustees (because the purchase price had been paid in full).

Whilst Southern Pacific Mortgages v Scott was authority to the effect that the 1999 contract had not conferred any proprietary rights on NEL that it could pass on, this did not matter because CSPL had stepped into the shoes of NEL, and could enforce the 1999 contract.

Further, in the circumstances, given that the Respondent had arranged matters such the Properties were treated as assets belonging beneficially to CPSL (not least for tax reasons), and as not as belonging to himself or NEL, he was estopped from denying that the held the Properties for CPSL beneficially.

The joint administrators were thus entitled to the relief that they sought.

Mark Cawson QC

MCawson@threestone.law


Re AB: Termination of pregnancy

15 July, 2019

Simon Hunter reviews the tragic case of Re AB in which the Court of Appeal overturned the decision of the Court of Protection to permit an NHS Trust to perform an abortion on a 24-year-old woman.

Re AB [2019] EWCOP 26, [2019] EWCA Civ 1215.

The case created headlines around the world, shining a spotlight on the work of the Court of Protection and the difficult decisions that it has to make on a daily basis.

Click here for the full story from Law & Religion UK.

 

Simon Hunter

shunter@threestone.law


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