Procedure in insolvency proceedings
December 8, 2021
This year has been an important one for the courts providing reinforced clarification as to the application of procedural requirements associated with insolvency proceedings. In particular, the courts have dealt with the practice of bringing “hybrid claims” in insolvency proceedings and have also recently clarified the position on joining a trustee in bankruptcy as a party to an action.
Whilst it may seem trite, these cases both, albeit in different ways, reinforce the need for strict compliance with the relevance rules on procedure and evince some clarification as to how the courts will handle application of those rules, as well as the remedial powers of the courts in handling breaches of those rules.
Manolete Partners Plc v Hayward and Barrett Holdings Ltd  EWHC 1481 (Ch)
This case involved three applications. This judgment was the reserved judgment of Chief ICC Judge Briggs in relation to the third of those applications, namely – an application by the Third and Fourth Respondents in the case for an unless order requiring the Applicant to pay the issue fee that would have been payable had the claim been commenced by way of a Part 7 claim and not as an insolvency application.
The value of this judgment is to be found in the guidance and clarity provided to practitioners seeking to commence insolvency proceedings, whilst they also consider bringing contingent non-insolvency proceedings. The judgment highlights the court’s powers in relation to these so-called “hybrid claims” and provides clarity as to how the court is likely to utilise these powers going forward.
Blackwater Plant Limited (“Blackwater”) entered a creditors’ voluntary liquidation on 17 August 2018. On the same day, a connected company called Hayward & Barrett Ltd (“H&B”) also entered a creditors’ voluntary liquidation. The Third and Fourth Respondents were de jure directors of H&B and it was alleged, for the purposes of various transaction avoidance claims under the Insolvency Act 1986 (“the Act”), and other debt claims, that they were also directors of Blackwater. In particular, it was alleged that the Third Respondent was a de jure director and that the Fourth Respondent was a de facto director.
By an agreement dated 3 September 2019, the joint liquidators assigned essentially any and all claims that Blackwater may have to the Applicant (encompassing claims under the Act and any other claim). Thereafter, the Applicant, as assignee of the claims, commenced proceedings against Blackwater’s directors (choosing to include the Third and Fourth Respondents). The issues with the Applicant’s proceedings stemmed from their claim under s 212 of the Act and their inclusion of a debt claim in their insolvency application made by way of form IAA.
It was argued for the Respondents that the Applicant did not have standing under s212 and that the debt claim was not an insolvency proceeding and that they should be ordered to pay the usual Part 7 issue fee.
In the end, the Judge sided with the Respondents and granted their application for the Applicant to pay the Part 7 issue fee. This decision was reached on broadly two grounds:
i) the Applicant did not have standing under s 212 of the Act. This section did not permit an application to be made by either the Applicant or Blackwater because they were not a creditor or contributory and because the offices of a liquidator and an official receiver cannot be assigned or sold. Hence, a Part 7 claim should have been begun by the Applicant; and
ii) the other claims that fell outside of the meaning of “insolvency proceedings” should not have been brought with other intended insolvency proceedings and should have themselves been brought as Part 7 claims.
In reaching this decision, the judge highlighted that, generally, the only claims that should be included in an insolvency application via form IAA are those made under parts I to XI of the Act. Claims which fall outside of these parts should, therefore, usually be brought as Part 7 proceedings. Notably, at paragraph  the following guidance was provided:
i) that the court has discretion to permit a claim to continue where it should have been started as a Part 7 claim (but was not), where the claim is a consequence of a liquidation, where it would be procedurally convenient or sensible to do so;
ii) that the court may exercise its discretion and order that a claim that is not an insolvency application but that is made by an insolvency application should not proceed – particularly where there is an abuse of process; and
iii) that in other circumstances the court may impose conditions to permit a claim that should have started as a Part 7 claim to proceed as an insolvency application, such as the requirement that the correct fee be paid.
Whilst the preceding points were laid out as potential options, Judge Briggs, at , emphatically denies that an overarching practice had been developed and accepted whereby non-insolvency proceedings could be joined with insolvency proceedings in a single insolvency application. Instead, he notes that the usual position should be that the only claims that should be brought as insolvency proceedings should be those proceedings contained in parts I to XI of the Act.
This case shows the vital importance of only including claims capable of being insolvency proceedings in an insolvency application. The court does detail some of the remedial action that may be available to it when a non-insolvency proceeding is wrongly included, but practitioners should be alive to the fact that these are remedial actions and not a new course of procedure for “hybrid claims” – as was argued by counsel for the Applicant and rejected by the judge.
Lemos v Church Bay Trust Company Ltd  EWHC 1173 (Ch)
This case clarifies the threshold required to be met before the court will allow trustees in bankruptcy to be added as a party to a claim under CPR 19.2. It clearly displays that the test hinders on desirability and provides an insight as to the kinds of contextual factors that are likely to be significant in proving said desirability.
The Claimant was the sister of the bankrupt debtor. She had invested a sum of approximately US$18 Million with her brother, which he subsequently failed to repay. The Claimant commenced proceedings in Jersey against her brother at the end of 2014 and obtained judgment in default against him in January 2015 to the value of US$18 Million. In the course of these proceedings, the Claimant had been granted an asset restraint order against the First and Second Defendants in relation to a property which her brother had transferred to them. The property had previously been the matrimonial home of the brother and his wife, the Third Defendant.
The brother later filed for bankruptcy and, thereafter, the Claimant obtained permission to bring a claim under s 423 of the Insolvency Act 1986 (“the Act”) against the Defendants in respect of the transaction over the property. The trustees applied to be joined as co-claimants in the case, through the application of CPR r.19.2(2)(a), but this joinder was opposed by the Third Defendant, who averred that their joinder should be rejected because the trustees did not meet the requirements for joinder under the CPR and because, amongst other things, it would prejudice her by increasing her costs threat.
The Trustees’ application to be joined as co-claimants was granted. The court detailed that when adding a party in such proceedings, the threshold test under CPR 19.2(2)(a) is not limited just to what is necessary to ensure that proceedings are properly constituted. The judge noted that, at paragraph :
“the language of CPR 19.2(2)(a) is that of ‘desirability’ not ‘necessity’ ”.
In this case, the court noted the following as the key elements as to why it was desirous that the trustees be added as co-claimants:
i) they had a direct economic interest in the outcome, given their duty to deal with the assets of the bankrupt for the benefit of his creditors as a whole;
ii) they were able to actively assist the court with matters of evidence, given they had lengthy dealings with the bankrupt;
iii) they were able to bring a fresh perspective to the proceedings, as they were independent office holders acting in the interests of all creditors. This was a significant factor, even though, under s242(2) of the Act, any s243 claim is treated as made on behalf of every victim of the transaction. There was the risk that the Claimant could settle the proceedings on uncommercial terms, because of her familial connection to the matters, and this could not be said to be in the interests of all creditors. Consequently, having an ‘arms length’ party would help protect other creditor’s interests; and
iv) there was evidence of some delay in the actions of the Claimant in the course of proceedings, which were put down to the fact that the bankrupt was her brother. It was held that having an independent force in the proceedings would be likely to drive the matter forward, accelerating a conclusion to proceedings and reducing the use of the court’s time.
The desirability of adding trustees can be shown to be established where it will protect the interest of other creditors and where it will ensure the efficacious conclusion of proceedings. This case, therefore, provides assistance to practitioners in displaying the kinds of factors that are significant when making applications under CPR 19.2(2)(a) in insolvency proceedings.