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This case considers section 245 of the Insolvency Act 1986, namely the rules on avoidance of certain floating charges, and provides analysis of the application of s245 notwithstanding the Liquidation originated in the British Virgin Islands.
Peak Hotels and Resorts Ltd was incorporated in the British Virgin Islands and was involved in lengthy litigation following breakdown in relationships with its joint venture partners and shareholders. In October 2015, Peak became financially strained and was unable to pay its solicitors, Candey Ltd. Peak and Candey reached an agreement for the historic unpaid invoices and all future legal work that Candey provided in the Litigation.
The Fee Agreement was secured in the BVI by way of a legal charge. On 8 February 2016 Peak was the subject of a winding up order in the BVI. On 24 February 2016 the Liquidation was subsequently recognised as a foreign main proceeding in the courts of England and Wales under the Cross Border Insolvency Regulations 2006.
Under Schedule 1, Article 21 of the CBIR the foreign representative is entitled to apply under the CBIR for the same relief as if the Liquidation was an English Liquidation. The parties agreed that the matter was best dealt with by an English Court because of:
- an exclusive English jurisdiction clause in the Fee Agreement;
- the similarity between s245 Insolvency Act 1986 and s247 of the Virgin Islands Insolvency Act 2003;
- the recognition of the insolvency proceedings in England and Wales; and
- the assets subject to the charge are held by the Liquidators in England and Wales.
The assets which Candey claimed security over (worth approximately $13m) were monies that were to be paid out of court to the Liquidators following settlement of the Litigation (“Court Monies”) and money held on trust in a Standard Chartered Bank ("SCB Money") account which had also been paid to the Liquidators.
The Liquidators argued that Candey did not have an interest in the Court Monies until they had been paid out of court to Liquidators and the payment out was only a result of the Liquidators’ actions, therefore the Charge did not bite over the Court Monies. The Liquidators accepted that the Charge bit over the SCB money but the Charge could be avoided pursuant to s245. Candey argued that the Charge was fixed, not floating.
The Court held that Peak had an interest in the Court Monies and were able to place a charge over them as:
- Peak could administer the fund comprising of the Court Monies;
- Peak was entitled to the remainder of the Court Monies after the purpose for which the monies had been paid into court had been satisfied; and
- Although the Liquidators had settled the Litigation and successfully obtained payment out of the Court Monies, the Court Monies were not considered a new asset of Peak recovered by means of the Liquidators’ labour.
The issue was therefore whether the Charge was fixed or floating and if floating, could it be avoided pursuant to s245.
S245 provides that when granted by an insolvent company within the 12 months preceding Liquidation, a floating charge is invalid except to the extent of the value of money paid or goods or services supplied after the charge was created.
The Court stated it would not be bound by labels used by the parties in classifying a charge and that it would determine its status by examining the nature of the rights and obligations the parties intended to grant to each other in respect of the charged asset. It was further held that the defining feature of a fixed charge is the absence of a right of the charger company freely to deal with the charged assets and to withdraw them from the security without the consent of the hold of the charge .
Based on the Court's analysis of a floating charge and the construction of the charging document, the Court held that the Court Monies and the SCB Money were subject to a floating charge rather than a fixed charge. The Court was also satisfied that Peak was insolvent on a cash flow and balance sheet basis. The only issue to be resolved was what was the value of the services provided after the charge was created. Given the nature of the Fee Agreement further evidence was required to determine this value at a later date but the other requirements of s245 were met.
The case is a useful reminder of the wide powers within the CBIR and the availability of the Courts of England and Wales to determine issues as if the insolvency process were an English process.
This article was written by Alan Bennett.