JOINT INSOLVENCY EXAMINATION BOARD Joint Insolvency Examination Tuesday 3 November 2009 ADMINISTRATIONS, COMPANY VOLUNTARY ARRANGEMENTS and RECEIVERSHIPS (3.5 hours) ANSWER ALL FOUR QUESTIONS QUESTIONS 1 AND 2 CARRY TWENTY MARKS EACH QUESTIONS 3 AND 4 CARRY THIRTY MARKS EACH SUBMIT ALL WORKINGS The Examiner will take account of the way material is presented. Candidates should answer the questions set - and marks will not be awarded for extraneous material. Note: References to legislation are to that which was in force on 30 April 2009. References to the Act are to the Insolvency Act 1986 as amended. References to Sections, Schedules and Rules are to Sections and Schedules of the Insolvency Act 1986 and to Rules of the Insolvency Rules 1986 as amended. References to Sections and Rules of other Acts, Regulations and Orders will mention the Act, Regulation or Order. JIEB/ACVAR/2009E Page 1 of 7 130093
1. Yesterday you and one of your partners were appointed Joint Administrators of AE Ramsey & Co Ltd ( the Company ), an IT consultancy. The appointment was by the directors. During the past few weeks your firm has assisted the Company to identify a purchaser for the business and assets. You are in advanced negotiations with the one remaining interested party and expect to conclude a sale agreement within the next day or so. Immediately following your appointment you issued redundancy letters to five of the Company s 15 employees who had received no prior notice from the Company. Those redundant employees were also issued with an RP1 claim form and explanatory booklets dealing with their rights under The Employment Rights Act 1996 ( ERA ). The prospective purchaser apparently wishes to employ the remaining ten employees following the completion of the business transfer. The Company has provided the prospective purchaser with a schedule of the redundant employees which is summarised below. Employee No. Service Years Age Weekly Pay (5 day week) Arrears of Pay (in days) Holidays Due (in days) Redundancy Qualifying weeks 1 2 19 600 20 3 1 2 5 33 1000 20 9 5 3 1 24 800 20 4 0 4 15 51 1500 20 13 25 5 12 43 1250 20 14 21 Contracts of employment provide for statutory notice and the statutory minimum redundancy scheme. The price negotiated for the transfer is 300,000, apportioned as to 290,000 for goodwill and the balance to furniture and fittings, and is supported by independent valuation advice. However, the prospective purchaser has expressed concern about the operation of the Transfer of Undertakings (Protection of Employment) Regulations 2006 ( TUPE ) and, consequently, the only remaining detail to be finalised in the business sale agreement is an amount to be retained from the purchase price by the purchaser to cover the claims of the five redundant employees in respect of arrears of pay, holiday pay, pay in lieu of notice and redundancy pay ( the retention sum ). As part of the sale agreement you will require the retention sum to be held in an escrow account with your solicitor for a maximum period of six months, and thereafter to be refunded to the purchaser only to the extent that the purchaser is liable for the redundant employee claims. There is a loan outstanding of 265,000 secured by a debenture incorporating a fixed charge over business goodwill and a floating charge over the remaining assets and undertaking of the Company. The purpose of the Administration is that set out at paragraph 3(c) of Schedule B1. Requirements (a) (b) Calculate the amount of the retention sum in respect of the claims of the five redundant employees against the Company. (Assume that any claim requiring mitigation is mitigated by 50%.) (10 marks) State, with reasons, how, under the ERA, the Redundancy Payments Office is likely to deal with the claims of both the five redundant employees and the ten employees employed by the purchaser. (10 marks) NOTE: National Insurance Fund upper limit on the amount of a week s pay is 350. Assume a notional tax rate of 20%. (20 marks) JIEB/ACVAR/2009E Page 2 of 7 130093
2. Revie Engineering Ltd ( the Company ) manufactures specialist components mainly for the aerospace and defence industries. The sole director and controlling shareholder, Terry Cooper, founded the Company some 30 years ago. It has 24 employees including Mr Cooper and occupies a large freehold site which is subject to a first legal charge in favour of Baywatch Bank Plc ( the Bank ), which also holds a floating charge over the remaining assets and undertaking of the Company. The Bank s charges secure overdraft and term loan liabilities currently amounting to 3.5 million and were taken out in the mid 1980s. The Company has been dependent for orders on key industry contacts that Mr Cooper has built up over the years and so when, some three months ago, he was taken permanently ill and unable to work, his absence had an immediate detrimental affect on the business for which there was no succession plan. The freehold site appears to have significant development potential which would result in a capital gain on disposal. The Bank has, therefore, decided to appoint you as Administrative Receiver. You received the instrument of appointment late yesterday afternoon and you gave formal written acceptance of the appointment to the Bank forthwith. Preliminary discussions with your appointor have confirmed that a short period of trading is likely to be beneficial in maximising asset realisations and mitigating liabilities. Requirements (a) (b) (c) Identify the risks generally of trading a company in Administrative Receivership. (8 marks) Outline your main priorities during the first week of your appointment in this case. (8 marks) State the duties of an Administrative Receiver to the preferential creditors. (4 marks) (20 marks) JIEB/ACVAR/2009E Page 3 of 7 130093
3. Ron Greenwood Law LLP ( the LLP ) was formed some five years ago by Messrs G Hoddle and C Waddle from an existing legal practice in which they had been partners for over 20 years. Eighty per cent of the income of the LLP is derived from residential conveyancing, with the remainder from property interests. A number of the properties are jointly owned with members of the Hoddle and Waddle families. There is no suggestion of any impropriety in relation to these arrangements. In the last 18 months, the level of income has reduced significantly and, although it has assets exceeding its liabilities, the LLP is unable to pay its debts as they fall due. The LLP therefore now seeks a Company Voluntary Arrangement ( CVA ) to allow 12 months to sell most of its property interests and repay its debts in full plus statutory interest. You obtain information about the LLP s assets and liabilities set out below. Clemence Cottage comprises a single property sub-divided into three small holiday lets. There are two mortgages with the total outstanding of 90,000. Contracts for the sale of the property have recently been exchanged with an independent third party at a price of 270,000. Castelo De Keegan, a luxury property in Portugal, is jointly owned by the LLP and Mr Hoddle s former wife, Mrs Ann Hoddle. It has an estimated value of 380,000 and no mortgage. 1 Sansom Road, Bunbury is jointly owned by the LLP and Mr Hoddle s daughter. It is a shop with offices above let at 17,500 per annum exclusive, expiring 2015. The tenant has made a verbal offer of 210,000 for the property. Agents have indicated the property should achieve a price of 250,000. 2 Wilkins Drive, Bunbury is a shop with offices above used and owned solely by the LLP. Agents have indicated the property has an open market value of 100,000. 3 Brooking Street, Bunbury is jointly owned by the LLP and Mr Waddle s son. It is a double fronted shop in a dominant position with offices above, currently occupied by the LLP. Agents have indicated the property should achieve a price of 300,000. The three Bunbury properties are subject to a legal charge in favour of Gascoigne Bank Plc to secure loans to the LLP amounting in total to 205,000. There are no further sums secured against these properties. Woodcock Park Garages comprises five derelict garages on a building plot which has been granted detailed planning permission for residential development. Agents have indicated the property should achieve a price of 250,000. It is jointly owned with the estate of F D Waddle, Mr Waddle s deceased first wife and is unencumbered by borrowing. 4 Coppell Road is solely owned by the LLP but mortgaged to Shilton Bank Plc with 120,000 outstanding. It is a shop with office above, formerly used by the LLP. It is currently let to a firm of solicitors at 9,000 per annum exclusive, expiring 2015. The tenant may be interested in purchasing the property. Agents have indicated the property should achieve a price of 220,000. All jointly owned property is held as tenants in common in equal shares. As part of the CVA, all properties will be marketed for sale with the exception of 2 Wilkins Drive, Bunbury which is to be retained as the sole operating location for the LLP. Mr Hoddle s daughter and Mr Waddle s son will defer their respective interests in the properties thereby enabling the LLP to realise the full value for the benefit of the CVA ( the deferred family interests ). Ann Hoddle has advised that she is not in a position to defer her interest. Solicitors acting for the estate of FD Waddle (deceased) have consented to a sale of Woodcock Park Garages, subject to receiving the estate s share of the sale proceeds. JIEB/ACVAR/2009E Page 4 of 7 130093
It is anticipated that a capital gains tax liability of 82,000 will arise on the disposal of the LLP s share of property interests which cannot be sheltered in any event. Capital gains tax liabilities amounting to 56,000 will also arise on the disposal of the deferred family interests, which in the event of approval of the CVA will be paid or reserved by the Supervisor. Chattel assets of vehicles and equipment are estimated to realise 66,000, and 14,000 respectively. The LLP has a current account with Hurst Bank Plc ( Hurst ) currently holding funds of 12,000. No other accounts are maintained with Hurst. All non-property assets are to be excluded from the CVA to facilitate continued trading with the exception of vehicles valued at 28,000 which are surplus to requirements. No voluntary contributions from trading income will be offered by the LLP. There are also unsecured loans, Crown debts, equipment hire creditors and trade creditors estimated at 700,000. Contingent claims and costs envisaged to crystallise in a winding up but not in a CVA include employee claims estimated at 110,000; Law Society intervention management costs estimated at 100,000 and Professional Indemnity Insurance run off cover estimated at 150,000. The estimated costs of the CVA including Supervisor s, agents and legal fees and all disbursements are estimated at 60,000. The corresponding liquidation costs are likely to be considerably higher and are estimated at 120,000, and in both cases are net of any rental income receipts. Requirements (a) (b) (c) Outline the matters that you should consider and the steps that generally you should take before agreeing to act as a Nominee. (5 marks) Outline the legal and practical steps that a Supervisor should take generally during his tenure of office from commencement to the conclusion of a CVA. (10 marks) Draft a statement comparing the estimated outcome of the proposed CVA and Creditors Voluntary Liquidation. (Assume that the incidental costs of realising jointly owned property are borne entirely by the LLP.) (15 marks) (30 marks) JIEB/ACVAR/2009E Page 5 of 7 130093
4. Robson Packaging Ltd ( the Company ) got into financial difficulty following a prolonged and expensive re-location. The directors placed the Company into Administration on 7 January 2009 and you were appointed as Administrator. Charlton Bank Plc ( the Bank ), which is owed around 650,000, holds a fixed charge over goodwill, leasehold property and intellectual property rights and a floating charge over all other assets. The Bank consented to your appointment. The security was granted during 2005 and was duly registered. After a short period of trading, the business and assets were sold as a going concern to an unconnected third party. At the time of your first interim progress report to the creditors there had been the following receipts and payments. Period 7Jan 2009 to 6 July 2009 Statement of Affairs 000 000 Assets subject to a fixed charge Goodwill 350 350 Leasehold property 10 10 Intellectual property rights 100 100 460 460 Assets subject to a floating charge Factored book debts - surplus 15 40 Non factored debts 5 15 Administration trading sales 20 - Plant & equipment 35 35 Plant & equipment Retention of Title 240 240 Bank interest 10 Total receipts 785 835 Payments Administrator's fees 55 Legal & debt collection fees 35 Direct labour 60 Other trading costs 35 Sundry expenses 10 Distributions Fixed chargeholder 340 Funds in hand 250 Total payments and funds in hand 785 In relation to the above payments, Administrator s fees of 45,000 and legal fees of 20,000 are allocated against fixed charge realisations. Amongst the assets comprised in the sale agreement were some large items of plant and equipment which have been the subject of an ongoing retention of title ( ROT ) claim by D Maradona & Partners. Virtually all matters in the Administration have been finalised with the exception of the ROT claim. If the ROT claim is shown to be valid, the amount of the purchase consideration allocated to the ROT assets will become refundable to the purchaser, to the detriment of the floating chargeholder. JIEB/ACVAR/2009E Page 6 of 7 130093
Subsequent to your first interim progress report you have recovered further surplus factored book debts and non-factored book debts amounting to 40,000 and 15,000 respectively. The remainder of your outstanding Administration trading debts amounting to 45,000 have also been collected. You have drawn further remuneration of 30,000 with requisite approval and have paid further legal costs of 15,000. Additional sundry expenses of 5,000 have been paid and bank interest of 5,000 has been received. You have made a second and final payment to the Bank of 55,000 under its fixed charge security, leaving a shortfall of 255,000 against which the Bank will look to make a partial recovery under its floating charge. There are no preferential creditors. Following discussion with your solicitors you are advised that it will not be feasible to conclude the Administration prior to the anniversary of your appointment. Consequently it will be necessary to obtain an extension of the Administration and you propose to do so by consent pursuant to paragraph 76(2)(b) of Schedule B1. You decide to draft your further interim progress report to creditors for that purpose as at today s date, 3 November 2009. Requirements (a) (b) For the purpose of seeking an extension of the Administration (i) Outline the main contents of your report to creditors; (5 marks) (ii) Set out in principle the information that you are required to disclose in relation to your remuneration; (5 marks) (iii) Outline the alternative steps you would take to obtain the requisite creditor approval of the proposed extension; (5 marks) (iv) Draft your account of receipts and payments in compliance with the Rules and required best practice. (8 marks) Assuming that the ROT claim is ultimately resolved in favour of the Company, and there are no further receipts and payments to the conclusion of the Administration (i) Calculate the amount of the prescribed part and the further amount recovered by the Bank; (2 marks) (ii) Discuss the options open to the Administrator for dealing with the prescribed part. (5 marks). (30 marks) NOTE: Ignore VAT and Corporation tax JIEB/ACVAR/2009E Page 7 of 7 130093