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Jackson v Song

Jackson v Song [2021] EWHC 1636 (Ch) is another example of an unhappy interaction between bankruptcy and family law, again in the form of an unsuccessful application by the trustee in bankruptcy of Michael Sheridan for relief under s. 339 Insolvency Act 1986 on the basis that payments made under the terms of a maintenance agreement constituted transactions at an undervalue.

Mr Sheridan and Ms Song had married in 2003 and had two children. The matrimonial home had been purchased in 2007 in the sole name of Mr Sheridan, although both Ms Song and Mr Sheridan asserted joint ownership. Ms Song also claimed to have carried out a great deal of work on the property, giving her an interest in it or bolstering the half interest she claimed. Mr Sheridan had been the only wage earner in the family; Ms Song did not work outside the home.

The marriage broke down, and Mr Sheridan and Ms Song agreed that the matrimonial home should be sold, the mortgage repaid and a substantial sum from the proceeds would be provided to Ms Song to enable her to buy a house for herself and the children, who were then 8 and 10 years old. Ms Song consulted a solicitor, and the parties entered into a separation agreement on 27 March 2012 which was executed as a deed and purported to dispose of any financial claims that either party might have against the other.

When the property was sold, Ms Song realised that the 80% of the proceeds of sale from the property which she was to receive under the agreement was not going to be enough for her to purchase the property in which she intended to live, so she asked Mr Sheridan for more. He agreed to provide a further £40,000. Ms Song was also helped with the purchase by her parents and sister in China, enabling her to complete the purchase of the new property in her sole name. The overall result was that Ms Song received £429,128 out of the net proceeds of sale of the matrimonial home and Mr Sheridan only £57,282, less than the 20% to which he was entitled under the agreement.

Mr Sheridan went bankrupt in December 2013.

The first issue Deputy ICC Judge Agnello had to decide was Ms Song’s interest in the former matrimonial property. She concluded on the evidence that there had been a common understanding or intention that the property would be owned equally. She also concluded that, in reliance on that understanding, Ms Song had acted to her detriment, so that the work she had done on the property met the test set out in Lloyds Bank v Rosset. “However,” she went on, “even if I had determined that Ms Song’s share was one quarter rather than one half, this would not have assisted the Trustee’s case. As I set out below, the valuation of the consideration provided by Ms Song is not necessarily restricted by whether she owned a quarter or one half of the family home. The exercise carried out by the Family Court is much wider.”

The deputy judge then analysed the agreement, concluding that Ms Song had agreed to accept her share of the proceeds of sale of the property in consideration of relinquishing any family law financial claims she had against Mr Sheridan. “In my judgment, the parties were bound by the terms of the separation agreement, subject to what is set out below relating to the effect of section 34 [Matrimonial Causes Act 1973] on the separation agreement.” (The judge held that the agreement was a maintenance agreement within the meaning of s. 34(2) of the MCA.)

The deputy judge then considered the case law. Having done so, she said:

“In my judgment, the issue as to whether the consideration provided by the wife under a settlement agreement is capable of being consideration of value and measurable ‘in money or money’s worth’ has been effectively determined by Hill v Haines and the earlier cases of Re Pope and Re Abbott. I do not consider that there is any distinction to be made as between the case relating to a settlement agreement, such as in Re Pope or the present case, or a case such as Hill v Haines, where the order is made in the ancillary relief proceedings. In relation to settlement agreements, then there is a risk that a court may subsequently alter what has been agreed by the parties. That does not, in my judgement invalidate the consideration provided or enable it to be valued at zero. In cases such as Xydhias v Xydhias, a compromise between the parties reached during the ancillary relief proceedings needs to be approved by the court. This is the distinction explained in…Sharland. However in both types of cases, in my judgment, the consideration is not zero and according to the Court of Appeal in Hill v Haines, is capable of being valued in money or money’s worth.”

The deputy judge’s findings above were plainly not of assistance to the trustee’s case, but the way the trustee had put her case now led to even greater problems: for the trustee had not set out what she asserted was the value of the consideration provided by Ms Song (beyond saying there was none). In a reply to a request for information she had pleaded that, in the event of the court determining that Ms Song had provided consideration, she, the trustee, would invite the court to determine the value of that consideration. That approach did not commend itself to the judge:

“In my judgment, it is for the Trustee to establish her case on the alternative limb being section 339(3)(c). Once the Court has considered the Trustee’s case as to value of the consideration provided and given, then the Court would determine whether the Trustee has discharged the burden of proof to the relevant standard. It is not for the Court to assess what is the value of that consideration. The burden remains on the Trustee.”

The trustee’s contention that Ms Song had provided “zero consideration”, or consideration the value of which was significantly less than the consideration she received was rejected.

An understandable attempt by counsel for the trustee in the face of that to run an alternative case on the additional £40,000 also failed. The judge found that it fell to be treated in the same way as the larger sum due under the strict terms of the agreement. She also said:

[I]n so far as I am wrong about the position relating to the additional £40,000 being in reality part of the separation agreement between the parties, I would not have, in the exercise of my discretion pursuant to section 339(2), made an order for Ms Song to account to the trustee in relation to the additional £40,000. Ms Song entered into the separation agreement and agreed a split of 80% of the net proceeds of sale, relying upon the promise made by Mr Sheridan, that the sum which would be available to her would be in the region of £450,000. Her intention was clearly to obtain sufficient funds to enable her to purchase a property for her and the children. She had clearly relied upon what she believed the sums available to her were to be when she exchanged contracts for the purchase of 50 Waterside. Although Mr Sheridan asserts that he was unaware that Ms Song intended to use the sums to buy a new property, in my judgment, he was certainly aware of that intention when Ms Song asked for further sums because of the shortfall. He agreed to provide further sums to Ms Song because she needed them for the acquisition of the new home for her and the children.”

The judge accordingly granted a declaration as to Ms Song’s 50% interest in the property and dismissed the trustee’s application.

The judgment in Jackson v Sing demonstrates the difficulties a trustee often faces in seeking to undo a maintenance agreement, even when it has been reached in circumstances that appear to fly in the face of creditor interests. The main lesson appears, however, to relate to the need to think carefully about issues of consideration and value in claims of this kind, which is often not easy.

It has long been known that settlement agreements are recognised as valid by the Matrimonial Causes Act and so have the same status as a consent type of order. This is the first case to confirm that position.

Deputy Judge Agnello also devotes a significant portion of her judgment to her evaluation of the witness evidence, drawing attention to the need for particular care where evidence is being given through an interpreter, as it was by Ms Song in this case.



Creditor awarded proportion of costs of appearing at convening hearings

Although in Re Amicus Finance plc [2021] EWHC 2255 (Ch) the company succeeded in persuading Snowden J that the threshold conditions provided for by s 901A Companies Act 2006 had been satisfied so that an order should be made to convene meetings of creditors for the purpose of considering and, if thought fit, approving a restructuring plan under Part 26A Companies Act 2006, the company and its administrators did not have an easy time of it.

The company’s business was the provision of short-term property and development finance. In 2018 it began to experience financial difficulties, and  administrators were appointed in December. The administrators now considered that it was no longer financially viable or in the interests of creditors for the company to continue in administration, mainly because the company’s loan portfolio had turned out to be more difficult and more expensive to service and realise than had been anticipated. They formed the view that a restructuring plan was the only alternative to  liquidation (which was said to be the relevant alternative to the proposed restructuring plan). The purpose of the restructuring plan was to compromise the company’s liabilities with a view to returning it to solvency and providing creditors with more than they would get if the company went into liquidation. That outcome was to be achieved by an injection of funding of £3.1 million, making lump sum payments to creditors and a “waterfall” of payments from the proceeds of  legacy loans to which the company was entitled.

The administrators had proposed to divide creditors into four classes for the purposes of the plan meetings and hold a single meeting in respect of each of them. The proposal for a single class of secured creditors was, however, opposed by a creditor, Crowdstacker Corporate Services Ltd. Snowden J upheld in part their objection to the proposed constitution of the class, holding that differences in existing creditor rights and their treatment under the restructuring plan meant that there was “little or no commonality of commercial interest as regards the holders of those different rights in their capacity as such.” He directed  that Crowdstacker and another creditor should form a single class in respect of their respective secured claims up to the value of Crowdstacker’s senior debt, and that the other creditor should form a separate class in respect of the balance of its claim.

Snowden J also referred to difficulties that had arisen in relation to the explanatory statement. At an earlier hearing Trower J had made observations as a result of which a revised explanatory statement had been prepared. However, even then a number of further points had emerged, some based on submissions made to Snowden J by counsel for the objecting creditor, others that Snowden J himself had identified. Those had necessitated further changes to the explanatory statement and in some cases changes to the terms of the restructuring plan itself.

These matters gave rise to an application for costs by Crowdstacker. Referring to his judgment in Re Virgin Active Holdings Limited, Snowden J summarised the principles as follows:

“i)  In all cases the issue of costs is in the discretion of the court.

  1. ii)  The general rule in relation to costs under CPR 44.2 will ordinarily have no application to an application under Part 8 seeking an order convening scheme meetings or sanctioning a scheme, because the company seeks the approval of the court, not a remedy or relief against another party.

iii)  That is not necessarily the case (and hence the general rule under the CPR may apply) in respect of individual applications made within scheme proceedings.

  1. iv)  In determining the appropriate order to make in relation to costs in scheme proceedings, relevant considerations may include,
  2. a)  that members or creditors should not be deterred from raising genuine issues relating to a scheme in a timely and appropriate manner by concerns over exposure to adverse costs orders;
  3. b)  that ordering the company to pay the reasonable costs of members or creditors who appear may enable matters of proper concern to be fully ventilated before the court, thereby assisting the court in its scrutiny of the proposals; and
  4. c)  that the court should not encourage members or creditors to object in the belief that the costs of objecting will be defrayed by someone else.
  5. v)  The court does not generally make adverse costs orders against objecting members or creditors when their objections (though unsuccessful) are not frivolous and have been of assistance to the court in its scrutiny of the scheme. But the court may make such an adverse costs order if the circumstances justify that order.
  6. vi)  There is no principle or presumption that the court will order the scheme company to pay the costs of an opposing member or creditor whose objections to a scheme have been unsuccessful. It may do so if the objections have not been frivolous and have assisted the court; or it may make no order as to costs. The decision in each case will depend on all the circumstances.”

Having regard to Crowdstacker’s partial  success on the class composition issue and what the judge described as its contribution to the task that the court performed at the convening hearing, he decided to make a partial costs order in favour of Crowdstacker and to make it immediately rather than put the decision off until after sanction, given that for the most part the issues raised and resolved at the convening hearing were discrete and would not be affected by decisions made at the sanction stage.



Al Jaber v Mitchell Section 236 & Witness Immunity Court of Appeal

In a convincing and meticulously reasoned judgment earlier this year (Mitchell & Anor v Al Jaber & Ors [2021] EWHC 912 (Ch)) Joanna Smith J highlighted the differences between judicial proceedings in general and proceedings governing private examinations under s 236 Insolvency Act 1986, holding that witness immunity did not attach to evidence given under examination. She gave permission to appeal. The appeal has now been heard and, surprisingly, allowed: Al Jaber v Mitchell [2021] EWCA Civ 1190.

After an examination of the history of and authorities on witness immunity Asplin LJ concluded that the existence of immunity from suit had traditionally been approached by the courts on a context specific basis.

“Even in cases in which the immunity is described in broad terms, the court has conducted a close examination of the particular circumstances of the case, bearing in mind the policy considerations, in order to determine whether the immunity applies.”

She identified a central consideration, citing Lord Clyde in Darker v Chief Constable of West Midlands:

“It is temptingly easy to talk of the application of immunities from civil liability in general terms. But since the immunity may cut across the rights of others to a legal remedy and so runs counter to the policy that no wrong should be without a remedy, it should only be allowed with reluctance, and should not readily be extended. It should only be allowed where it is necessary to do so”.

That need to balance the desirability for immunity against the rights of others to a legal remedy made it, in her view,

“[E]ssential that the precise nature of the immunity and the context in which it is said to arise, are considered in detail. Whether the immunity provides protection in respect of a statement made by a person involved in proceedings may depend, amongst other things, upon: the role or function of the person who made the statement in those proceedings and the relevance of that role; whether the maker of the statement was in that role or exercising that function when the statement was made; the purpose of the statement; the nature of the proceedings in which it was made, or with which it was connected; how ‘judicial’ those proceedings are; and the extent and nature of the connection between the statement itself and the proceedings.”

Asplin LJ embarked on just such an exercise in relation to the examination regime in the Insolvency Act. She appears, in doing so, to have attached great weight to Lord Sumption’s description of the nature of winding-up proceedings in Singularis Holdings Ltd v PricewaterhouseCoopers:

“Winding up proceedings have at least four distinct legal consequences, to which different considerations may apply. First, the proceedings are a ‘mechanism of collective execution against the property of the debtor by creditors whose rights are admitted or established’… Inherent in this function of a winding-up is the statutory trust of the company’s assets, to which I have already referred, and an automatic stay of other modes of execution. Second, it provides a procedural framework in which to determine what are the provable rights of creditors in cases where they are disputed. Third, it brings into play statutory powers to vary the rights of persons dealing with the company or its assets by impugning certain categories of transaction. …. Fourth, it brings into play procedural powers, generally directed to enabling the liquidator to locate assets of the company or to ascertain its rights and liabilities.”

Asplin LJ said that a s 236 examination fell within the “procedural powers” of the single proceeding that followed a compulsory winding-up. She also said, however,

“It seems to me that the nature of the section 236 process is ‘sui generis’ as Megarry J described its predecessor [in In re Rolls Razor Ltd (No. 2)] and the examinee cannot be equated in every respect with a witness in the ordinary sense. That conclusion reveals the difficulty [leading counsel for the appellants] faces in arguing that the authorities on witness immunity can be applied directly to the Sheikh’s statements. It does not follow, however, that an examinee does not enjoy immunity from suit in relation to statements made in the course of an examination.”

She then asked, “Does the fact the examination takes place in court suffice?” answering the question in the negative: “It does not follow that any statement made in a court, in any kind of procedure, by anyone, will automatically benefit [from immunity].” But, “That is not to say that the fact the section 236 procedure takes place in a court is irrelevant: on the contrary, it is an important factor which militates in favour of immunity from suit in relation to statements made by a participant in proceedings. But it is not conclusive. To determine the issue, it is necessary to look at the features and context of the section 236 procedure in a more holistic manner.”

“How should statements made by an examinee in a section 236 examination be viewed?” was the next question Asplin LJ posed. On that, she thought the judge below had approached the matter too narrowly. Section 236 examination had to be considered not as a standalone procedure, to be examined forensically against the Trapp v Mackie indicia examined by the judge below, but had to be viewed in the context of “the wider compulsory winding-up proceedings in which it arises which are commenced by an order of the court and which it is intended to facilitate.”

It appears to have been that consideration which ultimately led Asplin LJ to differ from the conclusion reached by Joanna Smith J:

“The section 236 examination is a tool which can be used by the official receiver in his capacity as an officer of the court or by the liquidator in the course of the winding-up proceedings. It is one of the ‘procedural powers’ described by Lord Sumption in Singularis. When posing questions under the supervision of a judge, the liquidator is seeking to further the purposes of the court-supervised compulsory winding-up. The liquidator is seeking to fulfil his statutory duty under section 143(1) IA 1986, to get in the company’s assets, realise and distribute them, and to place himself in a position to prepare a final account to be sent to the creditors, contributories, the Registrar of Companies and the Court: section 146 IA 1986.“

That, she said, “casts the section 236 examination in a different light:” it was properly to be viewed as part of the compulsory winding-up, starting with the winding-up order and continuing under court supervision thereafter; as such it was part of a wider “judicial proceeding.”

The liquidator or official receiver posing questions enjoyed immunity from suit in respect of the questions they asked, or the statements they put to the examinee. The judge was likewise immune in the performance of his or her duties. Thus:

“If Mrs Justice Joanna Smith is right that the Sheikh’s statements are not covered by immunity from suit, that creates a very curious situation: the judge clearly enjoys immunity from suit in respect of anything he or she says in the course of the section 236 examination; as I have said, the liquidator conducting the examination (or his representative) is protected from suit; and therefore, only the examinee is left exposed. It seems to me that the fact that both the judge and liquidator enjoy immunity, together with the very nature of the section 236 examination which I have already described, points to the section 236 examination, viewed in the context of the winding-up proceedings, as being the kind of judicial proceeding in which all participants are entitled to immunity.”

In Asplin LJ’s judgment, those considerations outweighed the factors relied upon by the judge below.

She agreed with Joanna Smith J that the question whether the examinee was a witness or a party to the proceedings was not relevant, nor was the fact that the liquidation originated in the BVI.

The outcome of the appeal will be a disappointment to the insolvency profession, apparently depriving the private examination of some of its bite. Asplin LJ offered some consolation:

“110. As I have said, individuals are under an obligation to comply with information requests prior to a section 236 order being made (whether under section 235 or separate statutory or fiduciary duties); affording immunity to examinees in relation to statements made only in the section 236 process does not diminish those obligations. Moreover, the court may penalise an examinee who ‘stonewalls’ in the face of all pre-236 examination enquiries in order to benefit from immunity by requiring them to pay the costs of the liquidators’ application for a section 236 examination and of the examination itself. That provides a further incentive not to delay until the moment of the section 236 examination.”

Many will consider that cold comfort.

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