Receivership Update – April 2015
Print newsletter24/04/2015

“Retaliatory evictions”
Under the new provisions of the Deregulation Bill, a section 21 notice served on a […]
Under the new provisions of the Deregulation Bill, a section 21 notice served on a tenant will be invalid where all of the following criteria are all met:
- the tenant has complained of the state of repair of the property, and the landlord (or receivers acting
- by the landlord) fails to provide an adequate response to the tenant within 14 days of receipt of the tenant’s complaint
- the tenant subsequently complains of substantially the same issue(s) to the local authority
the landlord’s response to the tenant making the complaint either to him or to the local authority was to serve a section 21 notice - as a result of the tenant’s complaint the local authority serves a ‘relevant notice’ (either an Improvement Notice or an Emergency Remedial Notice) in connection with the property.
In addition, a section 21 notice cannot be validly served for six months after the local authority serves one of the relevant notices in relation to the property (whether in response to a complaint by a tenant or otherwise) even if the landlord (or receivers) has subsequently taken action to remedy the breaches complained of.
However, at least until 2018, the new provisions will not apply to any tenancies entered into before the legislation comes into force and thus existing tenancies will not be subject to these additional stipulations. As such, any tenancy agreements inherited by receivers on their appointment which were already in place at the time the Deregulation Bill comes into force will not be subject to these requirements.
In addition, the new rules contain two important exceptions which will allow receivers to serve a valid section 21 notice where either (1) it can be shown that the poor condition of the property was caused by the actions of the tenants; or (2) it can be demonstrated that the property is genuinely on the market for sale.
The latter of these exceptions will assist receivers significantly if they are appointed over a property with the intention to sell the asset immediately. If receivers are able to evidence that they are preparing a property for sale at auction or through an estate agent or auction house, they may be able to rely on the exception in order to serve a valid section 21 notice notwithstanding that the tenant has complained about the condition of the property. Case law or future commentary is likely to dictate what stage of marketing a landlord or receiver must be at for the exception to be applicable.
In order to be able to show the court that the requirements of the exceptions have been met, and to retain the ability to rely on the section 21 notice to obtain vacant possession, the following steps may be advisable upon appointment:
- request from the borrower in writing any notices or other documentation relating to the condition of the property
- evidence as soon as possible the intention to sell the property
- if the local authority has been known to have inspected the property recently due to its poor condition, liaise with the local authority to minimise the risk that an enforcement notice will be served in relation to the property
- arrange an inspection of the property to ascertain current state of repair
- ensure any complaints of disrepair are properly dealt with and document the same in writing.
It should be noted that the introduction of these provisions could lead to increased awareness amongst tenants of their rights, and receivers and their managing agents will need to be careful to ensure that they provide a response quickly if tenants complain about the state of a property. A failure to take the necessary precautions could lead to costly delay, and potentially significant costs in complying with an enforcement notice. However, whilst these provisions have not yet been tested in the courts, it is hoped that in taking relevant precautions and fully documenting their actions, receivers will be able to rely on the exceptions in the legislation and retain the ability to rely on a section 21 notice to obtain vacant possession of the property.

New Insolvency Rules
The introduction of the new Insolvency Rules is now likely to be delayed until 2016 […]
The introduction of the new Insolvency Rules is now likely to be delayed until 2016 with the final form of the rules not expected to be published until the autumn. Practitioners will have – hopefully – a window of around six months to acquaint themselves with the new rules.
Among the changes we expect to see are:
- provisions to replace creditors’ meetings with communication by way of correspondence as the default method for decision-making
- creditors will be deemed to have consented unless 10 per cent or more of creditors by value or number object in writing
- the abolition of final creditors’ meetings in liquidation and bankruptcy
a simplified process for resignation of a liquidator or trustee in bankruptcy - clarification of the obligations to notify the company under rule 2.20 (notice of intention to appoint an administrator)
- removal of the requirement for administrators to state prior professional relationships with the debtor company
- administrators will be able to advertise extensions to the time to submit the initial report
- a new application procedure for a debtor’s bankruptcy petition which will involve a new adjudication process, which will operate on an administrative rather than judicial basis.
The current rules date originally from 1986 and encompass several rounds of amendments, located in numerous different statutory instruments. Accordingly, the new rules should be welcomed. Look out for further updates when the rules are in final form.

The effect of liquidation or dissolution on a fixed charge receivership
What is the effect of liquidation/bankruptcy and dissolution on the ability of a fixed charge […]
What is the effect of liquidation/bankruptcy and dissolution on the ability of a fixed charge receiver (whether appointed under a mortgage deed or as LPA receiver) to exercise the powers usually given to a receiver under the LPA or mortgage deed?
In summary:
- the powers of the receiver survive the liquidation or bankruptcy of the mortgagor save that the receiver may not incur new liabilities that would be provable in the liquidation or bankruptcy
- the powers of the receiver survive the dissolution of the mortgagor
- the receiver is entitled to his indemnity under the mortgage or statute from the charged asset, although it usually sensible for the receiver to obtain a comprehensive indemnity from his appointor.
As is well known, the agency of a receiver ceases upon the commencement of the winding up. However, there is clear case authority, accumulated over several decades, to the effect that this does not prevent the receiver from exercising his powers, including the power to dispose of the company’s property (and to use the company’s name for that purpose). In effect, the fixed charge holder stands outside the liquidation and is entitled to realise the charged assets independently under the terms of the mortgage.
The same principle applies with bankruptcy. It is also the case that the bankruptcy – and the winding up – bring to an end the power of the receiver to impose fresh obligations on the mortgagor. Accordingly, while the receiver can carry on business after the liquidation/bankruptcy, he may be personally liable to persons dealing with him, subject, of course, to any right of indemnity against the mortgagee.
In contrast to the position in respect of liquidation and bankruptcy, there is a dearth of authority as to the effect of dissolution on the receiver’s powers but, logically, the position ought to be the same, namely that he proprietary rights of the charge holder are granted on the creation of the charge and survive dissolution, as they survive liquidation.
Similarly, the right to an indemnity is a right granted pursuant to the charge and there is no legal basis for considering that it will fall away on liquidation or dissolution.
We are often asked very specifically on a receiver’s ability to serve notice under section 8 or section 21 of the Housing Act 1988 following a winding up or bankruptcy. Our view is that the receiver’s ability to serve notices and issue proceedings in the name of the company survives the winding-up/bankruptcy. The right to use the name of the company is a chose in action that will usually be charged to the lender and the receiver will be authorised to realise such property. Ordinarily, this will not create any new provable liability as the charge provisions will provide that all costs and expenses of enforcing the security form part of the charged liabilities; therefore, the receiver is not creating any fresh liabilities in his own name.

The new “corporate rescue” tax relief
Subject to certain exceptions, where a corporate lender agrees to release a debt, the lender […]
Subject to certain exceptions, where a corporate lender agrees to release a debt, the lender will be entitled to a tax deduction, which can be used to reduce taxable profits. On the other hand, the release will trigger a tax charge for the borrower. Given the debtor may well already be in financial distress, this is likely to be particularly unwelcome. There are therefore exceptions to this requirement to tax the release credit:
- the release is part of a statutory insolvency arrangement
- the debtor meets certain “insolvency conditions”
- the release is in consideration of the issue of shares in the borrower (or an entitlement to shares – an option or warrant) – a “debt for equity swap”.
In December 2014, the Government published draft legislation removing the need to bring into account loan relationships arising on the release of a debt where it is reasonable to assume that – but for the release – there would be a material risk that within the 12 months following, the company would be unable to pay its debts. A company will be “unable to pay its debts” if it is unable to pay its debts as they fall due, or where its assets are worth less than its liabilities.
In draft guidance published earlier this year, HMRC stated that a material risk of insolvency would require a significant risk of insolvency of “real concern” to the directors. The draft guidance lists the type of thing to look out for:
- likely breaches of financial covenants, negotiations with third party creditors over the release or restructuring of the debt
- enforcement action by creditors
- adverse trading conditions with no prospect of recovery, failure of a material customer or supplier, redundancies, business disasters, ligation that the company may not be able to meet
- management accounts, reports and forecasts showing material cash flow shortfalls
- qualified audit reports or accounts prepared on a break-up basis
- an insolvent balance sheet.
Helpfully, the draft guidance also states that the fact that the threshold is met will not automatically mean that by continuing to trade the directors will be in breach of their statutory duties under the Companies Act 2006 or guilty of wrongful trading.
In practice, the success or otherwise of the legislation will depend upon the approach taken by HMRC towards whether or not the threshold condition is met.
Contrary to expectations, the draft legislation did not find its way into this year’s Finance Bill, although the Government does still appear to be keen on the idea, stating that it will apply retrospectively to any release of a debtor relationship entered into on or after 1 January 2015. Even so, it is not clear at present when the legislation will come into effect.

Validation of dispositions of property made after the winding up petition
Pursuant to section 127(1) Insolvency Act 1986, if a winding up petition is made to […]
Pursuant to section 127(1) Insolvency Act 1986, if a winding up petition is made to court, any disposition of the company’s property, transfer of shares or alteration in the status of the company’s members is void, if not validated by the court.
In Wilson v SMC Properties Ltd [1], the purchaser of a commercial property from a company that had subsequently gone into liquidation was seeking a validation order. The company had decided to sell the property in November 2013 and a winding up petition was presented in February 2014. The property was sold in March and the winding up order made in April.
The liquidator argued that the transaction had been made at an undervalue and should be declared void.
In granting the application for the validation order, the High Court held that the policy behind section 127 was to prevent and remedy breaches of the principle that the insolvent’s estate should be distributed rateably among creditors of the same class. It prevented a disposition of the company’s assets to the prejudice of its creditors and prevented improper alienation by making every post-petition transaction void. In general, the court would not grant a validation order which ran contrary to this policy, save where the company’s assets were swollen as a result or the case demonstrated salvage.
A disposition made in good faith in the ordinary course of business at a time when the parties were unaware that a winding up petition had been presented, normally will be validated unless there are grounds for supposing that the payment was intended to prefer the recipient above other unsecured creditors. However, a transaction which significantly depleted the company’s assets to the detriment of the general body of creditors would be unlikely to be made in good faith.
On the facts of the case, the court found that the purchaser had not known of the presentation of the winding up petition when agreeing to make the purchase. The transaction had been made in good faith and at arm’s length within the context of a pressing secured creditor who would have taken possession and sold the property as a mortgagee in possession if not paid.
The court considered whether the sale had been made at an undervalue. It considered that the appropriate basis for valuation was the investment basis rather than an owner-occupation basis. Capitalising the rent and deducting the costs of purchase and refurbishment, the appropriate value at the date of transaction was £900,000. The purchaser had paid £850,000. Account being taken of the margin of error, the general body of creditors had therefore not suffered significantly, if at all, as a result of the transaction. Accordingly, it was appropriate to order validation of the transaction.
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[1] [2015] EWHC 870 (Ch)