|
Summary
A company manufactured and distributed mobile
phones. The company became insolvent and went into
administration. Two separate trust deeds were set up prior to
administrators being appointed. Administrators applied for
directions as to whether they could distribute funds to the
creditors listed on the two schedules attached to the trust deeds
in the way that was provided for in a draft protocol.
Facts
Sendo International Ltd (Sendo) and other
companies in the group were involved in the manufacturing and
distribution of mobile phones. Sendo was a company
incorporated under the laws of the Cayman Islands but it was
registered as a foreign company and had its centre of main
interests in England. Sendo and the other companies in the
group had a major supplier in Celestica Ltd and other companies in
the Celestica group. Sendo relied heavily on the financial support
of Celestica Ltd and the Celestica group of companies.
Celestica Limited was a secured creditor of Sendo. By the
time that administration orders were made, Sendo owed Celestica Ltd
US$220million. This far exceeded the value of the security
available to Celestica Ltd to meet this liability.
On 13 May 2005, Celestica Ltd withdrew further
credit from Sendo and the other companies in the group.
However, as a result of negotiations between Sendo and Celestica
Ltd, arrangements were made to enable Sendo to continue trading in
order to facilitate a sale of the Sendo group businesses. As
part of the arrangements Celestica Ltd confirmed in a letter dated
25 May 2005 that money which would otherwise have fallen under its
security could instead be applied to meet the liabilities arising
from and after the 13 May. By a further letter dated 25 May
2005, it was agreed that up to US£1million from the sale of the
Sendo group businesses was to be transferred to meet any shortfall
in funds available to meet those liabilities.
Following on from the two letters of 25 May
2005, a deed of trust was executed on 27 May 2005, which was stated
as having effect with respect to liabilities incurred between 13
May 2005 and the presentation of an application for an
administration order which turned out to be 20 June 2005 (Trust
1).
Celestica Ltd then agreed to further money
being released from its security by a letter dated 24 June
2005. On 28 June 2005, a second deed of trust was
executed which covered liabilities from and after 21 June 2005
until the date immediately before the administration order was
made, which in the event was on 29 June 2005 (Trust 2).
The administration order followed an
application by Sendo. The joint administrators were also appointed
as administrators of other companies in the Sendo group.
Soon after the appointment of the
administrators, the Sendo business was sold to Motorola and from
that sale and other assets, the administrators realised around
US$25.3million gross. At the time of the application for
directions, Trust 1 contained a sum of £3,962,659.97 in an account
with HSBC and the Trust 2 held £276,289.33 in another account with
HSBC. There was a shortfall on both accounts because, even allowing
for the additional US$1million, the amounts were going to be
insufficient to meet the claims of those persons shown on the
schedules as entitled to share in the funds. The distribution
of the funds was provided for in a draft protocol and the relevant
part of the protocol provided that, after allowing for reasonable
costs, expenses and disbursements, the net funds held on both
trusts should be distributed pro rata to the persons listed on the
schedules in proportion to the amounts shown against the names of
those persons listed in the final column of the schedule.
Two creditors, a Mr Wray (who was listed on
both schedules) and HDL International BV (who were listed on the
Trust 1 schedule only and who were another major supplier of
Sendo), objected to the proposed directions sought by the
administrators but both creditors limited their objections to the
question of the relevant amount that they were shown to be due in
the relevant schedules.
The arguments
There were no submissions before the court that the trust deeds
were ineffective in themselves. Celestica Ltd
agreed that the further US$1million should be added and dealt with
in accordance with the terms of Trust 1.
It appears to have been accepted, without any
argument, that the purpose of the trusts was to provide a means of
enabling Sendo (and other companies in the group) to continue
trading after 12 May 2005 notwithstanding that Sendo was
insolvent. This was achieved by Celestica Ltd allowing monies
which would otherwise be subject to its security to be applied by
Sendo to meet liabilities incurred by the Sendo group businesses
(other than to Celestica Ltd or other members of the Celestica
group) during the periods covered by the trusts in question through
the mechanism of the two trusts. The aim was to ensure that
sufficient monies were released by Celestica Ltd and placed into
the relevant trust account by Sendo to enable liabilities incurred
in the relevant period to be fully covered. This would enable
monies paid into the trust funds to be available in a
straightforward way for those creditors on the schedules rather
than being available for Sendo’s general body of creditors.
Mr Wray’s argument was that he should have
been shown as a creditor in the schedules for a sum of £40,985.71,
as opposed to the figure shown of £24,307.42.
HDL International BV maintained that it should
be shown as a creditor in an overall amount of £594,276.94 rather
than the figure shown of £50,045.82. HDL International BV
submitted that payments made to it by Sendo after 12 May 2005, but
before the Trust 1 fund was established, in satisfaction of
liabilities it maintained it accrued before 13 May 2005, had been
wrongly taken into account. It further submitted that the
amount set out in the schedule failed to reflect accurately the
invoices relating to the relevant period.
In summary, counsel for HDL International BV
submitted that the size of the relevant share of each creditor had
to be determined by an objective determination during the period
covered by the relevant trust deed and not simply by looking at the
schedules which should be just a starting point. The
submission by counsel for the administrators was that the size of
the relevant share was to be treated as fixed by the relevant
schedule upon which the name of the creditor appeared together, in
the last column of the schedule, with the amount of the creditor’s
claim (subject possibly only to manifest errors appearing from the
face of the schedule).
The administrators further submitted that the
terms of the two trust deeds were clear and that, in the interests
of economy, Sendo, acting by them, should be free without further
ado to distribute the funds to the creditors listed on the two
schedules pari passu in accordance with the amounts as listed on in
the relevant schedules.
The decision
Blackburne J stated that the only question
which had arisen concerned how the size was to be fixed of each
affected creditor’s share in the monies standing to the credit of
the relevant trust account.
Blackburne J held that the answer to the
question had to turn on the true construction of the relevant trust
deed. He focused upon the relevant definitions and clauses of
the trust deeds (taken together as Trust 2 was drafted directly
from Trust 1). Blackburne J held that although the trust
deeds were not “entirely happily worded” he did feel that the trust
deed and the schedule fixed the identity of those entitled to share
and the amounts of their shares. He did not accept the
submission of counsel for HDL International BV that there was a
need to introduce an objectivity test in addition to the wording of
the trust deed. An estoppel argument was also raised on
behalf of HDL International BV but Blackburne J held that even if
the facts established a basis for this, it would only relate to the
conscience of Sendo and it could not give rise to any equity
affecting the trust funds to which the creditor beneficiaries were
entitled under the terms of the trust deed.
Accordingly, Blackburne J made a direction
that the two trust funds be distributed in accordance with the
draft protocol.
Implications for insolvency
practitioners
- This case illustrates a robust approach by
the court to the examination of pre-insolvency trust deeds.
- In this particular case, the main supplier
and creditor was prepared to work with Sendo to assist it to
continue trading pending a sale of the business and there was time
for the arrangements and trust deeds to be put into place before
Sendo made its application for an administration order. This
is to be contrasted with the very short period of time before
administrators were appointed in the Farepak case (see news item
dated 29 March 2007).
- It is noteworthy that there appears to have
been no submission about whether or not the trust deeds were
effective and, unlike in the Farepak case, no submissions were made
as to whether there was a preference issue in so far as some of the
creditors within the schedules were in a worse position than
others.
For more information on this topic, please
contact Paul Rippon or
Mike Pavitt of Blake
Lapthorn’ Insolvency and Business Recovery team.
|