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Court approves bespoke mechanism for submitting potential expense claims

Out-Law Legal Update | 29 Jun 2017 | 9:53 am | 2 min. read

LEGAL UPDATE: The High Court has taken a pragmatic approach and implemented a system for submitting expense claims by a set date in a case involving the administration of 18 Nortel companies. The administrators of the various Nortel companies were aware of potential expense claims which had not been asserted so were unable to make a distribution to unsecured creditors. The insolvency legislation did not provide a mechanism for dealing with this, so the Court put its system in place.

Administrators of 18 Nortel companies were aware of the possibility that certain claims may be made in the administrations of those companies which, if established, might rank as expenses of the administration under paragraph 99 of schedule B1 to the Insolvency Act 1986. Unless these claims were brought to a head it would prevent or delay a distribution to unsecured creditors, who had already been waiting eight years for a distribution. These potential expense claims included, amongst others, claims in relation to use of software used post- insolvency and claims from French employees and tax authorities.  

In accordance with the order of priority of payments in insolvency, the so called "waterfall", expenses are to be paid in priority to all claims, except fixed charged creditors. Expenses are therefore paid in priority to, amongst others, unsecured creditors.

Neither the Act nor the Insolvency Rules 1986 provide a mechanism under which an administrator can require an expense claim be asserted by a specific date, or enable the administrator to refuse to deal with claims asserted after that date. The case was decided under the Insolvency Rules 1986, however, the position would have been the same under the Insolvency (England and Wales) Rules 2016.

The Court noted that the "unstated assumption" was that since expense claims have been incurred in the course of the administration the administrator will know what they are and pay them or make a reserve for them. The mechanisms in relation to distributions in the Act and the Rules did not assist the Administrators as they deal with unsecured claims only, not expenses.

The Court ordered that the administrator of the Nortel companies:

  • send explanatory letters to those with potential expense claims requiring the filing with the administrators of a completed "demand form" on or before a specified "bar date", which was approximately four months after the letters were to be sent out;
  • place advertisements to the same effect in a national newspaper in each of the jurisdictions where the companies were incorporated;
  • pay any expense claim that is notified and agreed by the bar date;
  • make a reserve in respect of any disputed expense claim and take appropriate steps to reach agreement with the claimant in relation to such claim;
  • agree, make a reserve for or apply a dispute resolution procedure to any expense claim received after the bar date but before any distribution to unsecured creditors has been made, provided that the late expense claim did not disturb the amount of reserves established or payments already made in relation to accepted expense claims or claims received before the bar date;
  • distribute the balance of any monies held to unsecured creditors, notwithstanding the existence of any unresolved expense claims;
  • agree, make reserve for or apply a dispute resolution procedure to any expense claims received after the bar date and after any distribution to unsecured creditors had been made from any other assets that might be in their hands. Such late claims to be paid, provided that the late expense claim did not disturb the amount of reserves established or payments already made in relation to accepted expense claims or claims received before the bar date or any earlier distributions to unsecured creditors.

The "demand form" required the creditor to give details of the claim and explain why it was an expense, rather than another category of claim. The court also ordered that a further explanatory letter be sent to the French employees.

The Court considered that it had the power under paragraph 63 of schedule B1 of the Act to make the orders.

The judge considered that the orders did not extinguish any legal rights or vary the statutory waterfall as "late comers" would still be entitled to assert the expense claim and "catch up" to the extent that it is possible through remaining distributions of assets. The judge also did not consider that the orders amount to impermissible judicial legislation.

Nortel Romania and Nortel Finland were given permission under paragraph 65 of schedule B1 of the Act to distribute to unsecured creditors.

Sally Williamson is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com