The High Court has upheld the pari passu principle central to English insolvency legislation when applied to a deceased’s insolvent estate and interpreting legislation stated to be “modified accordingly”. This approach clarifies that foreign currency claims and claims for interest should be calculated for voting purposes as at the date of death, rather than the date an Insolvency Administration Order (IAO) is made. HFW acted for the respondent in this case.
The Insolvency Act 1986 (Insolvency Act) and Insolvency Rules 1986 (Insolvency Rules) provide the statutory framework for dealing with insolvent individuals and corporate bodies. In the case of a deceased insolvent, it is the provisions of the Administration of Insolvent Estates of Deceased Persons Order 1986 (AIEDPO) that apply.
AIEDPO is a short piece of secondary legislation that essentially modifies provisions of the Insolvency Act to apply in circumstances where a deceased is insolvent.
The judgment of Mr Justice David Richards in Lockston Group Inc v Wood1 is to date, the only case dealing with the determination of when a creditor’s claim in a deceased’s insolvent estate is to be quantified.
Boris Berezovsky died on 23 March 2013. A petition for an IAO was presented by the General Administrators of his estate on 30 October 2014. The IAO was granted on 26 January 2015 – almost two years after Mr Berezovsky’s death. At the first meeting of the creditors of the estate, Messrs Nicholas Wood, Kevin Hellard and Michael Leeds of Grant Thornton UK LLP were appointed as trustees of the insolvent estate (the Trustees).
One of Mr Berezovsky’s creditors, Lockston Group Inc (Lockston), supported by another creditor, Baltic International Bank, disagreed with the two of the principles used by the chairman of the creditors’ meeting when admitting claims to proof for the purposes of voting. Lockston made an application to court, arguing that the chairman was wrong to:
- Limit the accrual of interest upon the sums admitted of all creditors up to the date of Mr Berezovsky’s death.
- Admit claims against the estate denominated in foreign currencies by converting those claims into Sterling at the relevant exchange rate prevailing at the date of Mr Berezovsky’s death.
Lockston contended that the correct date for both purposes was the date on which the IAO was made, rather than the date of death. Were that contention correct, the effect would have been significant because in the two years since Mr Berezovsky had died, the Russian Rouble (the currency of a number of the creditors’ claims) had devalued considerably against Sterling and very significant amounts of interest would have accrued on claims during the same period.
The case concerned the interpretation of AIEDPO, in particular the sections that modify the provisions of the Insolvency Act to apply in circumstances where the debtor died before the presentation of a bankruptcy petition.
- Mr Justice David Richards stated that there are “a number of grounds for rejecting Lockston’s case, but the primary ground is that it is inconsistent with a fundamental feature of insolvency law, that there is to be a single date for the ascertainment of liabilities”.
- The judge found that the effect of section 382(1), the section that defines “bankruptcy debt”, is that debts and liabilities are to be quantified as at a particular date. Further, the modifications to the Insolvency Act in the case of a deceased’s insolvent estate confirm that the “correct approach” is to identify and quantify debts and liabilities at the same date, as in the case of a living bankrupt.
- The conversion of foreign currency claims should also be at the same date. The Insolvency Rules, which are not specifically modified by AIEDPO, should be read “accordingly” with the modifications to the Insolvency Act. The judge found that in light of the substitution of the commencement of the bankruptcy with the date of death under section 382, “the conclusion is inescapable” that the rule relating to conversion of currencies, rule 6.111, is to be modified in the same way.
- The judge concluded, “Overall, I consider that, on their true construction, the relevant provisions fix one date, the date of death of the debtor, as the date as at which the assets comprising the insolvent estate are identified and as at which the debts and liabilities are identified and quantified... It produces a coherent and consistent regime”.
The judgment in Lockston Group Inc v Wood provides clear authority for insolvency practitioners and their legal advisors on the method to quantify debts and liabilities for voting purposes in the administration of a deceased’s insolvent estate under AIEDPO.