Corporate insolvency United Kingdom insolvency law

1 corporate insolvency

1.1 companies , credit
1.2 meaning of insolvency
1.3 priorities

corporate insolvency


corporate liquidations spiked after financial crisis of 2007-2008, after pre-crisis norm of around 13,000 per year.

corporate insolvencies happen because companies become excessively indebted. under uk law, company separate legal person people have invested money , labour it, , mediates series of interest groups. invariably shareholders, directors , employees liability limited amount of investment, against commercial creditors can lose no more money paid shares, or jobs. insolvencies become intrinsically possible whenever relationship of credit , debt created, happens through contracts or other obligations. in section of economy competitive markets operate, wherever excesses possible, insolvencies happen. meaning of insolvency inability repay debts, although law isolates 2 main further meanings. first, court order company wound (and assets sold off) or administrator appointed (to try turn business around), or avoiding various transactions, cash flow test applied: company must unable pay debts fall due. second, purpose of suing directors compensate creditors, or directors disqualified, company must shown have fewer overall assets liabilities on balance sheet. if debts cannot paid in full, creditors stand in competition 1 share of remaining assets. reason, statutory system of priorities fixes order among different kinds of creditor payment.

companies , credit


the credit ratings industry dominated fitch, moody s , s&p, london headquarters in canary wharf. companies pay rating agencies rate them, because provides access cheaper loans.

companies legal persons, created registering constitution , paying fee, @ companies house. natural person, company can incur legal duties , can hold rights. during life, company must have board of directors, hires employees. these people represent company, , act on behalf. can use , deal property, make contracts, settle trusts, or maybe through misfortune commission torts. company regularly becomes indebted through of these events. 3 main kinds of debts in commerce are, first, arising through specific debt instrument issued on market (e.g. corporate bond or credit note), second, through loan credit advanced company on terms repayment (e.g. bank loan or mortgage) and, third, sale credit (e.g. when company receives goods or services has not yet paid them. however, principle of separate legal personality means in general, company first person have liabilities. agents of company (directors , employees) not liable obligations, unless assumed. companies have limited liability investors. under insolvency act 1986 section 74(2)(d) means shareholders cannot sued obligations company creates. principle holds wherever debt arises because of commercial contract. house of lords confirmed corporate veil not lifted in salomon v salomon & co ltd. here, bootmaker not liable company s debts though person ran business , owned shares. in cases debt arises upon tort against non-commercial creditor, limited liability ceases issue, because duty of care can owed regardless. held case in chandler v cape plc, former employee of insolvent subsidiary company sued (solvent) parent company personal injury. when company has no money left, , nobody else can sued, creditors may take on company s management. creditors appoint insolvency practitioner carry out administration procedure (to rescue company , pay creditors) or else enter liquidation (to sell off assets , pay creditors). moratorium takes effect prevent individual creditor enforcing claim against company. insolvency practitioner, under supervision of court, can make distributions creditors.

the causes of corporate failure, @ least in market segment of economy, begin of creation of credit , debt. excessive debts run through outright embezzlement of company s assets or fraud people run business. negligent mismanagement, found breach duty of care, found. more frequently, companies go insolvent because of late payments. business on company relied credit or supplies in financial distress, , string of failures part of broader macroeconomic depression. periodically, insolvencies occur because technology changes outdates lines of business. frequently, however, businesses forced insolvency because out-competed. in economy organised around market competition, , competition presupposes losers or contemplates excess, insolvencies happen. variety of causes corporate failure means law requires different responses particular issues, , reflected in legal meaning of insolvency.

meaning of insolvency


most insurance companies , banks insolvent if policy , account holders required payments @ once. instead, main test of insolvency whether company can pay debts fall due.

the meaning of insolvency matters type of legal rule. in general terms insolvency has, since earliest legislation, depended upon inability pay debts. concept embodied in insolvency act 1986 section 122(1)(f) states court may grant petition company wound-up if company unable pay debts . general phrase is, however, given particular definitions depending on rules insolvency relevant. first, cash flow test insolvency represented under section 123(1)(e) company insolvent if company unable pay debts fall due . main test used rules. guides court in granting winding-up order or appoints administrator. cash flow test guides court in declaring transactions company avoided on ground @ undervalue, unlawful preference or created floating charge insufficient consideration. cash flow test said based on commercial view of insolvency, opposed rigid legalistic view. in re cheyne finance plc, involving structured investment vehicle, briggs j held court take account debts become payable in near future, , perhaps further ahead, , whether paying debts likely. creditors may, however, find difficult prove in abstract company unable pay debts fall due. because of this, section 122(1)(a) contains specific test insolvency. if company owes undisputed debt creditor of more £750, creditor sends written demand, after 3 weeks sum not forthcoming, evidence company insolvent. in cornhill insurance plc v improvement services ltd small business owed money, debt undisputed, cornhill insurance. solicitors had repeatedly requested payment, none had come. presented winding petition in chancery court company. cornhill insurance s solicitors rushed injunction, arguing there no evidence @ multi-million business had financial difficulties. harman j refused continue injunction noting that, if insurance company had chosen not pay, creditor entitled choose present winding petition when debt undisputed on substantial grounds.

english law draws distinction between debt , relevant cash flow test of insolvency under section 123(1)(e), , liability , becomes relevant second balance sheet test of insolvency under section 123(2). debt sum due, , quantity monetary sum, ascertained drawing account. contrast liability need quantified, instance, claim breach of contract , unliquidated damages. balance sheet test asks whether value of company s assets less amount of liabilities, taking account contingent , prospective liabilities. this, whether total assets less liabilities, may taken account purpose of same rules cash flow test (a winding order, administration, , voidable transactions). test used purpose of wrongful trading rules, , director disqualification. these rules potentially impose liability upon directors response creditors being paid. makes balance sheet relevant, because if creditors in fact paid, rationale imposing liability on directors (assuming there no fraud) drops away. contingent , prospective liabilities refer liability of company arise when event takes place (e.g., defined contingency under surety contract) or liabilities may arise in future (e.g., probable claims tort victims). method computing assets , liabilities depends on accountancy practice. these practices may legitimately vary. however, law s general requirement accounting assets , liabilities must represent true , fair view of company s finances. final approach insolvency found under employment rights act 1996 section 183(3), gives employees claim unpaid wages national insurance fund. purpose of certainty of objectively observable event, these claims arise, company must have entered winding up, receiver or manager must appointed, or voluntary arrangement must have been approved. main reason employees have access national insurance fund bear significant risk wages not paid, given place in statutory priority queue.

priorities



re nortel gmbh [2013] uksc 52, [39], lord neuberger

since bankruptcy act 1542 key principle of insolvency law has been losses shared among creditors proportionately. creditors fall same class share proportionally in losses (e.g. each creditor gets 50 pence each £1 owed). however, pari passu principle operates among creditors within strict categories of priority set law. first, law permits creditors making contracts company before insolvency take security interest on company s property. if security refers specific asset, holder of fixed charge may take asset away free else s interest in order satisfy debt. if 2 charges created on same property, charge holder first have first access. second, insolvency act 1986 section 176za gives special priority fees , expenses of insolvency practitioner, carries out administration or winding up. practitioner s expenses include wages due on employment contract practitioner chooses adopt. controversially, court of appeal in krasner v mcmath held not include statutory requirement pay compensation management s failure consult upon collective redundancies. third, if not retained, employees wages £800 , sums due employees pensions, paid under section 175. fourth, amount of money must set aside ring fenced fund creditors without security under section 176a. set statutory instrument maximum of £600,000, or 20 per cent of remaining value, or 50 per cent of value of under £10,000. these preferential categories (for insolvency practitioners, employees, , limited amount unsecured creditors) come in priority holder of floating charge.

fifth, holders of floating charge holders must paid. fixed charge, floating charge can created contract company before insolvency. fixed charge, done in return loan bank. unlike fixed charge, floating charge need not refer specific asset of company. can cover entire business, including fluctuating body of assets traded day today, or assets company receive in future. preferential categories created statute prevent secured creditors taking assets away. reflected view power of freedom of contract should limited protect employees, small businesses or consumers have unequal bargaining power. after funds taken away pay preferential groups , holder of floating charge, remaining money due unsecured creditors. in 2001 recovery rates found 53% of 1 s debt secured lenders, 35% preferential creditors 7% unsecured creditors on average. seventh comes money due interest on debts proven in winding process. in eighth place money due company members under share redemption contract. ninth debts due members hold preferential rights. , tenth, ordinary shareholders, have right residual assets.

aside pari passu or priority scheme, historical insolvency laws used many methods distributing losses. talmud (ca 200ad) envisaged each remaining penny dealt out each creditor in turn, until creditor received owed, or money ran out. meant small creditors more paid in full large , powerful creditors.

the priority system reinforced line of case law, principle ensure creditors cannot contract out of statutory regime. referred anti-deprivation rule . general principle, according mellish lj in re jeavons, ex parte mackay person cannot make part of contract that, in event of bankruptcy, additional advantage prevents property being distributed under bankruptcy laws. in case, jeavons made contract give brown & co armour plates patent, , in return jeavons royalties. jeavons got loan brown & co. agreed half royalties pay off loan, if jeavons went insolvent, brown & co not have pay royalties. court of appeal held half royalties still need paid, because special right brown & co arose upon insolvency. in case creditor owed money insolvent company, creditor owes sum company, forster v wilson held creditor may set-off debt, , needs pay difference. creditor not have pay debts company, , wait other unsecured creditors unlikely repayment. however, depends on sums set-off being in creditors possession. in british eagle international air lines ltd v compaigne nationale air france, group of airlines, through international air transport association had netting system deal expenses incurred 1 efficiently. paid common fund, , @ end of each month, sums settled @ once. british eagle went insolvent , debtor overall scheme, air france owed money. air france claimed should not have pay british eagle, bound pay netting scheme, , have sums cleared there. house of lords said have effect of evading insolvency regime. did not matter dominant purpose of iata scheme business reasons. nevertheless void. belmont park investments pty ltd v bny corporate trustee services ltd , lehman brothers special financing inc observed general principle consists of 2 subrules — anti-deprivation rule (formerly known fraud upon bankruptcy law ) , pari passu rule, addressed different mischiefs — , held that, in borderline cases, commercially sensible transaction entered in faith should not held infringe first rule. these anti-avoidance rules are, however, subject large exception creditors remain able jump priority queue, through creation of security interest.