United Kingdom insolvency law
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United Kingdom insolvency law deals with the insolvency of firms in the United Kingdom. The primary pieces of legislation are the Insolvency Act 1986 and the Enterprise Act 2002.
Insolvency is a term which encompasses both companies and individuals, though the term bankruptcy is generally reserved for individuals in the UK. United Kingdom bankruptcy law follows a similar, but separate set of principles. This article focuses on corporate insolvency.
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[edit] Overview
[edit] History
Some form of law for bankrupts can be seen tracing back to Ancient Babylon. In England, the first recognised piece of legislation was the Bankruptcy Act 1542. Bankrupts were seen as crooks, and the Act stated its aim to prevent "crafty debtors" escaping the realm.[1] A more humane approach was developed in the Bankruptcy Act 1705.[2] The Lord Chancellor was given power to discharge bankrupts, once disclosure of all assets and various procedures had been fulfilled. In Fowler v Padget[3] Lord Kenyon reasserted the old sentiment that,
"Bankruptcy is considered a crime and a bankrupt in the old laws is called an offender."
Though attitudes were changing and the Bankrupts (England) Act 1825[4] allowed people to start proceedings for their own bankruptcy. Before only creditors could start the proceedings.
In the middle of the 19th century, attitudes towards corporations were also quickly changing. Since the South Sea Bubble disaster, companies were viewed as inefficient and dangerous.[5] But with industrial revolution's full swing had changed that. The Joint Stock Companies Act 1844[6] allowed people to create companies without permission through a royal charter. Companies had "separate legal personality", the ability to sue and be sued, and served as an easy mechanism for raising capital through the purchase of shares (an equitable title) in the company's capital. The Act's corollary, to bring the existence of these "legal persons" to an end was the Joint Stock Companies Winding-Up Act 1844. The Limited Liability Act 1855 produced a further innovation. Before, if a corporation had gone broke, the people that lent it money (creditors) could sue all the shareholders to pay off the company's debts. But the 1855 Act said that shareholders' liability would be limited to the amount they had paid in their shares. So if you had invested £100 in a company, but now the company owed millions of pounds, the creditors could not come after you for the debts. You would lose £100 and no more. Your liability to pay debts was limited to the value of your shares. The Joint Stock Companies Act 1856 consolidated the companies legislation in one, and the modern law of corporate insolvency was born. In 1869, the Bankruptcy Act 1869 was passed allowing all people, rather than just traders to file for bankruptcy.
- Debtors' prison, Fleet Prison, Marshalsea Prison, King's Bench Prison, Debtors' Act 1869
- Charles Dickens, Hard Times, Mr Micawber in David Copperfield
[edit] Theory
The Cork Committee, chaired by Kenneth Cork produced the Report of the Review Committee on Insolvency Law and Practice, Cmnd 8558 (1982). The central argument of the report was that too many companies were simply left to die, when they could be revived, saved or brought to a close in a more orderly way. Cork advocated that the law should encourage a "rescue culture", to restore companies back to profitability, which would be in the longer term interests of creditors. The Cork report was followed by a White Paper in 1984, A Revised Framework for Insolvency Law, Cmnd 9175 (1984), and these led to the Insolvency Act 1986.
[edit] Definition
Corporate insolvency is defined as either cash flow insolvency or balance sheet insolvency. The Insolvency Act 1986, s.123 gives the definition of inability to pay debts, primarily if a creditor has given three weeks to be repaid over £750, but seen nothing (s.123(1)(a)) or,
| “ | (e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.
(2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities. |
” |
Cash flow insolvency has recently be re-interpreted in Re Cheyne Finance plc [2007] All ER (D) 25[7] (regarding a structured investment vehicle) to not only consider whether current debts are unable to be paid as they fall due, but also consider whether future debts will not be able to be paid. This makes it possible for creditors to call for insolvency earlier.
[edit] Priorities
- Pari passu
- Forster v Wilson (1843) 152 ER 1165
- Re Jeavons, ex parte Mackay (1873) LR 8 Ch App 643
- British Eagle International Air Lines Ltd v Compaigne Nationale Air France [1975] 1 WLR 758
- Floating charge
- Winding up expenses and s 176ZA
- Preferential creditor and s 176
- Ring fenced fund and s 176A
[edit] Secured lending
[edit] Debentures
- s 738 CA 2006
- Levy v Abercorris Slate and Slab Co (1887) 37 Ch D 260
- British India Steam Navigation Co v IRC (1881) 7 QBD 165
- National Provincial Bank v Charnley [1924] 1 KB 431
[edit] Registration
- s 860-877 CA 2006
[edit] Fixed and floating charges
- Agnew v IRC (Re Brumark Investments Ltd) [2001] UKPC 28
- Re New Bullas Trading Ltd [1994] 1 BCLC 485
- Re Spectrum Plus Ltd [2005] UKHL 41
- Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142
- Re Yorkshire Woolcombers Association Ltd [1903] 2 Ch 284
- Illingworth v Houldsworth [1904] AC 355
- Evans v British Granite Quarries Ltd [1910] 2 KB 979
- Re Bond Worth [1980] 1 Ch 228
- Re Cosslett (Contractors) Ltd [1998] Ch 495
- Re Bank of Credit and Commerce International SA (No 8) [1998] AC 214
- Re Castell and Brown Ltd [1898] 1 Ch 315
- Biggerstaff v Rowatt’s Wharf Ltd [1896] 2 Ch 93
- Re Brightlife [1987] 1 Ch 200
- Re Woodroffes (Musical Instruments) Ltd [1986] Ch 366
- N W Robbie & Co Ltd v Witney Warehouse Co Ltd [1963] 1 WLR 1324
- George Barker Ltd v Eynon [1974] 1 WLR 462
[edit] Equivalents to security
- Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676
- Barclays Bank v Quistclose Investments [1970] AC 567
- ss 40, 115, 175, 386 IA 1986, incentives to provide for fixed rather than floating charges
- Shamji v Johnson Matthey Bankers Ltd [1991] BCLC 35
- Roy Goode, 'Is the Law too Favourable to Secured Creditors?' (1983) 8 Canadian Business Law Journal 53, suggesting the law goes too far to promote secured creditors' interests over unsecured creditors.
[edit] Procedures
There are four main kinds of procedure when a company goes insolvent in the UK.
- administration, where the company's rescue is attempted
- receivership, where a creditor moves in to take assets to cover debts. Where a creditor has a charge over substantially all assets, it becomes administrative receivership
- liquidation or winding up, where the company is brought to the end of its life and dissolved
- company voluntary arrangement, ss.1-7 IA 1986, where directors agree what to do with creditors.
[edit] Administration
Administration is a proactive option to save a Ltd company in the UK. Administration is designed to hold a business together while debt restructuring and management plans are compiled to rescue the business. In order to apply for this procedure a business must submit the application to the high court. The application will provide immediate protection from all creditors including hire purchase and lease creditors. By choosing administration all company assets are protected.
- Administration (insolvency)
- Administration order, by the court in order to effect a rescue of the company
- Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] BCC 885, on the "rescue culture"
- Royal Trust Bank v Buchler [1989] BCLC 130, on the standard of care in administrator's decisions.
- Schedule B1, para 43(6), IA 1986, when a for an administration order is presented and an order is made, no "legal process" may be commenced against the company without leave of the court.
- Environmental Agency v Clark [2001] Ch 57
[edit] Receivership
- Receivership (and receiver (legal))
- Administrative receivership, initiated by floating charge holders.
[edit] Liquidation
[edit] Company voluntary arrangement
The company voluntary arrangement procedure allows a Ltd company to negotiate a satisfactory arrangement with all the registered creditors. This ensures creditors agree to a lower repayment schedule to be paid back over a period of 1-5 years in a full and final settlement. When the proposal is ratified the contract binds all creditors who had notice and were entitled to vote at the original meeting.
[edit] Increasing assets
[edit] Directors' duties
- Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] BCC 885
[edit] Unlawful trading
- Wrongful trading, s 214 IA 1986
- Re Produce Marketing Consortium Ltd (No 2) [1989] BCLC 520
- Re Continental Assurance Co of London plc (Singer v Beckett) [2007] 2 BCLC 287; [2001] All ER (D) 229
- Fraudulent trading, s 213 IA 1986, is an offence that existed since the Companies Act 1948. However with the introduction of wrongful trading, which has a lower burden of proof, it is not invoked as much as before.
- R v Grantham [1984] QB 675
- Re Augustus Barnett & Son Ltd [1986] BCLC 170
- Re Sarflax Ltd [1979] Ch 592
- Re a Company (No 001418 of 1988) [1990] BCC 526
[edit] Voidable transactions
- s 423, Insolvency Act 1986, transactions aimed to put assets beyond a creditor's reach will be void.
- s 238, Insolvency Act 1986, transactions at an undervalue may be set aside by court order if within two years before winding up begins, with a defence in s.238(5).
- Re MC Bacon Ltd (No 1) [1990] BCLC 324
- s 239, Insolvency Act 1986, preferences granted to creditors for security where there is some element of personal connection may be void.
- Re Agriplant Services Ltd [1997] 2 BCLC 598
When determining whether a gift or a payment to a creditor is an unlawful preference, both the date of the insolvency and the date of the bankruptcy - the liquidator or administrator will be able to recover money paid to a creditor as a preference if paid within six months (or two years if the creditor is a person connected to the company) preceding the date of liquidation and the company was insolvent at the time. In addition to unlawful preferences, liquidators and administrators in the UK may also challenge transactions at an undervalue, extortionate credit transactions, some floating charges and transactions defrauding creditors.
[edit] Paying winding up costs
- ss 115, 156, Insolvency Act 1986
- Soden v British and Commonwealth Holdings plc [1998] AC 298
- s 176ZA IA 1986
- Buchler v Talbot
[edit] Labour law
There are a number of provisions which deal with employees' rights upon insolvency, influenced by European Union law's harmonisation measures.
- EC Directive 80/987/EEC, amended by...
- EC Directive 2002/74/EC (read this one)
- Employment Rights Act 1996 ss.166-170 and 182-190, which allows compensation for up to £270 per week in the event of an employer going insolvent and not being able to pay outstanding wages.
- C-125/97 Regeling v Bestur Van de Bedrifsvereiniging Voor de Metallnijverheid [1999] IRLR 379
- C-278/05 Robins v Secretary of State for Work and Pensions [2007] IRLR 270
[edit] See also
- Transfer of Undertakings (Protection of Employment) Regulations 2006
- Enterprise Act 2002
- Wrongful trading (s.214 Insolvency Act 1986)
- UK company law
- Factoring (finance) and invoice discounting
[edit] Notes
- ^ I. Treiman, 'Escaping the Creditor in the Middle Ages' (1927) 43 Law Quarterly Review 230, 233
- ^ 3 Anne, c.17, passed in fact on 19 March 1706
- ^ (1798) 101 ER 1103; 7 Term Rep 509
- ^ 6 Geo. IV, c. 16
- ^ see, e.g. Adam Smith, Wealth of Nations (1776) Book V, Ch.1, para.107
- ^ 7 & 8 Vict. c.110
- ^ McDermott, Will & Emory, New Interpretation of English Insolvency Law (8.7.2008)
[edit] References
- Vanessa Finch, Corporate Insolvency Law: Perspectives and Principles (2002) Cambridge University Press
- Roy Goode, Principles of Corporate Insolvency Law, 3rd ed., para 1-05
- Andrew Keay and Peter Walton, Insolvency Law (2008) Longman
- Len Sealy and Sarah Worthington, Company law: Text, Cases and Materials (2007) Oxford University Press
[edit] External links
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