Rubin & Lan v Eurofinance involved a "novel, though we believe inevitable and desirable, development of the common law" (according to Lord Justice Ward). Founded on the principles of modified universalism (insolvency proceedings are collective, dealing with all assets for all stakeholders, but jurisdictional differences cannot be ignored), it builds on the relatively recent House of Lords cases of Cambridge Gas and HIH Insurance.

In essence a foreign insolvency representative can have the English courts enforce a foreign insolvency judgement (such as recovery of a transaction at an undervalue or a preference) in circumstances where they would not be able to enforce an ordinary foreign judgement.

What the Court of Appeal has said, in simple terms, is that there are some special features of insolvency law that are universal and should be recognised and assisted by the English courts, wherever the insolvency proceedings originated.

More foreign insolvency representatives can be expected to seek the assistance of English (and other Commonwealth) courts.
 

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We all know the definition of insolvency for a company - or do we?

The cashflow test - unable to pay its debts as they fall due - is relatively uncontroversial, but the balance sheet test is more difficult.

Section 123(2) Insolvency Act 1986 has rarely been subject to judicial interpretation, moving the Chancellor (Sir Andrew Morritt) to say in BNY Corporate Trustee Services Ltd v Eurosail- UK 2007- 3BL Plc & Ors [2010] EWHC 2005 (Ch):

"this appears to be the first time the proper interpretation of the requirement in s.123(2) to "[take] into account [the company's] contingent and prospective liabilities" has required such close consideration."

 Read the judgement for the detailed perspective, but the three key points about the balance sheet test are:

1. Only present (ie excluding contingent and prospective) assets should be taken into account in the balance sheet test and those assets may include items not on the company's balance sheet such as unresolved claims in litigation.
2. Contingent and prospective liabilities should not necessarily be taken into account at face value.
3. The balance sheet test is a legal assessment, not an accounting exercise, and generally accepted accounting principles do not apply.

Sir Andrew Morritt (C) may have made it more difficult to establish that a company has failed the balance sheet test, but it is clear that each case should be decided on its legal (rather than accounting) merits.

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Guarantee-stripping - the compromise of a landlord's claim against the guarantor of a tenant debtor - also known as the Powerhouse principle, has been endorsed by the High Court as a valid legal mechanism within a CVA, as long as the compromise is not unfairly prejudicial.

In a judgement that was highly critical of Peter Hollis and Nick O'Reilly, then of Vantis PLC, who proposed a CVA as administrators of Sixty UK Limited, the "Miss Sixty" retailer, Henderson J found that a landlord could have been crammed down in this way, but was in fact unfairly prejudiced (Mourant & Co Limited Trustees and another v Sixty UK Limited (in administration) and others). The CVA was set aside.

The judgement concludes:

I am conscious, of course, that I have not heard the administrators' side of the story, because of their decision not to participate in the trial. Nevertheless, I am satisfied that there is a prima facie case of misconduct on their part which ought to be considered by the professional bodies to which they are answerable. I therefore propose to direct that copies of my judgment should be sent to the appropriate bodies by which they are licensed to act as insolvency practitioners.

Such judicial criticism of IPs occurs rarely and is sad to see, not least because of its effect on the whole profession. Speedy, clear and fair action by the regulators concerned will no doubt ensue.

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Commercial landlords and insolvency practitioners are all alive to the effects of the decision of HHJ Purle QC in Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch) (07 December 2009), that rent is an administration expense when it falls due during the administration.

Gabriel Moss QC has however written a fascinating analysis in Insolvency Intelligence ((2010) 23 (5) Insolv. Int. 76), concluding that Goldacre failed to follow the Court of Appeal's approach to administration expenses in Re Atlantic Computer Systems plc, which he says was unaffected by the House of Lords decision in Re Toshoku Finance (UK) plc (in liquidation). Accordingly, he argues, the court retains a discretion whether or not to treat rent, a pre-administration liability arising at the time the lease was executed, as if it were an administration expense.

Goldacre's consequences were not an obvious triumph for the rescue culture and perhaps were due to a logical flaw. Can we now return to the common sense of the courts' discretion?

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The previous Government's support in giving businesses time to pay their their debts to HMRC via the Business Payment Support Service (BPSS) has been widely acknowledged as having provided a lifeline to many businesses. Continued support was assured in their March 2010 Budget although from the increasing number of referrals we have seen in recent weeks there are clear signs that HMRC are taking a stricter view when dealing with outstanding debt. This experience has been supported by information released by HMRC showing there has indeed been an increase in the number of applications being rejected with the rate having risen in the three months to 31 March 2010 compared to 5.3% in the first quarter of last year.

Whilst no formal comment on the continuance of the BPSS has been made by the new Coalition Government, pressure on it to cut the national deficit will inevitably lead to greater scrutiny of all applications made under the scheme. Rejection rates are likely to continue to increase as HMRC will at best apply more stringent criteria when assessing which applications for time to pay arrangements to support. As for existing arrangements in place, breaches of such agreements are likely to lead to support being withdrawn.

As long as the BPSS remains in place it will remain a valuable source of funds for companies able to demonstrate the existence of a viable business. However, businesses that are relying upon rolling over their deferrals are taking immense risk. Alternative funding options need to be explored and be put in place before any deferral period ends. We are seeing an increasing number of businesses following this course. As is always the case the sooner matters are addressed the more likely a distressed situation can be avoided. 

Peter Godfrey-Evans is a Restructuring & Insolvency partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Peter you can call him on 01908 605552. 

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Portsmouth FC's administrators' proposals to creditors make fascinating reading. Their accessibility highlights the Football Association's football creditors rule, which requires players, clubs and agents to be paid often very large sums in full, while non-football creditors including charities such as St John Ambulance, ordinary business suppliers and HM Revenue & Customs, receive only pence in the £ through a Company Voluntary Arrangement (CVA).

HMRC lost its legal argument against the football creditors rule in 2004 in the High Court and the Court of Appeal in the Wimbledon FC case. There, HMRC was a preferential creditor, but analogous arguments applied. The problem was that it was not the company but the buyer of the business who paid the football creditors. The courts found, perhaps surprisingly, that the amount paid by the buyer to the company was not reduced by the amount the buyer paid to the football creditors. In effect, payment to the football creditors was an entirely separate issue from the insolvency and distribution of the company's assets. The payment was a condition required by the football authorities to allow the purchaser to have the club continue to play in the Football League.

More recently in the Lehmans and Woolworths insolvencies, the courts have considered the deprivation principle ("an anti avoidance principle designed to prevent parties agreeing in advance provisions which better [a] party's position in the event of insolvency" according to the Woolworths judgement). One could imagine HMRC running an argument that the football creditors rule puts the football authorities in a better position than they would otherwise have been (namely that the participants in the football authorities' league competitions, and their associates, are protected financially when a club becomes insolvent).

Of course, in cases such as Portsmouth, where HMRC may be a sufficiently large creditor to vote down the CVA and force the club into liquidation, the point may not be argued in court. It will however be of great concern to Pompey fans, who want to see the club's business continue beyond the FA Cup Final. Many commentators (from CRITique via The Lawyer and accountingweb to The Daily Mail and The Telegraph) are now questioning whether the football creditors rule can survive, especially as its abolition has been proposed by the All Party Parliamentary Group on Football and questioned in parliament.

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Credit Today reports "OFT weighs up insolvency regulation" on the Office of Fair Trading study of the corporate insolvency market.

The OFT is considering whether to recommend that the number of Recognised Professional Bodies (regulators) be reduced to 2 or 3 - or even one. A key issue appears to be the encouragement of trust in the profession and transparency.

There is a lack of understanding about insolvency amongst creditors, according to the OFT. I think that is hardly surprising. The profession and the regulators have a lot to do to educate ordinary businesses and consumers. Insolvency is a complex technical and legal subject and not all practitioners are as user-friendly as they might be!

A tentative thought from the OFT is, interestingly, that secured creditor involvement appears to "regulate" IPs outside the formal system. If so, shouldn't banks' panels be expanded to encompass more IPs?

Insolvency practitioners are highly qualified professionals, and they are highly regulated. That they are trustworthy and properly represent creditors' interests should be made self-evident through effective regulation.

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Some landlords struggle with their position in administrations (especially pre-packs) and CVAs, as illustrated by the naturally landlord-centric perspective of insolvency given by the British Property Federation.

Landlords are so used to their powers of distraint and forfeiture maintaining their income streams from financially distressed tenants that they can fail to appreciate that formal insolvency will recognise them as mere unsecured creditors (albeit with a property that may or may not have value to the business) alongside all other suppliers.

I've talked about the issues of CVAs and Landlords before on this blog and commented on tenant insolvency under the InsolvencyNews item Rent deadline threatens retailers.

There is clearly much ground to be covered in convincing all landlords that it is not the insolvency procedure that causes them loss, but the underlying insolvency and the mismatch between their income expectations and the revenue that the property is able to generate.

Particularly in multi-site businesses there is no rationale for an insolvent business to continue to occupy uneconomic premises. All creditors should recognise that, whatever their particular concern, the business should, and the insolvency practitioner will, maximise overall value - even if some individual creditors, such as landlords with leases that have no value to the business, cannot continue to supply to the continuing or successor business.

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You will be delighted to know that The Insolvency (Amendment) Rules 2010 are not the only piece of insolvency legislation coming into effect on 6 April 2010.

The main insolvency rules changes are joined by The Insolvency (Amendment) (No. 2) Rules 2010, which correct a number of errors in the first attempt!

Succinctly and memorably named, The Legislative Reform (Insolvency) (Miscellaneous Provisions) Order 2010 makes the changes to The Insolvency Act 1986 required to give proper effect to the rule changes.

The new statutory forms required by all this legislation are listed on and should be available from the Companies House website.

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