The time limits within which transactions at an undervalue can be upset under sections 238 and 339 of the Insolvency Act 1986 are reasonably well understood: 2 years for companies and 5 years for individuals.

Section 423, which deals with transactions at an undervalue that were intended to defraud creditors, is less straightforward. It requires proof of intention - a much more difficult hurdle than simple proof of facts - to upset a transaction successfully. And although there is no statutory time limit, historically the courts were reluctant to extend its reach too far. The recent case Sands v Clitheroe [2006] BPIR 1000 revisits these issues and great care is now required to avoid falling foul of s423.

The facts in the Sands case were that Mr Clitheroe, a practicing solicitor, gifted his interest in his home to his wife. At the time he was solvent and a partner in a fairly secure practice, but he effected the transfer in order to protect the family home in the event of the financial collapse of the partnership. After being made bankrupt 15 years later, and despite all of his creditors being "new", the court upset the transaction.

The court decided that where the intent of the transaction had been to put assets beyond creditors' reach, even though the debtor was not engaging in "risky business" and none of the bankruptcy debts existed at the time, the transaction fell within Section 423, for which there is no time limit. Notably, Section 423 applies equally to companies as to individuals.

The case shows that if a transaction is for full value or the reasons for the transaction are other than to put assets beyond the reach of creditors, it will be safe from attack under Section 423, regardless of how long ago the transaction occurred. It is, therefore, imperative that the reasons for a transaction are fully documented rather than leaving a court to assume it was to avoid creditors. The case also highlights that, where there could be a dispute as to value, it would be wise to retain evidence of the basis of valuation well beyond the appropriate statute of limitations period.

• Email This
• Print
• Comments
• Trackbacks

As revealed in Insolvency reform - Bank Law Blog, the Insolvency Service has issued a consultation paper setting out its proposals to modernise and streamline the law governing insolvency procedure.

The broad aims are to bring insolvency law up to date with our current ability to communicate electronically, to move some decision-making process to insolvency practitioners and to remove some unnecessary burdens from insolvency practitioners. Replies to the consultation must be with the Insolvency Service by 10 December 2007.

The document's full title is:

"A consultation document on changes to the Insolvency Act 1986 and the Company Directors Disqualification Act 1986 to be made by a Legislative Reform Order for the modernisation and streamlining of insolvency procedures".

It is:

 "A Consultation Paper issued by The Insolvency Service on behalf of the Minister of State for Employment Relations and Postal Affairs"

and it is available for download (from the Insolvency Service website) here.

There are eight proposals, detailed below:

1. To modernise and make more flexible the means of communication, and the exchange of information, between insolvency office-holders and creditors (and others who send or receive information) in insolvency cases by:

1.Introducing a provision requiring creditors to “opt-in” if they wish to receive information issued by the insolvency office-holder during the conduct of the proceedings and/or who wish to participate in the insolvency process.
2.Updating insolvency legislation to make it explicit that communication can be effected electronically where the legislation requires it to be “in writing”.
3.Enabling insolvency office-holders to provide information by sending a link to a website on which information is posted.
4.Providing a legislative framework that will allow insolvency office-holders to hold meetings required to be held as part of their conduct of insolvency cases through media other than meetings held at a physical venue.

2. To remove a requirement that is imposed upon liquidators and trustees in bankruptcy requiring them to obtain sanction for certain actions they propose to take as part of their conduct of the case.

3. Moving to allow discretionary advertising of the appointment of a voluntary liquidator and to remove restrictions on the form any such advertisement can take.

4. Removing a requirement imposed upon liquidators to summon annual meetings of members and/or creditors for the purpose of laying an account of their acts and dealings and of the conduct of the winding up during the preceding year.

5. Removing the requirement for any document in insolvency proceedings to be sworn by affidavit and to replace it with a less burdensome requirement for such documents to be verified by a statement of truth in accordance with the Civil Procedure Rules 1998.

6. To remove the requirement for an insolvency practitioner, acting as liquidator, to submit a report to the Secretary of State on the conduct of the directors of a company if he has already submitted such a report as administrator of the same company.

7. To remove a requirement that exists for the Insolvency Services Account (“ISA”) kept by the Secretary of State to be held with the Bank of England.

8. To remove the power of the court to order that a person owing monies to a company in liquidation pay those monies into an account, in the liquidator’s name, at the Bank of England.

As an IP, I have to say that on first reading the proposals make good sense.

Comment below, or respond directly to the Insolvency Service on Annex B of the document.

• Email This
• Print
• Comments
• Trackbacks (1)

Section 216 of the Insolvency Act 1986 restricts the use by a Phoenix company or successor business of a similar name or trading style to that of a company in insolvent liquidation.

That is well known, as are the exceptions ñ or are they?

The Exceptions

S216 works by making any director of the insolvent company who is involved in managing the successor, unless he has leave of the court and subject to the exceptions in rules 4.228 to 4.230 Insolvency Rules 1986, both liable to criminal prosecution and personally liable (under s217) for the debts of the successor.

• The first exception, giving notice to creditors (rule 4.228), will rarely be available, contrary to widely adopted practice, because the notice must be given before the relevant director is involved with the successor, as the Court of Appeal made clear recentlyin Churchill & Churchill v First Independent Factors and Finance Ltd ([2006] EWCA Civ 1623).


• The second exception, a six week grace period following an application for leave made to the court no later than 7 days after the date of liquidation (rule 4.229), may be more common but requires an application anyway.


• The third exception, when the successor company has been known by the prohibited name for 12 months prior to the liquidation (rule 4.230), will also not assist most directors who wish to acquire and continue a business from an insolvent company.

Consequences

The first exception does not work in the way many people have thought. Notice to creditors is ineffective if the director is already a director, shadow director or de facto director of the successor business (but the notice cannot be given until the transaction has occurred).

What s216 therefore requires in most cases is an application to court for permission to be involved with a similarly named business, as a recent article ìRe-use of company names: the efficacy of the notice procedure called into questionî points out (Recovery, Summer 2006, p25).

Unless the application is made before the end of the first week of liquidation, making use of the second exception, there may be a period of several weeks during which the business cannot be transferred, pending the hearing.

Since the criminal and civil liabilities that result from breaching s216 are strict and automatic, and the court will actively consider whether approval is appropriate, and the court is unlikely to give retrospective permission (following Arden LJ in ESS Production Ltd v Sully [2005] EWCA Civ 554), a director would be ill-advised to rely on seeking permission after the event.

Sales by administrators

There are most likely to be unforeseen difficulties when the business was sold to the director by an administrator, administrative receiver or voluntary arrangement supervisor some time before the company went into liquidation. S216 will apply if the vendor company goes into insolvent liquidation at any time during the 12 months after it stopped being known by the prohibited name being used by the purchaser.

The only way for a director to avoid liability in these circumstances is to apply to court under s216. The application should be made before liquidation ñ although there is some doubt as to whether this would be valid ñ or within 7 days afterwards (making use of the six week period within which the application can be heard without liability attaching from the date of liquidation, provided the application is successful).

Addressing the problem

The situation is clearly unsatisfactory as MBO directors cannot wholly avoid the risk of liability and the Insolvency Service is therefore considering an urgent, albeit not retrospective, rule change.

In the meantime, directors involved in purchasing a business from an administrator may seek to agree with the officeholder that he avoids using insolvent liquidation as an exit mechanism. They are also likely to want him to avoid the vendor company being known by the prohibited name from the date of sale.

For those who have already breached s216 following an insolvency sale, in the mistaken belief that notice to creditors when the director was already involved with the successor was adequate, an application under s216 now would at least offer the prospect of relief from personal liability for the successor companyís future debts. Otherwise the director, whilst he remains involved in management of the successor company, will continue to be personally liable for all the successor companyís debts for up to 5 years after the liquidation of the vendor company.

Phoenixes beware!

• Email This
• Print
• Comments (2)
• Trackbacks