Technical Briefings
30 June 2010
WK Restructuring & Recovery technical brief - June 2010
Welcome to the first edition of the WK Restructuring & Recovery technical brief. This monthly update will provide you with practical information on personal and corporate insolvency issues, covering the latest topics which affect individuals and businesses.
Click on the links below to go directly to that section.
• New High in Personal Insolvencies
• Preferences – Section 239 of the Insolvency Act 1986
• An Introduction into Insolvency
If you have any questions regarding any of the topics covered please contact your nearest WK office who will be happy to answer any queries.
Keith Stevens
Partner, Head of WK Restructuring & Recovery
keith.stevens@wilkinskennedy.com
New High in Personal Insolvencies
Recent statistics released by the Ministry of Justice demonstrate that the number of bankruptcy petitions lodged in National County Courts by debtors personally has risen 20% from the previous three months in 2010 to 16,348. However the figure has levelled off in comparison with previous quarters, rising by only 108 individuals since the first three months of 2009. This rise however will be the fifth consecutive quarter that the number of people declaring themselves insolvent has reached a new high.
Contributory factors could well be the rise of unemployment from redundancies due to the economic meltdown, and people increasingly finding it difficult to avail new loans, or refinance older ones. In addition many companies are not only making job cuts but are opting to make pay cuts, which impacts greatly on individuals finances.
The figures show that although numbers of personal insolvencies have gradually increased, there were some variations in the ways people declared themselves insolvent.
There were 18,256 bankruptcies via the traditional route of dealing with overwhelming debt, which is down 10.7% on the same period last year, but up 7.3% on the previous quarter.
The introduction of Debt Relief Orders (DRO’s) in 2009, the new style of dealing with debts for individuals with debts under £15,000 and minimal assets, grew again to 5,644.
The number of Individual Voluntary Arrangements (IVA’s) stood at 11,782, whilst this was up 20.01% on the same period a year earlier, it is also at the lowest level since the first three months of 2009.
A factor for the levelling of IVA’s may perhaps be that job losses mean fewer people have surplus funds to afford regular monthly contributions to their creditors, which forces individuals down the route of bankruptcy as opposed to entering into agreements with creditors via a formal IVA or informal debt management plan.
With many varying options available to individuals to seek closure on their insolvent state it is not surprising that current personal debts are much greater, and today’s figures surpass those from the previous recession in 1992-93.
Amid the latest increase of personal insolvencies, the future of these decreasing or levelling looks rather bleak should the new government’s economic decisions to increase tax and reduce public spending comes into force. The new record high may well become history in the not too distant future!
Preferences – Section 239 of the Insolvency Act 1986
An Administrator or a Liquidator can apply to court to set aside a preference.
The court shall make such Order as it thinks just, for restoring the position to what it would have been if the company had not given the preference. That is to say, it is mandatory for the court to make an Order although it has a discretion as to what that Order is.
A company gives a preference to a person if that person is one of the company’s creditors, a surety or a guarantor for any of the company’s debts or liabilities...and...the company does anything or suffers anything to be done which has the effect of putting that person into a better position which, in the event of the company going into insolvent liquidation, will be better than the position he would be in if that thing had not been done - Section 239(4).
For a transaction to constitute a preference the company must have desired to prefer the creditor, surety or guarantor - Section 239(5). A company may, for example, be under substantial pressure to pay its creditors, however if one of those creditors is paid in order to keep the company afloat, which is the intended desire, rather than a desire to prefer the paid creditor, this may be sufficient to avoid a preference.
In establishing desire on the part of the company the Administrator or Liquidator need not necessarily prove that those controlling the company knew that the company was insolvent (Katz v McNally [1999]), or that they knew that the company would enter into insolvent liquidation (Willis v Corfe Joinery Ltd [1997]).
If a person is connected with the company (other than one of its employees) the desire to prefer is presumed, although this is rebuttable. There are numerous reported cases where presumption has been rebutted by evidence.
If the preference is given to a connected person the court can look back two years from the date of the onset of insolvency. In all other cases the court can look back six months from the date of the onset of insolvency.
The company must be insolvent at the time of the transaction or as a result of it. However there is no presumption of insolvency if a preference is made to a connected person – although a desire to prefer is presumed.
As it is difficult to prove an element of desire, there are only three reported cases in which a court has found there to be a preference in favour of a person other than a connected person: Re: Living Images Ltd [1996], Re: Agriplant Services Ltd [1997] and Re: Mistral Finance Ltd [2001].
Examples of a preference – payment in full of a debt which would only be partially paid off on winding-up or providing further security for an existing debt.
Examples where no preference – if someone is not a creditor, surety or guarantor of the company, there can be no preference. It has also been acknowledged that a payment in discharge of a valid security is not a preference as it does not improve the position of the secured creditor nor affect the position of the other creditors in a winding-up (National Australia Bank Ltd v KDS Construction Services Pty Ltd [1987] Australian High Court).
An Introduction into Insolvency
Where do I start? I always joked saying that going into insolvency was the worst decision I ever made, but how much further from the truth could I have been? I originally came from an accountancy background, studying for 4 years, graduating with an accountancy degree, joining a practice of chartered accountants and the whole time no one ever explained to me what insolvency was.
Sure, the subject was skimmed over, being described as something that happens when a business finally runs out of money, but I was never given an insight into the interesting world that is insolvency.
Whenever you think or hear about insolvency, words which automatically come to your mind might include, pre-pack administrations, liquidations and bankruptcy. You probably think they’re all the same thing, I certainly did, but they are not. These different words each describe a different insolvency procedure, each with their own tasks and labours which an Insolvency Practitioner (with the help of us lonely Administrators) must adhere to, to ensure that all assets of the failed company, or individual in the case of personal insolvency, are realised for the benefit of the creditors.
I’ve seen the media suggest that insolvency work is purely an asset stripping exercise to line the pockets of professionals such as Insolvency Practitioners, solicitors, agents etc. Nothing could be further from the truth. The main goal is to realise assets in order to distribute the monies back to the creditors who suffered a loss as a result of the company becoming insolvent. There are many people who are affected by a company going bust and in many cases the companies that are owed money will, in turn themselves collapse which results in redundancies and a boost in the figures the media are all too quick to quote.
One of the most interesting parts of insolvency, and many will disagree with me here, is our role as “crime scene investigator”. When a company enters administration, liquidation or administrative receiverships, the Insolvency Practitioner is obliged by statute to conduct an investigation into the affairs of the insolvent company. Here is where you can put your 'Poirot' hat on and look for those transactions entered into prior to insolvency which could be challenged under the Insolvency Act 1986, and in extreme cases could constitute fraud.
Whether you uncover the crime of the century or not, a report must be compiled and submitted to the government run Insolvency Service who take your findings and comments and assess whether the case should be investigated further. It is important that an investigation is done to the best of our ability since the quality of the report prepared will determine whether a case that should be considered for disqualification proceedings is considered.
This is just a taster into the life of an Insolvency Practitioner, and their staff. In reality, I am told every day how lucky I am to have a job, and to have such a great boss, and this once mysterious sector called insolvency is actually a pretty interesting place to work. Why not come give insolvency a try, you never know, you might like it.
Contact Wilkins Kennedy
To contact your local Wilkins Kennedy office simply click here.
