The credit crunch has made it more important than ever for business owners to address
viability and solvency issues early. Delays in taking remedial steps now will only result in
more pain and fewer options, and will give you less time to act later on. 

Directors and managers concerned about their business should carry out an ongoing and in-depth assessment of the company, asking themselves the following five key questions:

1. Where can I improve cash generation or legitimately defer outgoings in order to
   improve the retention of cash in the company? 
2. Where are the main risks in the business? What would I do if I lost that valuable
   customer, or the bank were to withdraw its support? 
3. Are there any costs which can be moved from being ‘fixed’ to ‘variable’? 
4. Are there any areas of business that should be pruned back or sold? Is that
   person, department, service or product adding real value at this point in time? Can
   I afford to take a long term view without increasing risk? 
5. What can I do to cut my drawings from the business?

You need to be brutally honest with yourself. If you are at all unhappy with the
answers to these questions, you should re-assess all of your available options, which could
include restructuring the business using formal or informal routes. Now is not a good time to
defer that re-assessment.

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We all know how to find a good service provider - personal recommendation. But what if you want help now and don't know who to ask?

One piece of good advice is to be wary of paying someone up front to find an investor for you - see Corporate Insolvency - Ecademy for an independent consultant's view. Any good professional will discuss your business with you first without charge and look to establish whether a business angel is likely to invest. I certainly would, and I would be delighted to help you find an investor if that's the best thing to do in all the circumstances. Of course, the right solution may be corporate or operational restructuring, or even the use of an insolvency process, and you may be advised to spend money with the professional to implement that optimum solution.

By the way, adding to the Ecademy post, if you want to find an insolvency practitioner (not that you need to look any further if you're reading this),  the most user-friendly search tool is at the website  of R3, the insolvency practitioners' trade body,  here.

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The High Court insists on payment of the bankruptcy debts and expenses being made in full before granting an annulment order, whereas in the county courts orders are often granted based upon undertakings to pay.

In the case of Halabi v London Borough of Camden and another Mrs Halabi applied for an annulment under section 282 of the Insolvency Act 1986 on the basis that the debts and expenses of the bankruptcy had been paid or secured. Her solicitor gave an undertaking to hold the funds in his client account until the annulment order was made by the court.

It was ruled that 'paid' in section 282(1)(b), taken together with rule 6.211(2) Insolvency Rules 1986, did not include the provision of security for a debt by way of undertaking. The wording of section 282 was clear that the bankruptcy debts and expenses had to have been actually paid, not just that the bankrupt's solicitor undertook to pay them. The court did however have the power to specify that an order for annulment should not take effect until a later date. If this method were used the operation of the order would be suspended until the conditions specified by the court were satisfied. It was ordered in this case that the annulment should not take effect until the Official Receiver had notified the court that the bankruptcy debts had been paid.

The ruling should have the effect of ensuring that in future annulments will not be granted until payment of the bankruptcy costs and expenses has been made in full, regardless of in which court they are heard. Debtors and their advisers should take note.

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Under our previous post Permacell Finance: judgements affecting charge holders, commentators debated the then recent High Court case of Day v Haine, in which Sir Donald Rattee held that a protective award (for the employer's failure to consult on redundancies pursuant to s189 Trade Union and Labour Relations (Consolidation) Act 1992) made after the date of liquidation is not a provable debt.

The Court of Appeal has now reversed that decision - Haine v Secretary of State for Business Enterprise & Regulatory Reform & Anor [2008] EWCA Civ 626 (11 June 2008).

The Court of Appeal's approach was that this is not essentially an insolvency issue, but rather a matter of employment law in the particular context of an EU Directive. The focus of this purposive judgement appears to be on protection of the workforce through the discouragement of failure to consult by the levy of a financial penalty on the company; and there is sympathy for the Secretary of State

"to whom are transferred the workforce's rights under the 1992 Act [and who] has no means of recouping his expenditure from the employer by proving in the company's liquidation."

What is not explicitly recognised is that any such expenditure by the Secretary of State is limited by s186 Employment Rights Act 1996, whereby each employee's maximum entitlement from the Secretary of State for all employment debts is (currently) £330 per week for eight weeks.

Is it right that the financial penalty should fall largely on creditors (and partly on the Secretary of State) in an insolvency? How will that discourage directors of going concerns who might be tempted to avoid consultation?

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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.

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The Court of Appeal case Oates v Stimson [2006] EWCA Civ 548 highlights the need for advisers when ascertaining parties' interests to consider not only the legal and beneficial ownership of a property but also the potential for a constructive trust to exist.

The case concerned how the equity should be split between two legal owners of a house. The parties had previously reached an oral agreement for Mr Oates to sell his interest to Mr Stimson, whereby the latter met all the outgoings and paid for certain improvements over an eight year period, despite not formalising the sale.

Although the Law of Property (Miscellaneous Provisions) Act 1989 requires a sale of an interest in land to be in writing, the Court of Appeal decided that the conduct of the parties had created a
constructive trust, "rendering it unconscionable not to permit him to enforce the oral agreement".

Therefore, if a debtor falls on hard times and the spouse continues to pay all the property outgoings over time, you need to look deeper than mere legal and assumed beneficial ownership when exploring their respective positions. Is there an earlier oral agreement and a course of conduct between them that affects their interests, and thus their available solutions?

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At some time during the development of a company the directors and shareholders are likely
to see advantages in diversifying the ownership of business activities. There are many
reasons why a reorganisation of a company's activities is desirable. More often than not the
desire is either to protect one or more business activities or to divide business assets so that
shareholders may go off in different directions.

The presence of potential tax liabilities can often be a deterrent. With careful planning, however, the commercial advantages of a reorganisation of business activities or shareholdings can be realised without triggering a significant (or in some cases any) tax bill. 

There are two principal ways of achieving this - through a statutory demerger or by using Section 110, Insolvency Act 1986. Provided the necessary criteria (eg not for the puposes of a sale or cessation of trade, not an investment buiness) are met, a statutory demerger can offer a relatively straightforward means of separating two trades. In our experience the criteria are such that most private business separations are made using the provisions of Section 110.

In this blog I explain how a solvent liquidation and Section 110 allow businesses to achieve their goals in this area.

The commercial justification driving a reorganisation will often be a wish to separate the business assets or activities so as to minimise risk to other parts of the business, or to allow shareholders to take greater ownership of the part of the business they wish to develop. Equally, though, it is possible that the management want to sell part of the business, whilst retaining the remainder. Examples of reorganisations on which we have recently advised include:

• A typical (pyramid) group with three activities (pubs and restaurants, hotels
  and hotel management) was demerged into three separate groups reflecting
  the separate trades. 
• Shareholders in a company owning nursing homes wished to separate the
  business assets between them so that they each could further develop part of
  the business, as they wanted. The properties were separated out into new companies. 
• A commercial property was split from a company's trading activity and transferred to a new company, so increasing the chances of a tax efficient sale of the trading business at a later date.
• A company carrying on two trades was approached by a potential purchaser who wanted only one of these trades. The trades were separated and the business wanted by the third party was sold.

In all of these cases, the reorganisation involved a Section 110 liquidation. 

Company reorganisations are fraught with tax issues. These include capital gains tax  (CGT), income tax on potential distributions or employment related transfers (benefits in kind), inheritance tax (IHT) - if there is a gift transferring value between shareholders - and stamp duty land tax (SDLT).

The prospect of facing significant tax liabilities will often be a deterrent to a reorganisation, particularly for the smaller business. However, HM Revenue & Customs (HMRC) recognise the procedure under Section 110 and will give tax clearances (where possible), confirming that the reorganisation is being carried out for genuine commercial reasons and that the various tax reliefs associated with a reorganisation are available. Provided that the reorganisation then follows the route advised to HMRC, the tax liabilities should be kept to a minimum.

Under Section 110 a liquidator may, with sanction, receive shares, policies or like interests in a transferring company for distribution among the members of the transferor company.

A typical Section 110 scheme will involve the creation of a new holding company (Newco H), which will, as part of the reorganisation, be placed into liquidation. This has a number of benefits, including the fact that Oldco is not associated with the liquidation.

Existing shareholders will exchange their shares for the issue of shares in Newco H in proportion to their present shareholding. The assets of Oldco will then be reorganised into the appropriate segments that will make them easily transferrable out of the group. This is likely to involve either
the transfer or distribution of assets or shares up to Newco H prior to liquidation.

Two or more new companies are then formed (Newco A and Newco B, etc). Newco H is placed into solvent liquidation and the liquidator tasked under Section 110 with distributing the assets of Newco H, in exchange for shares to be distributed to the shareholders of Newco H. The shareholdings in Newcos A, B etc need not necessarily be in the same proportion of the shareholdings in Newco H if, for example, the reorganisation is to enable shareholders to take ownership of different parts of the business. However, it will be critical, to avoid a tax charge, that
shareholders inherit shares with a value proportionate to their pre-reorganisation value.

Though comparatively rare, it is possible to carry out a Section 110 scheme or reorganisation without forming Newco H. However, creditors of the company to be liquidated will have to be settled either before or as part of the liquidation process.

There are some complicated tax rules where properties are being transferred and then leave a group, as well as SDLT considerations. Where the reorganisation involves properties, the tax planning and advice will be more involved.

In conclusion, the commercial justification to reorganise the business assets, activities or shareholders' interests within a company should not be frustrated by potential tax liabilities. HMRC recognise what can be achieved by a Section 110 reorganisation. Tax planning is critical, as is the drafting of the legal documentation covering the reorganisation.

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A unanimous appeal verdict but a divergence of reasoning characterise the Law Lords' speeches in McGrath and another v Riddell and others [2008] UKHL 21.

The significant point of the judgement is not the result of English assets being remitted to Australia, but the absence of majority support for the proposition that it is English common law or judicial principles, rather than section 426 Insolvency Act 1986, that allow the result.

Commentators suggesting that the judgement paves the way for foreign liquidators to seize English assets in cross-border insolvency disputes (eg Norton Rose, who acted for the Australian liquidators, and Accountancy Age) may therefore have overstepped the mark.

In the liquidations of four HIH insurance group companies, the Australian court sought the assistance of the English High Court through s426 Insolvency Act 1986 in directing that the English provisional liquidators, who had been appointed over the companies' English assets - mostly reinsurance claims, should remit the assets to the Australian liquidators for distribution rather than distributing them through an English liquidation.

Under the Australian regime an insurance company's assets are applied first to Australian debts and reinsurance proceeds are applied to the reinsured liabilities, whereas under the English regime at the time of the provisional liquidators' appointment (which was therefore applicable in this case although insurance insolvency priorities have since been changed) such assets would be distributed pari passu among insurance, reinsurance and other unsecured creditors.

The appeal was allowed and the assets are to be remitted, but there was disagreement in the judgements over how the decision could be reached.

Lord Hoffmann (with Lord Walker agreeing) analysed the doctrine of ancillary liquidation, noting that:

"the judicial practice to which I have referred . . . is inconsistent with the broad proposition that creditors cannot be deprived of their statutory rights under the English scheme of liquidation."

He went on to say that allowing the appeal and directing remittal of the assets to Australia was exercising a power established under English common law, and he concluded:

"this is a case in which it is appropriate to give the principle of universalism full reign."

Lord Phillips declined to support this view, saying:

"I do not propose to stray from the firm area of common ground [allowing the appeal on the basis of s426] onto the controversial area of whether, in the absence of statutory jurisdiction, the same result could have been reached under a discretion available under the common law."

Lord Scott was very clear in his opposing view:

"The proposition that the assistance and directions sought . . . could be given under an inhernet power of the court . . . is unacceptable . . . [and] would constitute the usurpation by the judiciary of a role expressly conferred by Parliament on the Secretary of State."

"It would, in my opinion, as I hope I have made apparent, have been sufficient [to justify a refusal] if the country of the principal winding up had not been a "relevant country or territory" for section 426 purposes."

"I would allow this appeal but repeat that I would do so on the footing that the power to accede to the Australian liquidators' request derives from section 426 and not from any inherent jurisdiction of the court."

Lord Neuberger similarly disagreed with Lord Hoffmann:

"I take the view that it would not have been open to an English court to make the order sought by the Australian liquidators in the absence of section 426(4) and (5) of the 1986 Act."

Under s426 it has always been open to the English courts to choose to apply the law of a "relevant country or territory" designated as such by the Secretary of State. This judgement clarifies the exercise of the court's discretion under s426 but it does not extend the geographical boundaries.

It has been suggested that this judgement will make it easier for foreign office-holders to obtain the assistance of the English courts under The Cross-Border Insolvency Regulations 2006. I would observe that the cross-border regulations restrict the court's discretion rather more than does s426, for example in Article 21(2):

"Upon recognition of a foreign proceeding, whether main or non-main, the court may, at the request of the foreign representative, entrust the distribution of all or part of the debtor's assets located in Great Britain to the foreign representative or another person designated by the court, provided that the court is satisfied that the interests of creditors in Great Britain are adequately protected."

and Article 22(1):

"In granting or denying relief under article 19 or 21, or in modifying or terminating relief under paragraph 3 of this article or paragraph 6 of article 20, the court must be satisfied that the interests of the creditors (including any secured creditors or parties to hire-purchase agreements) and other interested persons, including if appropriate the debtor, are adequately protected."

How do you see universalism developing in the response of English courts to requests from foreign liquidators and courts for assistance and directions?

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As the major (English) trading creditor of the London branch of a troubled bank registered and with its principal operations and headquarters in Switzerland but with other branches in a variety of largely offshore jurisdictions, what insolvency process would you seek to have employed in which jurisdiction in order best to protect your interests? The majority of the bank's assets are in England and you fear that without proper control being exercised they might be dissipated in the impending collapse.

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