In an earlier article we discussed The Insolvency Service's proposals for the UK to be an early adopter of two new "model laws" published by UNCITRAL relating to insolvency, namely the Model Law on Recognition and Enforcement of Insolvency-Related Judgments (MLIJ) and the Model Law on Enterprise Group Insolvency (MLEG).

The recent judgment in City Gardens Ltd v DOK82 Ltd [2023] EWHC 1149 (Ch) serves as a useful reminder of the extent of, and principles governing, the English court’s jurisdiction to wind up a company on the basis of inability to pay its debts.

Background

City Gardens Limited (C), and DOK82 Ltd (D), had entered into a “memorandum of understanding” (MoU) in relation to a significant debt owed by D to C.

The latest insolvency figures for May show insolvencies continuing to increase, with construction and retail being among the hardest-hit sectors. Company voluntary liquidations continue to top the table, accounting for 85% of the total 2,552 insolvencies for the last month. Compulsory liquidations are also on the rise, particularly driven by HMRC. Small and micro businesses (with annual sales of less than £1m) account for around 99% of all liquidations, according to PWC.

Exculpation clauses limiting the liability of certain entities for actions taken in connection with a bankruptcy case are a common feature of chapter 11 plans. However, courts disagree over the permitted scope of such clauses. They also disagree as to whether an order confirming a chapter 11 plan that includes exculpation and third-party release provisions is insulated from appellate review under the doctrine of "equitable mootness."

To prevent landlords under long-term real property leases from reaping a windfall for future rent claims at the expense of other creditors, the Bankruptcy Code caps the amount of a landlord's claim against a debtor-tenant for damages "resulting from the termination" of a real property lease.

To shield bankruptcy trustees and certain other entities from litigation arising from actions taken in their official capacity, the "Barton doctrine"—now more than a century old—provides that such litigation may be commenced only with the authority of the appointing court. The doctrine has certain exceptions, one of which—the "ultra vires exception"—was recently examined by the U.S. Court of Appeals for the Fifth Circuit as an apparent matter of first impression.

If any class of creditors under a chapter 11 plan is "impaired," the Bankruptcy Code provides that the plan can be confirmed by the bankruptcy court only if at least one impaired class of non-insider creditors votes to accept the plan. This "impaired class acceptance" requirement—stated in section 1129(a)(10) of the Bankruptcy Code—is straightforward in cases involving a single debtor, or in cases where the bankruptcy estates of several debtors are "substantively consolidated" so that the assets and liabilities of each debtor are deemed to belong to a single consolidated entity.

Corporate restructurings are not always successful for many reasons. As a consequence, the bankruptcy and restructuring laws of the United States and many other countries recognize that a failed restructuring may be followed by a liquidation or winding-up of the company, either through the commencement of a separate liquidation or winding-up proceeding, or by the conversion of the restructuring to a liquidation. Chapter 15 of the Bankruptcy Code expressly contemplates that the status of a recognized foreign proceeding may change, and that a U.S.

Section 363(m) of the Bankruptcy Code provides that the reversal or modification of an order approving a sale or lease of assets in bankruptcy does not affect the validity of the sale or lease to a good-faith purchaser or lessee unless the party challenging the sale or lease obtains a stay pending its appeal of the order.

The curiosity with claims based on transactions defrauding creditors is that a transaction can fall within its scope when a debtor is solvent and may never ultimately enter an insolvency process, and there is no requirement of fraud. Such claims fall under section 423 of the Insolvency Act 1986 (the act), and do require a debtor to have entered into a transaction at an undervalue (drawing on claims under section 238 and 339 of the act, in corporate and personal insolvency respectively) with the intention of putting assets beyond the reach of creditors.