In 2008, the catastrophic effect of the credit crunch spread to most world economies. As in previous recessions, insolvency has affected increasing numbers of individuals and companies, and parties to agreements to arbitrate are increasingly likely to find themselves dealing with insolvent companies. What are the issues to bear in mind?

1/ Prior insolvency

The case of Hull v Campbell serves as a reminder of an outmoded debt recovery procedure that needs to be modernised.

Introduction

Against the backdrop of the recent sheriff court decisions regarding the need to appoint a Court Reporter even in cases where the assets are insufficient to meet the IPs' fees, the Court of Session has taken an innovative approach to approving IP fees without the need to appoint a court reporter.

Background

Tax treatment in the hands of the creditor

The waiver of an outstanding debt by a creditor shall be treated as an extraordinary loss for accounting purposes. As taxable income for corporate income tax purposes is calculated from the company’s accounting results assessed upon accounting regulations, such loss is normally deductible unless income tax law provides for an adjustment.

Tax treatment in the hands of the creditor

Polish tax regulations provide three major methods for obtaining a tax deduction for irrecoverable debt: waiver or forgiveness of debt, debt write-off and revaluation write-off.

The UK generally distinguishes between “loan relationship” debts (e.g. loan receivables) and other debts (e.g. trading debt in respect of outstanding consideration for the sale of goods or services). It is possible to turn a trading debt into a loan relationship by issue of a debenture in respect of it.

Tax treatment in the hands of the creditor

Philip Bell v Philip Long, Andrew Thomson, PKF and Weatherall Green & Smith (North) Limited [2008] EWHC 1273 (Ch)

Background

The receiver's duty to exercise care in disposing of the company's assets and to ensure he obtains the best price reasonably obtainable at the time of sale was considered recently in the English case of Bell v Long & Others.

The recent downturn in the economy is undoubtedly having an adverse effect on the cash flows of a large number of businesses in the UK. Businesses are keeping a much closer eye on outgoings and expenses, and may be looking to ease financial pressure by making payments due to creditors as late as possible.

For a business operating from leased premises, quarterly rental payments are likely to be one of the biggest outgoings. The longer the rental payment remains in the tenant's bank account, the more interest they will accrue and the more likely that cash flow issues will be eased.

It is over 10 years since the House of Lords decision in the case of Sharp v Thomson (1997 SC (HL) 44) threw a judicial cat amongst the pigeons of property and insolvency law in Scotland. The House of Lords, overturning decisions of both the Outer and Inner Houses of the Court of Session, decided that ownership of a property passed unencumbered by, in this case, a crystallised floating charge, even though the disposition of that property (which had been delivered before the floating charge crystallised) had not yet been registered in the Property Register.

A recent insolvency law case in the Dutch Supreme Court could have serious consequences for software licensees faced with a bankrupt supplier or licensor. The effect of the judgment may be to render traditional software escrow agreements insufficient and to require additional protective measures.

Summary