The EU insolvency law has resulted in insolvent debtors shopping for a better jurisdiction in which to become bankrupt. This article examines why and how.
Why?
The EC Regulation on Insolvency Proceedings 2000 (the ECIR), came into effect in May 2002, providing a framework for the national jurisdictions to work together by recognition of each states insolvency mechanisms. However the EC Regulation does not harmonise substantive differences in insolvency law between the subscribing nations.
The High Court has held that where litigation is commenced against the administrator of a company, arising out of contractual obligations entered into in that capacity, he or she will not be personally liable, despite the insolvent company being unable to meet the resulting liability.(1)
The courts and FOS are now headed down very different paths in their approach to credit crunch losses suffered by clients of regulated firms. While FOS has all but abandoned the general law of causation in its approach to cases of consumer detriment, we have observed how the courts have held again and again that the general law of causation applies to mis-selling claims.
The Supreme Court yesterday ruled that client money held in un-segregated accounts should be treated the same as client money held in segregated accounts, enabling un-segregated account holders to share in the client money pool on the insolvency of a firm with whom the account is held.
Regulation 7 of TUPE states that a dismissal will be automatically unfair if the main reason for dismissal is the transfer itself, or a reason connected with the transfer that is not an economic, technical or organisational reason entailing changes in the workforce (‘ETO reason’). This provision has caused some uncertainty where employees are dismissed by an administrator in order to make a business more attractive to a prospective (but as yet unknown) purchaser.
The TUPE Regulations contain some provisions designed to make struggling businesses more attractive to prospective purchasers. TUPE will not apply to transfer employees, and dismissals will not be automatically unfair, where insolvency proceedings have been instituted with a view to liquidation of assets (Regulation 8(7)). However, TUPE will apply to insolvency proceedings which do not aim to liquidate assets, and employees will have unfair dismissal protection (Regulation 8(8)).
Written Ministerial statement
Edward Davey, Minister for Employment relations, consumers and postal affairs; Department for Business, innovation and skills
In March 2011 I announced that we would be taking steps to improve the transparency and confidence of pre-pack sales in insolvency. We subsequently consulted interested parties on measures targeted at the sales of assets in insolvent companies where these are sold to connected parties (such as the directors or their close associates).
The Court of Appeal has held that a transfer on an administration cannot be caught by TUPE rules, unlike on insolvency proceedings. As such administrations will not be “insolvency proceedings” for the purposes of the exemption to TUPE.
What does this mean?
Businesses who purchase companies who have been placed into administration will take on the liability under TUPE for the company’s employees. Employees will transfer under TUPE and will be protected from transfer- connected dismissals.
What should employers do?
Limited liability is not complete protection for directors and they must carefully consider their actions and, indeed, failures to act in order to avoid “piercing the corporate veil”. Directors may be ordered to contribute to the assets of the company even where they have not acted dishonestly.
A common issue facing landlords of commercial premises is to decide what to do if one of its tenants has stopped paying the rent and has entered into one of the types of insolvency prescribed by statute. In the case of companies, these can include company voluntary arrangements, administration, administrative receivership, Law of Property Act receivership or liquidation. In the case of individuals, they might include individual voluntary arrangements or bankruptcy.