The courts have the power to and increasingly will make a civil restraint order where an individual persistently issues claims that are totally without merit.

With ever increasing numbers of corporate insolvencies, it is likely that the courts will see an increase in litigation raised by insolvency practitioners and creditors arising out of restructuring arrangements entered into by companies in an attempt to stave off insolvency.

While debt restructurings must always remain a significant part of the corporate recovery toolkit, all stakeholders must be aware of the underlying rules relating to the challengeability of transactions in the run up to insolvencies.

There are two main challengeable areas in Scots law:

A pre-packaged business sale (or “pre-pack”) is an arrangement under which the sale of a company’s business or assets is agreed in principle with a buyer prior to the appointment of an insolvency practitioner (most commonly an administrator), who then executes the sale shortly after his or her appointment.

"Leaving the mice in charge of the cheese..." is how one commentator described the now far from unusual phenomenon of the pre-pack administration sale. But what is meant by a "pre-pack"; are they lawful and what is the legitimate area for concern? While they were fairly uncommon in the past, pre-packs now seem to have become all the rage. Why? What scope is there for challenge or review if abuse is suspected?

What is a "pre-pack"?

In the matter of Bernard L Madoff Investment Securities LLC [2009] EWHC 442 (Ch), Mr Justice Lewison granted an application for the transfer of personal data in the possession of the joint provisional liquidators of a UK subsidiary to the trustee in bankruptcy of its parent company in the US, Bernard L Madoff Investment Securities LLC. The application was granted on the basis that it was necessary for reasons of substantial public interest.

Treasury has published two orders made under the Insolvency Act 1986 and the Banking Act 2009. The orders are:  

Following the rejection of Stylo's proposed CVA earlier this year and the successful "unfair prejudice" challenge of Powerhouse's CVA in 2007, the recently approved CVA proposal put forward by JJB Sports, widely described by commentators as "ground-breaking", has generated significant interest in the CVA process and the use of a CVA to effect a solvent restructuring of a listed company without resorting to administration and a suspension of trading in its shares.

Where a debtor's assets exceed his liabilities, the onus is on the debtor to prove he can not pay his debts if a creditor seeks to annul the bankruptcy order.

In Paulin v Paulin and another, the defendant petitioned for his own bankruptcy claiming he was unable to pay his debts. The claimant applied for the order to be annulled claiming the defendant could afford to pay his debts and was deliberately attempting to defeat her claims in the matrimonial proceedings.

Where the entirety of a debt is not included in an agreement to settle, a creditor can continue to prove in a bankruptcy for the balance.

The absence of an intention to put assets out of the reach of creditors will thwart applications under the Insolvency Act to set declarations of trust or transfers aside.