When is a company in insolvent? When is a company's assets less than its liabilities (taking account of contingent and prospective liabilities)?

Under English law this is a commercial test and requires that a company has reached a "point of no return" and is not based solely on a review of the company's balance sheet:  

Company Insolvencies

One of the criticisms that is often made of the UK’s complex insolvency legislation is that it is too easy for the directors of a company to put it into liquidation or administration, ‘dump’ the company’s debts and then effectively start the same business again under the guise of a new company. Such phoenixism has often been of concern to HMRC both in the civil and criminal fields and prosecutions have been made against directors who have undertaken such activities on a repeated basis.

Personal Liability Notices (‘PLNs’)

The Court of Appeal has confirmed that where the Pensions Regulator (Regulator) exercises its anti-avoidance powers against a company during insolvency, the liability ranks as an expense in the insolvency process.  The 14 October 2011 judgment, in a case involving the Nortel and Lehman Brothers groups, upheld the High Court's landmark decision of last year.

As you may recall, the High Court ruled in December 2010, in a case brought by the administrators of 20 insolvent companies in the Lehman and Nortel groups, that the cost of complying with a financial support direction ("FSD"), issued by the Pensions Regulator after the date of the commencement of a company's administration or liquidation, would rank as an expense of the administration or liquidation.

Recently, the Court of Appeal upheld the High Court's decision in the Nortel Networks and Lehman Brothers disputes. The judgment confirms that liabilities under Financial Support Directions (FSDs) and Contribution Notices (CNs), which are issued by the Pensions Regulator, will rank ahead of almost all other claims when a company becomes insolvent. The discussions in the case focused on whether FSDs and CNs are classed as 'provable debts', expenses of the insolvency or, indeed, neither.

The Court of Appeal handed down its judgment on 14 October 2011 unanimously upholding the first instance decision that a Financial Support Direction (FSD) issued by the Pensions Regulator to an entity after it has commenced insolvency proceedings will rank as an expense of the administration, therefore affording it super-priority over floating charge holders and other unsecured creditors. This decisions has significant implications for lenders to groups with UK defined benefit pension plans if any of their security is taken as a floating charge.

TPR settled its dispute with Michael Van de Wiele (VdW) in relation to its UK pension scheme and issued a Contribution Notice (CN) for £60,000. Although this is significantly less than the £21 million originally sought and the £5.08 million decided by the Determinations Panel, TPR says it is “business as usual” for the use of its statutory anti-avoidance powers. A settlement at this level might be viewed as a defeat for TPR and an indication that CNs are not a potent weapon to deal with the avoidance of employer debts. That view would be seriously misguided.

In relation to the Great Lakes UK Limited Pension Plan a settlement was again reached before a full hearing with the Determination Panel could take place as reported by tPR on 13 July 2011.

The liquidator of Onslow Ditching Ltd (ODL), sought a declaration against two directors (on three grounds), seeking damages/fines or a contribution of assets from each director for:

In the recent case of Pressure Coolers Ltd v (1) Mr J Molloy; (2) Maestro International Limited; and (3) Secretary of State for Trade and Industry, the Employment Appeal Tribunal had to decide who should pay an employee’s basic award and notice pay following his unfair and wrongful dismissal after a “pre pack” TUPE transfer from his insolvent employer.