Company Voluntary Arrangements ("CVAs") have been in the news recently for all of the right reasons. The CVA proposal advanced by JJB Sports was approved by an overwhelming majority of creditors. This has allowed the survival of JJB Sports (JJB) in its current form and allayed fears that the company would be forced into administration or liquidation with consequent job losses and further detriment to creditors.

Introduction

In the current economic crisis, an increasing number of companies are facing financial difficulties and potential insolvency. Unsurprisingly, at such times, tax issues can often be overlooked. This can lead to potential tax risks, lost opportunities and a failure to maximise assets. Correct planning can make a significant difference to the potential tax liabilities and maximisation of tax assets of a company or a group that is facing insolvency.

A “pre-packaged sale”, or “pre-pack”, is an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator, and effected shortly (perhaps immediately) after appointment. The administrator effects the sale without the business being offered to the open market.

The Pensions Regulator (the Regulator) recently used its powers under the Pensions Act 1995 to appoint an independent trustee to the exclusion of all other trustees of the scheme. The employer was required to pay the fees and expenses relating to the appointment.

The Regulator decided to use its powers because:

For debtors with limited liabilities, little surplus income and minimal gross assets, the new Debt Relief Order (DRO) is a further tool to consider in managing their debts. DROs, which came into force on 6 April 2009, are aimed at those who find they are unable to pay off their debts within a reasonable time but for whom other forms of debt relief, such as bankruptcy or Individual Voluntary Arrangements, are unavailable, or perhaps unaffordable.

What are the criteria for a DRO?

A DRO can be applied for where the debtor:

In April 2008 the Bankruptcy & Diligence (Scotland) Act 2007 ("the Act") introduced a new regime for obtaining permission for (and recalling) diligence on the dependence of a court action (i.e. arrestment and inhibition). In terms of the Act, before granting (or recalling) warrant for diligence, the court must be satisfied that:

Historically, the United Kingdom has not had a specialised bankruptcy regime for dealing with the failures of financial institutions. Rather, these were handled under the same rules that applied to ordinary corporations.

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.

This recent case in the Employment Appeal Tribunal (EAT) is one of the first to examine how the insolvency provisions in the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) should apply and, in particular, the circumstances in which employment liabilities passed under TUPE to the buyer of the assets of an insolvent company.

Facts

This case involved a "pre-pack" administration.

The threat of insolvency proceedings against a corporate debtor can greatly assist a creditor's primary objective of getting paid, preferably in advance of everyone else. This is particularly so where the debtor is prevaricating but there is no genuine dispute that the sum in question is due and owing. Although the courts decry the use of the winding-up procedure as a means of debt collection, it is often a very effective tool.

Consider the following when faced with a corporate debtor who is refusing, without genuine reason, to settle its debts: