Today (20th December) the Court of Appeal has clarified how TUPE applies when a business is sold after administration proceedings are instituted. It has decided that employees transfer to the new owner of the business, and are protected from transfer-related dismissals, thereby putting to rest more than two years of legal uncertainty following conflicting decisions from the Employment Appeal Tribunal (EAT).

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.

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’)

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.

MF Global, one of the world's leading broker/dealer firms entered into insolvency proceedings in both the US and the UK on 31 October 2011. US entities MF Global Holdings Ltd. and MF Global Finance USA Inc. filed voluntary petitions for relief under Chapter 11 of the US Bankruptcy Code in the Bankruptcy Court for the Southern District of New York. Also on 31 October, the US Securities Investor Protection Corporation ("SIPC") initiated the liquidation of MF Global, Inc. a jointly registered futures commission merchant and broker-dealer, under the Securities Investor Protection Act ("SIPA").

Lending to a foreign company? If you choose English law to govern your facility documents and provide for the English court to have exclusive jurisdiction, an English scheme may be a viable means of restructuring the debt later, if the need arises.

Independent Insurance Co Limited (In Provisional Liquidation) v Aspinall and another UKEAT/0051/11

Independent Insurance Company - IIC- went into provisional liquidation in June 2001.  Half of its employees were made redundant including Mr Aspinall and Mrs O’Callaghan.  They issued proceedings claiming a protective award when IIC failed to comply with its collective consultation obligations, consult with employee representatives or arrange for necessary elections.   

Sections 216 and 217 of the Insolvency Act impose draconian sanctions on directors of liquidated companies who reuse "prohibited names". Prohibited names are names that are identical to, or "suggest an association with", a company that has gone into liquidation and of which they were previously directors. The sanctions include criminal penalties and personal liability for debts. It has always been difficult for advisers to confidently advise directors whether a proposed name for a new company would be a prohibited name, given the vague nature of the phrase "suggest an association".