According to the credit insurer, Euler Helmes, there were more insolvencies in construction than in any other sector during the first six months of 2011.

Where an insolvency affects consultants and contractors mid project then clients will be concerned about the possible ramifications for their projects.  What are some of the key considerations for a client in this scenario.

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’)

In recent years, several foreign companies have used the English law scheme of arrangement as a flexible restructuring method to compromise creditor claims.  The decision of the High Court in the latest of these cases, that of the German company Rodenstock GmbH, clarifies that an English court will accept jurisdiction where the only connection to England is that the company’s finance documents were governed by English law.

One of the many issues which arose from the collapse of Lehman Brothers was whether “flip provisions”, which reverse a swap counterparty’s priority in the order of payment on insolvency, were invalid on the basis that they contravened the anti-deprivation principle.  This is a long-established common law principle which seeks to prevent an insolvent party from arranging its affairs to frustrate the legitimate claims of creditors.

In its recent decision in Belmont Park Investments PTY Ltd v BNY Corporate trustee Services Ltd and Lehman Brothers Special Financing Inc,[1] the Supreme Court ruled in favour of investors, clarifying the limits of the anti-deprivation rule and holding that a commercially sensible transaction entered into in good faith and without the intention to evade insolvency laws should not infringe the anti-deprivation rule.

Background

The recent case of Stephen Petitioner offers some clarification regarding issues relating to the validity of appointment of administrators.

The Facts

The Insolvency Act 1986 makes provision for, amongst other things, bankruptcy and Debt Relief Orders.

When a person is made bankrupt, his property vests in the trustee in bankruptcy. Some items, however, are excluded from the estate, including any assured or secure tenancy (s283). Once a bankruptcy order has been made, no creditor in respect of a debt provable in the bankruptcy may have any remedy against the property of the bankrupt 'in respect of that debt' (s285(3)(a)).

New rules imposing extra regulation on pre-packaged insolvency sales by liquidators and administrators were expected to go live in October, but they will not now come into force before April 2012, according to the Insolvency Service. The delay is apparently due to the continued debate on the proposal for liquidators and administrators to have to give a three day notice period of a proposed sale aimed at giving creditors a chance to "express concerns ... or make a higher offer for the assets".

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.