Insolvency

[edb49]

Someone who owes us money has gone bankrupt, we've had a letter from the insolvency service. I am sure they are messing around, I know they completed a share sale at below market value just before entering into insolvency.

Forgetting about how much money we'll actually get back, what can we do to put wrongs right?

[Eric Mc]

If genuinely bankrupt, very little.

You should be approached by the insolvency practotioner who is handling the bankruptcy and will be asked to list amounts owed to you - but you more than likely will not receive anything.

[trunnie]

You can of course mention anything that you think that the insolvency practitioner should be aware of about the directors conduct. The IP is normally under an obligation to report inappropriate directors conduct to the DTI and they are far more active than they used to be about getting directors disqualified for inappropriate conduct.

Similarly if he/she thinks it worth it, the IP may take action to recover assets (but depends on how much involved/whether they are in funds to take action etc.).

[edb49]

Assuming that money is not recoverable, what's the most effective way of twisting their arm? E.G. Showing that they have given some creditors preference, disposed of shares at below value, failed to report assets, etc.

[jamesuk28]

You need to apply to the court to have the share transaction set aside as it may have been an undervalue transaction.

I quote:

the liquidator must demonstrate that:

the consideration received by the company in the transaction, in money or money's worth is significantly less than the value, in money or money's worth, provided by the company;

the transaction was entered into during the "vulnerability period"; and

at the time of the transaction, the company was unable to pay its debts as they fell due, or became unable to pay its debts as they fell due as a result of the transaction

In many legal systems, where a person or company transfers assets or pays a debt to a creditor shortly before going into bankruptcy, that payment or transfer can be set aside on the application of the liquidator or trustee in bankruptcy as an unfair preference or simply a preference

The law on unfair preferences varies from country to country, but characteristically, to set a transaction or payment aside as an unfair preference, the liquidator will need to show that:

The person or company was insolvent at the time the payment was made (either on the cash-flow test, or on the balance sheet test - it varies from country to country)

The person or company then went into bankruptcy within a specified time thereafter, usually referred to as the vulnerability period

The payment had the effect of putting the creditor in a better position than other unsecured creditors

In some jurisdictions, it is also necessary to show that the bankrupt intended to grant a preference.

In most countries an application to have a transaction set aside as a preference can only be made by the liquidator or trustee in bankruptcy (as the person making the payment must be in bankruptcy, and thus they are not normally liable to suits from other creditors).

The effect of a successful application to have a transaction declared as an unfair preference varies. Inevitably the creditor which received the payment or assets has to return it to the liquidator. In some countries the assets are treated in the normal way, and may be taken by any secured creditors who have a security interest which catches the assets (characteristically, a floating charge)

However, some countries have "ring-fenced" recoveries of unfair preferences so that they are made available to the pool of assets for unsecured creditors.

An unfair preference has some of the same characteristics as a fraudulent conveyance, but legally they are separate concepts. There is not normally any requirement to prove an intention to defraud to recover assets under an unfair preference application. However, similar to fraudulent conveyance applications, unfair preferences are often seen in connection with asset protection schemes that are entered into too late by the putative bankrupt.

Many jurisdictions provide for an exception in the case of transactions entered into in the ordinary course of business with a view to keeping the company trading, and such transactions are usually either validated or presumed to be validated.

Hope that helps.

[skwdenyer]

jamesuk28 said:

You need to apply to the court to have the share transaction set aside as it may have been an undervalue transaction.

I quote:

the liquidator must demonstrate that:

the consideration received by the company in the transaction, in money or money's worth is significantly less than the value, in money or money's worth, provided by the company;

the transaction was entered into during the "vulnerability period"; and

at the time of the transaction, the company was unable to pay its debts as they fell due, or became unable to pay its debts as they fell due as a result of the transaction

In many legal systems, where a person or company transfers assets or pays a debt to a creditor shortly before going into bankruptcy, that payment or transfer can be set aside on the application of the liquidator or trustee in bankruptcy as an unfair preference or simply a preference

The law on unfair preferences varies from country to country, but characteristically, to set a transaction or payment aside as an unfair preference, the liquidator will need to show that:

The person or company was insolvent at the time the payment was made (either on the cash-flow test, or on the balance sheet test - it varies from country to country)

The person or company then went into bankruptcy within a specified time thereafter, usually referred to as the vulnerability period

The payment had the effect of putting the creditor in a better position than other unsecured creditors

In some jurisdictions, it is also necessary to show that the bankrupt intended to grant a preference.

In most countries an application to have a transaction set aside as a preference can only be made by the liquidator or trustee in bankruptcy (as the person making the payment must be in bankruptcy, and thus they are not normally liable to suits from other creditors).

The effect of a successful application to have a transaction declared as an unfair preference varies. Inevitably the creditor which received the payment or assets has to return it to the liquidator. In some countries the assets are treated in the normal way, and may be taken by any secured creditors who have a security interest which catches the assets (characteristically, a floating charge)

However, some countries have "ring-fenced" recoveries of unfair preferences so that they are made available to the pool of assets for unsecured creditors.

An unfair preference has some of the same characteristics as a fraudulent conveyance, but legally they are separate concepts. There is not normally any requirement to prove an intention to defraud to recover assets under an unfair preference application. However, similar to fraudulent conveyance applications, unfair preferences are often seen in connection with asset protection schemes that are entered into too late by the putative bankrupt.

Many jurisdictions provide for an exception in the case of transactions entered into in the ordinary course of business with a view to keeping the company trading, and such transactions are usually either validated or presumed to be validated.

Hope that helps.

Out of interest, how does the English jurisdiction treat the above issues?