Up until 1st March, if directors wished to wind up a solvent business, a little known tax concession called the Extra-Statutory Concession (ESC) C16, allowed shareholders to realise assets informally, without the need to go through formal liquidation procedures. Funds distributed to shareholders were subject to Capital Gains Tax (CGT) rather than Income Tax –resulting in substantial savings.

On 1st March 2012, new formal rules were introduced. The previous informal route is now only available to small companies with distributions under £25,000. Any informal distribution involving more than £25,000 will now be deemed an income dividend to shareholders.

While many shareholders did prefer the comfort of a formal liquidation (known as a Members Voluntary Liquidation or MVL), since it avoided any subsequent comeback, previously it was not necessary to incur the costs of an MVL in order to obtain the CGT relief.

However the Government, in enacting “Extra-Statutory Concession C16” clearly believed the informal system was being abused.

For all that, one can still get distributions from solvent companies over £25,000 subject to Capital Gains Tax. To do so now requires a formal MVL. This is good news for insolvency practitioners since only we are entitled to do them!

Still, perhaps the most interesting thing in the Government’s press release is that it states that the cost of winding up “a small business with straightforward affairs” is about £7,500. I don’t know where it got these figures from, but our going rate is nearer £2,500 to £3,000!

Furthermore, the effect on bona fide business rescues would be profound since it would enable EU creditors to take pre-emptive action to enforce their debts prior to restructurings being finalised.

It would thus force many more companies into formal Administration or Liquidation. And even then, it seems possible that the frozen funds would be treated as security for the European creditor – since such is the norm in many EU jurisdictions.

EC proposal to create a European Account Preservation Order (EAPO)

In a press release issued on 25th July 2011, the EC proposed the EAPO be adopted on a qualified majority basis – i.e. “too bad if we don’t like it”. The UK Government does have a reserved right not to “opt in”. However their response to consultation, published on 26th January 2012, suggests that they are in broad support, subject to obtaining “sufficient changes” once the EAPO is adopted elsewhere in Europe.

In brief, an EAPO will permit a creditor in another EU country to freeze a UK company’s bank account if it claims to be owed money. An EAPO will be obtained “ex parte” – that is without notice, from the creditor’s local Court. And would not be capable of being reviewed by a UK Court. The proposal includes a duty on banks to disclose the existence of all the debtor’s accounts. So, it will not be even necessary for the creditor to identify where the bank account is held.

On service, a UK bank will be obliged by an EAPO to freeze a debtor’s bank account, at least to the value of the debt (plus costs). In practical terms, this would likely bring most UK debtors’ businesses to an end.

According to the July 25th EC Press release, the EAPO will be issued “without the debtor knowing about it, thus allowing for a “surprise effect” (its actual words!).

Also, it states: ‘the Order can be of crucial importance in debt recovery proceedings because it would prevent debtors from removing or dissipating their assets during the time it takes to obtain and enforce a judgment’. Thus, there seems to be an assumption that any delayed or unpaid debt results from fraud or wrongdoing, rather than simple illiquidity.

This draconian measure would afford EU creditors far greater debt recovery powers than a UK creditor. Under English law, freezing orders can only be obtained following a Court hearing. The judge needs to be convinced that the remedy is both justified and proportionate. There needs to be evidence of a ‘real risk’ that the assets could be dissipated.

Crucially in the UK, a person seeking the Order is under a duty to give full and frank disclosure and usually a cross-undertaking in damages. This does not seem to be required for an EU creditor.

Once an EAPO freezes a bank account, a debtor would have to apply in the European Court for relief; he would not be able to obtain relief from a UK court.

It should be noted the proposed EAPO is not just for enforcing trade debts, since the EC press release states: ‘citizens also suffer when…an absent parent fails to pay maintenance from abroad’.

The Government is, at present, resisting adoption of this new law but if it does come in by stealth, like so many others, watch out in a few year’s time for the hullabaloo in the media when these Orders are being made and businesses are being destroyed. ‘Elf ‘n safety complaints will pale into relative insignificance!

The Consultation Document proposed taking the majority of winding-up and bankruptcy petitions away from the Courts and putting them into the hands of an Adjudicator, employed by the Insolvency Service. Uncontested petitions would be rubber stamped by the Adjudicator. In the event of a contested petition, the adjudicator would be able to decide whether or not the company or individual was insolvent.

We believe this proposal probably originated from the fact that nowadays consumers maxed out on credit cards, and with no assets, file the vast majority of bankruptcies. These types of bankruptcies have undoubtedly clogged up the Courts. So allowing consumers to file for bankruptcy direct with the Official Receiver was deemed a good solution.

However, the Government Proposals went far beyond that simple reform. Experienced Insolvency Practitioners know all too well the phone call from a panic-stricken director or debtor. Finally realising that a petition is to be heard in a matter of days, he will finally take his head out of the sand.

Generally, if an alternative to bankruptcy or compulsory winding up looks viable, an Insolvency Practitioner will seek an adjournment, which the Courts will invariably grant at the first hearing.

An adjournment buys an insolvency practitioner time to find the best solution. For a company, this might mean an Administration, a proposal for a Company Voluntary Arrangement or even a more cost-effective Voluntary Liquidation. For an individual, this might mean putting together an Individual Voluntary Arrangement.

Judges are generally sympathetic if they see a debtor taking proper professional advice, albeit invariably at the last minute. However, this would not be the case with the Adjudicator. His task is simply to determine insolvency. Unless a debtor can show that he is not insolvent, a winding-up or bankruptcy will be granted to the petitioning creditor. Rescue remedies will not be considered.

Bankruptcy judges are independent of the state. They have the experience and the culture to find solutions to problems. An Insolvency Service employee will inevitably have a tick-box mentality. He will have an eye on targets to improve financial returns, by ensuring Official Receivers get more cases with assets in them.

SRB schemes and ‘declaring bankruptcy’

The SRB scheme offered near bankrupts the opportunity to sell their homes to an SRB company at well below market value. The SRB Company would then rent the property back to the homeowner.

The homeowner/debtor could then file for bankruptcy, without fear of the equity becoming a bankruptcy asset. Sometimes SRB schemes provided that the mortgage company took a shortfall. Inevitably they deprived creditors the possibility of realising the equity, generally the only asset in the estate.

We have encountered several of these schemes. In each case an insolvency solicitor advised us we could do little to overturn the undervalued transactions.

Upon bankruptcy discharge

Although never admitted, we believe some SRB companies offered informal and non-contractual buy back agreements. So upon bankruptcy discharge, the bankrupt would be able to reverse the deal in order to recover his equity.

In fact the FSA identified a particular mischief

The FSA appears to have accepted that some of these schemes, attractive to a near bankrupt, were in fact scams.

It found that having purchased a property at a low price, the SRB Company would later jack up the rent to an unaffordable level, repossess the property and then sell it at a substantial profit.

The FSA identified some 22 regulated firms who had been carrying on a sale and rent back business. All have been forced to stop. One firm has been referred to the FSA’s enforcement division.

On 26th January 2012, Government Minister for Employment Relations Ed Davey announced he has torn up proposals to overhaul the pre-pack administration insolvency tool. His reason? “The Government is not convinced of the benefits of the new rules.”

No doubt various self-interest groups will protest. However, they have failed to explain:

• The mischief they presume pre-pack administrations to cause

And in particular

• If the remedy proposed would actually have produced a better result

Background to the Government’s Pre-Pack Administration review

Back in March 2011, the Government, pressurised by ill-informed complaints, announced that it intended to amend the legislation, which allows companies to file for the instant protection of administration. Instead it proposed creditors be given a minimum of three days notice.

Supposedly, this was to give creditors a chance to propose an alternative. Quite what the creditors were supposed to do in that period, no one really knew!

In reality, the only beneficiaries would be trade competitors and suppliers who would exploit the uncertainties for their own ends. For example, a landlord would be given the opportunity to enter premises and change locks, thus gaining an immediate negotiating advantage over an Insolvency Practitioner. Reducing the chances of a straightforward business rescue.

When do we use pre-pack administrations?

Pre-pack administrations provide for the immediate sale of a business. Most pre-pack administrations are the culmination of intense selling efforts by the administrator. In larger cases, almost certainly potential third-party purchasers will have been approached on a confidential basis. It is unlikely a sale to management would have been organised as a “stitch-up”. More likely, the management simply bid more than others because it knew what it was buying.

Fact. The majority of businesses that become insolvent are relatively small, owner-managed or SME’s.

In practice, such insolvent businesses would rarely readily sell to a third party at a premium to appraised asset value. Most insolvency practitioners recognise that to generate more than minimal auction value for the assets, the business needs to be sold back to the management. Hopefully the management will have learned from their mistakes and will now run the business profitably.

Even with small businesses where there is no other conceivable buyer, any Insolvency Practitioner will negotiate the best deal he can.  It is a myth that pre-pack sales are done “on the cheap”. The reality is an insolvent company’s assets are rarely worth anything like their accounting book value.

The role of the Insolvency Practitioner – Rescue, Recovery and Renewal

Our professional regulations put us through the hoop to ensure we get the best result.  Insolvency Practitioners are required to report to creditors in detail the action taken to justify a pre-pack sale, in particular one to former management.

We have a duty to provide a transparent report detailing:

• Independent valuation evidence
• An analysis of all possible alternatives
• Full details of the sale itself.

There remains a puritanical streak in the British psyche that believes becoming insolvent is sinful and needs to be avenged.  ‘Owners/managers must have done wrong and therefore should be punished.’  This attitude simply overlooks the real and complex causes of many failures. It also ignores the fundamentals of the capitalist system, which provides that some enterprises will succeed and some will fail.

Modern business rescue techniques are designed to maximise the salvage value of failure for the common good. Forcing an insolvent business to cease trading (which is what the opponents of pre-pack administrations seem to want) does not seem to be sensible.

A pre-pack administration sale will almost inevitably generate a better return than the liquidation alternative.  It is quick, clean and above anything else, transparent.

So let’s be having no more nonsense!

Payday loans are ultra short-term but expensive lending for those who exist on a hand to mouth basis. Emanating from America, they are heavily marketed through TV advertising and even unsolicited text messages to the vulnerable.

As initial loans tend to be modest (except to the borrower), insolvency practitioners (IPs) are as yet unclear of payday lenders attitudes to bankruptcies and IVAs. most of the consumers in financial difficulty who are likely to purchase payday loans are unlikely to have the wherewithal to propose an IVA.

But, most IPs do provide an informal service to this part of the market, even if it is simply helping debtors to find the local bankruptcy court. Most of us have concerns to educate those who we find unable to manage their finances.

Apologists for payday loans, such as John Lamidey of the Consumer Finance Association, which represents payday lenders, regularly defend the product.  In a recent article in Credit Collections & Risk magazine (January 2012), Lamidey stated: ‘there is a plethora of inaccuracies surrounding many of the industry’s responsible businesses’.

In contrast, these are my own observations.

• Payday lending companies make serious money from consumer borrowers, who are made up of people who can least afford it.

• Payday lenders compare their rates favourably to that of an unauthorised overdraft. Surely an “unauthorised” overdraft is borrowing from someone who hasn’t agreed to lend? That’s not too far away from stealing!

• Lamidey defends the claim that the payday market is unregulated by providing a long list of regulations that he claims apply. None are specifically aimed at payday loans. I believe the issue is not market regulation; it is the easy availability of a product, which can cause much future misery.

Lamidey suggests that without the availability of payday loans consumers would have: ‘lower living standards if they cannot manage their personal cash flow by smoothing out the peaks and troughs of income and expenditure’. This is the crux of the problem to which payday loans should NOT be the answer.

I suggest the ‘need’ is for consumers to be taught how to manage their money, a skill that seems to have been forgotten.  Being of a certain age, I recall the time when there was no consumer credit and one managed one’s money by putting something aside for the rainy day.

We no longer seem to educate people as to this desirable trait.  I do not believe that there is any god-given right to borrow money. I think we might see fewer financially stressed consumers if they realised this.

We have seen the rise and fall of credit cards for all and the wringing of hands about those who borrowed way beyond any ability to repay.  Payday loans are targeted at those who can least afford them. Unless there are controls over this type of lending, we are going to see increasing stories in the media of suicides or criminal behaviour by those who cannot cope.

Being realistic, I guess expensive payday loans are probably here for a while. Ideally I would like to see government health warnings akin to cigarette sales.  Or better still, wouldn’t it be a nice if Consumer Finance Association members devoted say 10% of their significant profits towards educating customers in how to manage income and expenditure, so as to avoid the needs for such lending?

As an EU member the UK is obliged to recognise Court decisions made in other member states, even if they do not accord with our law. We get concerned when a Greek Court extradites a UK citizen to face what might be a minor offence here.  But, it works two ways; Europeans must recognise our laws.

English bankruptcy laws are amongst the most debtor-friendly in the western world.  The process is simple, quick and fairly benign with an exit in a year.

Contrast this with many European jurisdictions, where the process can last seven, eight or in the case of Ireland, twelve years. It may be rigorous during that period, catching assets and rights that are exempt in the UK.

Sean Quinn is just one insolvent European looking to have his bankruptcy dealt with under the English regime. Forum shopping (the action of seeking a court or judge deemed likely to render a favourable result) has long been done by companies.

So why is it wrong for individuals?

Creditors seem to perceive this to be an abuse and apply to have such bankruptcies annulled.  In the end it all comes down to COMI – where you have your Centre of Main Interest. This is where you are entitled to file for bankruptcy.

COMI is simply defined as the place where the debtor conducts the administration of his interests on a regular basis – and the latter has been held to need no minimum period but merely to have an “element of permanence”.

In the case of re Mitterfellner, the Court annulled the bankruptcy on the basis that the debtor had come over on a day trip to open a bank account and did little else. It found his so-called job offer over here was fictional. Mitterfellner had also told the German authorities he was moving to Dublin.

On the other hand, in the case of re Eichler, the position was somewhat different.  Here, the bankrupt was a German doctor who had obtained a genuine (although short-term) job here as a locum.  Eichler organised his affairs so:

• his assets had been transferred to his wife who remained in Germany
• he was employed via a service company and was paid a minimal amount (thus avoiding a three-year bankruptcy income payments order)

This was not found to offend English bankruptcy law.

So, while such favourable bankruptcy filings may be controversial, they do have legal backing.  As far as is known, there has as yet been no equivalent case law on foreigners filing for IVAs here but there appear to be no obvious reasons why they would not be effective.

Being cynical, one suspects that the average European creditor would not understand the effect of an IVA on his rights which might make it fairly easy to get a scheme through and be binding on unwitting creditors.

So, while Sean Quinn is an extreme case (and the decision on whether the legal challenge will succeed or not is awaited), there is no doubt that we will see an increasing flood of insolvent Europeans taking up residence in the UK.

For my debut I thought I’d look at the vexed question of what happens to the family home in bankruptcy. Home owners are often left confused by the process and a recent court ruling does little to clarify the position. If you have any thoughts on the issue, I’d love to hear them so why not add a comment at the bottom.

Divorce and bankruptcy frequently focus on the same problem – who owns what in the matrimonial home. In divorce, one party leaves the home or it is sold and the proceeds split. In bankruptcy, on the other hand, the parties’ usually jointly want to keep their home. But with many home-owners being unmarried and many instances where only one name is on the title deeds, complexity and uncertainty are common.

A recent Supreme Court judgment complicates things further. Jones v Kernott was not a bankruptcy case, but the court tried to lay down guidance on who owns what when it comes to the family home. Its conclusion in a nutshell: It all depends…

It is an undoubted truth that different insolvency practitioners acting as trustees in bankruptcy or in formulating IVA proposals take differing attitudes towards the individual’s interest in their home. Some IPs see it as their duty to maximise recovery for creditors, even if this means the family loses its home. Others seek to interpret the law as equitably as possible to minimise the individual’s contribution to his estate, thus avoiding the loss of the home.

The truth is there is no right answer. And in my opinion, the new ruling creates both greater uncertainty, but also greater flexibility for IPs in determining the amount to be realised.

The starting positions are fairly clear. Where the legal (ie registered) title is joint, the property is owned 50:50 in the absence of any contrary deed of trust. Where the legal title is in only one person’s name, they own 100 per cent of the home. But these are just starting points and the laws of trusts and equity then come into play.

Essentially, what the Supreme Court now says is that one has to look at the parties’ common intentions even if they are not fully documented.

In the case of a sole legal title, if it can be inferred the parties intended to share beneficial ownership, the law will uphold such rights. Further, if there is no objective evidence from which to infer intentions, the court will impute what it assesses would have been the parties’ common intention had they addressed the issues.

With jointly owned properties, adjustments to the 50:50 presumption will similarly be available if such intention can be inferred from the parties’ actions. Again, if fairness requires a different ratio of interest, the courts will be likely to accept it.

Jones v Kernott was a joint ownership case involving an unmarried couple with two children where the man left the home and bought his own property. Many years later he claimed a 50 per cent interest in the house which had substantially increased in value due to inflation. The Court awarded him about 10 per cent taking into account what it inferred the parties’ intentions were at the time he abandoned the relationship and home.

Interestingly, the Court gave short shrift to the complex measures often now adopted to determine shares based on capital contributions and adjusted by what is called ‘occupational rent’ – this is further adjusted if there is a failure to pay a share of the mortgage. Occupational rent is a theoretical calculation that accounts for the departed party not having the benefit of living in the property. The court said this ‘would involve a quite disproportionate effort both to discover the requisite figures (even supposing they could be discovered) and to make the requisite calculations, let alone to determine what the ground rules should be’.

For insolvency practitioners who wish to promote fairness and equity in the often tragic personal consequences of financial failure – bankruptcy, family home loss and the rest – there is clearly now more scope for negotiation.