Insolvency Litigation: Fast High-Speed High-Stakes Cases

Insolvency litigation is characterised by two principles: high impact consequences with much at stake, and speed. Complex and sizeable insolvency cases can move quickly following service of an initial statutory demand through to issuance of petitions for bankruptcy (of an individual) or winding up (of a company). Usually, there are only 21 days to react initially, and hearings are usually in a small number of months.

Insolvency cases move fast in the UK because of the streamlined process and efficient case management. 

The legal framework is contained inthe Insolvency Act 1986 and Insolvency (England and Wales) Rules 2016. Insolvency refers to a situation where debts cannot be paid. Bankruptcy is a specific legal process that applies only to individuals. A company is not made bankrupt but can become insolvent and can enter into a number of alternative processes, including administration, liquidation, or voluntary arrangements. An equivalent insolvency process to bankruptcy that applies to companies is winding up, where the company ceases to exist.

With insolvency risk, time is money. Rapid action can and might preserve any remaining business value, such as company assets, while also preventing more debt from accruing. 

Understanding the Speed of Insolvency Litigation

Insolvency moves quickly in England and Wales. 

Speed is good because it allows realisation of the remaining business assets, ensuring that the creditors receive their payments as quickly as possible, and preventing the business situation from worsening further. It’s the best timely outcome for all the parties.

Identifying the Parties Involved in Insolvency Litigation

The main protagonist is the debtor, either an individual or a business that cannot meet its financial obligations. Creditors are key players in the bankruptcy or insolvency process, looking to recover money owed to them. Specialist solicitors such as our commercial litigation team are often instructed to assist and advise both creditors and debtors. 

After an insolvency order has been made, a licensed insolvency practitioner is an independent party appointed to manage any remaining assets the debtor has and generally oversee the proceedings to ensure they reach a fair outcome. A licensed insolvency practitioner must be authorised by a relevant professional body, suchas the Insolvency Practitioners Association (IPA) or the Institute of Chartered Accountants in England and Wales (ICAEW).

If litigation occurs, the court will ensure that proceedings are conducted fairly and in accordance with current UK law. Sometimes, in complex or high-value cases, a trustee is appointed to manage the debtor’s assets and make decisions on asset distribution. 

Outlining Core Actions and Claims You May Encounter

Avoidance Actions: Preference and Defrauding Creditors

A bankruptcy trustee can recover property transferred to creditors before the bankruptcy filing; this is called a preference claim. A preference claim is taken against transfers made within the six-month period before the making of the bankruptcy application that resulted in bankruptcy or the date of the presentation of the petition on which the debtor is made bankrupt ensure fair distribution of value amongst all the creditors. 

In a case where the transaction is made to an associate of the debtor, the time limit is two years prior to the making of the bankruptcy application as a result of which the debtor is made bankrupt or the date of the presentation of the petition on which the debtor is made bankrupt

The trustee can also issue a claim if a transaction defrauds creditors because it is made at an undervalue and entered into with the purpose of putting assets beyond the reach of a person who is making or may make a claim against the debtor, or otherwise prejudicing the interests of such a person in relation to the claim they make or may make in the future.

Claims Against Officers and Directors

Claims against officers and directors can be made under the Insolvency Act. These include wrongful trading (when the directors continued trading when they knew or should have known that insolvency was unavoidable) and fraudulent trading.

Fraudulent trading requires proof of actual dishonesty and that the company officers intended to defraud creditors.

Shareholders can bring a claim in the Company’s name under the Companies Act 2006 for breach of directors’ duties when they have demonstrably failed to act in the company’s best interests or used their position for personal gain.

Another potential claim is misfeasance against directors who have breached fiduciary duties or misapplied company money.

Transactions at under value can form the basis of a claim to recover assets specifically transferred for less than market value in the two years before the company went into administration or liquidation.

A claim for preferences is to set aside transactions in which a creditor was given preferential or favourable treatment over others before insolvency.

Actions against company officers and directors can have serious consequences, including personal liability and financial penalties.

Lien Challenges and Fraud Claims

A lien is a claim or legal right against property owned by an individual or a company used as security for a loan.

Bankruptcy trustees can initiate litigation to prevent or avoid certain transactions to protect the bankruptcy estate and its creditors, including fraudulent transfers and preferential transfers that benefit the debtor at the creditors’ expense.

A trustee can protect the creditors’ position by creating a legal interest in the property or assets until the debt is repaid. Essentially, the trustee empowers the creditors to sell or realise the asset to ensure that the funds benefit the creditors.

Challenging a lien or pursuing a fraud claim requires trustees to file an adversarial proceeding with the courts on behalf of the creditors. This must demonstrate that the transfer occurred whilst the debtor was insolvent, and they benefited from it at the expense of the creditors.

These specialist claims are all part of the trustees’ powers to protect creditor rights and ensure they receive the maximum return as part of the bankruptcy or insolvency process. Trustees have an overriding duty to ensure that the bankruptcy process operates fairly and efficiently with the primary aim of benefiting the creditors.

Inter-Creditor and Deepening Insolvency Issues

Inter-creditor agreements set out how creditors will share the available assets from the debtor in the event of bankruptcy or insolvency, known as the payment waterfall.

Debt structures like this can be highly intricate, reflecting different interests, security, and a structural hierarchy. Inter-creditor agreements ensure fair play, and there is a range of sophisticated precedents.

Inter-creditor agreements usually contain a standstill provision, which prevents junior creditors from taking any enforcement action for a specified period. The idea is that the financial restoration to creditors can be managed without interference, at least at the outset.

Inter-creditor claims can be the reality of multiple creditors with one single debtor. Despite meticulous negotiation and drafting, dissatisfaction and disputes, leading to individual claims and litigation, are sometimes unavoidable.

Deepening insolvency is a relatively new legal concept that originated in the United States. When it comes to a legal basis, the courts of England and Wales have not yet recognised this as a standalone tort. Instead it is considered within the framework of directors’ duties which require directors to prioritise creditors’ interests when a company is in financial distress of approaching insolvency.

The theory is that when a corporation is insolvent, creditors can be further harmed when the company negligently or fraudulently contributes to increasing the debt pool, thus worsening their position. 

This could be further depleting company assets or artificially extending the life of the company, worsening the creditors’ position and chances of recovery.

Frequently Asked Questions

What Do Insolvency Lawyers Do?

Insolvency lawyers represent their clients’ interests in the insolvency process, be that an individual creditor or the business itself. Their support helps with the complexities of insolvency ,including negotiating with creditors and helping businesses make informed decisions about their financial position. They will also represent their client in court and provide post-bankruptcy financial advice and support.

What Are Insolvency Proceedings?

Insolvency proceedings are a range of formal, legal processes for managing company debt when a company cannot meet its financial obligations. Not all companies that start insolvency proceedings may be insolvent or declared insolvent. Insolvency offers different forms of rescue, including Company Voluntary Arrangements (CVAs), through to formal liquidation.

What Is the 10-10-10 Rule in Insolvency?

The 10-10-10 rule is a relatively recent insolvency rule that came into effect in April 2017. It prescribes the criteria for a meeting of creditors during the insolvency process. A meeting must be requested by creditors representing at least 10% of the total value of the debts owed, or at least 10% of the total number of creditors, or at least 10 individual creditors.

Ready to Contact Helix Law With Insolvency Litigation?

Insolvency is high-speed, highly regulated, and complex. The technicality and pace of these cases mean that expert advice from lawyers with a sophisticated understanding of the procedure and practical knowledge of bankruptcy law is vital. Our team are specialist litigation solicitors- forcing and defending insolvency allegations across the country. We have a track record of experience and knowledge in handling bankruptcy and insolvency litigation. Contact us today for swift, practical advice from experienced professionals.