Claims against insolvent companies and individuals

When a company or an individual enters into a formal insolvency or enforcement process, restrictions may be imposed on the ability of creditors or prospective creditors to continue or bring claims against that insolvent company or individual. This is distinct from the commercial considerations of whether it is worthwhile (economically or otherwise) bringing, or continuing with, a claim against an insolvent opponent.

Corporate insolvency processes

Restrictions on bringing, or continuing with, claims against a company which is in a formal insolvency process apply in liquidations, administrations and, to some extent, company voluntary arrangements (CVAs).

There is no formal moratorium during either a restructuring plan under Part 26A of the Companies Act 2006 (CA 2006) or a scheme of arrangement under CA 2006, Pt 26, although parties may agree their own arrangements. Once approved, both restructuring plans and schemes of arrangement bind those affected classes of creditors and/or members.

Other than commercial considerations, no restrictions apply in respect of a company in receivership (including administrative receivership).

Administration

There are two types of moratorium in an administration, the moratorium and the interim moratorium,

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Restructuring & Insolvency analysis: This was an application for an injunction to restrain presentation of a winding up petition. The respondent was a company which asserted that it was entitled, pursuant to a term sheet prepared during loan negotiations, to a £350,000 break fee and certain other sums. The applicant’s main argument was that it had a cross-claim in misrepresentation which meant that (1) the term sheet, to the extent that it had contractual force, had been rescinded and (2) there was in any event a damages claim large enough to extinguish the alleged debt. It was held that there was sufficient evidence of misrepresentation to meet the test. The applicant was entitled to an injunction. Written by Nora Wannagat, barrister at Tanfield Chambers.

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This week's edition of Restructuring & Insolvency weekly highlights includes: the publication by the Insolvency Service of its monthly insolvency statistics for November 2024, an examination of the meaning of ‘unregistered company’ under section 220(1) of the Insolvency Act 1986 (IA 1986) (East Riding of Yorkshire Council v KMG), analysis of the Commercial Court’s guidance on pleading and proving claims under IA 1986, s 423 (Invest Bank PSC v El-Husseini), plus a round-up of other news and cases for restructuring and insolvency professionals.

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Restructuring & Insolvency analysis: The court dismissed the applicants’ applications to remove and replace the joint administrators. The administrators’ decisions fell within the range of decisions that were open to them, even though further renegotiations with the secured creditor (Desiman) and the purchaser’s ‘chipping’ at the purchase price during turbulent economic conditions eroded the prospect the applicants would receive an economic return in the administration. In that respect, Desiman could be said to have driven a hard commercial bargain, but that was not a circumstance for which the administrators were ultimately responsible. Nor was it sufficient for any of the allegations to be made out. Written by Samuel Parsons, barrister at Erskine Chambers.

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Restructuring & Insolvency analysis: The Court of Appeal has confirmed that the authority to bind a firm for the purposes of its winding up (conferred on partners after the dissolution of a partnership by section 38 of the Partnership Act 1890 (PA 1890)) applies to pursuing causes of action which accrued prior to dissolution. Whether PA 1890, s 38 will permit partners of a dissolved partnership to pursue litigation post-dissolution is a fact sensitive question. The question is whether such litigation is reasonably required in all the circumstances to wind up the affairs of the partnership. Relevant considerations are not circumscribed and will include considerations of prospects of success and cost-effectiveness. In Flohr, the Court of Appeal confirmed a general partner of a limited partnership governed by the Limited Partnership Act 1907 (LPA 1907) was empowered to sue a third party on behalf of the partnership notwithstanding the dissolution and winding up of the partnership. This was so even though the relevant cause of action arose prior to dissolution. Written by James Fagan, Barrister, at Radcliffe Chambers.

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