Litigation - Corporate insolvency legislation

Prior to the Enterprise Act, the IA 2000 made a number of important amendments to the IA 1986. The IA 2000 was the result of a review process, which began with the publication in September 1999 of a joint Treasury and DTI (now BIS) working group consultation paper, setting out proposals for corporate insolvency law reform. The proposals were then subject to a further review and the report of the review group was published in November 2000.

In summary, the IA 2000: 

• Introduced a company voluntary arrangement (CVA) moratorium for small companies facing financial difficulties.
• Provided for unlicensed practitioners to be recognised by the Secretary of State to act as nominees and supervisors of CVAs.
• Changed the effect of approving CVAs so that they are binding on all creditors, including unknown creditors.
• Extended the moratorium in administration to prohibit peaceable re-entry by a landlord without the consent of the administrator or the leave of the court.
• Amended the Company Directors Disqualification Act 1986 (CDDA) to allow directors to provide voluntary undertakings in disqualification proceedings to avoid court proceedings.
• Introduced an enabling provision allowing the Secretary of State to implement UNCITRAL, the UN's model law for cross-border insolvencies on recognition of foreign insolvency procedures and office holders. 

In addition to UK legislation, insolvency work is becoming increasingly international and often involves cross-border aspects. Advice may therefore be needed from local lawyers in other jurisdictions, although there are some guiding principles at both UN and European Union (EU) level. The EU Regulation on Insolvency Proceedings (1346/2000) now applies in all EU member states (except Denmark) and establishes the principle that any collective insolvency proceedings are to be opened in the member state where the debtor has their centre of main interests.

It is often important to determine whether a company is insolvent or not for many reasons. For example, insolvency is a prerequisite for the initiation of formal insolvency proceedings and, if a company is insolvent when it enters into certain transactions and then formal insolvency proceedings are commenced within a specified time, that transaction may be open to challenge – particularly if the transaction involves transferring assets at an undervalue. In addition, whether a company is solvent or not will determine whether a voluntary liquidation is controlled by its creditors or members. Directors also owe certain duties once a company is insolvent. 

Certain company law procedures may only be taken by solvent companies, such as a members voluntary liquidation, and the directors may need to make a statutory declaration of solvency stating that the company is solvent and will remain so for the next 12 months.