INSOLVENCY REGIME

Posted: December 22nd, 2022

INSOLVENCY REGIME

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Insolvency Regime

Introduction

When discussing about insolvency law, it is elemental to understand its functionality within the legislative premise which is promoting transparency, economy and fast problem resolution. In definition, insolvency refers to the inability by an organization or an individual in fulfilling its financial duties to lenders facilitated by accrued debts which are due (Investopedia 2003). Prior to engaging in insolvency proceedings, the person or company is most likely to establish payment arrangement in collaboration with a creditors. In the event the insolvent company or person is entirely unable to service the debt, the insolvency law provides protection to these entities with inclusivity of bankrupt entities (Investopedia 2003). One of the main components of this law is ensuring that insolvency issues are resolved quickly in order to circumvent the inherent disruptive impact on the community (Keay & Walton 2017). A prolonged resolution process is often considered as being detrimental as it increasingly deteriorates the debtor’s asset value. In order for insolvency law to impact a positive effect on both stakeholders, creditors and debtors, acceptance is warranted from these entities with the requirement of being transparent and public in nature in order to assure impartiality and avoid secret compromises and resolutions.

Principles of Insolvency Law

1. Administration

The insolvency law has various principles that serve several purposes in ensuring the overall effect of this legislation in resolving insolvency is effectively executed. One of the core principalities is administration. It offers the company a chance for recovery and successful restoration if applied appropriately (Keay & Walton 2017). For company to enter into administration, this mandate is passed by the court. The selection of an administrator can be through voluntary appointment by the company directors or by the legal system. Firstly, the appointed administrator takes control of the company. At this juncture, it is important for the establishment to ensure this particular individual is licensed as insolvency practitioner (Mevorach 2018). The principal goal driving administration is to utilize the firm’s assets to facilitate repayment of creditors as fully and quickly as possible without giving any particular preference.

The duration of time is normally 2 months which is equivalent to 8 weeks. Within this timeframe, the administrator is expected to effectively communicate with the creditors through formal administrative proposal that clearly indicates the plan of action that will be executed in debt repayment (Keay & Walton 2017). Additionally, this proposal highlights the anticipated outcome of the course of action taken as well as the company’s financial status. Some of the core benefits associated with administration is insolvent companies or individuals are protected from any legal suits pursued by the creditors (Keay & Walton 2017). It is also important to note that in the administration phase, this process usually finalizes after a one -year term. An exemplary case is Midland which is currently placed under administration by Prime Bank. This event occurred under the company failed to service a loan by defaulting. The bank acted based on the insolvency Act 2015. The administrator, Ponangipali Venkata Raman Rao is the current administrator. This bank is warranted to reinforce their hold on the floating charge which is a direct claim over all the company assets existing upon insolvency. The administrator’s function as instructed by the Midland bank is the provisioning of the company’s financial status as well as any available options effective in assuring asset resale in order to offset the defaulted debt.

• CVA

The second principle is often intertwined with administration. It is applied when the company demonstrates the highlighted characteristics of possible recovery. At this juncture, the administrator is involved in establishing a formal agreement with the establishments or private entities owed by the company without necessarily having to resort to business liquidation (Finch & Milman 2017). This agreement is known as the company voluntary agreement (CVA). One of the main advantages of this principal is the insolvent company is a provided an opportunity for structuring, lease agreement negotiations, and ending unprofitable organizational endeavors.  Additionally, the company is also allowed to pay back debt in form of reasonable monthly payment (Xie 2016). It is important to note that the two parties coming into agreement are legally bonded the four are mandated by law to fulfill their responsibilities as outlined in the CVA. One of the company proposing the possibility of a CVA is KPMG to facilitate rent deductions and cite closures. The company has been facing a decline in its instore sales which was also observed in their total basis estimations. This company as well as other causal and retail establishments such as Pound World and Prezzo has reorted to CVA in order to restructure and recover from these declines in sales.

• Liquidation

Liquidation is the third face which occurs when a company or an establishment is incapable of recovering from its financial problems. Upon request, the company can be placed for voluntary liquidation where it is dissolved and all the assets are disbursed (Mevorach 2018). The role of an administrator at this juncture is to avail protection to the company’s directors in the event where these legal suits charging these individuals with wrongful trading. Different forms of liquidation occur depending on the nature of the process. Whether voluntary or mandatory, this face is quite complex and imposes numerous implications on the company’s management. The compulsory liquidation often occurs when a winding-up petition is forwarded by the creditors. This step is considered seriously as it is a direct request for the company to shut down its operations and avail the necessary assets which upon resale can allow the creditors to reclaim their debts (Omar 2016). It is very necessary for a company to seek consultation from a licensed insolvency practitioner at this stage in establishing a solution effective in avoiding liquidation.

The creditor’s voluntary liquidation is a request set forward by the company or insolvent party that wishes to halt its operations and trading. This decision is made from a close analysis on the financial status of the company and whether or not it is in a position to generate substantive finances necessary in clearing its debt (Omar 2016). Companies which often result in closure are setting that continued trading is orphan detrimental thus worsening its relationship with the creditors (Finch & Milman 2017). Closure leads to the release of assets which are then sold. The resulting dividend are utilized in paying the creditors.

 An elaborate case of companies facing liquidation is MH Carbon which succumbed to voluntary liquidation. The company dealing with the insolvency case was Parker Andrews based in Norwich. MH Carbon contacted their creditors concerning the liquidation. However, the non-insolvent stakeholders who had purchased the carbon credit were not notified concerning the liquidation. This is mainly because 100% of its shares were under the PCS Nominee Limited. This failure to notify shareholders of the company raised significant concern as they purchasers perceived this as an act of fraud. There have been many issues associated with the process of insolvency based on anomalies identified in the case. In comparison to administration, this method is limiting and allows for loop holes whereby clients can be directly swindled. Firstly, MH Carbon did not file its annual accounts for 2013 therefore raising questionability of the legitimacy of its insolvency and decision to voluntarily liquidate. This problem has no possibility of occurring in administration as the administrator is directly in charge of evaluating the company’s accounts and records to determine its qualification to undergo liquidation in case there is limited chance of recovery.

Fairness of Insolvency Law and Regime

In evaluating insolvency law and regimens, call is proposed that the consideration of Human Rights plays a significant role in influencing the administrative policies constituting this legislation. The assessment of various insolvency cases often indicates that arguments associated with fairness and appearance to human rights are normally at the peripheral (Omar 2016). With this in mind, the correlation between fairness and insolvency is quite unclear there for requiring an in-depth analysis on whether or not they are considerate of fair treatment of all involved parties. According to the layman’s understanding, the main functionality of insolvency proceedings is to avail protection to the creditor, debtor, stakeholders, lenders and employees (Xie 2016). Basing on this fact, it has become central in eliciting conflict in ensuring the fair distribution of the fiscal distress often experienced by the involved parties when it comes to debt collection and servicing.

In terms of protection offered, insolvency fails to offer the same level of consideration to the parties involved.  Based on the procedurals theory, access of organization in the disbursement of the debtor’s assets to the indebted lenders and creditors in order to limit the inconvenience caused to these entities say they were to collect their debts individually (Omar 2016). According to the proceduralists understanding of this process, creditors benefits more. However debtors are affected negatively as their assets can either be dismembered or dissipated in the Instance where the creditors failed to come to an agreement on distribution of available assets. In addition to this when considering the element of security concerning the death acquisitions insolvent establishment or individual, a secondary and fairness factor is identified (Tolmie 2013). Case in point, secured creditors are usually in agreement with the enactment of an insolvency regime in order to and sure there is a collective settlement. However for unsecured creditors, they place an increased risk to the debtor as in the likelihood of successful execution of the insolvency regime, the settlement is usually higher due to the lack of any form of security or assurance at the point of loan acquisition.

The theory of traditionalism also provides a differential view on the fairness of insolvency law. This principle aims at emphasizing the fundamental value of upholding traditional values, human rights, mores (Omar 2016).  It is also imperative to Note that, perspective disregard the essence of compliance to the absolute priority rule. In addition to this, it heavily relies on evaluating the interest and concerns of the weaker parties caught in the Crossfire of an insolvency regime (Finch & Milman 2017).  These entities include tort victims, workforce and stakeholders who lack any form of legal rights. Basing on this theory, insolvency is a non-inclusive law which is highly inconsiderate to non-creditor parties such as the communities and the workforce who are directly or indirectly affected by the outcomes of this policy once is implemented to effect collective settlement from an insolvent establishment.

 When analyzing CVA and fairness, several aspects are considered. Firstly, it is not as public as the other processes there for it does not impact a negative effects on the insolvent company (Xie 2016). By offering privacy, the company is able to resolve the matter with its creditors without any further interference. Secondly it offers great protection to the insolvent party as any legal action that might happen is stayed (Tolmie 2013). This means that upon agreement between the creditor and the insolvent Entity, the latter is protected from petitions. Additionally, in the event where the insolvent company had experienced bank account restrictions as an outcome or a request in a petition, they are able to file for a validation order (Virgos, Soriano, Garcimartin, & Alférez 2004). Once it is approved, it provides a directive for account restoration by the opening. It is also important to Note that secured creditors are also offered protection which is critical for the seamless execution of a CVA (Finch & Milman 2017). Component of fairness is once the CVA is agreed upon the creditors cannot make any repayment demands as long as the insolvent remains compliant to the agreed terms. Any additional charges or interests are restricted from accruing in order to ensure that the creditor can manage facilitating or servicing the debt.

Conclusion

Insolvency law is fundamentally important policy in the global society based on its effect on the economy. It plays a significant role in dealing with the increased cases of debts that are on an upward trajectory in the modern day setting. By redirecting resources to provide the much-needed assistance by financially-troubled enterprises, this law assures effective restructuring and avoidance of insolvency. In terms of fairness, insolvency law offers protection to both the creditor and the insolvent party. The main recommendation would be to offer inclusivity of non-credit such as communities and the workforce for improved outcomes. From evaluating the CVA, its terms and regulations as well as operations are fair to both parties involved in the agreement therefore driving a high level of adherence needed in assuring the debtor can service accrued debts.

References

Finch, V, & Milman, D 2017. Corporate Insolvency Law: Perspectives and Principles, Cambridge, Cambridge University Press.

Investopedia 2003, Insolvency Definition. Available from https://www.investopedia.com/terms/i/insolvency.asp. [21 November 2019]

Kashyap, A, 2018. Corporate insolvency law and bankruptcy reforms in the global economy, Hershey, IGI Global.

Keay, A, & Walton, P 2017.  Insolvency law: corporate and personal, Bristol, Jordan Publishing (GB).

Mevorach, I 2018. The future of cross-border insolvency: overcoming biases and closing gaps. New York, Oxford University Press.

Omar, P 2016. International insolvency law: themes and perspectives, London, Routledge.

Tolmie, F 2013. Corporate and personal insolvency law, London, Routledge.

Virgos, M, Soriano, MV, Garcimartin, F & Alférez, F J 2004. The European insolvency regulation: law and practice, Kluwer, Kluwer Law International B.V.

Xie, B 2016. Comparative insolvency law: the pre-pack approach in corporate rescue, Gloucestershire, Edward Elgar Publishing.

Ziegel, J S 2003. Comparative consumer insolvency regimes: a Canadian perspective, Bloomsbury, Hart Publishing.