Limitation Periods

The legislation does not deal expressly with the issue of what limitation periods are applicable to the transaction avoidance provisions. This is an issue which has, however, been addressed in case law. The basic position will be set out in this chapter. In summary, there is no general rule that actions by office holders are not subject to the rules of limitation and the issue of what time limits are applicable would appear to turn on the form of relief that the office holder is seeking. The position will also be affected if the action can be said to be based on the fraud of the defendant. The office holder would be well advised, however, to ensure that, as far as possible, the action is not delayed as this may lead to a striking-out action under the Civil Procedure Rules. Reference should be made to specialist works on limitation periods for further details of this area of law.

Pensions (Bankruptcy Only)

A category of asset that requires separate consideration is the debtor’s pension. A need for transaction avoidance may arise here if the bankrupt has made excessive contributions to his pension in a bid to deprive creditors of these sums. Although formerly a problem, due to the inadequacy of existing avoidance provisions, case law developments meant that such tactics by the bankrupt were to no avail. This area of law is now primarily governed by the Welfare Reform and Pensions Act 1999, the material parts of which came into force on various dates, the earliest being 29 May 2000. Provisions of this Act dictate that the debtor’s entitlements under approved pension arrangements do not form part of the debtor’s estate in bankruptcy. Rights under pension schemes that are not approved are also exempted by regulation. In each of these cases the trustee is, however, able to apply for an order to set aside any excessive pension funding. Relevant case law principles will still govern the affairs of those who were adjudged bankrupt prior to 29 May 2000, and so they are considered in this chapter also. A diagram explaining the various applicable rules appears at the end of the chapter.

Transaction Avoidance in Offshore Jurisdictions

For regulatory and tax reasons, many businesses now choose to incorporate at least part of their corporate structure in offshore jurisdictions. Many of these jurisdictions have strong historical links to England, which is reflected in their legislation and in their adherence to the common law. Leading examples include the Crown Dependencies of Jersey and Guernsey and the Overseas British Territories of Bermuda, the British Virgin Islands, and the Cayman Islands.

Introduction

Since at least the Middle Ages, credit has played a significant role in the functioning of the commercial economy in England and Wales, and it continues to be a central feature of the modern economy. Credit enables goods and services to be traded on a much wider scale than would otherwise be the case. However, for almost as long as there have been credit dealings, there have been debtors who have been unable to meet their obligations, either through circumstances beyond their control or through deviousness. The collective insolvency procedures of liquidation and bankruptcy have traditionally been employed in such circumstances, with the debtor’s available assets (subject to certain exemptions) being used to make payments to creditors. The aim of these collective procedures is to distribute the debtor’s assets among creditors in a manner that is, as far as possible, fair.

Pensions (Corporate Insolvency Only)

Transaction avoidance issues may arise in relation to pensions in the context of corporate insolvency. However, such issues are of a rather different nature from those that arise in the context of bankruptcy and are discussed in Chapter 14. In the bankruptcy context, the issue is avoidance of transactions by the bankrupt (in the form of contributions to pension schemes) that have diminished his estate. Avoidance is therefore sought for the benefit of creditors. In the present context, the issue is avoidance of transactions by the insolvent company or others that have diminished the funds of an occupational pension scheme in respect of which the insolvent company is the employer company. Avoidance is therefore sought for the benefit of the members of the scheme rather than the general body of creditors of the company.Moreover, if the company has received assets under the transaction in question and avoidance of the transaction is sought with a view to recovering such assets, such avoidance will operate to the detriment of the general body of creditors. The relevant provisions and principles are explained more fully below after a few words about pension scheme deficits and the Pensions Regulator.

Evidence Gathering

The Insolvency Act 1986 recognizes that an office holder, as a stranger to the affairs of the debtor, may encounter problems in trying to unravel the debtor’s past dealings, something which can be exploited by those who have entered into voidable transactions. In personal insolvency the debtor, his spouse, and his associates may well wish to conceal information about the debtor’s dealings in order to protect the transactions that the office holder is seeking to attack. Similarly, in corporate insolvency, the officers of the company and others who are involved in the company’s affairs may wish to suppress information. This situation is not helped by the fact that some of the avoidance provisions, in particular those dealing with preferences and transactions defrauding creditors, contain elements which may be difficult for the office holder to prove.

Extortionate Credit Transactions (Insolvency Act 1986, Sections 244 and 343)

Companies and, in particular, individuals in financial difficulties may suffer from an inequality of bargaining power with lenders. Unscrupulous lenders may exploit the debtor’s need for cash by demanding an excessive credit rate, fee, or equity. Debtors may be left with little choice but to comply if other lenders refuse to give them credit. Naturally, a high credit rate may be justified as a potential debtor with financial difficulties may be regarded as a credit risk; however, the rate charged may go far beyond that which would reflect this risk. In these circumstances, the lender is getting far more than he would have been able to obtain if the rate or terms of the transaction had been entered into fairly. This may be seen to disadvantage other creditors who have been reasonable in their dealings with the debtor. The legislation accordingly provides for such transactions to be adjusted, on grounds that they constitute extortionate credit transactions.

Avoidance of Unregistered Company Charges (Companies Act 2006, Section 859H)

The presence of a charge over a company’s property will reduce the likelihood of an unsecured creditor obtaining payment, or at least a substantial dividend, in the insolvency of the company. The prudent unsecured creditor will bear this in mind in assessing whether to advance credit to a company, and at what level. For this reason a system of charges registration has long been employed, initially with a separate scheme for England and Wales and another for Scotland, in order that unsecured creditors can be aware of the presence of charges. This system has recently been revised and simplified and a single scheme now applies in the UK with effect from 6 April 2016. Charges created by UK companies prior to that date remain subject to the previous regime.

Cross-Border Transaction Avoidance

Significant differences in format and underlying policies may be noted in transaction avoidance provisions worldwide; indeed varying avoidance provisions are only one aspect of the lack of uniformity in the world’s insolvency laws. These differences may assume great practical importance in the insolvencies of companies or individuals with dealings in more than one country. The insolvency laws of more than one jurisdiction may be invoked: for example, a company may be wound up in more than one country, or enter into concurrent rescue procedures, such as a British administration procedure and a US Chapter 11 procedure. In addition, litigation arising out of the insolvency proceedings may be pursued in more than one country. Recourse to the laws of an overseas jurisdiction may occasionally be had where the laws of the country in which the winding up is being conducted are inadequate to deal with the issues that have arisen.

Avoidance Powers Under The Companies Act 2006

As an alternative, or in addition, to the avoidance provisions available under the Insolvency Act 1986 a transaction may, in an appropriate case, be challenged under provisions of the Companies Act 2006 as a transaction exceeding constitutional limitations. Other directors’ duties may also be raised in an action, such as the duty to act in good faith to promote the success of the company.