Topic 3: Insolvency Flashcards
Does insolvency always mean the company is going bust?
NO; it can also just mean that the company has to sell its bad debts and keep the good ones
What are the key principles of Insolvency?
1) Shift from shareholder perspective to creditors
2) Office-holder will take charge of assets as they are
3) Only beneficial assets in company ownership can be distributed
4) Creditors share assets collectively (NOT eqally, via equity)
What is the priority of the Insolvency Procedure?
1) Fixed charge holders
2) Insolvency expenses
3) Preferential creditors (e.g. employees)
4) Floating charge holders
5) Unsecured (Provable) creditors
6) Shareholders
What is the Pari Passau Principle?
Does not allow the parties to disrupt the hierarchy of creditors (Not even by contract)
(Re Jeavons, ex parte Mackay)
Is the Pari Passau Principle mandatory?
YES, always applies (However, IATA v Ansett)
Difference between cash flow and balance sheet insolvency?
Cash Flow = Debtor is unable to pay debts as they fall due
Balance Sheet = Debtor’s inability to pay its debts if its assets are less than its liabilities
What is the Anti-Deprivation principle?
A party cannot contract to deprive itself of an asset in the case of insolvency, such a contract will be void
(Re Harrison, ex parte Jay)
When does the Anti-Deprivation rule NOT apply?
1) Removal/deprivation of valueless assets (Money Markets v London Stock Exchange)
2) Forfeiture of a lease (Whitmore v Mason)
3) Ipso Facto clause that does not attempt to deprive asset from creditor
What did the case of Belmont decide regarding the Anti-Deprivation rule?
1) Rule may apply to any agreement that gives another party an asset due to a creditor
2) Courts should investigate whether purpose of agreement was to evade the rule
3) Commercial transactions should not be interfered with as long as made in good faith
Will the Anti-Deprivation rule invalidate commercially sensible transactions?
NO; as long as they were not intended to interfere with the insolvency regulations
