“It is a basic principle of insolvency law that rights prior to insolvency should not be interfered with” Discuss the veracity of the above statement in light
of the law governing insolvency in Uganda?As a basic principle governing insolvency law , it is indeed true that rights prior to insolvency should not be interfered with[1], this is simply because that at that time the debtor has not yet been declared insolvent and therefore all rights accruing to him and his creditors and third parties should remain as they are, it follows from the foregoing therefore that this question requires me to examine whether this basic principle is administered in absolute or to it there admits some exemptions and if so what are they in light of the insolvency act 2011 of Uganda and the relevant case law. I am therefore going to first discuss the main body of rights that exist prior to insolvency and show where exceptions exist how these rights are affected and the justifications for doing so.
GENERAL OVERVIEW THE ESSAY.
This essay seeks to examine the extent to which the basic principle of insolvency law to the effect that the rights prior to insolvency should not be interfered with is true. The essay is divided in three limbs, in the first limb, am going to define what insolvency means and give a brief background to the evolution of the law of insolvency and some of its type and its main aim. In the second limb I am to analyze the extent to which it is true that as a basic principle governing insolvency law rights prior to insolvency should not be interfered with. In doing so, am to first explain in detail what is basic principle means and why is it justified, this is because all other principles governing insolvency emanate from this first basic principle and it becomes imperative to explain it in detail, references will be made to the relevant sections under the Ugandan insolvency act 2011 and decided cases from other jurisdictions whose insolvency act is similar to that of Uganda[2]. I will then turn to consider the exceptions to this basic principle giving the rationale behind each and finally I will draw up my personal conclusion and show whether the above state is wholly right or not.
INTRODUCTION.
The
term insolvency comes from the word insolvent which ordinarily means the state
of not being able to pay one’s debts[3] as
they fall due or having an excess of liabilities over assets[4]. Basically there are two limbs of insolvency,
first is individual insolvency technically known as bankruptcy and the second
type is liquidation which refers to corporate insolvency. There are three types
of insolvency that is to say balance sheet insolvency[5],
cash flow insolvency[6]
and ultimate insolvency[7]. A
person can petition for an insolvency order in respect of a debt of 50 currency
points in respect of an individual and 100 currency points for a company[8]
Origins of insolvency
law.
It
is clear from the sources that debt was a powerful and frequently troublesome
factor in ancient society. There is ample evidence of lending and borrowing in ancient
Greece. Hesiod speaks of the loan of seeds and implements between peasants,[9]
other authors speak of small borrowings to cope with unforeseen crises and
substantial loans among the wealthy to support an elite lifestyle.
However
in a society that facilitates the use of credit by companies and individuals
there is a degree of risk that the creditors[10] will
suffer because the debtors[11]
have become unable to pay their debts[12] on
the due date.[13]
If a number of creditors were owed money and all pursued the rights and
remedies available to them (for example, contractual rights; rights to enforce
security interests; rights to set off the debt against other obligations;
proceedings for delivery, foreclosure or sale) a chaotic race to protect
interests would take place and this might produce inefficiencies and unfairness.
It is because of the unfairness that would result as creditors try to enforce
their rights that insolvency law was developed with the main aim of replacing
this free-for-all with a legal regime in which creditors’ rights prior to
insolvency are preserved and their remedies are suspended and a process
established for the orderly collection and realization of the debtors’ assets
and the fair distribution of these according to creditors’ claims.[14] The principles governing insolvency are a
blend of company law, equity and trusts, property law and other aspects of
commercial law generally.[15] Dalhuisen notes that as bankruptcy is at the
same time a creditor’s remedy as well as a substantive device and as such a
complicated, composite procedure, intertwined with many other areas of the law,
like personal law, company law, law of securities and priorities, contract law
and sometimes also criminal and public law, it is all the more difficult to
rely on a general approach without regard to the particular situation, the
nature of the rules involved, and areas of the law affected[16].
These other laws determine the pre-existing rights and interests of debtors,
creditors and third parties at the time of the adjudication[17].
In
Uganda under the companies act cap 110 originally insolvency of corporations
was governed by the bankruptcy act cap 67 but with the 2012 amendment of the
companies act, corporate insolvency is now governed by the insolvency act 2011[18],
the insolvency act 2011 also repealed the bankruptcy act and it is now replaced
by the insolvency act of 2011 which is the same legislation that governs
individual insolvency.
Analysis
of the basic principle.
Professor
Goode[19]
notes that, corporate insolvency law recognizes the all rights accrued under
the general law prior to liquation. That this is the basic principle upon which
all other principles that govern insolvency are founded. It should be noted
that though he makes reference to corporate insolvency in particular because it
is what he was writing about, this principle applies both to individual and
corporate insolvency as a whole. He further explains that this principle is of
cardinal importance, its effect being that relative entitlements created before
liquidation are preserved so that insolvency law will in general respect the
priority of proprietary or contractual rights to counter vailing personal
claims (and thus secured over unsecured claims). He makes a very important
observation to the effect that in line with this principle, the general rule is
that;
“Liquidation
(insolvency) does not of itself terminate contracts or extinguish rights,
though it
does inhibit the pursuit of remedies”
The
important point is that insolvency whether personal or corporate is a
collective proceeding to enforce rights and not to establish them.[20]
So the starting point of insolvency law is that rights accrued prior to
insolvency proceedings will be respected.
This
basic principle of insolvency is reflected in two sections of our insolvency
act. First is under section 20 (3) which is to the effect that the bankruptcy
order made under (1) or (2) shall declare the debtor bankrupt and shall appoint
the official receiver[21]
as the interim receiver of the estate, for the preservation of the estate of
the bankrupt. In my view, the mere fact that the official receiver’s main role
is to preserve the estate of the bankrupt after being declared bankrupt shows
that all rights that were created prior to insolvency over the estate of the
debtor are preserved and remedies are
suspended except as proved under insolvency . section 27 brings it out more
clearly in a sense that it provides that upon the making of a bankruptcy order,
the estate of the bankrupt vests first in the official receiver and then in the
trustee without any conveyance, assignment or transfer no proceedings, execution
or other legal process, distress may be commenced or continued against the
bankrupt or his estate except with court’s leave or written consent of the
official receiver. This in effect is the
same as stating that all rights prior to insolvency should not be interfered
with though the remedies are suspended since insolvency is a collective
proceeding to enforce rights in order to achieve fairness to all creditors.
At
this point several questions arise, first being when does insolvency commence? This question is important because in order
for us to deter the question of rights acquired prior to insolvency, we should
know when insolvency both for the individual and the company commence. The
second question that a rise is, whose rights are we talking about, third is what
are these rights, fourth is does this
basic principle apply in absolute without exceptions and lastly how is this
basic principle reflected in the Ugandan insolvency act since the question
requires me to discuss the veracity of the statement in light of Uganda
context. All these questions are thoroughly discussed below.
It is important to first dispose off the
question of when does insolvency commence so as to distinguish rights that
exist prior which should not be interfered with, from those that may be created
after commencement of insolvency which are not envisaged in this principle.
Section 20 (5)[22]
is to the effect that bankruptcy shall
commence on the date on which the bankruptcy order is made thus as for the case
of individuals all rights prior to the court giving a bankruptcy order to
whoever may have petitioned it to declare the debtor bankrupt are reserved. For
the case of corporate insolvency, it commences when the resolution is passed by
a company for voluntary liquidation[23].
However in all other cases liquidation of a company by court shall be taken to
commence at the time of presentation of the petition for liquidation.[24]
It becomes imperative to also consider
whose rights we are talking about in order that one gets a clear picture of
what I am trying to discuss. As a general rule, most legal systems recognize
only the acts of those who are defined as ‘persons[25]’
and at law a person is construed to mean both a natural (individual) and an
artificial person (company). That being the case, It should be noted that there
are mainly three parties that are the main subjects of pre insolvency
transaction, the debtor, the creditor and third parties (bonafide purchasers),
other parties for example the debtor family member are auxiliary. It follows from the fore going that when we
talk of rights, we mainly mean the rights as they accrue to the debtors, the
creditors and third parties who may either be an individuals or corporations
prior to insolvency.
The next question that arises is what is
a right? And which rights are being referred to here? A right means title to or
interest in any property or any other interest or privilege recognized and
protected by law or any freedom to exercise any power conferred by law[26].
It follows from the outgoing that the term rights as used under this principle
is to be construed in light of the above definition. The question as to what
rights are we talking about here is answered by looking at each group, to begin
with is the debtor. Having it at the back of our mind that this may be a
natural person (individual) or an artificial person (corporation) we should note
that as a natural person he enjoys all rights that are guaranteed under the
constitution for example the right to life, right to equality and freedom from
discrimination, the right to personal liberty, respect of human dignity and
protection from inhuman treatment, protection from deprivation of property[27]
etc it thus follows that while looking at individual insolvency, our minds
should not be limited to his right to property simply because insolvency mainly
affects this right but we should also focus to other rights say the right to
respect a person’s dignity and protection from inhuman treatment. This is
because the basic principle does not distinguish as to what type of rights,
secondly insolvency does not affect only a person’s economic rights as many
think but also affects his other rights that is why the principle strives to
reserve rights without categorizing them. As for the case of a corporation as a
debtor, its rights prior to insolvency are somewhat unique since it is an
artificial person[28],
thus it enjoys rights such as owning property in its own name, suing or being
sued in its own name, transacting business in its own name among others
It
imperative that we get a broader insight of some of these rights for a better
understanding of the basic principle;
Article 26 of the constitution recognizes
every person’s right to own property individually or in association with
others. The term person used here connotes both an individual and a company
thus this right is enjoyed by any of the two. This right is recognized and
preserved as a pre existing right of a debtor under insolvency law which should
be interfered with. It should be noted that
though section 27.is to the effect that property of a debtor upon
issuance of an insolvency order vests in the official receiver and secondly
that it is a basic principle of insolvency law that upon declaration of
insolvency the debtor ceases to be the beneficial owner of the property, this
should not be interpreted to mean that the law interferes with his title to properties
held by him but rather as Kirby j
puts it in his dissenting opinion in the case of commissioner of taxation v linter textiles Australia ltd[29]that
“in the majority view, it is not correct to say that the company’s beneficial
ownership ceases on it’s going into liquidation, rather the position is that
the company holds its property beneficially but subject to the statutory scheme
of liquidation under which the liquidator is to pay creditors and distribute
any surplus among members” in my view I subscribe to this thinking because it
reconcile with the principle that all right prior to insolvency should not be
interfered with .and I rightly belive that it is one of the reasons as to why
section 14 reserves all the surplus in case of any after paying off the
creditors to be given to the debtor.
Related to the above the law recognizes the
debtor’s right to matrimonial home and all tools, books and other items of
equipment necessary to the bankrupt for personal use in the course of
employment or business and the bankrupts clothing, beddings and provisions
necessary for satisfying the basic needs of the bankrupt or his family as a
special right to property which is enjoyed in the absolute and is never
interfered with even after the commencement of insolvency[30]
Secondly both an individual and a company
being persons under the law, they enjoy the right to contact or enter into
transactions in their own name because in the very first place they have legal
capacity to contract. It thus follows that where they by virtue of exercising
their contractual rights an individual or a company may enter into transactions
to acquire assets or dispose them off to any person willing to buy them. Thus
title of the company or individual to assets acquired before the commencement
of insolvency and their rights in respect of assets which any of them has
contracted to dispose of remain valid and effective despite either of them
being declared insolvent. Where a company has entered into a transaction to
dispose of its assets the contract is not terminated by the company going
insolvent but if the contract is repudiated by the liquidator, the other
parties remedies are confined to proving in liquidation damages for breach of
contract the measure of such damages being the same as if the company had not
gone in liquidation.[31]
Related to the above, assets which the
company or an individual as a debtor holds as an agent or a bailee or as a
trustee for another person are not affected[32]
and cannot be applied by a liquidator in paying the company’s debts[33]
thus where a company offers shares for subscription and undertakes to pay the
money received into a separate bank account until the stock exchange listing is
obtained for shares the money remains property of the subscribers inequity[34]
For the case of executory contracts
entered into by the company or an individual prior to insolvency, they are not
affected whatsoever except in as far as
they so expressly provide or unless they are personal in character or create
rights and obligations the extent of which are determined by personal
characteristics of the original parties[35]
. As for the case of rights of employees
created by virtue of a debtor signing employment contracts with workers, all
these rights are preserved thus if a liquidator sells or disposes of the whole
or part of the company’s business undertaking as a going concern, the rights, powers
and liabilities of the company as regards its employees prior to insolvency are
transferred by law to the purchaser or disponee of the business undertaking as
part of it. However these rights are only interfered with on liquidation to the
extent that they will rank 4th among the preferential debts and in
as far as the extent of payment is concerned it is limited to wages or salaries
of up to four months[36]
and the rest is claimed as other unsecured creditors.
Where rights have been created by virtue
of a debtor signing insurance contracts say where a company which has insured
against a certain risk goes into liquidation, the benefit of the insurance
contracts will still form part of its general assets and claims a rising or
those that have arisen under the policies, the liquidator must thus apply the
amounts received from the insurers in the same way as the company’s other assets
except where the contract covers the liabilities of the company or debtor to
third parties in which case the companies rights under the insurance contract
vest in the third parties.
As
for the case of an individual’s or the company’s right to sue in its own name,
this right also remains intact however as for the case of a company the
liquidator has powers to sale this right out to a purchaser for value[37].
For the creditors who may also be
individuals or corporations, their main rights which are being envisaged in
this basic principle are basically economic since they do nothing more than
advance credit to the debtor which credit is property, therefore creditors in
most cases are concerned with how they can enforce these rights should the
debtor be declared insolvent. The economic rights being envisaged here include
contractual rights; rights to enforce security interests; rights to set off the
debt against other obligations; proceedings for delivery, foreclosure or sale,
all these rights must exist prior to insolvency. The basic principle reserves the creditors’
right to their property[38]
owed by the debtor prior to insolvency but suspends the perusing of remedies
under the general law should the debtor be declared insolvent. Creditors may be
secured or unsecured, in all cases the rights of a secured creditor prior to
insolvency are never interfered with, that is why even after the issuance of a
insolvency order he can still sale off the collateral without first seeking court’s
or the receiver’s permission except at his own will, he chooses otherwise as
provide for under section 11(2) of the act. For the unsecured creditors[39]
their proprietary interests in the properties of the debtor is reserved but
only affected to the extent that they will rank last when it comes to priority
of payment of debts[40] as
compared to secured creditors
The
right to set off as amongst creditors who have been mutual credits, mutual
debts or other mutual dealings between a company or an individual person is
preserved[41]
under section 9 of the act and is only interfered with where a person is
reasonably expected to have foreseen that the debtor would be likely to be
unable to pay their debt at the time of giving credit in which case such a
creditor is not allowed to set off.
As for the case of third parties right
the act provides that these should be left intact thus under section 19(6)
though court is given power to set aside any voidable transaction, its power to
do so is will not affect the title or interest of a person in property which
that person has acquired from a person other than the insolvent for value
without notice since such a person is deemed t have acted bonafide[42]
Having looked at how some rights are
preserved, it should be noted that these rights cannot be exhaustively
discussed because we are limited by space, it thus becomes imperative to note
that this basic principle does not operate in absolute and to it there admits
some exceptions of which some we have already discussed above but it is
important to look at the general exceptions that affect this basic principle
under the act;
It should be noted that there exists
valid grounds upon which court will interfere with the pre-existing rights but
in summary, court will do so because transactions under which those rights were
created are in contravention of the anti-deprivation rule or in contravention
of the parri pasu principle, or they are transactions at undervalue, or
preference transactions, or extortionate credit transactions, or tractions
creating voidable charges or insider dealing transactions. This is because in
all these transactions the main objective of insolvency law of establishing a
proper procedure of realizing the property of the debtor any fairly
distributing it amongst his creditors is defeated if such rights created under
such transactions were not interfered with thus the debtor will hide his
property or will favour some creditors at the expense of the others. It follows
therefore that;
Significant exceptions to the basic
principle are necessary in order to ensure fairness and treat creditors with
the same claims equally before the law; it is to this effect that insolvency
law dictates that:
All pre- proprietary rights created by way
of contractual provisions under which insolvency is the trigger for removal of
assets from the insolvent’s estate contrary to the anti-deprivation rule[43]
will be interfered with thus under section 19 of the act a liquidator,
receiver, a member or contributory, trustee or a creditor is given power to
petition court to set aside all voidable transactions stated under section 15,
16, 17 and 18 of the act. It becomes important to look at what these
transaction;
First are preferences[44]
captured under section 15 of the act to the effect that a transaction involving
the transfer of property by a company or an individual to another is voidable upon application by a liquidator,
creditor or trustee where the transaction is made on account of an antecedent
debt[45]
or at the time the company or individual was un able to pay their debts within
the year preceding the commencement of liquidation or bankruptcy unless the
debt was incurred in the ordinary course of the company’s business and the
transfer was made not later than 45 working days after the debt was incurred[46].
Second is where a person as a result of such a transaction receives more
towards the satisfaction of the debt than would otherwise have received or be
likely to receive under liquidation or insolvency.[47]
Transactions at under value; these are
captured under section 16 of the insolvency act, generally a transaction is
deemed to be that of under value where it was entered into within one year
preceding the commencement of insolvency where the transaction involved
disposing of the insolvents estate without receiving a substantially equivalent
consideration[48]
or when at the time the transaction was entered into the company or individual
was unable to pay his debts or where he or she was engaged or about to be
engaged in transactions for which its, his or her financial resource were
unreasonably small or where the company advances credit knowing that the
corporation or individual would not be unable to pay their debts[49],
or where the company or individual became unable to pay its , his or her due
debts a result of the transaction or
where the transaction was entered into to aid the insolvent to put the assets
beyond the reach of the creditors[50].
The other type of
pre-existing rights that are subject of interference are proprietary rights and
interests created under transaction of voidable charges as captured under section
17 of the insolvency act. It follows therefore that a transaction providing for
or creating a charge over company assets or those of the individual in respect
of a debt is voidable on application by a receiver or creditor , liquidator etc if the charge
was created within the year preceding the commencement of insolvency on an
account of antecedent debt[51]
unless the charge secures the actual price or value of the property sold or any
other valuable consideration is given by a person making a charge prior to
execution of the security and immediately after the charge was made the company
or individual was able to pay its debt or where the charge in substitution of a
charge given more than one year preceding the commencement of insolvency
Lastly section 18 is to the effect that insider dealing transactions
entered into by a company or individual relating
to any assets of the insolvent are voidable on application by a receiver or
liquidator, trustee where the transaction is with between the range of people
considered to be insiders as capture in section 18(1)(a)-(c)[52]
and unless a contrary is proven such a transaction is taken to be a preference
or a transaction aimed at aiding the to put his assets beyond the reach of his
creditors and this applies to transactions entered into within one year
preceding insolvency.
In as far as the
personal rights of a debtor as a natural person are concerned, his right to
practice any lawful profession, trade, occupation or business in Uganda
guaranteed under article 40 (2) of the constitution is greatly interfered with to
the extent that such a person upon being declared bankrupt he is disqualified
from being appointed as judge or acting as a judge in any court in Uganda or
from holding the office of justice of peace or any other public office for a
period of five years except where such an individual obtains from court a
certificate to the effect that his bankruptcy was caused by a misfortune
without any misconduct on his or her part[53]. Related to the above, section 54(1)
makes it an offence for an undischarged bankrupt to obtain credit without
discloser of his status yet prior to insolvency he is not meant to do so, thus
in as far as entering business transaction he is meant to disclose his status
to the other party.[54]
Though a person enjoys a pre existing
right of a person to participate in the affairs of government individually or
through his or her representation in accordance with the law as guaranteed
under article 38 of the constitution, this right is interfered with to the
extent that section 45 (1) (b) together with articles 80(2) and 102 disqualify
a bankrupt from being a member of parliament or becoming a president of Uganda.
In conclusion it
is my view that to a great extent that rights prior to insolvency should not be
interfered with, the exceptions that are admitted to this basic principle of
insolvency law are justifiable on ground the best interests of justice and the
main of insolvency law of realizing all the properties of the insolvent and distributing
fairly amongst his creditors would be defeated if freedom
to contract for any consideration adequate or not, was not curtailed as transactions for an undervalue,
or anything unregistered or after presentation of a winding up or bankruptcy
petition was not looked into .The freedom to contract for any security is
restricted, as a company's attempt to give an undue preference to one creditor
over another, particularly a floating charge for no new money, or any charge
that is not registered can also be unwound. Furthermore, emphasis on increasing
the accountability of company directors for breach of duties, especially
negligence or conflicts of interest[55].
Encroaching on limited liability and separate personality[56],
any intentional wrongdoing and fraud is always dealt with strictly, yet a
variety of claims exist without any such proof so as prevent unjust enrichment
for selected creditors at others'
expense and deter wrongdoing. All this is done to ensure transparency and
fairness in insolvency proceedings and to protect the entire public from people
who have already been declared insolvent who stand high chances of defrauding
the public if freely allowed to transact before they are undischarged form
insolvency
[1] Goode principles of corporate insolvency 4th ED sweet
and Maxwell at page 94
[2] This is because the insolvency act 2011 is a new piece of
legislation whose provisions wait being tested in courts of law and as of now
there are no Ugandan cases that I can point on to as authorities under our
insolvency act, those that were decide under the now repealed bankruptcy act
can only be referred to as analogous because the law has since then changed
[3] A debtor is deemed unable to pay their debts according to section 3
of the insolvency act if he fails to comply with a statutory demand or if in case
a judgement debtor he returns an execution wholly or partly unsatisfied or
where his property is placed in the control of the receiver. However under
section 3(3) in ability to pay debts can be proved by other means.
[4] Steven A Frienzie insolvency law 4th ED Cavendish
publishers at page 1.
[5] Under balance sheet insolvency one looks at the debtors assets and
liabilities to see if as a whole there is a net surplus or a deficit, if there
is a deficit then the company or person is insolvent, the balance sheet test
depends on showing that the value of the debtor’s assets is insufficient to
meet his liabilities including (for certain statutory purposes i.e. section
3(4) of the insolvency act) contingent and prospective liabilities.
[6] Under cash flow insolvency actual liquidity of a person is
considered, a person may have high value assets but cannot pay their debts as
and when they follow due, one does not actual cash or money to pay his
creditors though he may have more assets than liabilities.
[7] Ultimate insolvency deals
with a situation where the debtors assets being sold off the best amount they
can fetch in the market especially under a forced sale, the amounts realized
cannot meet his debt obligations. Ultimate insolvency is the end result of it
all.
[8] Section 4(a) and clause 1 of the second schedule to the insolvency
act
[9] Hesiod’s Works
and Days (8th century BCE),
[10] A creditor
is any person who is entitled to enforce payment of a debt at law or
equity.
[11] A debtor ordinarily means a person who owes money to another
(creditor)
[12] A debt according to section 2 means a debt or liability, present or
future, certain or contingent and includes an ascertained debt or liability for
damages. For one to claim under a statutory demand, there should not be any dispute
as to the debt otherwise insolvency courts are not meant to settle issues
pertaining the existence of a debt. See BNP Paribas v Jurong Shipyard Pte Ltd
[2009] 2 SLR 949; [2009] SGCA 11
[13] all such prisoners for debt as are altogether
unable to pay, that they may not perish in prison through the hard-heartedness
of their creditor; and that all such who have any estates may be enforced to
make payment accordingly and not shelter themselves in prison to defraud their
creditors thus debtors were not left to go free..
[14] Vanessa finch corporate insolvency law perspectives and principles
(Bankruptcy, then, is a multi-faceted
institution. In its overall purpose of managing the conflict of interests
between the creditors inter se, between the creditors and the debtor and, quite
possibly between these private parties and the state, it can be fashioned in
various ways).
[15] This is because this branch of law has evolved over time as a
result of personal interaction involving proprietary rights which are
inseparable from the laws governing contracts, companies, trusts etc.
[16] J.H., Dalhuisen
on International Insolvency and Bankruptcy (1984,
Matthew Bender, New York NY) Vol. 1, Part III, at §2.03[2]. UNCITRAL, above
note 7 at 13 lists the following examples of non-insolvency laws that may
affect the
conduct
of an insolvency proceeding: ‘labour law; commercial and contract law; tax law;
laws affecting foreign exchange, netting and set-off and debt for equity swaps;
and even family and matrimonial law’.
[17] This is why section 264 of the act preserves the application of
rules of equity and common law under insolvency proceedings.
[18] Section 272 of the companies’ act 2012 provides for the application
of the insolvency act 2011 in voluntary winding up of a company.
[19] In his book principles of corporate insolvency 4th ED, Sweet
and Maxwell at pages 96-97.
[20] Lord Hoffman in Cambridge
gas transportation corp. v Official committee of unsecured creditors of
Navigators holdings plc (2007)1 AC 508 .
[21] Section 198 of the insolvency act defines an official receiver as
an official appointed by the minister under the act to perform the functions of
an official receiver as prescribed under section 199
[22] Of the insolvency at 2011
[23] Section 93(1) of the insolvency act.
[24] Section 93(2) ibid.
[25] Paul j. Omar international insolvency law Themes and perspectives.
At page 6.
[26] A concise dictionary of law ED 2oxford university press at page 362
[27] 1995 constitution (chapter four)/ (bill of rights).
[28] Salomon v Salomon (1897) AC 22.
[29] (2005)at 215 A.L.A.I
[30] Section 31 ibid
[31] This is because it is another basic principle of insolvency law
that a liquidator takes the assets subject to all limitations and defenses and
stands in no better position than the company itself when asserting rights in
the name of the company. Perpetual
trustee co.ltd v BNY corporate trustee services ltd (2010) Ch 347
[32] Section 31(2) (a)
[33] This is because it a basic principle of insolvency law that only
assets of the debtor are available for payment of debts. Re marwalt ltd 91995) 1BCLC 345.
[34] Re Nanwa gold mines ltd
(1955)3 ALLER 219
[35] British wagon co.ltd v lea
(1880)5 QBD 149
[36] Section 12(5) ibid
[37] A potential benefit is that because the causes of action are vested
in the company, they may be assigned to third parties, who may prefer to take
the risk and reward of pursuing litigation over the liquidator or administrator
See Re
Oasis Merchandising Services Ltd [1995] 2 BCLC 493
[38] Section 2 of the insolvency act 2011 defines property to include
money, goods, things in action, proceeds, land and includes every description
of property whether situated
,obligations, interest, whether present,
future ,, vested or contingent, arising out of or incidental to property.
[39] Section 10 ibid
[40] This is because unsecured creditors have equitable interests in the
property of the debtor as opposed to secured creditors whose interest is legal
in nature.
[41]Foster v Wilson (1843) 152
ER at 1165 held that the creditor may set-off the
debt, and only needs to pay the difference.
[42] Section 19(7)(a) ibd
[43] The anti deprivation rule is a cardinal rule of insolvency law that
contractual provisions designed to remove from the estate of the insolvent
assets held at commencement of insolvency are void as being contrary to public
policy.
[44]Professor Goode notes that in determining whether a creditor has
been preferred, the acid test is whether what is done would have the effect of
disturbing the statutory order of priority in an insolvent liquidation or
bankruptcy. Improving the creditor’s position must be at the expense of other
creditors. Millet j in the case of Re MC Bacon Ltd [1990] BCLC 324 that
it will no longer enquire whether there was a dominant intention to prefer the
creditor but whether the company’s decision was influenced by a desire to
produce the effect mentioned in the what is the equivalent of our section15
(b). this does away with the element of intention. Thus intention is no longer
relevant in determining the question of preference.
[45] The freedom to contract for any consideration, adequate or not, is
curtailed as transactions particularly those for past consideration or a
floating charge for no new money.
[46] Re Gray’s Inn Construction Co Ltd [1980] 1 WLR 711
Buckley LJ held that courts would habitually approve all contracts that were
plainly beneficial to a company entered into in good faith and the ordinary
course of business. The predominant purpose of the provision is to ensure
unsecured creditors are not prejudiced, and the company's assets are not unduly
depleted. In this case, however, because a host of transactions honoured by the
company's bank that was in overdraft, between the presentation and the winding
up petition being granted meant unprofitable trading, the deals were declared
void.
[47] , in Re agriplant
services ltd (1997)2 BCLC 324 Jonathan Parker J held it was an
unlawful preference for Agriplant to pay £20,000 due on a leasing contract for
earth moving equipment to a company. This was mainly because Agriplant's major
shareholder Mr Sagar, had guaranteed that Agriplant's liability, and so
repayment absolved Mr Sagar's liabilities above other creditors.
[48] in Phillips v Brewin Dolphin Bell Lawrie Ltd
[2001]the liquidators of an insolvent company, AJ Bekhor Ltd, claimed rescind
the transfer of assets to a subsidiary, whose shares were then purchased by the
investment management house Brewin Dolphin for £1. The only other consideration
given by Brewin Dolphin was the promise to carry out a lease agreement for
computers, which itself was likely to be unwound and therefore worthless. The
House of Lords held that the total package of connected transactions could be
taken into account to decide whether a transaction was undervalued or not, and
held that this one was
[49] This may arise in cases of extortionate credit transactions ie
transactions where the creditor impose strict terms on the borrower that make
it difficult to repay the debt thus in the case of Barclays bank plcv Eustice
(1995)2 BCLC 630.court found out that court may make an order to setting aside
a transaction to which the company was a party and which involved the provision
of credit to the company on extortionate terms
[50]In Arbuthnot Leasing International Ltd v Havelet Leasing Ltd
(No 2) [1990] BCC 636 Scott J held that the motive of the company or
its directors was irrelevant, so that even though Havelet Leasing Ltd's lawyers
had advised (quite wrongly) that their scheme of starting another company and
transferring assets to it would be lawful, because the scheme's purpose was to
put the assets out of other creditors' reach it breached section 423
[51]Re Shoe Lace Ltd [1994] 1 BCLC 111
Hoffmann J held that £350,000 advanced in April and May was not close enough to
a floating charge created in July to be considered "at the same
time". The floating charge could not secure those amounts. Because the
context of the legislation was a business one, and in view of the fact that
floating charges can be registered up to 21 days after their creation, a few
months was far too long. This only rescinds the charge, and not the debt
itself, which remains in effect as before but the creditor becomes unsecured
[52] Insiders include; (a) spouses, siblings, children of the insolvent
or any person with a close social proximity to the insolvent, (b) employees,
officers, professional or other service providers of the insolvent and (c)
business associates, partners, shareholders, directors or other similar person.
[53] Section 45 of the insolvency act.
[54] R V Hartley (1972) ALLER 597 held that the crime is an absolute
offence and it is not necessary to prove fraud.
[55] Section 113 ibid
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