Last summer I blogged about an important High Court judgment, the first to apply the recent Supreme Court’s analysis in an antecedent transactions case. This was important because many claims by office holders require the parties to prove whether at the time of the transaction (which might, for example, be a preference or an undervalue) the company entering into it was in fact insolvent. We need to know what the proper test is, and how we apply it to this sort of case, so people know where they are and do not embark on pointless litigation or drive up costs with hopeless defences.
The theme of my earlier blog was that Casa Estates was not particularly unusual, and yet because of the uncertain tests to be applied had become very complex and expensive. It did not get any less complex or expensive after Mrs Bucci (who was due to pay the liquidator a sum of money) then appealed the High Court decision to the Court of Appeal. The Court of Appeal heard the case last month and handed down its judgment on 3 April. A copy of the Court of Appeal judgment is here. Unfortunately for Mrs Bucci, the Court did not see things her way, and supported the High Court’s analysis. More usefully for the rest of us, Lord Justice Lewison, giving the unanimous judgment of the Court of Appeal, took the time to try to draw a common thread from Eurosail and through the High Court judgment, which readers may find helpful if they ever have to apply the ‘cash-flow solvency’ or ‘balance sheet solvency’ tests in the future.
For now, I would say that, even with Lord Justice Lewison’s assistance, establishing on a balance of probabilities (wherever that burden may lie in a given case) that a debtor is or was solvent or insolvent is never going to be as straightforward as taking a limited snapshot on a given date and trying to tell if the debtor was covering their debts adequately at the time. A debtor can in principle be solvent despite temporary illiquidity just as much as they can be insolvent despite being able to pay Paul today; nothing short of a really full inquiry into the debtor’s finances by minds who really can say with some certainty what the numbers mean will demonstrate with any real particularity whether one of the tests is met. Inevitably there will be shades of grey, just as there are with pretty much any mainstream dispute.
Insolvency practitioners as a profession, and others who litigate frequently about such issues including third party funders, are slowly but surely (as court procedures have evolved) coming to recognise the value of mediation and other forms of alternative dispute resolution (ADR) as a means of short-circuiting such disputes and settling them within sensible parameters which recognise the risks inherent for all parties of taking a case to court, let alone to trial, in an increasingly unforgiving legal system. Lawyers can, and to my mind should be instrumental in this pre-action settlement process, whether in terms of advising on evidence, preparing draft proceedings as a basis for settlement, using the levers of ADR and considering funding options appropriately, or leading or supporting negotiations, to name but a few. Experience teaches us that incurring a relatively modest legal spend upfront in terms of properly assessing the position in good time before formal proceedings are seriously threatened, with a view to entering into a fair compromise (if possible), will typically save a great deal of procedural cost down the road, whether formal litigation then follows or not. In my own practice, I have for example seen a marked increase in 2014 in insolvency practitioners prepared to issue proceedings alleging transactions at an undervalue and automatically void transactions. By responding to those claims promptly and sensibly, employing such legal assistance as is required, prospective defendants are often able to head off those proceedings altogether.
As a final note, lest any particularly contentiously focused IPs out there think that by this I am encouraging them to shy away from appropriate use of court procedures, they need not be concerned. I am merely pointing out that contentious insolvency work is very much like insolvency advisory work; some businesses are suitable for restructuring and a collaborative approach with creditors and other stakeholders, whilst other businesses you will know need a formal insolvency procedure from the moment you first meet with them. In the same way, the courts will invariably be a necessary recourse against the serial offender, the ignorant and the intransigent, of whom unfortunately we seem to have no shortage!
If you think we may be able to help with any insolvency-related dispute in which you are, or a company over which you are appointed is, involved, please do not hesitate to call.