Insolvency law does not exist in a vacuum and the rules of insolvency may influence the behavior of a debtor or stakeholder in the ordinary course of business. Interestingly, English law has no definition of ‘insolvency’ though, rather, various tests of one’s ‘inability to pay debts’ and it therefore falls upon the Courts to decide the issue of solvency. Indeed a clear definition of “inability to pay debts” has been termed ‘fundamental’ to any system of insolvency law. The Insolvency Act 1986 (the ‘Act’) deems a company to be unable to pay its debts following the satisfaction of any one of a number of tests, the most important of which are cash-flow and balance-sheet insolvency tests. The Eurosail case is thus pivotal as it involved the concept of balance sheet test as set out in s 132 (2) of the Act. So significant was the Eurosail case that as the Court of Appeal heard it, the residential mortgage-backed security (RMBS) market held its breath, as the precedent setting case had implications for note holders in other transactions with poorly performing assets or broken currency hedges, and it could have rendered other RMBS companies with broken swaps insolvent. Lord Neuberger, with whom Toulson and Wilson LJ agreed, approved the opinion of Professor Goode that, in order for s. 123(2) of the Act to be satisfied, it would be necessary for the company to have reached the "point of no return”. The Supreme Court however rejected the point of no return test for establishing balance sheet insolvency and clarified that the correct test was the need to satisfy the court, on the balance of probabilities, that a company had insufficient assets to be able to meet all its liabilities, including prospective and contingent liabilities. Th...
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...o fundamental to any system of insolvency law, either the courts or Parliament need to re-introduce some certainty to the issue.’
Conclusion
The Supreme Court decision is welcome news to holders of distressed debt in particular and participants in the financial markets generally. The "point of no return" test adopted by the Court of Appeal had set a high hurdle for parties seeking to assert insolvency in complex commercial scenarios. However, there is need for greater clarity on assessing balance sheet insolvency either in the form of an amendment to the Insolvency Act 1986 or in the documentation used by lawyers and drafters of contractual documents. It is my opinion that the industry will be served an amendment merging the cash flow test and the balance sheet test or by contractual stipulations as to which test will be used to trigger an act of default.
The presence of systemic risk in the current United States financial system is undeniable. Systemic risks exist when the failure of one firm may topple others and destabilize the entire financial system. The firm is then "too big to fail," or perhaps more precisely, "too interconnected to fail.” The Federal Stability Oversight Council is charged with identifying systemic risks and gaps in regulation, making recommendations to regulators to address threats to financial stability, and promoting market discipline by eliminating the expectation that the US federal government will come to the assistance of firms in financial distress. Systemic risks can come through multiple forms, including counterparty risk on other financial ...
1 Determine if bankruptcy is the best option for you. Bankruptcy should be considered your last option, and should only be used if you have exhausted all other possibilities.
The law of contract in many legal systems requires that parties should act in good faith. English law refuses to impose such a general doctrine of good faith in the field of contract law. However, despite not recognizing the principle, English contract law is still influenced by notions of good faith. As Lord Bingham affirmed, the law has developed numerous piecemeal solutions in response to problems of unfairness. This essay will seek to examine the current and future state of good faith in English contract law.
In conclusion it is clear the pari passu principal in practice is rarely achieved and is quite frankly easy to refer to as a glorified theoretical doctrine as it has been severely eroded. This being said it is impossible to discount the pari passu theory as a fundamental principle in corporate insolvency law as although not overly effective in the capacity it was created, the principle spreads all across insolvency law promoting fairness and efficiency in the distribution of assets in insolvency proceedings from the hierarchy and classes of claims to other rules for proportionality. It is a principle which advocates creditor protection which is a pillar of corporate insolvency law.
The forced liquidation of some $3 trillion in private label structured assets has been deprived from the financial markets and the U.S. economy has obtained a vast amount of liquidity that the banking system simply cannot restore. It is not as easy to just assign blame within these case however it is noted that the credit rating agencies unethical decisions practices helped add onto the financial crisis of 2008 and took into account the company’s well-being before any other stakeholders.
In previous years the big financial institutions that are “too big to fail” have come to realize that they can “cheat” the system and make big money on it by making poor decisions and knowing that they will be bailed out without having any responsibly for their actions. And when they do it they also escape jail time for such action because of the fear that if a criminal case was filed against any one of the so called “too big to fail” financial institutions it...
A banking failure of Lehman Brothers had considerable negative influence on economics and financial markets worldwide. Beginning from the point what it could have been/be done, several authors agree that LB’s bankruptcy could have been/be anticipated (Christopoulos et al., 2011; Maux and Morin, 2011). They perceive a major problem in unwillingness or incapabil...
Introduction This submission will discuss the problems created by the Doctrine of Judicial Precedent and will attempt to find solutions to them. Whereas, English Law has formed over some 900 years it was not until the middle of the 19th Century that the modern Doctrine was ‘reaffirmed’. London Tramways Co. Ltd V London County Council (1898). Law is open to interpretation, all decisions made since the birth of the English Legal System, have had some form of impact whether it is beneficial or not The term ‘Judicial Precedent’ has at least two meanings, one of which is the process where Judges will follow the decisions of previously decided cases, the other is what is known as an ‘Original Precedent’ that is a case that creates and applies a new rule. Precedents are to be found in Law Reports and are divided up into ‘Binding’ and ‘Persuasive’.
As a consequence of the separate legal entity and limited liability doctrines within the UK’s unitary based system, company law had to develop responses to the ‘agency costs’ that arose. The central response is directors’ duties; these are owed by the directors to the company and operate as a counterbalance to the vast scope of powers given to the board. The benefit of the unitary board system is reflected in the efficiency gains it brings, however the disadvantage is clear, the directors may act to further their own interests to the detriment of the company. It is evident within executive remuneration that directors are placed in a stark conflict of interest position in that they may disproportionately reward themselves. The counterbalance to this concern is S175 Companies Act 2006 (CA 2006) this acts to prevent certain conflicts arising and punishes directors who find themselves in this position. Furthermore, there are specific provisions within the CA 2006 that empower third parties such as shareholders to influence directors’ remuneration.
Among the study’s findings were that the deciding factor of the predictor of bankruptcy should not be only a few ratios, as the measure of a company’s financial solvency may differ as the firm’s situations differ. The important question is to which ratios are to be used and of those ratios chosen, which ratios are given priority weight.
The English legal system is ostensibly embedded on a foundation of a ‘high degree of certainty with adaptability’ based on a steady ‘mode’ of legal reasoning. This rests on four propositions
... work the banks and other financial institutions would also be required to have a system of reporting. If these reports consist of all the necessary information to predict a future crisis or imprudent behaviour in the banks then procedure can be put in place to guide the banks into the appropriate approach.
The study defines “default” is a risk to the repayment history of borrowers where the borrowers are missed at least three installments in 24 months. This showed a symbol and indication of borrower behavior will actually default to cease all repayments. This definition does not mean that the borrower had entirely stopped paying the loan and therefore been referred to collection or legal processes; or from an accounting perspective that the loan had been classified as bad or doubtful, or actually written-off (Pearson & Greeff, 2006).
A person who is unable or unwilling to pay his or her debts may declare bankruptcy. The state of being solvent means that one has the ability to pay his or her debts. However, insolvency means that a person cannot pay his or her debts. In order to declare bankruptcy, a person must file a petition for bankruptcy in a bankruptcy court. A voluntary bankruptcy proceeding is started by the person who is declaring bankruptcy, whereas an involuntary bankruptcy proceeding is started by the creditors of the bankrupt person. A creditor who is not a party to the bankruptcy proceedings, but who has an interest in the proceedings, may file an ex parte application with the bankruptcy court.
The courts of England and Wales acknowledge that the above must be something of value, in order to amount to consideration. A valuable consideration in the perspective of the English La...