LAW40615: Introduction to Corporate Insolvency
Introduction to Corporate Insolvency
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LAW40615: Introduction to Corporate Insolvency
Garden Express Limited (hereafter Garden Express), a private limited company by shares, is
located in a small island, Amar, off the coast of India. Amar is a nature island where tourists
visit year-round to explore its beautiful natural landscapes. The currency in Amar is the
Amarian dollar (AMR). Garden Express is the main employer in that country, employing
55% of the residents, and providing services to all business in landscape architecture and
plant/material supplies. Its major business, which accounts for 90% of its income, is the
provision of nature tours.
In 2019, the only private airplane, which offered flight services to the Amarian National
Airport (ANA), ended its service to that market, prompting the introduction of new player in
the form of a ferry from Chennai, India to Amar. This resulted in a sharp decline in tourists
on the island, and a significant decrease in the sales of Garden Express. At this point, the
company’s debts stood at AMR $476,000 with assets of AMR$375,000.
In the middle of 2021, an announcement that the private airplane service would be returning
to ANA resulted in a heavy investment of AMR$100,000 by Garden Express into its tour
services. The return of the flight service did not materialise. Garden Express was formally
notified of this on 31 December 2021. The company’s accumulated debt, as at 1 January
2022, stood at AMR$976,000 with assets of AMR$275,000. A portion of this debt related to
employee salaries, a golden handshake given to the recruitment of an internationally
acclaimed managing director and a loan from Rupert Mandeville of AMR$50,000, which was
to be repaid by 30 March 2023. This loan has matured but has not yet been repaid. Rupert
intended to use this money to pay for his sick child’s healthcare at a premier health institution
in India.
When the Governor of Amar was asked to investigate the circumstances of this company, on
1 July 2023, in addition to the above, she found the following:
1. All employees had been paid for 50% of their salary for the period of February 2020
to present. This included three classes of employees: first, four directors have golden
parachutes of AMR$1.5 million (combined). Of these directors, two are engaged in
interlocking directorships and thus sit on boards of other local companies for which
they receive an income. Second, only junior staff were also owed overtime, as the
practice has been to pay the senior staff overtime to the exclusion of this class of
employees. One of these junior employees, Maka developed a spinal work-related
injury in late 2019 and she has been depended on her salary to pay for the treatment,
as the company claims that it does not have sufficient money to refund her bills at this
point. Maka could seek recourse through the state’s National Insurance fund, but this
procedure could take up to 9 months to complete the refunds. There is also some
confusion about whether this is possible given the outstanding employee and
employer contributions owed by Garden Express to the National Insurance Scheme.
The final class of employees, senior staff, had paid into a workplace pension and the
deficit is AMR$65,000.
2. In March 2016, Money International Limited, a larger international bank, loaned the
company AMR$50,000. The debt was secured by a charge on the company’s manure
production equipment. In addition to the power to write off losses when it (Money
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International Limited) files its tax returns, any other losses on their loans are covered
by a special insurance policy. When the financial sector’s confidence rose due to the
expected return of the flight service, Money Bank International loaned Garden
Express AMR$20,000 on 15 December 2021 to invest in a new fleet of vehicles. The
bank received notice on 24 December 2021 (before Garden Express) that the flight
service would not be returning. On 27 December 2021, it approached the company
and received a charge over the vehicles and a valuable trademark for its last loan
disbursement of AMR$20,000.
3. The Government is intending to bail out Garden Express given its prominence as an
employer in the country but there is public outcry regarding the use of public funds to
bail out this company, which has often refused to contribute to charitable causes. It
has also openly refused to join the Wildlife Engagement Society and its employees
claim that it does not practice good corporate social behaviour. The Government is
owed AMR$100,000 in taxes as well but is willing to waive this debt and contribute
towards the pension deficit. It has also informed the public that should it proceed with
this bailout, it will not be able to invest in the much-needed development of new
educational facilities in the north and south of the island, but the trade-off will be that
45% of the population may remain employed. The Government was asked to provide
assurances that the bailout will ensure continued employment, but it has indicated that
given the turbulent financial affairs of Garden Express, it is unable to provide any
assurances at this time.
4. Since its inception, Garden Express has relied on Starters Limited, a company
specialising in the production of seedlings. Starters Limited employs 25% of the
population in Amar. Garden Express’ business accounts for 85% of the orders
processed by Starters Limited. If Garden Express were to collapse, Starters Limited
has informed the Government, during its recent impact assessment study, that it would
also become insolvent and 95% of its staff would be made redundant. Thus, Starters
Limited has made a strong case for government intervention.
5. Though Garden Express owns greenhouses on its present premises, it leases a large
warehouse about five miles from the head office where it stores its flowering plants
before sale. These plants are the highly valued as customers prefer to purchase them
at this stage in the growth process. It is likely that Garden Express will be unable to
pay its rent in three months and the landlord has threatened that if he is not paid, he
will prevent access to the warehouse. The company, however, needs access to the
warehouse to ensure that it can continue to sell the plants, which often have a lifespan
of 6 weeks before they require re-planting. If the Governor does not act quickly, 40%
of Garden Express’ stock may be lost.
Assume that there is no existing insolvency or other statutory framework in Amar to assist in
the resolution of these claims. Instead, the Governor of Amar will herself decide how to deal
with the competing interests of the different parties outlined above. She will prepare a report
to present to Parliament. To this end, she asks that you write a report to form the basis for her
proposed action.
Below are the three main areas of focus for Parliament.
First, the Governor has heard that the United Kingdom offers an excellent approach to
rescuing companies by virtue of administration. She requests that you advise her on how
these four elements of administration under UK law map on to the aim, policies, objectives
and visions of insolvency law:
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(i) Moratorium outside of insolvency processes under the Corporate Insolvency and
Governance Act 2020
(ii) Order of priorities for the administrator
(iii)Role and power of the administrator
(iv) The operation of pre-packaged administrations
You should understand how each of these work under existing insolvency law. As these
provisions will have to be tested in a court of law, she is happy for you to discuss United
Kingdom jurisprudence (including case law) to assist in your explanation of the above.
Second, the Governor has been informed by her counsel that it is likely that if the company is
not successfully rescued by virtue of administration, that she will have to place an alternate
procedure in place. Having spoken to the company and its creditors, she understands that it
does not intend to wind itself up. Thus, it appears that the court will have to take action in
winding up the company. She has also heard that the United Kingdom provides a robust
method of division as assets by virtue of a procedure, called liquidation. She has also
requested that you advise her on how these three key elements of liquidation map on to the
aim, policies, objectives and visions of insolvency law:
(i) Exclusion of charged assets from the pool of assets, including protecting pre-
insolvency entitlements.
(ii) The identification and treatment of specific creditors as preferential*
(iii)Application of pari passu in the distribution of assets
Due to a range of actions of parties stated below, she has been informed by one of the
Government’s junior advisers that she should consider whether the pot should be larger due
to unjustified transactions in the run-up to insolvency. Based on the facts below, she has been
given a list of transactions that should be further explored. She seeks your advice using
English law to determine the validity of these claims. The company was insolvent when these
transactions were made. These transactions would have occurred within 12 months of the
company’s insolvency proceedings. She is not sure whether any assets will be produced from
this investigation but is seeking to determine the validity of these claims. She has also
provided you with the relevant statutory provisions which will assist the resolution of these
issues:
- Money International’s extortionate interest rate (Insolvency Act 1986, section 244) and late
floating charge (Insolvency Act 1986, section 245) to secure AMR$20,000
- Early payment of golden parachutes to directors (Insolvency Act 1986, section 239) and
directors’ duties based on a change in the terms of the golden handshake (Companies Act
2006, sections 170 – 177)
- Maka’s purchase of the land as a transaction at an undervalue (Insolvency Act 1986, section
238)
- The transfer of all the stock in the warehouse to the landlord as a preference (Insolvency
Act 1986, section 239)
She also wishes to know whether there are any justified reasons why a liquidator would not
proceed with a claim, even if it were found to have merit. She requests that these
considerations also be balanced in light of the aim, policies, objectives and visions of
insolvency law.
At every point, your answer should be balanced (in the sense of giving sufficient credit to the
value of a range of competing objectives, policies and visions when balancing interests in
insolvency).
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Case law from the United Kingdom may also be useful in assisting her in understanding the
relevant interpretation in a court of law.
You should be able to use the aim, objectives, policies and philosophies of insolvency law to
justify the trade-offs and choices for the Governor.
Word Limit: 3,000 words
(excluding footnotes and appendices, bibliography, contents,
tables of cases and title pages)
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