THE VALIDATION OF TRANSACTIONS INVOLVING THE PROPERTY OF INSOLVENT DEBTORS—A comparison of judicial discretion with a statutory code
| Date | 01 May 1983 |
| DOI | http://doi.org/10.1111/j.1468-2230.1983.tb02516.x |
| Author | Nigel Furey |
| Published date | 01 May 1983 |
THE
MODERN
LAW
REVIEW
Volume
46
May
1983
No.
3
THE VALIDATION
OF
TRANSACTIONS
INVOLVING THE PROPERTY
OF
INSOLVENT
DEBTORS-A
comparison
of
judicial discretion with a statutory code
INTRODUCTION
ONE
of the main aims of the statutory procedures for administering
the assets of insolvent debtors is to ensure that as many as possible of
the available assets of the debtor are first preserved for the benefit of
creditors and then distributed among the creditors
pari
passu
or rate-
ably according to their claims.
To
this end there are provisions in both
the bankruptcy and winding-up legislation for ensuring that the debtor,
once the judicial process has commenced, cannot dispose of assets
which should be made available to his creditors.
As
is well known,
English law suffers from
a
regrettable duality
in
dealing with the estates
of insolvent debtors under which individual debtors may be made
bankrupt whereas corporate debtors cannot be made bankrupt’ but
are liable instead to winding-up proceedings. The problems faced by
insolvent debtors and their creditors, however, are frequently the
same whether the debtor is an individual or a company. One such
problem is the need to stop the debtor disposing
of
his assets once the
judicial insolvency procedure has commenced. Yet the statutory
provisions dealing with this problem differ considerably depending on
whether the debtor
is
being made bankrupt or wound up. The broad
approach of both schemes is that after the commencement of the
judicial insolvency procedure* any disposition of the property of the
debtor is void.* This is then made subject to a number of exceptions.
But, whereas in the Bankruptcy Act these exceptions are defined with
Bankruptcy Act
1914,
s.
126.
a
In bankruptcy this means the commission of the act
of
bankruptcy
on
which a
petition leading to a receiving order is based. If the debtor committed more than one act
of bankruptcy in the three months prior to presentation of such
a
petition it means the
earliest such act: Bankruptcy Act
1914,
s.
37 (1).
In
compulsory winding up it means the
date of presentation of the petition: Companies Act
1948,
s.
229 (2).
In
bankruptcy this is achieved by making all the assets of the debtor vest in a trustee-
in-bankruptcy at the commencement of the bankruptcy: Bankruptcy Act
1914,
ss.
18
(I),
38(a). In compulsory winding up the Companies Act
1948,
s.
227
makes any disposition of
the property of the company after the commencement of the winding up void.
In
voluntary
winding up
no
dispositions are made void. Protection of the company’s assets is achieved
by making the powers of the directors cease
on
the appointment of
a
liquidator except in
so
far as they are allowed to continue by the members
or
the liquidator in
a
members’
257
M.L.R.-~
258
THE
MODERN
LAW
REVIEW
[Vol.
46
relative precision,* in the Companies Act the whole matter is left to the
discretion of the The purpose of this article is to compare the
solutions given to similar problems under the two systems and to
consider whether the detailed approach of the Bankruptcy Act or the
discretionary approach of the Companies Act offers a better means of
resolving the problems that arise.
The whole of insolvency law has recently been reviewed by a com-
mittee chaired by Sir Kenneth Cork.* Its proposals are for
a
stream-
lined and where possible unified approach to personal and corporate
insolvency. In particular the commencement of the equivalent procedure
under its proposalis would be the making of
a
protection order.’ Until
that moment all dispositions of the debtor’s property would be valid
unless they fell within specified exceptions such as fraudulent con-
veyances, voluntary settlements or fraudulent preference. After the
making of the protection order all dispositions of the debtor’s property
would, according to the Report, be void.8 In practice it is likely that
certain dispositions will, as at present, need to be protected. The Report
does not discuss how this protection should be implemented but it is
hoped this article may offer some guidance as to the relative merits of
a
detailed as opposed to a discretionary approach to such protection.
In comparing the validation of dispositions in winding up and bank-
ruptcy it is helpful to divide up the cases according to the type
of
transaction involved. Different objectives within insolvency law may be
voluntary winding
uy
(Companies Act
1948,
s.
285 (2)),
or
the committee of inspection
or
creditors in a creditors’ voluntary winding up
(ibid.
s.
296 (2)).
There may, nevertheless,
be a gap between the passing of the resolution to go into liquidation and the appointment
of the liquidator during which even this protection will not be available. Problems may
also arise during the period between the directors’ decision to call meetings
of
the share-
holders and creditors to pass the necessary resolutions and the actual passing of the
resolutions. The Report of the Review Committee chaired by Sir Kenneth Cork entitled
Insolvency
Law
and
Practice,
Cmnd.
8558 (1982)
recommends eliminating these gaps in
protection by providing that the commencement
of
such a liquidation and the appointment
of a provisional liquidator should take effect immediately upon the passing of the resolution
of the board of direclors: See paras.
666-670
of
their Report.
Bankruptcy Acl
1914,
ss.
45,46
and
47
and the Bankruptcy (Amendment) Act
1926,
s.
4
(together covering
81
lines in the Queen’s Printer’s edition).
Companies Act
1948,
s.
227
(covering four lines in the
Queen’sPrinter’sedition).
It is
sometimes suggested (see,
e.g.
the discussion in Biscoe
Credit Factoring,
pp.
151-152)
that protection for third parties dealing with companies is also available under the
European Communities Act
1972,
s.
9 (4).
This provides that a company may not rely on
the making of a winding-up order, or, in a voluntary winding up, the appointment of a
liquidator until the went has been officially notified in the appropriate Gazette unless the
company proves that the third party knew
of
the event; and, even after such notification
the company cannot rely on the event for
15
days against third parties who prove that
they were unavoidably prevented from knowing
of
the event. Whilst this may well operate
to prolong the authority of the directors in a voluntary winding up it is submitted that
it
has no effect on the Companies Act
1948,
s.
227.
This takes effect on the presentation
of
a
winding-up petition not the making of a winding-up order and
s.
9
(4)
of
the
1972
Act
docs not appear to prevent a company relying on the presentation ofa winding-up petition.
The presentation of a winding-up petition does, however, have to be advertised in the
appropriate Gazette and one other newspaper under the Winding-up Rules
1949,
r.
28,
which
is
similar to oficiarnotification and in exercising its discretion under the Companies
Act
1948,
s.
227
the court does in some cases take into account whether
or
not the third
party knew a petition had been presented. See further, note
20,
below.
6
See
supra,
notc
3.
‘I
The Cork Report, para.
530.
fbid.
paras.
565
(c)
and
637
(a).
To continue reading
Request your trial