To learn more about our work in this area or to request our Insolvency & Restructuring Capability Statement, please contact Claire or a member of the Dispute Resolution team.
The search for the Holy Grail of insolvency law
Whilst there are key differences in the ways in which different jurisdictions deal with insolvency, it is clear that the challenges faced are largely the same, in the search for the perfect insolvency law.
At the same time as the Isle of Man’s insolvency law comes under scrutiny, the EU are seeking to amend their own policies, to provide greater harmonisation of insolvency law across EU markets.
Key themes include that businesses doomed to fail, should be allowed to fail, freeing up capital for those businesses which are viable. Viable businesses, on the other hand, should be allowed breathing space in the form of a moratorium in order that they may seek to restructure and work their way out of insolvency situations, caused by e.g. cash flow or an unprofitable aspect of the business. These ideals must be weighed against the need for a quick, predictable and cost effective remedy for creditors and contributories, such that value may be ring fenced and preserved.
Many consider that amendment of insolvency law comes late, lagging behind the reality of economic crisis. This may be the reason that the Isle of Man insolvency laws are yet to be updated, the economy having remained relatively stable following the financial crash. It remains to be seen if and when the Isle of Man’s insolvency laws will be updated and how they will balance between the competing interests in an insolvency situation.
Brexit – Are we prepared?
Andrew Shore from The Insolvency Service (part of the UK Government) gave delegates a fascinating insight into the current approach being taken by the UK to the drafting of new insolvency legislation. As widely advertised, it is the current proposal that on exit day all pre-existing legislation, including the current EU insolvency framework will be moved into a UK legislative framework. However, this assumes that the EU will continue to assist the UK courts as it currently does. It is recognised that reciprocity is extremely important in insolvency. In circumstances where “nothing is agreed until everything is agreed”, continued reciprocity between the UK and the EU cannot be guaranteed. As the current EU framework assumes reciprocity, which the UK cannot unilaterally require, the UK must prepare for a “hard Brexit” resulting in the current EU framework needing to be removed from UK law.
As the UK prepares for all eventualities, it remains to be seen what effect Brexit may have on the wider market, including the Isle of Man. Economic uncertainty is the by-product of political uncertainty, which may result in an increase in insolvency, particularly where lender confidence is affected.
The use of technology in Insolvency Courts
A common complaint in insolvency proceedings is that by the time insolvency proceedings are initiated it is often “too late”: too late to save a failing company which might otherwise have been saved or to preserve value such that maximum protection may be afforded to creditors, in circumstances where liabilities outstrip assets. Early intervention is key.
The Belgian Courts are utilising technology to assist them in early intervention, by reviewing companies in order to seek to predict when companies may be in financial crisis. The system notes events such as when companies are the subject of default judgments or have not paid their rent. On top of this the Courts receive automatic messaging from the Government, notifying them of when VAT or social security payments remain unpaid or filed accounts show hallmarks of a failing company. Once identified, the company’s principals are invited to an interview at which they may explain why the company should be allowed to continue. If no reasonable explanation can be made or if the company does not attend the interview, the court may liquidate the company without the need for creditors or contributors to have commenced insolvency proceedings themselves.
Whilst it is unlikely that any review of the insolvency law will include such a radical change in the system, by taking the decision of when to liquidate out of the hands of creditors and contributors, the Belgian Courts are able to intervene at the earliest opportunity.
Digital assets in an increasingly digital age
In the age of cryptocurrency, it is likely that insolvency practitioners will increasingly be asked to deal with digital assets upon any winding up.
A pole of delegates showed less than 20% of the professionals in attendance held cryptocurrency. It was perhaps unsurprising, therefore, that in the event of insolvency, over 80% of delegates in attendance would advise immediate sale of cryptocurrency, held in an insolvent estate. These statistics are indicative of a high degree of scepticism and suspicion surrounding crypto in the European insolvency profession.