Society of Young Solicitors Ireland

Autumn Conference 2003

7-9 November 2003

Issues Relating to Corporate Recovery

Contents

Pages Chapter One Day to Day Issues Chapter Two Restriction of Directors recent case law Chapter Three Insolvency generally recent case law Chapter Four Cross Border Insolvency Regulations Chapter Five Transfer of Undertakings Insolvency Issues 43 54 26 42 16 - 25 12 - 15 2 - 11

Chapter One Day to Day Issues INTRODUCTION 1.1 Despite the good economy, in the last few years there has been a steady flow of liquidations. With the levelling off of the improvement in our economy, an increase is likely to occur during the next few years. 1.2 Statistics relating to liquidations in the last few years give an idea as to trends. Year 1990 1996 1997 1998 1999 2000 2001 2002 1.3 No. of Liquidations 501 560 433 410 337 336 439 412

When I use the word liquidations I am referring to insolvent liquidations. There are three types of liquidation: (a) Members voluntary liquidation (solvent) 2

(b) (c) 1.4

Creditors voluntary liquidation Court Liquidation

(insolvent) (insolvent)

Today, we will be talking about both types of insolvent liquidation.

LANDLORDS 1.5 By and large the event which brings a solicitor in touch with a Liquidator is the fact that the solicitor acts for the Landlord of a property. That property is occupied by a company which goes into liquidation. The attitude of the Landlord usually determines the attitude of the Solicitor acting for the Landlord. 1.6 This attitude can be broken down into three groups: (a) (b) (c) 1.7 Practical/Common sense approach. Legalistic approach. Aggressive.

Disclaimer is a word which always crops up in the context of the relationship between Landlord and Liquidator. Yes, a Liquidator can disclaim an onerous contract. the area of disclaimer, it is important to set the scene. I will

describe this more fully shortly. But before becoming involved in

1.8

Inevitably, when the liquidation starts there will be money due to the Landlord by the Company by way of arrears of rent (or for some other liability which stems from the lease). Obviously, different forces are at play: more than likely, the Landlord will 3

want the property back.

Sometimes however, the Liquidator

wants the property for a few months to conduct an orderly wind down of the Companys affairs. 1.9 The reverse can happen: the Landlord doesnt want to take the property back and the Liquidator is very keen to give the property back. 1.10 It is important to distinguish disclaimer from surrender. difference between the two words is: (a) A surrender takes place by agreement. In other words both the Landlord and the Liquidator agree the terms on which the leasehold interest in the property will be surrendered back to the Landlord. (b) Disclaimer. This mechanism will only be triggered where surrender is unavailable. In other words, where the Landlord and the Liquidator do not agree on the basis for the return of the property to the Landlord. Then the Liquidator is usually placed in a position where something must be done with the property but the Landlord and the Liquidator cannot agree terms. 1.11 In essence, a disclaimer is an application to the High Court under Section 290 of the Companies Act 1963. The application is brought by the Liquidator on the basis that a part of the property of the Company consists of land burdened with onerous covenants. The

1.12

There is a time limit: the Liquidator may disclaim the property with the leave of the Court at any time within 12 months after the commencement of the winding up or any extended period which may be allowed by the Court.

1.13

Forfeiture Forfeiture is another aspect of the relationship between the Company/Liquidator and its Landlord. Generally, leases contain a provision for the forfeiture of the lease on the commencement of an insolvent liquidation.

1.14

However, this provision is watered down considerably by Section 2 of the Conveyancing Act 1892 which gives the Liquidator 12 months relief from forfeiture. In essence, if the Liquidator is prepared to pay the rent and comply with the other covenants in the lease, then the Landlord is unable to exercise apparent rights under a forfeiture clause in the lease for a period of 12 months after the date of the commencement of the liquidation. You may from time to time hear the phrase the Liquidators year. This is where the phrase comes from.

1.15

The legalistic approach As I have mentioned, the Liquidator may apply to the Court for leave to disclaim. That power is available for 12 months after the commencement of the liquidation. However, Section 290 (5) of the Companies Act 1963 allows someone like a Landlord, to force the agenda. That section says that a Liquidator would not be entitled to disclaim any property in a situation where an application has been made in writing to him by the Landlord 5

requiring the Liquidator to decide whether or not he will disclaim. The Liquidator will not be entitled to disclaim where the Liquidator has not given Notice of Intention to apply to the Court for leave to disclaim with in 28 days after receiving the written warning. 1.16 Therefore, a legalistic approach is as follows: (a) (b) (c) (d) (e) 1.17 Company goes into liquidation. Landlord serves a Notice requiring Liquidator to decide about disclaimer within 28 days. 28 days expires. Liquidator has not given Notice of Intention to apply to the Court for leave to disclaim. Liquidator now deemed to have adopted the lease.

Alternatively, the sequence could be: (a) (b) (c) (d) Company goes into liquidation. Landlord serves notice. Liquidator gives Notice of Intention to apply to Court for leave to disclaim. Application to Court/Leave given.

1.18

By and large, Liquidators and their solicitors do not like receiving this 28-day notice. It puts them under much greater pressure than they would like to be under, particularly if the notice comes at the beginning of the liquidation. They have other things on their minds at that stage rather than having to make a very important decision regarding the premises.

1.19

The disadvantage (from a Landlords point of view) is that it generates a possible High Court action, the outcome of which almost inevitably in favour of the liquidator and disclaimer.

1.20

Common Sense Approach The common sense approach is by far the most attractive. Everyone wins. The property usually goes back to the Landlord who is then free to let the property to another tenant.

1.21

Obligation to pay Rent If the Liquidator uses the property for the beneficial winding up of the Company, the rent is an expense of the liquidation. The Liquidator is not personally liable for the amount due. However, the expense is one of the first payments to be made by the Liquidator out of the funds in the liquidation and, in most cases, the rent will be paid for the period of occupation.

1.22

A miscellaneous point regarding disclaimer: a Liquidator cannot disclaim a contract which is less profitable than another contract. For instance, if the Company had contracted (prior to liquidation) to sell its factory for 1,000,000 but the Liquidator knows that a better price can be obtained in the liquidation, it is not open to the Liquidator to set aside the contract as an onerous contract and re-sell the property. onerous contract. This is not an The It is simply a less profitable contract.

Liquidator would be obliged to specifically perform the contract already entered into by the Company.

INJURED PARTIES 1.23 Quite often in liquidations, the Liquidator will encounter existing Court proceedings against the Company in relation to a personal injury action. The Liquidators standard response in these circumstances is to transfer the running of the case to the Companys former insurers. Normally there is no problem but sometimes the insurers wish to repudiate liability for a number of different reasons. What does the plaintiff do in those circumstances? The decision of relevance was made by the Supreme Court in the case of PJ White Construction Limited [1989] ILRM 803. In essence, the plaintiff can sue the Insurance Company. the case on the grounds of lack of privity etc. 1.24 Proceeds of Insurance Claim Trust Money Section 61 of the Civil Liability Act, 1961 provides that the award to an injured party is trust money in favour of the injured party. The fund does not become part of the assets of the Company. The plaintiff should not be put off or stopped from proceeding with

RESERVATION OF TITLE 1.25 The rules relating to Reservation of Title have now settled down. Liquidators are very willing to deal quickly with Reservation of Title claims. 1.26 Inevitably, the debates centre around the documentation, the wording of the clauses and the notification of the clause to the purchaser i.e. the Company which is now in liquidation. 1.27 The golden rule in relation to a Reservation of Title claim is that the creditor must act quickly. 1.28 If the goods can be identified and if the documentation is in order, the goods are likely to be handed back straight way by the Liquidator. The amount of litigation relating to Reservation of Title has diminished considerably. RESTRICTION 1.29 Practitioners are becoming more and more involved in

Restriction applications. 1.30 Restriction was introduced by Section 150 of the Companies Act 1990. Thirteen years down the line there is a large number of directors who have been restricted by the Court. 1.31 The Court appointed Official Liquidator must apply to the Court for a Restriction Order against the relevant directors.

1.32

Since the enactment of the CLEA 2001 liquidators in creditors voluntary liquidations will be obliged to apply to the High Court for these restriction orders, unless they are relieved of the obligation by the Director of Corporate Enforcement.

1.33

As a result, the number of restriction applications increased dramatically.

1.34

In the vast majority of cases, the directors seek legal advice regarding the defence of their position as directors.

1.35

There have been a number of recent key note decisions in which: (a) A number of individuals have been declared to be shadow directors by the Court (and therefore liable to restriction). (Vehicle Imports Ltd.; Gasco Ltd) (b) The restriction provisions apply to anyone who is a director of the Company at the time of liquidation (and anyone who has been a director of the Company within the previous 12 months). The Court cannot restrict someone who is no longer a director of the Company for 12 months prior to liquidation. Therefore, the Court looks particularly at the behaviour of directors and the conduct of the Company in the 12 months prior to liquidation. (Gasco Ltd). (c) Nevertheless, the Court is also obliged to look at the entire tenure of the directorship (Re Squash Ireland).

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(d)

Being a non-executive director does not mean that there is sympathy from the Court (Re Hunting Lodges), as nonexecutive directors have a residual duty to supervise the affairs of the Company (Vehicle Imports Ltd).

1.36

It is essential to note that the onus is on the director to prove that he or she has acted honestly or responsibly in relation to the conduct of the affairs of the Company.

1.37

The Court has continuously emphasised the importance of keeping proper books and records in relation to the Companys affairs. The Court will also look to see whether the Company has kept its statutory returns up to date and whether it has fulfilled its obligations to the Revenue Commissioners.

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Chapter Two Restriction of Directors Recent Case Law

GMT ENGINEERING SERVICES LIMITED (IN VOLUNTARY LIQUIDATION) High Court 30th July 2003: Ms Justice Finlay Geoghegan 2.1 This was an action for a declaration of restriction of directors under s.150 Companies Act 1990. 2.2 In relation to the substantive issue, it was held that the directors had acted honestly and responsibly in relation to the conduct of the affairs of the company and accordingly the directors were not restricted. 2.3 Counsel for the liquidator then applied for an order against the respondents for the applicants costs in the proceedings. This was based on the premise that if the respondents did not bear the costs, it would have to be borne by the creditors of the company. 2.4 Counsel for the respondents argued that the court had no discretion to make an order for costs against the respondents where an application for restriction had been refused. 2.5 The general jurisdiction of the High Court in relation to costs is the Rules of the Superior Courts. The Rules provide that the costs of every proceeding in the Superior Courts shall be at the discretion of the court subject to any other Act or Statute.

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2.6

Section 150 (4B) Companies Act, 1990 provides that the court may order that the directors against whom the application is made shall bear the costs of the application..

2.7

Finlay Geoghegan J concluded that s. 150(4B) of 1990 Act be construed as limiting the discretion of the Court in orders relating to the applicants costs in s.150 cases.

2.8

She explained that the Company Law Enforcement Act, 2001 introduced a filtering system which allows the Director of Corporate Enforcement to relieve a liquidator of the obligation to make an application under s.150 in appropriate circumstances.

2.9

Finlay Geoghegan J held that it is consistent with this filtering system and the constitutionally guaranteed right to ones good name and property that a respondent director in a s.150 application should only become obliged to bear the applicants costs where the application for a declaration of restriction is successful.

2.10

It follows that the Liquidator or the creditors of an insolvent company are obliged to bear the costs of an unsuccessful application by the liquidator to the High Court under s.150.

2.11

The High Court decision in Re GMT Engineering Services Ltd. may make liquidators reluctant to wind up small companies. In cases where the companys assets are not sufficient to pay for legal costs, the costs of the High Court application will have to be shouldered by the liquidator and/ or his lawyers.

13

EUROKING MIRACLE (IRELAND) LIMITED (IN VOLUNTARY LIQUIDATION) High Court 5 June 2003: Ms Justice Finlay Geoghegan 2.12 The facts of this case revolved around a jurisdictional issue. The 4 respondents in this case resided in England. There is no express provision in Irish Law for the service out of the jurisdiction of an originating notice of motion seeking a declaration of restriction pursuant to s.150 of the Companies Act 1990. The first issue to be determined in this case was whether section 150 confers jurisdiction on the High Court to make declarations thereunder in respect of directors resident outside this jurisdiction. 2.13 Finlay Geoghegan J. concluded that the High Court had this jurisdiction. Having regard to the frequency with which persons resident outside the State are appointed directors of Irish companies, it would clearly be absurd to suggest that the Oireachtas, in enacting these provisions in the public interest, only intended to restrict resident directors. The use of the phrase any person in s.149 (2) underlines this intent. 2.14 In relation to the service of a Notice of Motion on a director outside this jurisdiction, Finlay Geoghegan J. concluded that service by registered post was sufficient.

14

E HOST EUROPE LIMITED (IN VOLUNTARY LIQUIDATION) High Court 14 July 2003 Ms Finlay Geoghegan J 2.15 Section 52(1) of the Company Law Enforcement Act 2001 imposes a time limit of 6 months on a liquidator to produce a report to the Director of Corporate Enforcement (the Director). Section 56(2) provides that not earlier than 3 months and not later than 5 months after this report has been produced to the Director, the liquidator is obliged to make a restriction application to the High Court, unless relieved by the Director from that obligation. Failure to comply with this section is an offence. 2.16 Finlay Geoghegan J concluded that although a liquidator will be guilty of an offence for contravening these sections, this in itself does not bar the liquidators entitlement to bring a section 150 application. There is no express prohibition in s.56 (2) against a liquidator bringing an application at a later date. Furthermore, s150 (4A) gives a liquidator power, without any time limitation, to bring an application under s.150. 2.17 Its important to point out that Finlay Geoghegan J, pointed out that this application was among the first batch of applications, and therefore the liquidator could be excused from fully appreciating the time constraints. Therefore, in granting a time extensions to the liquidator in this case, the judge was not signalling to liquidators and their solicitors that other such time extension can easily be obtained. There is a very clear legislative intent that the application should be made within the specified time. 15

Chapter Three Insolvency Generally Recent Case Law Re Ruby Property Company Ltd (in receivership) 3.1 Sale of Assets by a Receiver and the Obligations Imposed by Section 316(A)(1) of the Companies Act 1963. 3.2 There was a recent judgment which is very relevant to this issue. The Judgment of Mr Justice McKechnie was delivered on 31 January 2003 in the case of in Re Ruby Property Company Limited (In Receivership). 3.3 Section 316 Companies Act, 1963 allows a Receiver to apply to the High Court for directions on any aspect of the receivership. Section 316(A) places an obligation on a Receiver, in selling the property of a company, to exercise all reasonable care to obtain the best price reasonably obtainable for the property at the time of sale. It is generally accepted that this was putting into statutory form an obligation on the Receiver which had long since been recognised at common law. 3.4 The Ruby Property Company Limited case involved the sale by the Receiver of a property in Sutton, County Dublin, under the powers contained in a collateral mortgage. The challenge to the disposal was mounted by the company itself and its controlling shareholders. The ultimate issue before Mr Justice McKechnie was an alleged breach by the Receiver of his duties under Section 316(A) of the 1963 Act and included among the allegations were the following:16

(i) (ii) (iii) 3.5

That the property should have been sold by public tender. That the property should have been publicly advertised in the press. That the market was not tested.

McKechnie J made a number of observations in his judgment:(i) He cited with the approval the Judgment of ODalaigh C.J. (Holohan -v- Friends Provident and Century Life Office 1966 1 I.R.) that the duty on a mortgagee when exercising its power of sale is to act in good faith and, in addition, to act in all the circumstances as a reasonable man would. (ii) The duty on a Receiver is to exercise reasonable care to obtain, at the time of sale, the best price reasonably obtainable for the property in question. (iii) Each case must depend and must be determined on its own individual circumstances. (iv) There are no pre-determined, fixed or rigid rules by which such disposal of property must take place. Public auction, exposure by media or bill board, market strategy, expenditure of money, generous time limits and the hiring of experts were all matters for consideration, as are many others but not for mandatory engagement.

17

3.6

The Judgment also addressed the onus of proof in such cases. The Court rejected the Plaintiffs contention that the Receiver had the responsibility of satisfying the Court that he had not been in breach of Section 316(A).

18

Re W & R Morrogh Stockbrokers 3.7 The issue of the application of pari passu distribution or the Rule in Claytons case to cash funds in an insolvency 3.8 This issue was addressed in the reserved Judgment of Mr Justice Murphy delivered in the High Court on 6 May 2003. The firm of W&R Morrogh Stockbrokers ceased to trade in April 2001 and a Receiver and Manager was appointed to the firm by the High Court. In July 2002, the Receiver sought directions on a number of issues. 3.9 The only aspect of the Judgment considered here is the treatment of the money in the firms bank accounts in the context where overall, the liabilities of the firm were approximately double the realisable assets. This meant that the manner of distribution was crucial in that the application of the rule in Claytons case, namely first in first out would result in some claims being discharged in full and other claimants receiving little or nothing whereas if a rateable distribution was made all creditors would suffer a proportionate case. 3.10 The money in the firms bank accounts comprised:(a) Amounts due to clients following the sale of investments acquisitions. (b) Amounts due to clients following the sale of investments undertaken without the knowledge or consent of the client. 19 or cash provided by clients for

(c)

Parties who sought to trace their funds to funds held in the bank accounts of the firm.

3.11

The Receiver expressed the view that there were two categories of claimants in relation to these monies, namely:(a) Those parties who could trace their monies into the accounts by the application of the rule in Claytons case. (b) Those parties who would suffer a substantial loss by the application of that rule.

3.12

Murphy J recognised that the application of the first in first out rule would greatly benefit those whose money was lodged to the firms bank accounts in the period immediately before the collapse. It was calculated that this period was so short that any money lodged more than one week before the collapse would have been lost. Other parties contended that the application of the first in first out rule was not appropriate. The Court agreed and found that the monies in the client bank accounts of the firm shared at least some of the characteristics of a pool and had not been appropriated as between one client and another. The Court concluded that the principle that equity is equality should be applied. Therefore, although declining to make a declaration in favour of a general pooling of the assets of the firm, it did hold in favour of a pari passu distribution of the funds to credit of the firms bank account.

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3.13

The Order made following this Judgment is under appeal.

21

Re C.B. Readymix Limited (in liquidation) 3.14 The application of disqualification and restriction provisions of the Companies Act 1990 to Liquidators. 3.15 The restriction and disqualification provisions of the Companies Act 1990 had been virtually exclusively applied to directors until the Judgment of Smyth J in the High Court on 20 July 2001 in the case of in Re C.B. Readymix Limited (In Liquidation). Smyth J disqualified Dr Michael Grimes from being concerned in the management of the company as a liquidator, receiver or examiner for a period of seven years from 20 July 2001, and imposed conditions limiting the right of the Respondent to act as auditor, director or secretary of any company during the same period. Dr Grimes appealed this decision and the Judgment of the Supreme Court was delivered by Mr Justice Murphy on 1 March 2002. 3.16 The relevant facts were that Dr Grimes had purportedly been appointed liquidator of C.B. Readymix Limited (the company) on 15 January 1996 in circumstances where the appointment was clearly invalid. Shortly thereafter, on 25 April 1996 a provisional liquidator was appointed but Dr Grimes continued to hold himself out as being liquidator and disputed the entitlement of the provisional liquidator to act in that capacity. Some time after the appointment of the provisional liquidator Dr Grimes decided to destroy the books and records and sought to justify so doing on grounds that were clearly unsustainable. Murphy J expressed the view that the fact that Dr Grimes had deprived the Official Liquidator of the books and records of the company was extremely serious and in his decision to destroy or permit 22

the destruction of the books and records of Readymix was a very serious wrong indeed. He therefore held that the High Court was entitled to make the Order in the form given by Smyth J and in particular was entitled to limit the terms upon which Dr Grimes could act as an auditor, director or secretary of a company as an alternative to making an absolute disqualification order against him. To meet the circumstances in which Dr Grimes was never properly appointed liquidator to the company, Murphy J held that the relevant legislation is as applicable to a de facto liquidator as it is to a de facto director.

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Re Macks Bakeries Limited (in voluntary liquidation) 3.17 The Solicitors Lien in the context of Section 244(A) of the Companies Act 1963. 3.18 For many years, it had been a considerable comfort to the solicitors profession to know that, in the event of the insolvency of a corporate client, the solicitor would have a lien over files and title deeds of the client, other than statutory books and records, for the discharge of unpaid costs and outlay. This comfort appeared to have been removed by the addition, under the provisions of the Companies Act, 1990, of Section 244(A) of the Companies Act 1963 which provided that in the winding up by the Court or by means of a creditors voluntary winding up no person shall be entitled as against the Liquidator or provisional liquidator to withhold possession of any deed, instrument or other document belonging to the company, or books of account, receipts, bills, invoices or other papers of a like nature relating to the account or trade dealings or business of the company, or to claim any lien thereon. 3.19 It was contended in the case of in Re Macks Bakers Limited (In Voluntary Liquidation) firstly that a solicitors lien in common law had been expressly recognised by the Irish Courts and secondly that by virtue of Section 284(1) Companies Act, 1963 the law of bankruptcy is to be applied in an insolvent liquidation in order to establish the rights of creditors of the insolvent company. 3.20 Section 3(1) of the Bankruptcy Act 1988 includes in the definition of a secured creditor any creditorholding anylien.as security for a debt due to him. The ingenious 24

argument was then made that if the new Section 244(A) was to be interpreted as removing the solicitors lien, it would bring it into conflict with Section 284(1) of the Companies Act, 1963 and bring about a change in the law of insolvency which was not intended. The Respondents contended that the law of lien is well established and to interpret Section 244(a) in the manner sought by the liquidator would give effect to radical and far reaching changes. 3.21 Mr Justice Kelly concluded that the language used in Section 244(A) is clear and unambiguous and allows of no other interpretation but that the legislature intended that the holder of a lien would not be entitled to claim such as against the liquidator. Kelly J recognised that Section 244(A) had brought about a change in the law of insolvency relating to holders of liens. failed. However, these changes could not be regarded as Consequently the claim to a lien unintended or ambiguous.

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Chapter Four European Union Cross-Border Insolvency Regulation INTRODUCTION 4.1 On 31 May 2002, Council Regulation (EC) No. 1346/2000 (the Regulation) came into force. The Regulation does not apply to Denmark. 4.2 The introduction of the Regulation brings to an end a long period of effort on the part of the various members of the European Community to co-operate in relation to cross-border insolvency cases. 4.3 The Regulation does not attempt to harmonise substantive law. Instead, the EU has identified that the proper functioning of an internal market requires that cross-border insolvency cases should operate efficiently and effectively. 4.4 The Treaty of Rome included judicial co-operation as one of the methods by which an internal market could operate successfully. The introduction of the Regulation comes within the scope of the concept of judicial co-operation. 4.5 The Regulation is to be welcomed because more and more insolvency cases involve cross-border issues. The EU had identified the fact that the proper functioning of an internal market would be hindered if there were incentives for parties to transfer assets or judicial proceedings from one Member State to 26

obtain a more favourable legal position (forum shopping). Accordingly, action at a Community level was required. 4.6 The Regulation tries to achieve its objectives with three mechanisms:(a) (b) (c) 4.7 The Jurisdiction. Recognition. Applicable law. of the Regulation involves two key

implementation

strategies:(a) (b) 4.8 Main Proceedings. Secondary (territorial) Proceedings.

The Regulation sets out how the Main Proceedings and Secondary Proceedings will interact against the backdrop of jurisdiction, recognition and applicable law.

LANGUAGE 4.9 Compiling a Regulation inevitably leads to problems regarding language. The words used in the Regulation must be approached with care. Some of the words, on first reading, will give a misleading impression given our normal use of those words. However, once that mindset has been altered, then the position becomes clear. 27

4.10

For instance:Proceedings:This word is used throughout the Regulation. For us, we should think: procedure. Liquidator:This word is used extensively throughout the Regulation. For us, it would be preferable to keep in mind the image of insolvency practitioner. Open:This word effectively means begin.

SCOPE 4.11 The Regulation applies to a company with a branch or assets in more than one Member State. The Regulation does not apply to companies with subsidiaries in other Member States. 4.12 The Regulation also applies in personal bankruptcy, but this paper addresses the issues of corporate insolvency only. 4.13 Because it relates only to a single entity, the Regulation will have limited effect - most businesses operating on an international scale will have subsidiaries in other countries. 4.14 From an Irish perspective, insolvency proceedings (i.e.

procedures) covered by the Main Proceedings are: (a) Creditors voluntary liquidation (with confirmation of Court).

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(b) (c)

Compulsory winding up by the Court. Company examinership.

For the sake of completeness, the following are also covered:(e) (f) Bankruptcy. The administration in bankruptcy of the estate of persons dying insolvent. (g) (h) Winding up in bankruptcy of partnerships. Arrangements under the control of the Court which involve the vesting of all or part of the property of the debtor in the Official Assignee for realisation and distribution. 4.15 The areas which we will concentrate on are:(a) (b) (c) Creditors voluntary liquidation (with confirmation of Court). Compulsory liquidation). Company examinership (i.e. Examinership). winding up by the Court (i.e. Court

NOTE: Receiverships are not covered by the Regulation. 4.16 An issue immediately arises in relation to a creditors voluntary liquidation. Before the implementation of the Regulation, there was no process involving a creditors voluntary winding up being confirmed by a Court. This been remedied by Statutory 29

Instrument 333/2002. This S.I. allows the Master of the High Court to confirm a creditors voluntary liquidation. MAIN PROCEEDINGS : SCOPE 4.17 The Main Proceedings can cover all of the following:(a) (b) (c) Creditors voluntary liquidation. Court liquidation. Examinerships.

SECONDARY (TERRITORIAL) PROCEEDINGS : SCOPE 4.18 Secondary (territorial) Proceedings do not include Examinerships. Therefore, the Secondary (territorial) Proceedings only cover:(a) (b) EXCLUSION 4.19 Insolvency proceedings involving the following are not covered by the Regulation:(a) (b) Insurance undertakings. Credit institutions. Creditors voluntary liquidation. Court liquidation.

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(c) 4.20

Investment undertakings

The reason for this is that these undertakings are subject to special arrangements and, to some extent, the national supervisory authorities have extremely wide ranging powers of intervention.

JURISDICTION: MAIN PROCEEDINGS 4.21 Article 3.1 of the Regulation provides that the Courts of the Member State in which the centre of a debtors main interests is situated has the jurisdiction to open (i.e. begin) insolvency proceedings (i.e. procedures). The place of the registered office of a company is presumed to be the centre of its main interests, unless there is evidence which suggests otherwise. 4.22 Some guidance to be found in paragraph 13 of the Preamble which states that the centre of main interests should correspond to the place where the debtor conducts the administration of its interests on a regular basis and is therefore ascertainable by third parties. 4.23 The State before which the proceedings are opened is called the State of the opening of proceedings. JURISDICTION : SECONDARY PROCEEDINGS 4.24 Article 3.2 says that where the centre of a debtors main interests is located within the territory of any Member State, the courts of another Member State have jurisdiction to open insolvency proceedings against that debtor if there is an establishment 31

within the territory of that other Member State. However, the effect of the Secondary (territorial) Proceedings is restricted to assets of the debtor located in the relevant territories. 4.25 There are two circumstances where the Secondary Proceedings may be opened before the opening of the Main Proceedings:(a) where the Main Proceedings cannot be opened because the conditions for doing so in the Main State cannot be satisfied. (b) where Secondary Proceedings are requested by a creditor in the second Member State within which the debtor has an establishment or where the creditors claim arises from the operation of that establishment. 4.26 The word establishment is defined as any place of operations where the debtor carries out a non-transitory economic activity with human means and goods (Article 2). 4.27 The purpose of the requirement for an establishment is to limit forum shopping. The mere presence of assets in a Member State will not be sufficient to enable the courts of that State to exercise insolvency jurisdiction on a territorial basis. RECOGNITION 4.28 Chapter II of the Regulation sets out the rules for recognition of insolvency judgments. A judgement opening insolvency proceedings delivered by a Court of a Member State which has the appropriate jurisdiction will be recognised in all other 32

Member States from the time the Judgment becomes effective in the State of the opening of proceedings. 4.29 Consequently, the appointment of a liquidator (i.e. insolvency practitioner) will be recognised in other Member States without any further formalities. This extends not only to the Order appointing the liquidator but also the powers conferred on him/her by the laws of the main State. 4.30 A certificate issued by the Court will be evidence of a liquidators appointment. The liquidator may exercise all powers which derive from his/her appointment including the power to remove the debtors assets from the territory of any Member State in which they are located, subject to special rules concerning rights in rem. 4.31 The liquidator must give notice of his/her appointment in the Member State in which he/she has been appointed and in any other relevant Member State. Secondary Proceedings. 4.32 Publication is important in relation third parties honouring obligations to the debtors. Article 24 provides that where an obligation has been honoured in a Member State for the benefit of a debtor who is the subject of insolvency proceedings (opened in another Member State) when it should in fact have been honoured for benefit of the liquidator in those proceedings, the person honouring the obligation is deemed to have discharged the obligation only if he/she was unaware of the opening of the proceedings. 33 The notice must state whether he/she is the liquidator in the Main Proceedings or in the

4.33

If the obligation is honoured before the appointment has been advertised in the relevant Member State it is presumed that the third party was unaware of the opening of the insolvency proceedings. If the appointment has first been advertised in that Member State, the third party is presumed to have been aware of the opening of the proceedings and the onus will fall on him/her to prove otherwise.

4.34

Recognition extends not only to judgments concerning the opening of insolvency proceedings and the appointments of liquidators but also to judgments concerning the course and closure of insolvency proceedings. Those judgments can then be enforced in accordance with Regulation 44/2001 (i.e. Brussels 2).

4.35

Article 25 deals with judgments handed down by a Court whose judgment concerning the opening of proceedings is recognised in accordance with the Regulation and which concern:(a) (b) (c) The course (of insolvency proceedings) and, The closure (of insolvency proceedings) and, Compositions (approved by the Court).

4.36

Judgments will also be recognised where those judgments derive directly from the insolvency proceedings and which are closely linked with them, even if they were handed down by another Court. (Article 25).

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4.37

This is a significant substantive provision because it extends the concept of recognition and enforcement beyond basic issues such as the liquidators appointment.

4.38

It is likely that judgments concerning the following issues will be recognised:1. 2. 3. Fraudulent preference (S. 286, Companies Act 1963). Invalidity of floating charges (S. 288, Companies Act 1963). Return of assets improperly transferred (S. 139 Companies Act 1990). 4. 5. 6. Contribution to debts (S. 140, Companies Act 1990). Pooling of assets (S. 141, Companies Act 1990). Personal liability fraudulent/reckless trading (S. 297, Companies Act 1963). 7. Personal liability failure to keep proper books and records (S. 204, Companies Act 1990). 8. Personal liability misfeasance (S. 298, Companies Act 1963). 9. Examination by Court (S. 245, Companies Act 1963).

4.39

Until now, the ability of the insolvent company (through its insolvency practitioner) to recover assets situated abroad to 35

discharge Court judgments has been very limited. practitioners. APPLICABLE LAW 4.40

These

recognition issues open up numerous possibilities for insolvency

Article 4 of the Regulation states that the law applicable to insolvency proceedings and their effects shall be that of the Member State within the territory of which such proceedings are opened. That Member State is referred to in the Regulation as the State of the opening of proceedings. This is the concept of lex concursus.

4.41

The law of the State of the opening of proceedings determines all the effects of the insolvency proceedings, both procedural and substantive. It governs all the conditions for the opening, conduct and closure of the insolvency proceedings.

4.42

Therefore, the following issues will be dealt with under the law of the State of the opening of the proceedings:(a) (b) (c) (d) (e) The ascertainment of assets/liabilities. Powers of debtor. Powers of the liquidator i.e. the insolvency practitioner. Conditions under which set offs may apply. The effect of the insolvency proceedings on contracts.

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(f) (g) (h) (i) (j) (k)

Lodging/verification/admission of claims. Distribution of proceeds from realisation of assets. Ranking of claims. Rights of creditors. Costs/Expenses. Voidness /voidability /enforceability of acts detrimental to all creditors.

EXCEPTIONS 4.43 There are a number of exceptions to the principle of determination according to the law of the State of the opening of proceedings. These matters concern:(a) (b) (c ) (d) (e) (f) Rights in rem. Set off. Reservation of title. Immovable property. Payment/settlement systems. Employment contracts.

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(g)

Rights subject to registration (ships/aircraft).

SECONDARY PROCEEDINGS 4.44 The Regulation allows the opening of Secondary Proceedings in another Member State after the commencement of the Main Proceedings. State. 4.45 As mentioned, an establishment means any place of operations where the debtor carries out non-transitory economic activity with human means and goods. This would encompass not only a branch of the debtor but could include a commercial agent. 4.46 Secondary Proceedings do not apply to examinership they are purely winding up proceedings. 4.47 In addition, the Secondary Proceedings are restricted to the assets of the debtor located in the territory of the relevant Member State. 4.48 The law applicable to the Secondary Proceedings is the law of the Member State within which those Secondary Proceedings are opened. This is particularly important when it comes to the priority/ranking of claims, the effects on contracts and the potential for challenges to transactions such as fraudulent preference. The laws of the State of the Secondary Proceedings only apply in relation to realisation and distribution of the assets within that State. However, to open Secondary Proceedings, the debtor must have an establishment in that other Member

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4.49

Secondary Proceedings may be requested by the liquidator (i.e. insolvency practitioner in the Main Proceedings or any other person empowered to request the opening of insolvency proceedings under the law of the Member State within which the Secondary Proceedings are requested. Therefore, if the liquidator in the Main Proceedings does not request Secondary Proceedings, it is foreseeable that a creditor in the second Member State will do so.

4.50

The existence of parallel insolvency procedures will result in the need for considerable co-operation between the relevant insolvency practitioners.

4.51

The liquidator in the Main Proceedings, can request the Court in the Secondary Proceedings to suspend those (secondary) proceedings. debtor. This presumably may be required in a situation where the liquidator is trying to benefit all the creditors of the

4.52

A creditor may lodge a claim in both the Main Proceedings and in any Secondary Proceedings. Each liquidator must lodge (in the other proceedings) claims which have already been lodged in his individual liquidation provided that doing so advances the interest of the creditors concerned. Each liquidator is empowered to participate in the other proceedings, as if he/she were a creditor, in particular by attending creditors meetings (Article 32).

4.53

Where the Secondary Proceedings result in a surplus after payment of all claims allowed under the proceedings, the second liquidator must transfer that surplus to the main liquidator. 39

CREDITORS INFORMATION/CLAIMS 4.54 The Regulation promotes the basic principle of equality of treatment of creditors. 4.55 Article 39 allows a creditor in a Member State (other than the State of opening of proceedings) to lodge claims in the main insolvency proceedings. 4.56 This will include tax authorities. The ability of a tax authority to claim in the liquidation in another State overturns the widely practiced rule of private international law by which Courts of one State refused to enforce the Revenue laws of another. The Regulation does not alter issues such as the priorities of claims under Irish law. In Ireland, only debts to which Section 285, Companies Act 1963 (as extended) will enjoy preferential status in a liquidation. This means that the claim of a foreign revenue authority must be admitted in the liquidation but not within a category to which preferential status attaches. 4.57 There are two other important provisions preserving the fundamental right of the equal treatment of creditors. These are contained in Article 20:(a) After insolvency proceedings have been opened if a creditor obtains total/partial satisfaction of his/her claim from assets of the debtor situated in another Member State, those assets must be returned to the liquidator. (b) Where a creditor receives a dividend in the course of insolvency proceedings in any State (main or secondary) 40

that creditor can only share in dividends in another set of insolvency proceedings where creditors of the same rank have already obtained an equivalent dividend. 4.58 Once the insolvency proceedings have commenced, the liquidator/Court must inform known creditors in other Member States. The notification will include time limits and other details concerning lodging claims. It must be given in one of the official languages of the State of the opening of proceedings. The form must bear a heading Invitation to Lodge a Claim: Time Limits to be Observed. That notation must be in all the official languages of the institutions of the EU. 4.59 The creditor may then lodge a claim in the official language of his/her own State. However, the lodgement of the claim must bear the heading Lodgement of Claim in one of the official languages of the State of the opening of proceedings. 4.60 Creditors can be required to provide a full translation of the claim into the language of the State of the opening of proceedings. INSOLVENCY PRACTITIONERS : CO-OPERATION 4.61 It will be the duty of both the main liquidator and any other liquidator appointed under Secondary Proceedings to keep each other informed and to co-operate for the benefit of creditors. There will be a duty on the liquidator to ensure exchange of information and co-operation. 4.62 A creditor may lodge a claim in the Main Proceedings and also 41

in one, two or even more Secondary Proceedings if these have been opened. Ultimately, creditors of the same standing are entitled to the same proportion of distribution of the total assets. Therefore, there will be high degree of co-ordination, cooperation and exchange of information required between the various insolvency practitioners. 4.63 It would appear that the reconciliation of all the claims will eventually fall on the liquidator in the Main Proceedings. That liquidator will be entitled to any surplus in Secondary Proceedings. CONCLUSION 4.64 The Regulation will transform the conduct of cross-border insolvency proceedings involving member countries of the EU. From an Irish perspective, there will be an immediate need for reform of procedures/formalities (particularly in relation to the treatment of claims and information for creditors). 4.65 That said, the Regulation will achieve its objective of improving the efficiency and effectiveness of cross border insolvency proceedings. It will also give greater powers to insolvency practitioners in relation to remedies available to them. Given the complexity of modern business, this regulation will have an immediate impact and is to be welcomed.

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Chapter Five Transfer of Undertakings Insolvency Issues INTRODUCTION 5.1 The European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 (the 2003 Regulations) set out specific provisions relating to bankruptcy and insolvency. Under Council Directive 2001/23/EC of 12th March 2001 (the Directive) relating to the transfer of undertakings, Member States were given the right to tailor the requirements of the Directive to local bankruptcy and insolvency situations with the overriding statement that Member States were to take appropriate measures with a view to preventing misuse of insolvency proceedings in such a way as to deprive employees of the rights provided for in the Directive. 5.2 The general principle is that the provisions of the Directive and the 2003 Regulations transferring employment rights and obligations from the transferor of a business or undertaking to its acquirer shall not apply where the transferor is the subject of insolvency proceedings. It is important to note that even before it was defined by the 2003 Regulations the scope of this insolvency exclusion has been considered by the European and Irish Courts and given a narrow interpretation. 5.3 The case law of the European Court of Justice (ECJ) in interpreting the Acquired Rights Directive 1 and of the Irish Courts in considering the application of the precursor to the 2003

Council Directive 77/187/EEC

43

Regulations,

the

European

Communities

(Safeguarding

of

Employees Rights on Transfer of Undertakings) Regulations, 1980 and 2000 (the 1980 Regulations) will continue to be highly relevant to situations arising under the 2003 Regulations. 5.4 The concern of the courts, reflected in one of the first cases to consider the application of the Acquired Rights Directive to insolvency situations, Abels Case2 is to ensure that undertakings will not engineer insolvencies so that employees can be dismissed before businesses are transferred. It is for this reason that Courts have tended to suggest that any extra-judicial process, such as the appointment of a receiver by a debenture holder, is within the Directive whereas any insolvency process under Court supervision may fall outside the Directive. 5.5 While the 2003 Regulations define for the first time in domestic legislation the circumstances which are regarded as constituting insolvency proceedings, the definition is based on the Directive and reflects the case law of the ECJ. DEFINITION OF INSOLVENCY UNDER THE DIRECTIVE 5.6 Article 5(1) provides: Unless Member States provide otherwise, Articles 3 and 4 shall not apply to any transfer of an undertaking, business or part of an undertaking or business where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the

Abels v Bedrijfsuereriging voor de Metaalindustrie en de Electrotechnische Industrie [1985] 2 ECR 469 (Abels Case)

44

supervision of a competent public authority (which may be an insolvency practitioner authorised by a competent public authority). 5.7 The Directive clearly contemplates that any insolvency

proceedings which will have the effect of excluding the general provisions of the Directive as to transfer of employment rights and obligations will be under the supervision of a competent public authority. In Ireland the competent public authority for this purpose would be the Courts which have jurisdiction under the Companies Acts and the Bankruptcy Act 1988 (the Bankruptcy Act). 5.8 The Directive also provides in Article 5 (2) for Member States to provide, where Articles 3 and 4 apply to a transfer during insolvency proceedings which are under the supervision of a competent public authority that: (a) the transferors debts relating to contracts of employment which pre-date the transfer shall not transfer to the transferee and/or alternatively that (b) the parties may agree alterations with the representatives of the employees to the employees terms and conditions of employment with a view to ensuring the survival of the business. 5.9 The Directive further provides that Member States may apply Article 5(2) (b) to any transfer where the transferor is in a situation of serious economic crisis, as defined by national law as declared by a competent public authority and open to judicial 45

supervision. DEFINITION OF INSOLVENCY UNDER 2003 REGULATIONS 5.10 Regulation 6 of the 2003 Regulations provides as follows: (1) Regulations 3 and 4 of these Regulations [transfer of employee rights and obligations] shall not apply to any transfer of an undertaking, business or part of an undertaking or business where the transferor is the subject of bankruptcy proceedings or insolvency proceedings. (2) For the purposes of paragraph (1) bankruptcy

proceedings or insolvency proceedings shall mean the following: (a) Proceedings whereby the transferor may be adjudicated bankrupt under section 14 or 15 of the [Bankruptcy] Act of 1988; (b) Proceedings whereby the estate of a deceased transferor may be administered in bankruptcy under section 115 of the [Bankruptcy] Act of 1988; (c) Where the transferor is a partnership, proceedings whereby all the members of the partnership may be adjudicated bankrupt under section 106 of the [Bankruptcy] Act of 1988; (d) Proceedings whereby the transferor may become the subject of a protection order under section 87 of the [Bankruptcy] Act of 1988 where all or part of the property of 46

the transferor vests (under section 93 of that Act) in the Official Assignee for realisation and distribution; (e) Proceedings where the transferor may be wound up under section 213 (e) of the [Companies] Act of 1963; (3) Notwithstanding paragraph (1), if the sole or main reason for the institution of a bankruptcy or insolvency proceedings in respect of a transferor is the evasion of an employers legal obligations under these Regulations, the Regulations shall apply to a transfer effected by that transferor. 5.11 The 2003 Regulations do not take advantage of the opportunity afforded by Article 5 (2) of the Directive to introduce provisions allowing for the non-transfer of pre-transfer employment obligations or the variation of post-transfer employment terms. 5.12 Irish law does not recognise the term serious economic crisis Section 5(3) of the Directive will not apply in Ireland and the specific definition of insolvency set out in Regulation 6 of the 2003 Regulations will apply. BANKRUPTCY 5.13 Although Regulation 6 defines in some detail the circumstances constituting bankruptcy for the purpose of the insolvency exclusion, in practice most of the situations in which the Courts have considered insolvency in the context of the Acquired Rights Directive and the 1980 Regulations have to date related to corporate insolvency. 47

5.14

The various categories of bankruptcy situations set out in Regulation 6 are as follows: (a) Section 14, Bankruptcy Act, 1988 S.14 relates to presentation of a petition for adjudication by a creditor. Before such petition is presented certain requirements set out in S.11 of the Bankruptcy Act must be complied with and proven to the Court. (b) Section 15, Bankruptcy Act, 1988

Under S.15 where a debtor presents the petition, the Court will also require proof that he/she is unable to meet his/her commitments to his/her creditors and as to the state of his/her assets. (c) Section 115

Either a creditor or the personal representative of the deceased may present petitions to the Court in the case of a deceased person where there are circumstances which would have been sufficient to support a bankruptcy petition against the deceased if he had been alive. (d) Section 106

Under this section where two or more members of a partnership obtain the protection of the Court and make proposals to their creditors for the payment or compromise 48

of their joint and separate liabilities, the Court may adjudicate all of the members bankrupt if any of the proposals are not accepted. (e) Section 87

Any debtor who is unable to meet his/her commitments to creditors and petitions the Court for an approval of a composition of his/her debts under Court control may be protected until further order from any action or other process (including a bankruptcy summons and the registration of a judgment mortgage). CORPORATE INSOLVENCY 5.15 Under the 2003 Regulations corporate insolvency is confined to situations which come within Section 213 (e) of the Companies Act 1963. This sub-section reads as follows: A company may be wound up by the court if (e) the company is unable to pay its debts RECEIVERSHIP 5.16 The High Court considered the application of the 1980 Regulations in the context of a receivership in the case of Mythen v- Employment Appeals Tribunal [1980] 1 IR 98. In that case an employee whose employment had been terminated by a receiver appointed by a debenture holder on grounds of redundancy on the same day as the part of the business in 49

which he was engaged was sold to a purchaser successfully argued that Irish domestic legislation relating to redundancy and unfair dismissals should be interpreted in light of the provisions of the Acquired Rights Directive. 5.17 The High Court reviewed in detail Abels case and affirmed the importance of judicial control in determining whether the exclusion from the Acquired Rights Directive should apply. It was held that it could not be assumed that because the Directive would not apply to a court ordered liquidation that it would not also apply to a receivership which was an extra-judicial process. VOLUNTARY LIQUIDATION 5.18 In Blaney and others v- Vanguard Plastics Ireland Limited (in voluntary liquidation) and others3 the Employment Appeals Tribunal (EAT) considered whether the Acquired Rights Directive and the 1980 Regulations applied to the sale by a liquidator of a business as a going concern. The liquidator had been appointed by the members of the company in general meeting as part of a members voluntary liquidation process. During the course of the liquidation the company continued to trade. The purchaser of the business, the second named respondent in the action, claimed that the business was insolvent and that although the liquidator continued to trade that was with a view to maximising the value of its assets. 5.19 The case is instructive because in the course of the decision the EAT reviewed the ECJ authorities and also had regard to the provisions of Council Directive 98/50/EC which contained the

EAT case no. UD 271/00

50

provisions relating to insolvency similar to those now set out in Article 5 of the Directive. The EAT held that the 1980 Regulations would apply to a transfer of the business unless the company involved is the subject of a court liquidation (and has been adjudged insolvent by a competent judicial authority). 5.20 The majority decision of the EAT stated We are of the opinion, by a majority, that unless the winding up of a business results in the cessation of that business in its entirety the Directive, the purpose of which is clearly to protect employment, logically should apply to the situation. 5.21 5.22 The principal ECJ authorities considered by the EAT were: (a) In the Jules Dethier quipment case4 [1998] ECR 1061 the

company was in court ordered liquidation but was not under Belgian Law the subject of insolvency proceedings. The objective of the procedure was the liquidation of the companys assets for benefit of its creditors. The company had continued to trade during the liquidation. The ECJ held the Directive applies in the event of a transfer of an undertaking which is being wound up by the court if the undertaking continues to trade. (b) In the case of Sanders [1998] ECR 6965 the company was

in voluntary liquidation and the ECJ commented: it should be noted that the reasons which led the court to hold in Dethier Equipment that the Directive can apply to transfers that occur while an undertaking is being wound up by the court are all the

Jules Dethier Equipement SA v-v Jules Dassy, Sovram SPRL, in liquidation

51

more pertinent when the undertaking transferred is being wound up voluntarily. EXAMINERSHIP 5.23 In the case of DUrso and others v- Ercole Marelli [1991] ECR 3057 the ECJ held that the Acquired Rights Directive applied to the company which was undergoing a compulsory Court administrative liquidation where by Order it had been decided that the undertaking was to continue trading for so long as that decision remained in force. 5.24 Applying the analysis of the DUrso case and the new definition of insolvency contained in the 2003 Regulations the appointment of an examiner under the Companies (Amendment) Act 1990 would seem to come within the provisions of the Directive and is not specifically covered by the exceptions set out in Regulation 6 of the 2003 Regulations. FAILURE TO COMPLY WITH 2003 REGULATIONS 5.25 A significant feature of the 2003 Regulations is the possibility that a Court will, in the event of any claim brought before it, examine the motivation of the parties in instituting the insolvency proceedings. It is difficult to see how, in the absence of clear bad faith, a Court can come to a conclusion that the the sole or main reason for the institution of a bankruptcy or insolvency proceedings in respect of a transferor is the evasion of an employers legal obligations5 under the 2003 Regulations. The

Section 5(3) of 2003 Regulations

52

effect of such a determination by a Court is that the 2003 Regulations will apply to a transfer effected by that transferor. 5.26 Nonetheless, insolvency practitioners will now have to actively consider the situation of employees and the possible application of the 2003 Regulations in circumstances where assets or businesses are disposed of as part of the winding up of a companys affairs. 5.27 Any strategm to avoid the application of the 2003 Regulations may fall foul of Regulations 5(3) and/or 9 (1). The latter provides that any provision in any agreement shall be void insofar as it purports to exclude or limit the application of the 2003 Regulations. 5.28 The penalties for failure to comply with the notification and consultation of employees requirements of the 2003 Regulations and the overall remedies for employees set out in the Regulations should also be considered. CONCLUSION 5.29 The introduction in the 2003 Regulations of a definition of bankruptcy and insolvency proceedings for the purpose of excluding such proceedings from the ambit of the Regulations will provide enhanced clarity to practitioners in determining whether the 2003 Regulations must be considered at the time of disposal of assets of the business. 5.30 The motivation of parties in instituting insolvency proceedings which have the effect of depriving employees of protection of 53

the 2003 Regulations is likely to be the subject of judicial examination. While this is consistent with the approach adopted by the ECJ since the Acquired Rights Directive was introduced the inclusion of a specific sanction for abuse of the insolvency exclusion may have the effect of further limiting the circumstances in which employers seek to rely on the exclusion.
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