Insolvency and bankruptcy

Negotiation Anatomy™ →Go uptown 123 Definition of inability to pay debts. (1) A company is deemed unable to pay its debts— (a) if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company’s registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or (b) if, in England and Wales, execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part, or (c) if, in Scotland, the induciae of a charge for payment on an extract decree, or an extract registered bond, or an extract registered protest, have expired without payment being made, or (d) if, in Northern Ireland, a certificate of unenforceability has been granted in respect of a judgment against the company, or (e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due. (2) A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities. (3) The money sum for the time being specified in subsection (1)(a) is subject to increase or reduction by order under section 416 in Part XV. Walk-away | Escalation | Algorithm | Heuristic | subject matter expert | Operationalisation | Playbook | Smart contract | Dead horse | Knife fight | 7 wastes | Cruddy legal advice Index: Click ᐅ to expand: Negotiation Negotiation hacks Contract Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

A credit officer’s blackest fear.

The statutory definition of insolvency in the UK appears in Section 123 of the Insolvency Act 1986, and is set out in the panel, and includes cashflow insolvency (123(1)(e)) and balance sheet insolvency (Section 123(2)).

The above only applies to UK persons, of course.

Broadly, it means you do not have sufficient assets to meet your liabilities, and you are no longer a viable business. Your creditors are entitled to apply to the court for the appointment of a receiver who will liquidate your assets, determine your liabilities, and distribute the proceeds of that liquidation to your creditors pro rata. After that, the game is up and you no longer exist.

There are all sorts of special regimes and intermediate statuses in different jurisdictions (such as America's famous Chapter 11 protection - designed to help a struggling company reorganise itself and get out of insolvency without going to the wall - and banks and financial institutions generally will be subject to bank resolution and recovery regimes which make the winding-up process a little bit more complicated.

Termination upon insolvency

Credit officers will hotly deny this, but when it comes to closing out a master trading agreement there are two main triggers: failure to pay and bankruptcy/insolvency. They also tend to be the most lightly negotiated — it’s hard to argue that your counterparty shouldn’t be allowed to pull its trigger if you are insolvent.

Still, there are some nuances to what counts as insolvency. It may differ for different entity types: banks and insurers, in particular, having special local administrative regimes or recovery and resolution frameworks which ameliorate the hard lines between solvency and oblivion. So expect a little jiggery-pokery around the edges in defining what counts as an “insolvency event”. But it is not contentious stuff; just detail.

Where these suspension rights stop you quickly closing out and netting your exposures they might mean your netting analysis fails altogether. This gives you real-world, present time problems, since you must hold capital against the gross exposure under the contract.

See also

• Bankruptcy under the ISDA Master Agreement