Corporate Recovery & Corporate Recovery & Insolvency ServicesInsolvency Services

A Presentation to The Bahamas Institute of Chartered AccountantsA Presentation to The Bahamas Institute of Chartered AccountantsByBy

Jeffrey Beneby, CAJeffrey Beneby, CAPrincipalPrincipal

Beneby & CompanyBeneby & Company

November, 2004November, 2004

Definition of InsolvencyDefinition of Insolvency

• The Debtor is unable to pay their The Debtor is unable to pay their debts as they fall due (the cash-flow debts as they fall due (the cash-flow test).test).

• The liability of the Debtor exceeds The liability of the Debtor exceeds their assets (the balance sheet test).their assets (the balance sheet test).

Pre-Insolvency DecisionsPre-Insolvency Decisions

Find new money from:Find new money from:

• Increase capitalIncrease capital

• Make voluntary arrangements with Make voluntary arrangements with creditors, extend credit, reduce interest creditors, extend credit, reduce interest rate and payment terms.rate and payment terms.

• Find new investors.Find new investors.

• Merge or split the company.Merge or split the company.

• Sell off certain activities.Sell off certain activities.

• Increase in-going cash flow or decrease Increase in-going cash flow or decrease costs.costs.

Pre-Insolvency Decisions, Pre-Insolvency Decisions, continuedcontinued

AlternativelyAlternatively

• Replace the managementReplace the management

• Replace shareholders (Management Replace shareholders (Management buy-out)buy-out)

• Appoint a ReceiverAppoint a Receiver

• Go into voluntary liquidationGo into voluntary liquidation

Laws & Rules Governing Laws & Rules Governing InsolvencyInsolvency

• The Company’s ActThe Company’s Act

• Conveyance & Law of Properties ActConveyance & Law of Properties Act

• Rules of the Supreme CourtRules of the Supreme Court

• Case LawCase Law

Who can place a company into Who can place a company into Insolvency!Insolvency!

• Members?Members?

• Creditors?Creditors?

• Regulators?Regulators?

ReceivershipsReceiverships

• Members-voluntaryMembers-voluntary

• Members-Court SupervisedMembers-Court Supervised

• Secured creditorSecured creditor

Receiverships, continuedReceiverships, continued

• ReceiverReceiver

• Receiver and ManagerReceiver and Manager

• Powers of Officers and Directors Powers of Officers and Directors continued in a general way, but not continued in a general way, but not to interfere with the authority to interfere with the authority granted to the Insolvency granted to the Insolvency Practitioner.Practitioner.

LiquidationsLiquidations

The main purpose:The main purpose:

• For a just distribution of the net For a just distribution of the net assets of the companyassets of the company

• Termination of a Company’s Termination of a Company’s existence.existence.

Liquidations, continuedLiquidations, continued

Upon execution of instruments of an Upon execution of instruments of an Insolvency Practitioner’s appointment:Insolvency Practitioner’s appointment:

• The company’s assets transfer to the The company’s assets transfer to the control of the practitioner.control of the practitioner.

• Rights of unsecured creditors are frozen.Rights of unsecured creditors are frozen.

• Possible able to claw back some Possible able to claw back some advantages received by other litigious advantages received by other litigious creditorscreditors

• Can call the officers and directors to Can call the officers and directors to account for their conduct.account for their conduct.

Voluntary LiquidationsVoluntary Liquidations

• Members’ resolution by passing a Members’ resolution by passing a special resolution at a general or special resolution at a general or special meeting.special meeting.

• Creditors liquidation through Creditors liquidation through members’ resolution as above.members’ resolution as above.

• Officers and Directors powers cease.Officers and Directors powers cease.

Compulsory LiquidationsCompulsory Liquidations

• Winding up by the Supreme Court as Winding up by the Supreme Court as a result of a formal petition by a result of a formal petition by members or creditors.members or creditors.

• Powers of officers and directors Powers of officers and directors cease and all employments contracts cease and all employments contracts are terminated.are terminated.

Cross-Boarder InsolvenciesCross-Boarder Insolvencies

• Where assets and or subsidiaries operate in Where assets and or subsidiaries operate in other jurisdictions away from the home other jurisdictions away from the home country.country.

• Jurisdiction is with country or state of Jurisdiction is with country or state of incorporation of the company or its parent.incorporation of the company or its parent.

• Co-operations between courts and Co-operations between courts and International comityInternational comity

• Need for tracing assets.Need for tracing assets.

• Mareva InjunctionsMareva Injunctions

Tracing AssetsTracing Assets

• May be subject to tracing where fraud or May be subject to tracing where fraud or other impropriety is suspected.other impropriety is suspected.

• E.g.. A dishonest company director, E.g.. A dishonest company director, misappropriate company assets by misappropriate company assets by transferring them to dummy company that transferring them to dummy company that he controls in return for an illusory he controls in return for an illusory consideration. Funds are electronically consideration. Funds are electronically transferred between various jurisdiction and transferred between various jurisdiction and some may be utilize for personal expenses some may be utilize for personal expenses or purchase personal property in the original or purchase personal property in the original jurisdiction.jurisdiction.

Identifying CreditorsIdentifying Creditors

• Proof of debt.Proof of debt.

• Time certain for accessing claims.Time certain for accessing claims.

• Contact secured creditorsContact secured creditors

Identifying AssetsIdentifying Assets

• Audited financial statementsAudited financial statements

• Interim financial statementsInterim financial statements

• General LedgerGeneral Ledger

• Other specifically maintained asset Other specifically maintained asset registers (e.g.. investments, registers (e.g.. investments, receivables, fixed assets or bank receivables, fixed assets or bank accounts)accounts)

Conducting of the Conducting of the InsolvencyInsolvency• All correspondence should clearly indicate that All correspondence should clearly indicate that

the company is insolvent.the company is insolvent.• Meeting and accountsMeeting and accounts• Realization of assets (power of sale)Realization of assets (power of sale)• Tracing of assets if necessaryTracing of assets if necessary• Identifying creditorsIdentifying creditors• Litigating if requiredLitigating if required• Suggest Court Order for any major decisions Suggest Court Order for any major decisions

especially sale or disposal of major assets.especially sale or disposal of major assets.• Distribution to creditors (interim or final) Distribution to creditors (interim or final)

dividends or return of capitaldividends or return of capital

Marshalling & Distribution of Marshalling & Distribution of AssetsAssets

• Cost & expenses including Insolvency Cost & expenses including Insolvency Practitioner remuneration.Practitioner remuneration.

• Preferred creditorsPreferred creditors

• Ordinary creditorsOrdinary creditors

• MembersMembers

Need For Insolvency ActNeed For Insolvency Act

• Can give relief to individual as well Can give relief to individual as well corporations to make voluntary arrangement corporations to make voluntary arrangement (legal contracts) for the satisfaction of debts, (legal contracts) for the satisfaction of debts, which upon being accepted is binding upon all which upon being accepted is binding upon all creditors and controlled by an Insolvency creditors and controlled by an Insolvency Practitioner.Practitioner.

• Defines who is qualified to perform insolvency Defines who is qualified to perform insolvency services.services.

• Specify details guidelines and code of conduct Specify details guidelines and code of conduct for Insolvency Practitioners.for Insolvency Practitioners.

Compensation of Insolvency Compensation of Insolvency PractitionersPractitioners

• DependsDepends

• You and your staff hourly rates.You and your staff hourly rates.

• Premium rates depending on Premium rates depending on complex legal or cross-border issues.complex legal or cross-border issues.

• 2% of assets recovered.2% of assets recovered.

• Engagement letter is recommended Engagement letter is recommended but is not the norm.but is not the norm.

Relationship with AttorneysRelationship with Attorneys

• Need to retain a psychiatrist first.Need to retain a psychiatrist first.• Need to retain a spiritual advisory second.Need to retain a spiritual advisory second.• Stay away from the devil, Attorneys are his Stay away from the devil, Attorneys are his

agents.agents.• Adversaries are seeking to maximize their fees Adversaries are seeking to maximize their fees

and will seek any opportunity to write or e-mail or and will seek any opportunity to write or e-mail or file frivolous law suits that they know they cannot file frivolous law suits that they know they cannot win.win.

• Seek to disrupt the Insolvency Practitioner job Seek to disrupt the Insolvency Practitioner job and try to control the Insolvency to their clients and try to control the Insolvency to their clients advantage.advantage.

Relationship with RegulatorsRelationship with Regulators

• NoneNone

• Communicate out of courtesy.Communicate out of courtesy.

Importance of Case LawImportance of Case Law

• Very important.Very important.

• The Law surrounding Insolvencies The Law surrounding Insolvencies consist a great deal on legal consist a great deal on legal precedent. precedent.

• Almost every situation you encounter Almost every situation you encounter you can find at least one case to you can find at least one case to support it.support it.

Working PapersWorking Papers

• Basically this is your callBasically this is your call

• You have to keep records of creditors names You have to keep records of creditors names and addresses and claims.and addresses and claims.

• Records of your collection and Records of your collection and disbursements.disbursements.

• Statement of AffairsStatement of Affairs

• Record of Dividend or return of capital Record of Dividend or return of capital paymentspayments

• No time set. But in the U.K. this is 10 years.No time set. But in the U.K. this is 10 years.

Engaging The Insolvency Engaging The Insolvency PractitionerPractitioner• Normally by Board or Members ResolutionNormally by Board or Members Resolution• Legal document prepared by the Petitioner’s Legal document prepared by the Petitioner’s

attorney.attorney.• Court PetitionCourt Petition• Recommend preparing a separate engagement Recommend preparing a separate engagement

letter defining scope, fees, frequency of letter defining scope, fees, frequency of payments, dispute resolution, termination, payments, dispute resolution, termination, frequency of communications with client, frequency of communications with client, frequency of reporting, etc.frequency of reporting, etc.

• IndemnificationIndemnification• Reasonable retainerReasonable retainer

Professional Responsibility & Professional Responsibility & Liability of The Insolvency Liability of The Insolvency PractitionerPractitioner• Great exposure for personal liability.Great exposure for personal liability.

• Liability limited for your action that Liability limited for your action that may be in bad faith and breaches of may be in bad faith and breaches of fiduciary duties.fiduciary duties.

• Liability should not be personal Liability should not be personal except for above and should be a except for above and should be a charge against the company’s charge against the company’s assets.assets.

Insolvency Practitioner-Insolvency Practitioner-Responsible To Whom?Responsible To Whom?

• Who is your Client?Who is your Client?

• The Petitioner?The Petitioner?

• The Creditors?The Creditors?

• The Shareholders?The Shareholders?

• The Court?The Court?

• The Regulator?The Regulator?

Library Resources a MustLibrary Resources a Must

• Kerr on ReceivershipKerr on Receivership• The Companies ActThe Companies Act• The Conveyance and Law of Property ActThe Conveyance and Law of Property Act• The Supreme Court RulesThe Supreme Court Rules• Tolley’s Corporate InsolvencyTolley’s Corporate Insolvency• Loose on LiquidatorsLoose on Liquidators• Resue of Companies-AIJA Law LibraryResue of Companies-AIJA Law Library• International Tracing of Assets by Michael Ashe, International Tracing of Assets by Michael Ashe,

QC and Barry RiderQC and Barry Rider• Cross-Border Insolvency by ButterworthsCross-Border Insolvency by Butterworths• NexusNexus

Reporting & How OftenReporting & How Often

• Court appointed required more Court appointed required more frequent reportingfrequent reporting

• Non-Court appointed depends on Non-Court appointed depends on your terms of engagement.your terms of engagement.

• When something major has occurred When something major has occurred such as the sale or recovery of such as the sale or recovery of significant assets or payment of significant assets or payment of dividends or returns to members.dividends or returns to members.

Concluding The Concluding The EngagementEngagement• Call final meeting of CreditorsCall final meeting of Creditors• Distribute any final dividends or returns to Distribute any final dividends or returns to

membersmembers• Present Final ReportPresent Final Report• File Report with Court in Case of File Report with Court in Case of

Compulsory or Court Supervised InsolvencyCompulsory or Court Supervised Insolvency• File Report with Registrar of Companies File Report with Registrar of Companies

with Minutes of final meetingwith Minutes of final meeting• Get paidGet paid• Vacate officeVacate office