20 corporate recovery
FPN takes off from a broad base
The insolvency test
David Kendall of Penningtons Solicitors LLP considers the definition of insolvency in the light of a recent Supreme Court decision
New Southampton-based business FPN is focused on corporate finance and transactional activity over a wide range of sectors, and with management teams at different stages in their business lives working for companies across a wide range of financial positions and profitability
Its wide client base makes it a particularly good barometer of the state of the transactional market in the south.
Directors Rosemary Penn-Newman and Antony Fanshawe (pictured) set out to replicate and develop the model pioneered by Fanshawe Lofts, of having a corporate finance service working in tandem with a corporate recovery business. “However, our experience so far has led us to decide to invest mainly in our corporate finance business, because the demand for our services has overwhelmingly been for strategic advice, sale mandates, assistance with acquisitions and raising new finance both debt and equity,“ commented Penn-Newman.
“We have advised on the acquisition of Portsmouth Football Club by the Pompey Supporters‘ Trust and we are working on several exciting deals which we hope will come to fruition shortly. They cover a wide range of sectors, including technology, media, chemicals, sport and leisure and alcohol.“
Fanshawe continued: “The evidence so far is anecdotal, but we think that there will be growth in the number of management teams looking for exits and in the appetite of trade purchasers. Some of that we think will come from overseas, as our corporate assets are now looking quite
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cheap with the fall in the value of sterling, but there is a tremendous amount of cash being held by UK corporates – I read an estimate of £700 billion recently, which, at some point, needs to find an income generating home or be recycled back to shareholders.
“So far as funders are concerned, the story is largely the emergence – or re-emergence – of financial sources. Some will come from corporate treasuries, and some from the community, such as occurred with Portsmouth FC, some from crowd funding and we think we will see an increase in demand for asset-based lending this year in the light of continued depressed bank lending to SMEs.“
FPN anticipates a much better year for corporate finance than has been seen for some time.
Details: Antony Fanshawe
023-8038-1956/07979-103275
antony@fpn.uk.com
Rosemary Penn-Newman 07798-886525
rosemary@fpn.uk.com
www.fpn.uk.com
The Insolvency Act 1986 itself does not define insolvency. Instead the Act uses the expression “unable to pay its debts“. This is specified in section 123 of the Act. The definition sets out certain circumstances in which a company will be deemed to be unable to pay its debts, including:
• where a company is unable to pay debts as they fall due (commonly referred to as the cashflow test); and
• where the value of a company‘s assets is less than its liabilities taking into account contingent and prospective liabilities (commonly referred to as the balance sheet test).
A company may be cashflow solvent but balance-sheet insolvent (or vice versa). Some companies operate permanently in this state particularly where a company has sufficient revenue to pay its debts as they fall due (and so is not cashflow insolvent) but is balance sheet insolvent as its liabilities exceed the value of its assets.
The recent Supreme Court case, BNY Corporate Trustee Services and others vs Eurosail-UK 2007-3BL PLC and others [2013], concerned loan notes which included the issuer not satisfying the balance sheet test as an event of default. Although the issuer continued to pay its debts as they fell due, some noteholders argued that it had become insolvent on the balance sheet test.
The Supreme Court decided that the cashflow test is relevant in relation to the company‘s current debt as well as debts falling due in “the reasonably near future“. What constitutes the reasonably
THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – JULY/AUGUST 2013
near future will depend on all the circumstances. Where it is necessary to move beyond the reasonably near future any attempt to apply the cashflow test is purely speculative, and the balance sheet test “becomes the only sensible test“.
The court held that the balance sheet test is not a simple mathematical exercise and that whether or not the company “had reached the point of no return“ was not the appropriate question. Instead, whether or not the company is balance sheet insolvent would depend on all the available evidence as to the circumstances of the case. The court must assess whether the company can reasonably be expected to meet its liabilities, looking at the assets and making proper allowance for prospective and contingent liabilities.
In the BNY case
the assets of the issuer were affected by “imponderable“ factors and its liabilities could be deferred until 2045. In these circumstances the court could not be satisfied that the company was unable to pay its debts.
Details: David Kendall 01483-791800
david.kendall@
penningtons.co.uk www.penningtons.co.uk
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