You are about to enter a new dimension. A world not only of law and of the Insolvency Act 1986, but of equity. You are about to enter… The Twilight Trust Zone!
Cash-flow is the life blood of a company. As a company fails the flow of this vital sustenance grows weaker. The heart stutters and fails. The company is dying. Worse, it is unable to meet its liabilities as they fall due, and so fails one of the statutory tests of insolvency.
When the company collapses, the cash flowing through the company’s veins, like all other assets, is taken by the dreaded “Insolvency Practitioners”. Is there any way in which it might avoid this fate? Come, reader, and let me show you…
Edward was a director of Cullen and Sons, coffin makers. Times were hard in the coffin making business – fewer and fewer customers wanted the bespoke top of the range items that Edward and his family specialised in. One day, Edward was contacted by Jacob, a potential customer. He wanted a bespoke coffin and was prepared to pay a fifty percent deposit up front. Edward accepted this deposit and placed it in the company’s main account.
One order was not going to change this company’s fate, however, and Edward sensibly spoke to a Turnaround Consultant before time ran out. He was given many wise words of advice. Among these, Edward was told that in order to minimise his potential personal liability as a director of a company that might become insolvent, he was obliged to do all he could to minimise losses to creditors. One way of doing this was to create a trust, in which to hold deposits from customers taken during the “Twilight” period while the company’s fate remained uncertain.
Edward took the advice and established a separate Twilight Trust account. A deposit received from another new customer, Bella, was paid straight into the account. An amount reflecting deposits paid by Jacob and others were also paid from the main account into the trust account.
And how did the tale end? Was all well? I am afraid not…
The company became insolvent. Bella’s deposit, received and held throughout on trust was returnable to her. In the case of Jacob, however, a very different fate awaited. His money had been received by the company and held as part of the company’s cash assets. As such, the transfer into a trust was an improper “preference” payment made by the company – it benefitted Jacob and other creditors like him, but depleted the assets available for the liquidator to distribute to the remaining creditors.
Using the powers they derived from the Insolvency Act, the Liquidators unravelled the preferential transaction, and the monies paid over flowed back into the reservoirs that were now within those Liquidators’ control.
Jacob never saw them again.