Business Law

Insolvency Procedures | Business Law – SQE1 & SQE2 Exam

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Insolvency Procedures
• 15th September 2003 – date that the Enterprise Act 2002 came into force,
introducing a new regime under IA 1986 to bring in a rescue culture = ‘relevant date’
o Supported by Insolvency Rules 2016
• Collective procedures – for the benefit of all the creditors as a whole, both secured
and unsecured (administration and liquidation)
o Secured creditor has a proprietary right to certain assets and can therefore
look to proceeds of these assets to recover claim
o Unsecured creditors – no such right
• Enforcement procedures (not strictly speaking insolvency procedures) => secured
creditors enforce security for their sole benefit, applying proceeds of sale of secured
assets to pay off own debts owed (administrative receivership = receiver appointed
by single secured creditor for their own benefit)
© Liam Porritt 2020 2
Informal (Consensual) agreement
• Agreement (with contractual force) in the sense that major creditors (usually
secured creditors) and the company in financial difficulty agree a deal in order to
save the company
o Restructuring agreement, facility agreement, security documents
o Stand-still agreements => agreement not to sue debtor while negotiation
takes place
• Only works where all the major creditors agree to terms
Formal agreements
• Schemes of arrangement under ss. 895 – 901 CA 2006
• Company voluntary arrangements (CVAs) under ss 1-7 IA 1986
• Creditor cram-down => majority of creditors agree on a deal proposed by the debtor
+ this will bind the minority
Schemes of arrangements
• Arrangement:
o Agreed by ≥ ¾ in value of each relevant class of creditor
o Agreed by majority in number (> 50%) of each relevant class of creditor
o Sanctioned by the court
• Once sanctioned, binds all creditors, including those dissenting + unknown
• Where company wishes to compromise secured liabilities and does not have 100%
agreement among secured creditors, scheme of arrangement is only method of
obtaining compromise
© Liam Porritt 2020 3
CVAs (Company Voluntary Arrangements)
• Generally cheaper, quicker and easier than Scheme of Arrangement
• Timetable for repayment (usually in part) of liabilities owed to (usually) unsecured
creditors which will enable the company to survive
• Alternatively, CVA may achieve better asset realisation and distribution than on
winding up
• CVA cannot compromise rights of secured creditors (including right to enforce
security) or the rights of preferential creditors without their unanimous consent
• Therefore, secured creditors rarely vote in favour of a CVA + consensual agreement
(combined with CVA) or scheme of arrangement may be needed
Setting up a CVA
• CVA implemented and supervised by supervisor, who is the nominee until the CVA is
approved => must be a licenced insolvency practitioner (IP)
1. Directors of company (advised by IP) formulate a written proposal for repayment /
restructuring debt in conjunction with major creditors + specify nominee
2. Nominee seeks creditors’ approval for CVA using procedure under IR 2016, giving at
least 14 days’ notice of meeting = Creditors’ decision made
a. ≥ ¾ in value of creditors who respond vote in favour
b. > 50% in value of unconnected creditors (i.e. ignoring claims of related
companies)
3. Nominee calls separate meeting of company’s shareholders held within 5 days of
creditors’ decision => approve CVA by OR
• If creditors (with or without shareholder approval) approve CVA, it binds all creditors
+ their claims dealt with in accordance with CVA
CVA Challenges
• Creditor can challenge CVA within 28-day period of date of filing nominee’s report
on approval of CVA
• Grounds =>
o Unfair prejudice (i.e. creditor treated unfairly compared to others); or
o Material irregularity (relating to procedure for approving CVA)
• CVA binding at end of 28-day challenge period
© Liam Porritt 2020 4
Supervisor’s role
• Directors propose CVA = directors remain in place under CVA + powers limited only
as specified in CVA
• Supervisor =>
o Generally ensure that company complies with CVA obligations
o Collect funds to be used for distribution to creditors
o Send final report on implementation of proposal to all members + creditors
bound by CVA, then step down
CVAs + other insolvency procedures
• Administrator / liquidator can propose CVA
• Company may need benefit of administration moratorium to prevent creditors
taking hostile action during period between sending out of notice to creditors and
CVA decision procedure
• Small companies may apply to court for short moratorium (28 days) to propose CVA,
providing protection from creditor action until decision on CVA proposal
© Liam Porritt 2020 5
Administration – Schedule B1 of IA 1986
• Where company insolvent, generally enter into administration first and then possibly
into scheme of arrangement, CVA or liquidation
• Moratorium prevents creditors without court or administrator consent from
exercising their usual rights and remedies (e.g. right to enforce security / terminate
lease by re-entry / ceasing possession of goods to which creditor has title)
Statutory purpose of an administration (Sch B1, paragraph 3(1))
a) Primary objective = rescue of the company as a going concern
b) If (a) not reasonably practicable / would not achieve a better result for the creditors
as a whole, then the objective is achieving a better result for creditors as a whole
than on winding up
c) If neither (a) nor (b) is reasonably practicable and provided an administrator does
not unnecessarily harm the interests of the creditors as a whole, then the objective
is realising property in order to make a distribution to one or more secured or
preferential creditors
Appointment of administrators
Who can apply to court for administration order?
• Company by OR
• Directors by BR
• Creditor
• Supervisor of a CVA
• Liquidator
Who can use the out-of-court procedure to appoint an administrator?
• Company acting through members (rare)
• Directors (most common as QFCH generally do not want publicity)
o Where creditor has begun winding-up proceedings, out-of-court
appointment procedure unavailable, and therefore must apply to court for
appointment of administrator
§ If court makes administration order, pending winding up proceedings
are automatically dismissed
• Qualifying floating charge holder (QFCH)
o Where winding-up petition, QFCH may still use out-of-court procedure and
petition automatically suspended
© Liam Porritt 2020 6
Qualifying floating charges
• Debenture containing floating charge + fixed charges over (substantially) whole of
company’s assets
• Debenture usually includes provision giving right to qualifying floating charge holder
(QFCH) to appoint an administrator following an event of default under the loan
agreement => only valid if floating charge created is qualifying floating charge
o Sch B1, paragraph 14 IA 1986 – QFC =
§ Floating charge as created, including any floating charge which has
crystallised
§ Floating charge over whole or substantially the whole of the
company’s property (either alone or in conjunction with other
security); and
§ Charging document states either:
• Para 14 applies
• Gives holder right to appoint
o Administrator; or
o Administrative receiver
Effective date of appointment
• Where o-o-c procedure by QFCH, QFCH files notice of appointment at court and
appointment commences on later of:
o Date of filing
o Service of notice on prior QFCH
• Where o-o-c procedure by directors / company:
o File notice of intention to appoint administrator at court + serve on any
QFCH, identifying proposed administrator and giving QFCH 5 days’ notice of
intention to file notice of appointment with court
o QFCH may appoint own choice of administrator within 5-day period if:
§ Security enforceable +
§ Has right to appoint administrators at this point of time
o NB in practice, usually QFCH will here have already liaised with directors,
made preferred administrator known, and then will consent to appointment
of administrator within a matter of hours
o AT end of 5 days or on QFCH consent, directors make appointment by filing
notice of appointment with court within a further 5-day window
o Administrators appointed on filing of notice of appointment
© Liam Porritt 2020 7
Administration moratorium
• Appointment of administrator creates an immediate moratorium, whereby (except
with consent of court / administrator):
i. No order or resolution to wind up company can be made / passed
ii. No administrative receiver of company can be appointed
iii. No steps can be taken to enforce security / repossess goods
iv. No legal proceedings, execution or other process can be commenced or
continued against company or its property
v. A landlord cannot forfeit a lease of company’s premises by means of
peaceable re-entry
• Interim moratorium where:
o Application made to court for appointment of administrator
o Notice of intention to appoint administrator filed
• However, neither of these prevent QFCH appointing own administrator o-o-c
Powers and duties of the administrator
• Pending appointment of administrator, directors should preserve company’s
business and assets until administrator appointed
• Following appointment:
o Administrator must publicise appointment
o Company stationery must state company in administration
Duties
• Aim of achieving chosen purpose of administration
• Directors unable to exercise any management power without consent of
administrator
• Administrator acts as agent + incurs no personal liability provided he acts within
powers
• Administrator = officer of the court (even if appointed using o-o-c procedure) + has
duty to:
o Court +
o Act in the interests of all the creditors
© Liam Porritt 2020 8
Powers
• Sch 1 IA 1986 –
o Power to carry on business of company
o Take possession and sell property of company
o Raise money on security
o Execute documents + deeds
• Do not have power to pay dividend to unsecured creditors without court permission
(i.e. must enter liquidation to do so)
o Do have power to pay dividend to secured creditors out of proceeds of
creditor’s security +
o To pay prescribed part dividend to unsecured creditors out of the “prescribed
part” fund +
o To propose a CVA / scheme of arrangement on terms that he has the power
to make dividend payments, or the administration will end and liquidators
will be appointed to make the distribution
• Power to apply to court to make order to set aside (“claw back”) certain voidable
transactions (antecedent transactions) which occurred before administration
• Power to sue directors for wrongful / fraudulent trading
Termination
• Terminates automatically after 12 months
o One-year extension possible if creditors agree
• Court may sanction any extension
• Administrators can bring administration to an end w/out court by filing notice with
court
Pre-pack administrations
• Administrator sells business + assets as going concern very soon after appointment
• Terms of sale agreed before appointment + become effective immediately following
appointment
• Concerns re: whether this achieved the best price of the assets for creditors, and
therefore more regulation introduced (SIP 16)
© Liam Porritt 2020 9
Receivership
Fixed charge receivers
• Appointed by holder of fixed charge in circumstances set out in loan / security
documentation
• Limited powers under LPA 1925 + powers under security documentation
• Receiver only of property charged – not entitled to deal with any other property of
the company / manage the company’s business
• But not where administrative moratorium
Administrative receivers
• Pre-EA 2002, debentures generally provided lenders quick and cheaper method of
enforcement through AR
• AR appointment = procedure to enable secured creditor to enforce security by
realisation of assets
• EA 2002 effectively abolished receiverships re: QFCs created on or after Relevant
Date (15th September 2003), with limited exceptions in special transactions
• Pre-Relevant Date QFCHs retain the right to appoint an AR
• AR owes duty to appointer, so pre-RD QFCHs are in better position than later QFCHs
Appointment of AR
• QFCH with rights to appoint AR with pre-RD charge may appoint:
o Following event of default + creditor accelerates loan and makes demand for
immediate repayment which debtor does not satisfy; or
o Where loan repayable on demand, following charge holder making demand
for repayment + debtor does not satisfy demand
Powers of ARs
• Express powers in debenture
• Extensive powers in Sch 1 to IA 1986 (same as administrator)
• NB no moratorium
AR’s role and duties
• Required to be licenced IP
• Agent of company, but primary duty to appointor
• AR both receiver and manager – sell assets secured by charge under which
appointed while running business
• Order of priority for payments on realisation of assets by AR is same as on winding
up
© Liam Porritt 2020 10
Liquidation
• Liquidation is the most basic insolvency procedure
• Function –
o Realise company’s assets for cash (generally piece-meal sale);
o Determine identity of company’s creditors;
o Amount owed to each of them; and
o Pay dividend to the creditors on a proportionate basis relative to the size of
their determined claims
§ Creditors of same rank = pari passu
• Ranking of creditors set out in IA 1986, IR 2016 and general law
• Liquidation may be:
o Compulsory
o Voluntary
§ Members’ voluntary liquidations (solvent liquidations); and
§ Creditors’ voluntary liquidations (insolvent loiquidations)
Nature of liquidation
• Liquidation ≠ rescue mechanism => liquidator has very limited powers to carry on
the business of a company
• Usually close business and dismiss employees very soon after his appointment
• Sell assets piece-meal rather than as a going concern
• Statutory moratorium very limited
Liquidation following administration
• Administrators do not generally have the power to pay a dividend to unsecured
creditors (other than prescribed part dividend to be paid to them)
• Where there is a dividend to be paid to them, companies in administration may later
enter into liquidation after the objective of the administration has been achieved =>
purpose of liquidation is to provide mechanism for agreeing creditor’s claims and
payment of a dividend to them
Following liquidation
• Company’s life generally brought to an end automatically by dissolution
• Compulsory liquidation => dissolution 3 months after notice by liquidator to CH that
winding up completed
• Voluntary liquidation => 3 months from filing by liquidator of final accounts and
return
© Liam Porritt 2020 11
Compulsory liquidation
• Applicant presents winding up petition to court under which A requests court to
make a winding up order on statutory grounds –
o A may be:
§ Creditor
• Usually an unsecured creditor who is unable to appoint
administrator through o-o-c procedure, as can a QFCH
• Secured creditor with fixed charge usually appoints fixed
charge receiver to enforce security
§ The company (acting by shareholders)
• Where insufficient funds to fund a voluntary liquidator
§ Directors (by BR)
• Ditto
§ Administrator
§ AR
§ Supervisor of CVA
§ SoS
o Grounds of petition:
§ Insolvency, i.e. inability to pay debts (s 122(1)(f) IA 1986), proved
under s 123 IA 1986:
• Failure by company to comply with creditor’s statutory
demand (written demand in prescribed form, used if debt
exceeds £750 + not disputed, giving company 21 days to pay
debt)
• Creditor sues company, obtains judgement and fails in
attempt to execute the judgment debt
• Proof to satisfaction of court that company is unable to pay its
debts as they fall due (cash-flow test)
o Usually fulfilled by going through statutory demand
process
• Proof to satisfaction of court that value of company’s assets is
less than amount of liabilities, taking into account contingent
and prospective liabilities (balance sheet test)
§ Court being of opinion that just and equitable for company to be
wound up (s 122(1)(g) IA 1986)
• Court issues petition and fixes date for hearing
• A then serves petition on company
© Liam Porritt 2020 12
Voluntary liquidation
Members’ Voluntary Liquidation (MVL)
• MVL = only if company solvent (cashflow and BS solvent)
• Procedure (s 89(1) IA 1986) –
o Directors make statutory declaration that company will be able to pay its
debts in full within a period specified in the declaration (not exceeding 12
months from the commencement of the winding up)
o Attach simplified form balance sheet listing assets and liabilities and showing
assets exceed liabilities
o Notice of intention to put resolution for MVL to shareholders given to QFCH
o Shareholders pass:
§ SR to place company into an MVL; and
§ OR appointing liquidator
• MVL becomes CVL if company becomes unable to pay debts within period (invariably
one year) specified in the statutory declaration
Creditors’ voluntary liquidation (CVL)
• Insolvent liquidation
• Commenced by resolution of shareholders but under effective control of creditors
• Creditors choose liquidator
• Procedure:
o Shareholders pass SR to place company into CVL
o Shareholders may also pass OR to nominate person as liquidator
o Within 14 days of SR, directors must ask creditors to either approve
nominated liquidator or put forward their own choice
o Where creditors choice differs from members’, creditors’ nomination takes
precedence
o Directors daw up statement of company’s affairs setting out assets and
liabilities and send to company’s creditors
© Liam Porritt 2020 13
Liquidator’s power and duties
• Liquidator de facto agent of company w/ extensive statutory powers
o Directors lose powers
• Liquidator’s powers:
o Collect in and realise the company’s assets to distribute them in statutory
order of priority under IA 1986
o Make any compromise or arrangement with creditors
o Bring in or defend action or legal proceeding in the name of and on behalf of
the company
o Maximise the assets available for distribution to the company’s creditors by:
§ Challenging voidable antecedent transactions / sue directors for
wrongful / fraudulent trading
• Power to assign right to wrongful / fraudulent / transactions at
an undervalue claims
§ Disclaiming onerous property (s 178) – both solvent and insolvent
liquidations => e.g. lease, by issuing notice of disclaimer, under which
all rights, interests and liabilities cease
• Person who suffers loss may prove as an unsecured creditor
• Proceedings against the company – before winding up order made, company +
creditor / contributory can apply to court to request provisional order to stay actions
against company (which will be automatically stayed later when winding up order
made)
© Liam Porritt 2020 14
Order of priority in an insolvency (ranking of creditors)
• Liquidator will (and administrator may) distribute assets of company to creditors by
way of dividend
• May be affected by priority / subordination agreement between creditors
Order
1. Liquidator’s costs of preserving and realising assets subject to a fixed charge – paid
out of proceeds of selling the assets subject to the relevant fixed charge
2. Fixed charge creditors in respect of assets subject to a fixed charge / mortgage
– money left over from sale of charged assets after costs of realising assets paid
o Where > 1 creditor with fixed charge over asset, rank in order of creation
o Any amount owed not recovered from sale of assets subject to fixed charge
will be outstanding and recoverable by the creditor following the order of
priority (i.e. under a floating charge if there is one, or unsecured creditor if
not)
o Any amount from sale in excess of amount owed to creditors is available for
creditors down the order of priority
3. Other costs and expenses of liquidation –
o Costs of selling assets secured by floating charge
o Costs of litigation (wrongful trading / voidable transactions) provided prior
approval from
i. Preferential creditors and floating charge holders; or
ii. Court
4. Preferential debts (Schedule 6) –
o Employees for remuneration:
i. Due in the 4 months before the ‘relevant date’ (generally the date of
the winding up resolution or petition)
ii. Up to £800 per employee + accrued holiday pay
o Where company bank / BS, retail deposits
5. Prescribed part fund – set aside for distribution to company’s unsecured creditors,
where post-Relevant Date floating charges (s 176A)
o Net property = proceeds of property – fixed charge property -expenses –
preferential debts
o Prescribed part fund = 50% of first £10,000 + 20% thereafter up to a max.
fund of £600,000
o Does not apply where net property < £10,000
o Floating charge holder who suffers a shortfall on floating charge realisations
does NOT share in PPF, although shortfall constitutes an unsecured claim
against company
© Liam Porritt 2020 15
6. Floating charge creditors – After payment of general expenses of liquidation,
preferential debts + prescribed part, liquidator pays remaining realisations from
assets subject to floating charges to floating charge holders, according to priority of
their security (order of creation)
7. Unsecured creditors – rank equally (pari passu) => NB prescribed part fund NOT for
secured creditors; other assets FOR both secured and unsecured creditors pari passu
o Ordinary trade creditors who have not been paid
o Secured creditors to extent that the security is invalid / insufficient
o Crown debts (VAT, PAYE)
o Employees’ outstanding remuneration
NB secured creditors (both fixed + floating charge creditors) who have not been paid
in full from realisation of assets subject to security can only claim as unsecured
creditors against realisations from unsecured assets – not eligible to PPF
8. Interest on unsecured (including preferential) debts – interest accruing on
unsecured debts from commencement of winding up
9. Shareholders – shareholders who participate in equity of company rank last
o Amongst themselves, ranking depends on rights of classes of shares

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