1 Insolvency and enforcement procedures in England & Wales
2 Contents Introduction...01 Company Voluntary Arrangement (CVA)...02 Scheme of Arrangement (Scheme)...05 Administration / Pre-pack Administration...08 Receivership Liquidation / Winding up...13 Insolvency procedures which apply to natural persons...15 Tax considerations...18 About us...19 Contacts...20
3 01 Introduction This briefing document summarises the key insolvency procedures available for companies and individuals, and is a high level general guide. The information in this briefing document is correct as at 12 March If you have any queries, please contact any of the named individuals on the back page, as this overview does not replace the specialist legal advice that Taylor Wessing provides.
4 02 Company Voluntary Arrangement (CVA) Points to note A CVA is an arrangement by which a company in financial difficulties comes to a compromise or arrangement with its creditors about the basis on which it will repay its debts. The CVA must be approved at meetings of members and creditors of the company. To be binding, the approval of 75% by value of all creditors attending and voting is required (with a proviso that if those voting against the proposal include more than 50% in value of unconnected creditors, the CVA will fail). A CVA binds every member and unsecured non-preferential creditor (even if they did not have notice of or were not present at the respective meeting and/or voted against the proposal). Secured and preferential creditors cannot be affected without their consent. Directors of the company remain in control, but the CVA is supervised by a qualified insolvency practitioner (before the CVA is approved, known as a nominee, and after the CVA is approved as a supervisor ). For small companies (i.e. a company satisfying two or more of the following criteria: (i) turnover of less than 6.5m, (ii) balance sheet of less than 3.26m or less than 50 employees) a partial moratorium is available for 28 days (which can be extended for a further 2 months by shareholder / member consent). The moratorium does not, however, prevent enforcement of security.
5 03 Process of a CVA (without small companies moratorium) Directors, administrator or liquidator propose CVA and submit proposals to nominee Nominee considers proposals and must report to court on whether to call meetings of creditors and members Notice of meetings given to creditors and members Meetings of members and creditors to approve CVA Binding against all creditors if approved by at least 75% by the value of creditors voting in person or by proxy Nominee must report to court on approval (or otherwise) of CVA (CVA can be challenged within 28 days on grounds of unfair prejudice or material irregularity) Nominee becomes supervisor and implements proposals Once the CVA has been fully implemented, the supervisor must make a final report to creditors and members within 28 days
6 04 Advantages of a CVA There is limited court involvement and, as the directors and existing management remain in control, a CVA may cause minimal disruption to business; it can, therefore, also be cheaper than formal insolvency procedures. A CVA is a flexible tool to restructure all or specific liabilities, and can even involve debt for equity swaps, or the transfer of the company s business to a new company leaving behind onerous obligations. As long as requisite voting majorities are achieved, a CVA binds all unsecured non-preferential creditors. The optional moratorium for small companies can provide breathing space. A CVA is recognised as a main proceeding under the EC Regulation on Insolvency Proceedings and can, therefore, be useful in cross-border cases. Disadvantages of a CVA There is no moratorium for companies which are not small companies. In addition, the small companies moratorium is ineffective against secured creditors. Because of this, companies are often put into administration to obtain the benefit of an automatic and full moratorium and a CVA may then be proposed during the administration, but the combination of procedures can be expensive. A CVA cannot bind preferential or secured creditors without their consent.
7 05 Scheme of Arrangement (Scheme) Points to note A Scheme is a flexible compromise or arrangement between a company and one or more classes of creditors or members. Schemes are used by both solvent companies (e.g. acquisitions, group reorganisations, demergers) and insolvent companies (e.g. debt forgiveness, restructuring, and debt for equity swaps). Creditors and members who possess similar interests are grouped together in classes. Of each class, at least 75% by value and more than 50% in number must approve the Scheme. Schemes must also be sanctioned by the court and the process involves two or more court hearings. Creditors or members who were included in one of the voting classes are bound (even if they did not have notice of or were not present at the respective meeting and/or voted against the proposal). Schemes can also bind secured creditors and often have an impact on the rights of junior / mezzanine secured lenders. Directors of the company remain in control.
8 06 Process for a Scheme Application to court by company, creditor, member, liquidator or administrator to seek the following: directions to call meetings of creditors and/or members; and the sanction of the court if the scheme is approved by the members / creditors First court hearing: court considers whether scheme has a chance of being approved and whether the proposed voting classes are correctly constituted. If so, court orders meetings of relevant classes of members and/or creditors Notice of meetings sent to each class of members and/or creditors affected (usually 21 clear days notice given) Meetings of classes of members and/or creditors In each class, the approval of at least 75% by value and 50% in number of creditors / members voting in person or by proxy is required If approved by voting classes, court considers whether to sanction scheme at a hearing with opportunity for creditors to attend court and challenge the scheme
9 07 Advantages of a Scheme Unlike CVAs, Schemes can bind secured and preferential creditors. Schemes provide a very flexible tool and can take a variety of forms. Disadvantages of a Scheme There is no moratorium. Schemes are, therefore, sometimes used in connection with administration (to gain the benefit of the automatic administration moratorium) and this combination of procedures can become expensive. The process for implementing a Scheme can be time-consuming and expensive as it involves a formal court application and at least two hearings. Schemes are not recognised as main proceedings under the EC Regulation on Insolvency Proceedings.
10 08 Administration / Pre-pack Administration Points to note Administration allows for the reorganisation of a company or the realisation of a company s assets whilst it is under the protection of a statutory moratorium. Administration lasts 12 months unless extended by approval of certain classes of creditors, or the court. The administrators must act in the best interests of all creditors. The administrator reports to the company s creditors within eight weeks of his appointment setting out his proposals for achieving the purpose(s) of the administration. The prescribed purpose(s) of administration are: rescuing the company as a going concern, or (if that is not reasonably achievable), achieving a better result for the company s creditors as a whole than would be likely if the company were wound up (without first being in administration), or (if that is not reasonably achievable), realising property in order to make a distribution to one or more secured or preferential creditors. A pre-pack is a sale and purchase of all or certain of the company s assets which is negotiated before the company s administration, which completes on or shortly after the administrator s appointment. A pre-pack is often used where it represents the best value for creditors by preserving goodwill and jobs.
11 09 Advantages of Administration Administration provides breathing space for a company by imposing an immediate moratorium on all enforcement (except with permission of the administrator or the court). An administrator has wide powers to collect and deal with the company s property, including property and assets subject to a floating charge and/or (with permission of the court or consent of the relevant secured creditor(s)) subject to a fixed charge. An administrator has the power (amongst other things) to trade the business, employ staff and enter into contracts as agent of the company. An administrator has the power to investigate and take recovery actions in relation to transactions at undervalue, preferences, extortionate credit transactions and voidable floating charges. Disadvantages of Administration An application to the court is the only way in which a creditor who is not a qualifying floating charge holder can take steps to place a company into administration. Generally more expensive than receivership due to the frequency of statutory reporting.
12 10 Process of appointment of an Administrator Out-of-Court Appointment Court Appointment Pre-pack Notice of Intention to appoint (by QFCH without first ranking status, directors, or company) Application to court (by creditor(s), company, directors) Negotiation of transaction Notice of Appointment (by first ranking QFCH, or parties referred to above after completing prior step) Order granted Company placed into administration (via court or out-ofcourt ) Administrator appointed Transaction completes
13 11 Receivership There are two main types of receivership: administrative receivership and fixed charge receivership. Points to note on both types of receivership Receivers owe their primary duty to their appointor only, rather than all creditors. Receiverships are often cheaper than administrations as receivers do not have the same detailed statutory reporting obligations as administrators. There is no moratorium available. Administrative Receivership Points to note An administrative receiver can only be appointed by the holder of a debenture containing floating charges over the whole or substantially the whole of a company s property where the debenture is dated prior to 15 September 2003 (save for certain limited exceptions). An administrative receiver has extensive powers, including the power to carry on the company s business.
14 12 Fixed Charge Receivership Points to note A fixed charge receiver ( FCR ) is appointed over asset(s) subject to a fixed charge under the terms of a security document. The Law of Property Act 1925 provides a receiver with limited powers to deal with the property; these are often extended expressly in the relevant security document. The directors can continue to deal with assets of the company which are not covered by the receivership. An FCR is not an officer of the court so is less likely to be recognised by foreign jurisdictions. An FCR does not have the power to compel co-operation of directors or to investigate the directors conduct. Process of appointment of receiver Fixed Charge Receivership Administrative Receivership Fixed Charge? Power to appoint receiver? Floating charge over all or substantially all of the borrower s assets and undertakings? Charge created before 15 September 2003? Power to appoint receiver? If default, serve letter of demand on borrower If default, serve letter of demand on borrower Appointment by Notice which has to be accepted in writing by receiver Appointment by Notice which has to be accepted in writing by receiver
15 13 Liquidation / Winding up Points to note Liquidation is the process of winding up the affairs of a company before dissolution and can be used in solvent (members voluntary liquidation) and insolvent (creditors voluntary or compulsory liquidation) situations. The liquidator is unlikely to become involved in trading the business and has limited powers to do so. The liquidator will instead sell assets for the best possible price and where possible pay a distribution to creditors, after costs. A liquidator cannot deal with assets covered by a fixed charge holder, without the fixed charge holder s consent. The liquidator in an insolvent liquidation will be responsible for investigating directors conduct and prior transactions. In a compulsory liquidation, all dispositions of the company s property following the presentation of a winding up petition are void.
16 14 Process of commencing a liquidation Members voluntary Creditors voluntary Compulsory Statutory declaration of solvency sworn by directors Directors contact insolvency practitioner Statutory demand served by creditor (optional) Resolution by members to put company into liquidation and appoint liquidator Members and Creditors vote to put company into liquidation and on identity of the liquidator Petition to court by company, directors, creditors, etc. Company in liquidation Company in liquidation Company in liquidation if ordered by court
17 15 Insolvency procedures which apply to natural persons Bankruptcy Bankruptcy is a process in which a trustee in bankruptcy is appointed to realise the debtor s assets and pay the proceeds to creditors. Creditors or the debtor may apply to court for an order for bankruptcy. For a creditor s application, a statutory demand must first be personally served on the debtor giving 21 days for payment of the debt. A debtor is able to apply to court to set aside the demand within 18 days of service. The creditor can then petition to the court for a bankruptcy order if the demanded sum (which must be in excess of 750) remains unpaid and the statutory demand has not been set aside. On the making of a bankruptcy order, the debtor s assets vest in a trustee in bankruptcy. The debtor will also be subject to certain restrictions, including a restriction on acting as a director of a company and obtaining credit. The trustee has various powers to investigate a bankrupt s conduct, affairs and prior transactions. These include requiring the bankrupt to attend court to give evidence on oath and/or applying to the court for an order for possession and sale of any property in which the bankrupt possesses an interest. On discharge (which is typically eight to twelve months from the bankruptcy order) the bankrupt is released from all bankruptcy debts and all bankruptcy restrictions are lifted. Assets remain vested in the trustee, however.
18 16 Individual Voluntary Arrangement (IVA) An IVA is an arrangement by which a person in financial difficulties comes to a compromise or arrangement with his creditors about the basis on which he will repay his debts. The debtor produces a proposal and statement of affairs to a nominee who in turn supervises the arrangement once the IVA comes into effect. The nominee reports to court on whether the proposal has a reasonable prospect of being approved and implemented. The IVA must be approved by more than 75% of the value of all creditors attending or voting by proxy, and then it becomes a binding contract between the individual and all their unsecured creditors who possessed a right to vote at the meeting regardless of whether they had notice of it. The nominee / supervisor oversees the debtor s compliance with the IVA and will petition for his/her bankruptcy if there is a breach.
19 17 Process for bankruptcy / Individual Voluntary Arrangement Bankruptcy Individual Voluntary Arrangement Personally serve statutory demand Proposal put forward by individual Petition by Creditor (if no application to set aside) Nominee reports on the IVA to court and calls creditors meeting Bankruptcy Order Binding contract if approved by more than 75% of the value of creditors voting in person or by proxy Discharge (usually after one year)
20 18 Tax considerations Tax will often play a role in any decision regarding insolvency / enforcement options and specific advice should be sought in each instance. For example: Corporation tax In administration capital gains / corporation tax is payable and (together with VAT) will constitute an expense of the administration meaning it will be paid ahead of distributions to a secured creditor out of floating charge assets. In a fixed charge receivership, however, the receiver is not required to satisfy corporation tax resulting from a sale of the assets which will remain an unsecured claim against the company. Accounting period Administration automatically ends an accounting period which may impact on the ability of the company to surrender its losses (if the company is part of a wider group). The appointment of a fixed charge receiver will not end an accounting period.
21 19 About us The Restructuring & Corporate Recovery group is a crossjurisdictional team of over 20 specialists advising on some of the most complex and high-profile restructurings and insolvencies in Europe, the Middle East and beyond. The group acts for national as well as international corporations, their directors and shareholders, lenders, bondholders and other institutional creditors, insolvency practitioners and unsecured creditors in businesses which are in or anticipating financial difficulties. We are renowned for our proactive and imaginative approach to finding solutions for clients. With members of the team acknowledged in the major legal directories as leaders in their field, the group acts on many of the largest-value restructurings and insolvencies in Europe, but also has significant experience in this field working with small and mediumsized enterprises and personal insolvency. In addition, the group frequently undertakes contentious work relating to insolvencies and corporate recovery situations and is adept in using alternative dispute resolution techniques where they are appropriate.
22 20 Contacts Claire Martin-Royle Partner, London +44 (0) Nick Moser Partner, London +44 (0) Neil Smyth Partner, London +44 (0) David Johnson Senior Associate, London +44 (0) Malti Shah Senior Associate, London +44 (0) Negeen Arasteh Associate, London +44 (0) Alice Monteuuis Associate, London +44 (0) Amy Patterson Associate, London +44 (0)
24 Europe > Middle East > Asia Taylor Wessing LLP 2012 This publication is intended for general public guidance and to highlight issues. It is not intended to apply to specific circumstances or to constitute legal advice. Taylor Wessing s international offices operate as one firm but are established as distinct legal entities. For further information about our offices and the regulatory regimes that apply to them, please refer to: NB_000747a_03.12