1 Brief guide to English Corporate Insolvency Law
2 The main English Insolvency Procedures. This guide deals with the main insolvency procedures in England and Wales, namely: > Administration, which is primarily aimed at rescuing companies in financial difficulties, and allowing them (or at least their business) to continue as a going concern; > Voluntary Arrangements, which may be used on a stand-alone basis or as part of the administration process, and which provide for a restructuring plan which obtains sufficient creditor support to be imposed on dissenting creditors; > Receivership, which is an enforcement right granted to a secured creditor which typically results in the company s business being sold and the company itself going into liquidation; and > Liquidation, which results in the company ceasing trading, and which involves a liquidator collecting in the company s assets and distributing the resulting realisations to the company s creditors so as to satisfy, as far as possible, the company s liabilities. While this guide deals only with the insolvency of companies, a number of these insolvency procedures are also applicable to partnerships, although in amended form. Exactly which procedures may be available will depend on the type of partnership being looked at. Where is the relevant law to be found? The primary source of English insolvency law is the Insolvency Act 1986 (the Act ). The Act has undergone a number of significant changes since its implementation, particularly those introduced by the Insolvency Act 2000 and the Enterprise Act The Act is supplemented by the Insolvency Rules 1986 (the Rules ) which largely govern procedural matters. These have also been amended since 1986 and are due to be substantially revised during the course of Further specific issues that directors may need to consider are set out in the Company Directors Disqualification Act There are many other statutes and statutory instruments which contribute to the body of insolvency law. Some sectors or industries (including the financial markets, credit institutions, gas and electricity suppliers, water and railway companies) have specific legislation applicable to them, largely to address public policy concerns, which may supplement, modify or disapply general insolvency law. European legislation is another important source of insolvency law, the EC Regulation on Insolvency Proceedings 2002 being particularly important in the context of insolvencies involving a number of different European jurisdictions. Finally, case law plays a significant role in the interpretation of insolvency legislation. To take one example, a significant amount of the law relating to receivership is based on common law and equity. Linklaters gives an absolutely rock-solid performance in the restructuring and insolvency area. Restructuring & Insolvency; Chambers UK, 2009
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4 Administration Administration is a rescue procedure for companies that are, or are likely to become, insolvent. It is similar in concept to Chapter 11 proceedings in the United States but is very different in detail. It has been extensively reformed since the Enterprise Act 2002 came into force on 15 September 2003, with the aim of making it a more efficient process. Entry routes There are now three routes into administration: >>by court order; >>by notice filed at court by the holder of a qualifying floating charge ( QFC ); or >>by notice filed at court by the company or its directors. Whichever route is followed, an administrator must be satisfied, before accepting appointment, that one of the three following objectives can be satisfied (in descending order of priority): >>to rescue the company as a going concern; or >>(if the first objective is not possible), to achieve 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 the second objective is not possible), to realise property in order to make a distribution to one or more secured or preferential creditors. Moratorium The administration process includes a statutory moratorium, preventing creditors from taking certain enforcement actions without first obtaining the consent of either the administrators or the court. This moratorium does not extend to preventing creditors from terminating contracts or from exercising rights of set-off. The moratorium, which lasts for the duration of the administration, is intended to provide the administrators with a breathing space, freeing them from creditor pressure and giving them time to formulate proposals, lay them before the creditors and implement those which are approved (which implementation may involve a voluntary arrangement see Section 4 below). Powers and duties The administrator takes over management and control of the company and has the power, on behalf of the company, to do all things necessary or expedient for the management of its affairs, business and property, including the power to remove and appoint directors, to borrow money and to dispose of the company s assets. The administrator owes his/her duties to the company and its creditors, being required to exercise their powers in the interests of the creditors of the company as a whole. Coming to an end The most typical outcome of an administration is probably the sale of the business (possibly by means of a pre-pack sale, the terms of which were largely agreed before the administrator was appointed) and the subsequent distribution of the proceeds of sale to the creditors of the company. The administration will terminate automatically after a year, unless a six month extension is agreed by the creditors. The administration may extend beyond 18 months, but only with court consent.
5 Voluntary arrangements Company voluntary arrangements (CVAs) A CVA enables an insolvent company to put a proposal to its creditors to restructure its debts. For the most part, the terms of the company s proposed composition or scheme are not restricted by the Act, meaning that a CVA has great flexibility. The only limit is that no proposal may alter the rights of secured or preferential creditors without their individual consent. Debt write-offs, payments from future earnings and debt/equity conversions are all possible. A CVA cannot be commenced by creditors. Voting The advantage of a CVA over a nonstatutory agreement with creditors is the ability to bind any dissenting minority creditors. The CVA is binding on all creditors (other than secured or preferential creditors, as mentioned above) once approved by 75% or more in value of the unsecured creditors present in person or by proxy and voting on the resolution (provided that not more than 50% of the unconnected creditors present in person or proxy vote against the CVA). There is a limited, 28 day, period after the proposal is approved during which any dissatisfied creditor or shareholder can object to the court. Limited moratorium However, a weakness of the CVA regime is that there are limited provisions for a moratorium it is available only to small companies (defined by reference to their turnover, balance sheet and number of employees). For this reason standalone CVAs are rare (since creditors may continue to exercise enforcement rights) and, particularly with larger companies, they are more commonly proposed within an administration. Schemes of arrangement Arrangements with creditors of an insolvent company can also be implemented as schemes of arrangement under Parts 26 and 27 of the Companies Act 2006 (formerly section 425 of the Companies Act 1985). A scheme is similar to a CVA in that a wide range of proposals may be put to creditors. Voting The voting requirements for a scheme differ, however, from a CVA. In a scheme, the creditors must be divided into classes and this requires a consideration of creditors rights and interests to ensure that the composition of the classes is correct. The scheme must be approved by a majority in number representing 75% in value of those persons present and voting (in person or by proxy) in each relevant class. As with a CVA, there is no moratorium available when proposing a scheme (not even for small companies). Role of the court If creditors approve a scheme, its terms still need to be ratified by the court before the scheme becomes effective, the role of the court being to ensure that there was a fair voting process, that the voting classes were correctly identified, and that no stakeholder was unfairly prejudiced. Other arrangements It is also possible for creditors to come to arrangements with the insolvent company outside one of the formal insolvency regimes, but consensual solutions of this type cannot be imposed on dissenting creditors. Consensual rescues/restructurings/ workouts are still relatively common, particularly for larger companies and international groups which want to avoid the perceived stigma of entering into an insolvency process, although they may be harder to implement without using a voluntary arrangement where there are large numbers of creditors with potentially conflicting aims.
6 Receivership Unlike the other procedures mentioned in this guide, receivership is not a collective remedy. It is an enforcement right given to an individual secured creditor, usually by virtue of a debenture or similar security document executed in its favour by the company (although a receiver can, in certain limited circumstances, be appointed pursuant to statute or by the court). Types of receiver There are, broadly speaking, two different types of receiver, namely an administrative receiver and a LPA or fixed charge receiver. An administrative receiver, who has wider powers and duties, and who normally takes over the running of the company s business, is a receiver appointed over the whole, or substantially the whole, of a company s property by the holder of a floating charge. A receiver who is not an administrative receiver is known as a fixed charge or Law of Property Act (LPA) receiver. They do not need to be licensed insolvency practitioners and are mostly used to sell land or other fixed single assets. The key distinction between an administrative receiver and a fixed charge/lpa receiver is that the latter has to stop acting if an administrator is appointed. The appointment of an administrative receiver, on the other hand, would prevent the appointment of an administrator. QFC holders The impact of receivership has diminished significantly due to recent legislative changes, as many lenders who previously had the power to appoint an administrative receiver (such lenders being referred to in the relevant legislation as the holders of qualifying floating charges ) now only have the choice between either appointing an administrator out-of-court, as described above, or appointing a fixed charge/lpa receiver. A qualifying floating charge holder may now only appoint an administrative receiver (and thus prevent the appointment of an administrator) if either: >>the QFC was created before 15 September 2003; or >>the QFC was created after that date, but it falls within one of the limited exceptions set out in sections 72A- GA of the Act. Process of appointment If a secured lender wants to appoint either an administrative or fixed charge receiver, the appointment process is broadly the same. The security document will state the circumstances in which an appointment may be made. These are usually that some part of the secured debt is not paid when due or that there has been a breach of some other obligation owed to the secured creditor. A demand for repayment is normally required. If the demand is not complied with, a receiver may be appointed. There is no court involvement in this process. In practice an appointment is often made almost immediately after the default, the company inviting the secured creditor to appoint a receiver in cases where administration is not seen by the company s directors as a viable alternative. Role A receiver s primary duty is to realise the security and to pay the proceeds to the debenture holder, up to the amount of the secured debt, with any remaining balance being paid to the company, its liquidator or any subsequent ranking security holder. Receivers must pay the preferential debts and the prescribed part (see creditors and the payment waterfall below) out of the proceeds of those assets which are subject only to a floating charge, before paying the balance to the charge holder. There is no moratorium in receivership, so creditors can enforce any rights which are consistent with the priority of the debenture security. These include the exercise of liens, rights of set-off and forfeiture, the collection of goods subject to retention of title and the termination of contracts.
7 Liquidation There are two types of liquidation voluntary (which is started by a shareholder resolution) and compulsory (which is started by a court order). Whether voluntary or compulsory, liquidation is a termination procedure. A liquidator is appointed to take control of the company and to realise its assets, distributing the realisations (in cash or in specie) to satisfy, as far as possible, the liabilities of the company to its creditors. The order for distribution in such circumstances is set out in (see creditors and the payment waterfall below). Once the liquidation process has been completed, the company is dissolved and ceases to exist. Voluntary liquidation A voluntary liquidation may be: > >a members voluntary liquidation which involves the directors swearing a statutory declaration of solvency (i.e. that the company will be able to pay its debts in full, including interest and the costs of the procedure, within 12 months of the commencement of the winding-up) and then calling a meeting of the members to pass a winding-up resolution. It is possible for a MVL to be carried out with no court involvement, and, in many ways, it is not really an insolvency procedure since all creditors should be paid in full. It is often used in group reorganisations to remove dormant companies; or > >a creditors voluntary liquidation this is also commenced by a shareholder resolution but is used by insolvent companies (or where the directors are unwilling to make the statutory declaration of solvency). The creditors control the process and appoint a liquidator. This is normally a simpler and less expensive procedure than applying to the court for compulsory liquidation and it is the preferred route (assuming that the company s shareholders are willing to pass the necessary resolution) if the company is likely to have sufficient assets available to pay the liquidator s fees and expenses. If the assets are likely to be insufficient to meet the liquidators fees, a liquidator would be unlikely to agree to take on the liquidation and the only course in those circumstances would be for the company to be wound up compulsorily. Similarly, if the company s shareholders are unwilling to pass the necessary resolution, a creditor may be forced to commence a compulsory liquidation. Compulsory liquidation A compulsory liquidation is commenced by the filing at court of a windingup petition. A petition is usually presented by a creditor, although it may also be presented by the directors, the company, a shareholder, any administrator or administrative receiver or the relevant Secretary of State. The petitioner must demonstrate that the company is unable to pay its debts. Section 123 of the Act sets out the circumstances where such inability will be deemed. These include: >>failure to pay a debt of at least 750 within 21 days of service of a demand (in the prescribed statutory form, usually known as a statutory demand ); >>an inability to pay debts as they fall due (i.e. a cash flow insolvency test) which is a question of fact often proved by the existence of an unsatisfied statutory demand or judgement; and >>it being proved to the satisfaction of the court that the value of the company s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities (i.e. a balance sheet insolvency test) which involves a judicial assessment of the balance sheet position.
8 Creditors and the payment waterfall Liquidation In a liquidation, unsecured creditors must prove for their debts. There are detailed rules regarding proofs of debt, including rules on the notices to be given by the liquidator to creditors, the valuation of debts, the ability to prove for interest on any debt and the exercise of rights of set-off. Provided that its security is valid and enforceable, a secured creditor will usually elect to enforce its security, and it will generally be free to do so during the liquidation, applying the proceeds towards payment of the secured debt. Administration In an administration, if there is a sale of all or part of the company s business, administrators can elect to distribute the proceeds which they have realised to the company s creditors, although they usually decide to transfer the proceeds to a liquidator, who would then deal with the distribution process. Order of priority In either case, the administrator or liquidator is under a duty to make such distributions in accordance with a statutory order of priority which, broadly speaking, runs in the following descending order: >>proceeds of fixed charged assets (less direct realisation costs) to fixed chargeholders; >>expenses of the liquidation/ administration (which include contracts entered into by the administrators as agent for the company in administration) to the counterparty owed such amount by the liquidator/ administrator; >>preferential debts (primarily limited amounts due to employees); >>the prescribed part, which is set aside for unsecured creditors from realisations from floating charge assets (up to a maximum of 600,000); >>proceeds of floating charge assets (less preferential debts and the prescribed part as above) to floating chargeholders; >>unsecured creditors, who rank equally between themselves, unless they are subject to a binding subordination agreement; and >>any surplus to shareholders to be paid out in accordance with the company s articles of association or other relevant constitutional documents.
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10 Cross border insolvency The EC Regulation on Insolvency Proceedings Since 31 May 2002, the EC Regulation on Insolvency Proceedings has governed the insolvency jurisdiction of courts within the member states of the EU, other than Denmark, over debtors (corporate or individual) having their centre of main interests within those states. All English collective insolvency remedies (CVAs, administration and liquidation but not receivership or schemes of arrangement) are now available to any debtor (wherever incorporated) which has its centre of main interests or COMI in England and Wales. Establishing this is a practical, fact based test, although there is a rebuttable presumption that a debtor s COMI will be where its registered office is situated. Only winding-up proceedings are possible in England against a debtor whose centre of main interests is elsewhere within the EU. The Cross-Border Insolvency Regulations 2006 The UNCITRAL Model Law on Cross- Border Insolvency provides for the mutual recognition of judgments and for direct access of foreign representatives to the courts of any state which enacts it, allowing foreign insolvency officials to apply for relief and assistance. It was incorporated into English law by the Cross-Border Insolvency Regulations on 4 April Within the EU, it only applies to the extent that the EC Insolvency Regulation does not apply or to the extent that it does not conflict with the EC Insolvency Regulation. Assistance to courts in other jurisdictions Section 426 of the Act obliges all United Kingdom courts to give assistance in respect of insolvency matters to courts in other parts of the United Kingdom and in other designated jurisdictions (principally former commonwealth countries, including Australia, Canada and various Caribbean islands). In doing so they may apply English or foreign law principles with the result that, to take one example, an administration order has been made in respect of an Australian company, pursuant to a request from the Australian courts. General principles of private international law In situations where the various crossborder regulations, conventions or treaties do not govern the effects in England of foreign insolvency proceedings, or the effects of English insolvency procedures in other jurisdictions (and there are otherwise no applicable statutory provisions under English domestic law), insolvency procedures will be governed by general principles of private international law. Accordingly, the English courts may recognise principles of comity, and will generally assist an overseas office holder if this does not conflict with the rights of English creditors. However, recognition of the effects of a foreign procedure is discretionary, in the absence of specific statutory provisions, with the result that such recognition may not always be forthcoming.
11 Further Information Linklaters has a global restructuring and insolvency practice, of which the United Kingdom is a significant part. This guide covers matters of English restructuring and insolvency law only. Guides for other jurisdictions may be available on request from your usual Linklaters contact. Key London R&I contacts Tony Bugg Partner, Global Head of Restructuring and Insolvency Telephone Robert Elliott Partner, Global Head of Banking Tel:
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