Insolvency concepts and their impact. Stewart Perry Partner Clyde & Co

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1 Insolvency concepts and their impact Stewart Perry Partner Clyde & Co

2 Insolvency concepts and their impact Stewart Perry Thursday 24 September 2015

3 Insolvency concepts and their impact Insolvency processes Insolvency triggers and their consequences International recognition and cross border Priorities Insolvency specific issues Directors duties 3

4 Insolvency processes Insolvency & insolvency processes: Insolvent = (1) cash flow; or (2) balance sheet Fatal: Liquidation (compulsory/voluntary) (English), Chapter 7 (US), liquidation judiciaires (French), Konkurs (Swiss) Intensive Care: Administration (English), Chapter 11 (US), procédure de sauvegarde (French), Nachlassstundung und Nachlassvertrag (Swiss) 4

5 Insolvency processes (2) Corporate Administration Administrative receivership Company Voluntary Arrangement ( CVA ) Creditors Voluntary Liquidation ( CVL ) Compulsory winding up Scheme of arrangement Other [Fixed charge receiver] Dissolution/Strike off Personal Bankruptcy Individual Voluntary Arrangement ( IVA ) 5

6 Insolvency processes (3) Court order Para 14 appointment (QFCH) Para 22 appointment (directors / company) Application to court MORATORIUM Court order Administrator Charge enforceable [Notice of intention to appoint] [INTERIM MORATORIUM] Notice of appointment Board meeting / Company resolution [Notice of intention to appoint] [INTERIM MORATORIUM] Notice of appointment MORATORIUM MORATORIUM Administrator Administrator 6

7 Insolvency processes (4) Objective: rescue, realise, repay Proposals Meeting Management Dividend? Exit Back to directors CVA/Scheme Liquidation (inc conversion into winding up) Application/appeal Dissolution 7

8 Insolvency triggers Question: Is this clause triggered by an appointment of an administrator by the directors? For the purposes of clause 32.1 a company becomes insolvent: on the making of an administration order against it under Part II of the Insolvency Act 1986; on the appointment of an administrative receiver or a receiver or manager of its property under Chapter 1 of Part III of that Act or the appointment of a receiver under Chapter 2 of that Part; on the passing of a resolution for voluntary winding up without a declaration of solvency under section 89 of that Act; or on the making of a winding-up order under Part IV or V of that Act. William Hare Limited v Shepherd Construction Limited [2009] EWHC 1603 (TCC) 8

9 Insolvency triggers (2) English law PSA: an order has been passed in court declaring the bankruptcy, liquidation, or dissolution of the Operator English law JOA: If any Participant fails to pay in full its share of any Payment English law construction contract: in the event of the CONTRACTOR becoming bankrupt or making a composition or arrangement with its creditors or a winding-up order of the CONTRACTOR being made or (except for the purposes of amalgamation or reconstruction) a resolution for its voluntary winding-up being passed or a provisional Liquidator, Receiver, Administrator or Manager of its business or undertaking being appointed or presenting a petition or having a petition presented applying for an administration order to be made pursuant to Section 9 Insolvency Act 1986, or possession being taken by or on behalf of the holders of any debenture secured by a Floating Charge of any property comprised in or subject to the Floating Charge, or any equivalent act of thing being done or suffered under any applicable law. 9

10 Insolvency triggers (3) Consequences: Service/Supply agreement Operator can terminate Contractor needs to rely on repudiatory breach JOA Stalemate? Suspension of voting & information rights Forfeiture of production Forfeiture of interest Licences & PSCs Revocation (UK) Termination (usually if only one party) 10

11 International recognition Recognition Centre of Main Interests ( COMI ) EU Regulation on Insolvency Proceedings 2000 UNCITRAL model law Section 426 Insolvency Act 1986 Primary and secondary proceedings Law Law of COMI applied in other jurisdictions if recognised Law of asset applied if dispute as to ownership UNCITRAL countries Australia Canada Chile Columbia Greece Japan Mauritius Mexico Montenegro New Zealand Philippines Poland Republic of Korea Romania Serbia Slovenia South Africa Uganda United Kingdom United States of America 11

12 Priorities The concept The liquidator/administrator is only entitled to the assets of the company. It is not entitled to assets held by the company for someone else. Order of payment Breach of contract claims are (usually) unsecured, and are at the bottom Proprietary/security/trust claims are paramount; the asset is not owned by the company In rem rights Security Retention of title Trusts Company asset realisations IP expenses and remuneration Prefs (Employees) Prescribed Part Floating Charge Creditor Unsecured Creditors Shareholders 12 Insert footer text by selecting Footer on the Clyde & Co Tools ribbon tab

13 Step in rights etc Legal When are they triggered? Do you have an enforceable right? Ie is it a proprietorial/in rem right? Practical Do you have what you need? Walk through it 13

14 Insolvency specific actions Use of set-off Transactions at an undervalue Preferences Anti-deprivation principle 14

15 Directors duties 15 Mostly set out in the Companies Act 2006 Obligations are to promote the success of the Company, meaning the shareholders, but switches from shareholders to creditors on insolvency. Wrongful trading - the worrying one for directors: s.214 IA86 the person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and [did not take] every step with a view to minimising the potential loss to the company s creditors as he ought to have taken. Section 172(1) Co. Act 2006 A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to the likely consequences of any decision in the long term, the interests of the company's employees, the need to foster the company's business relationships with suppliers, customers and others, the impact of the company's operations on the community and the environment, the desirability of the company maintaining a reputation for high standards of business conduct, and the need to act fairly as between members of the company.

16 Things to remember Triggers Read the document (and amend it if possible) Draft it broadly and use analogous proceedings Priorities Ensure trust assets are recorded as such and where possible are located in jurisdictions that would recognise them Try to obtain (1) payment in advance, (2) security, (3) retention of title, (4) LoC/guarantee, (5) set-off rights Step-in Rights Make sure you have sufficient legal and practical rights Insolvency actions Be careful! 16

17 17 Questions from the floor

18 Termination To exit or as a lever to renegotiate rates Non-compliance with specification Health, safety and environmental Bribery Failure to perform 18

19 Failure to perform - LOGIC First Class working condition due care and diligence, with the skill expected of a reasonable contractor experienced in such types of work Maintenance obligations 19

20 LOGIC Mobile Drilling Rig Termination COMPANY shall have the right to terminate: For convenience Force Majeure Bankruptcy of CONTRACTOR Breakdown of CONTRACTOR S equipment Breach by CONTRACTOR of material obligations 20

21 What is materiality? materiality involves considering : the actual breaches the consequences of the breach to [the innocent party], the [defaulting party's] explanation of the breaches, the breaches in the context of the Agreement, the consequences of holding the Agreement determined, and the consequences of holding the Agreement continues. 21

22 When can Contractor terminate? Contract is usually silent Common law rights Repudiatory breach? 22

23 Repudiatory breach A failure of performance which goes to the root of the contract or which deprives the innocent party of a substantial part of the benefit to which he was entitled, enabling the innocent party to treat the contract as at an end. It may be a failure to perform at the time provided in the contract or it may be a statement that it will not perform when the time comes (an anticipatory breach ). In either case, it must be an actual or prospective fundamental breach. 23

24 24 Can failure to pay amount to a repudiatory breach? Yes, but only in relatively extreme circumstances and very fact dependent Alan Auld Associates Ltd v Rick Pollard Associates [2008] Court of Appeal - repeated failure to pay invoices amounted to a repudiatory breach of contract which entitled the defendant to bring the contract to an end. The breaches of contract were held to be substantial, persistent and cynical. None of the nineteen invoices, issued between 31 December 2004 and 30 April 2006, were paid on time. The breaches occurred against a background of repeated complaints. In those circumstances Defendant was entitled to consider that he would be treated in the same way for the duration of the rest of the agreement.

25 The Factors (Court of Appeal) The starting point is to consider what benefit the injured party was intended to obtain from the performance of the contract. The next step is then to look at the effect of the breach on the injured party, such as: What financial loss it has caused? How much of the intended benefit has already been received by the innocent party? Can the innocent party be adequately compensated? Is the breach likely to be repeated? Will the guilty party resume compliance with his obligations? Has the breach fundamentally changed the value of future performance of the guilty party s outstanding obligations? 25

26 The effect of possible insolvency? Dalkia Utilities Services Plc v Celtech International Ltd [2006] Payment by 12 instalments per year over the 15 year period. Right to terminate immediately if the Defendant was in material breach of its obligation to pay the Charges The Defendant failed to pay three consecutive instalments out of 174 payments to the Claimant - 390,000 Material breach because the three monthly instalments were neither trivial nor minimal sums of money and the Defendant's failure to pay was serious. Not repudiatory "In assessing the materiality of any breach it is relevant to consider not only of what the breach consists but also the circumstances in which the breach arises, including any explanation given or apparent as to why it has occurred." 26

27 Dalkia Defendant had not paid the instalments because it was not in a position to do so. The company was facing insolvency and it was unlikely it would be able to pay in the near future. The factors taken into account by the judge included the fact that the instalments missed were consecutive, that nothing suggested that there was any better prospect of being paid and that, although in the context of the whole project the missed instalments were small, the payments represented a whole quarter's payments and 8.5% of the total charges unpaid for the remainder of the term. 27

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