SQE 1 Business Law and Practise: Corporate Insolvency

15 September 2003

when the EA came into force and is known as the 'relevant date'

aims of the corporate insolvency reforms in EA

- to promote the rescue culture and remove the stigma surrounding insolvency therefore encouraging entrepreneurial culture; and

- to increase entrepreneurship by giving prominence to collective insolvency procedure

EA 2002 streamline

the administration procedure encouraging company rescue and restricting the use of administrative receiverships after the relevant date

CIGA 2020 new insolvency procedures

1. pre insolvency moratorium

2. The restructuring plan

meaning of insolvency

s. 123 IA 86 four tests or situations for when a company is unable to pay their debts

S123 IA 1986 scenarios

1. is unable to pay its debts as they fall due (cash flow test)

2. Has liabilities greater than its assets (balance sheet test)

3. does not comply with a stat demands for a debt over £750

4. has failed to pay a creditor to satisfy the enforcement of a judgement debt

Directors' obligations towards companies in financial difficulties

the directors must continually review the financial performance of a company and recognise when it is in financial difficulty. They need to decide what action to take on behalf of the company

options for company facing financial difficulty

1. do nothing

2. do a deal

3. appoint an administrator

4. request the appointment of a receiver

5. Place the company into liquidation

informal agreements

a company negotiating informally with their creditors. Contractually binding but not regulated by IA or CIGA

standstill agreement

the creditors agree not to enforce their rights or remedies for a specific period to give the company time to negotiate an arrangement with them to resolve the company's financial issues

pre insolvency moratorium

- not a formal insolvency process

- a period in which creditors are unable to take action to exercise their usual rights or remedies creating a breathing space for the company

actions restricted by moratorium

- no creditor can enforce its security against the company's assets;

- there is a stay of legal proceedings against the company and a bar on bringing new proceedings against it

- no winding up procedures can be commenced in respect of the company and no shareholder resolution can be passed to wind up the company

- no administration procedure can be commenced in respect of the company except by the directors)

procedure for obtaining a moratorium

company files documents at court including

- a statement that the company is, or is likely to become, unable to pay the debts as they fall due

- a statement from a licensed insolvency practioner known as a monitor stating that in their view the moratorium will result in the rescue of the company.

20 business days

duration of the moratorium but this can be extended by the directors for a further 20 business days.

further extensions

possible with the consent of a requisite majority of creditors and/ or a court order.

one year

maximum period subject to court order to extend the moratorium further

terminate automatically

a moratorium will if the company enters liquidation or administration or at the point the CVA is approved or court sanctions a restructuring plan or scheme of arrangement

pre- moratorium debts

do not have to be paid by the company whilst the pre- insolvency moratorium subsists. These are debts which have fallen due before or during the moratorium by reason of an obligation incurred before the moratorium

pre- moratorium debts that must still be paid

- monitors renumeration of expenses

- goods and services supplied during the m

- rent in respect of the period of the m

- wages, salary or redundancy payments; and

- loans under a contract involving financial services

moratorium debts

must still be paid. these are debts that fall due during or after the m by reason of an obligation incurred during the m

formal arrangement

if the requisite majorities of creditors vote in favour, it is binding on all creditors

two types of formal arrangement

- company voluntary arrangement; or

- a restructuring plan

Company voluntary arrangement (CVA)

defined as ' a composition in satisfaction of its debts or a scheme of arrangement of its affairs'

essence is the creditors agree to part payment or new extended timetable for repayment

CVA supervised

and implemented by a Supervisor who is an insolvency practioner

CVA alongside

can be used together with administration or liquidation

setting up a CVA 1.

directors draft a CVA proposal and appoint a nominee. If the company is in liquidation or administration, the administrator or liquidator drafts the CVA proposal and acts as nominee

nominee

must be an insolvency practitioner.

setting up a CVA 2

The directors must submit the CVA proposal and statement of the company affairs to the nominee

setting up a CVA 3

Nominee considers the proposal and within 28 days must report their opinion tot he court, the company's creditors and shareholders should be asked to vote on the proposal

setting up a CVA 4

nominee must allow at least 14 days for creditors to vote on the CVA proposal. A shareholder meeting must take place within 5 days of the creditor's decision

setting up a CVA.5 voting

CVA proposal will be approved if

- at least 75% in value of those voting on the proposal are in favour

- if the above majority is obtained, the decision of those creditors will be invalid if those voting against the CVA include more than half the total value of the creditors unconnected to the company

- a simple majority of the shareholders/ members vote in favour

setting up a CVA 6

Nominee reports to the court that the CVA has been approved

setting up a CVA 7

nominee usually becomes the supervisor and the supervisor will implement the CVA proposal

CVA effect unsecured creditors

is binding on all unsecured creditors including those who did not vote or voted against it

CVA effect secured creditors

secured or preferential shareholders not not bound unless they unanimously consent to the CVA- major disadvantage to the procedure

28 days

a creditor can challenge the CVA within ... of its approval

unfair prejudice or material irregularity

grounds a creditor can challenge on a CVA

after 28 days

the CVA becomes binding on all the creditors

restructuring plan

purpose is to compromise a company's creditors and shareholders and restructure its liabilities so a company can return to solvency

who can the RP be used by

can only be used by companies which have or are likely to encounter financial difficulty

75%

plan must be approved by at least ... in value of those voting in class

RP plan

only binding if the court sanctions it. if the court sanctions it then it is binding on all creditors including secured creditors

advantages of RP

- the court can exclude creditors and shareholders from voting even if they are affected by the plan if they have no genuine economic interest in the company

- the court can sanction a plan which brings about a cross class cram down if it is just and equitable to do so even if one of more classes do not vote to approve the plan

cross class cramdown

means one class of creditor can force the plan on another who has voted against the plan.

cramdown of shareholders

means forcing shareholders to accept a debt for equity swap in which are creditors are able to hold new shares in the company in place of their debt claims

administration

a collective insolvency procedure. The administrators are required to perform their duties in the interest of the creditors as a whole rather an a particular creditor.

administrators

must be licensed insolvency practitioners

statutory objectives of administration

1. to rescue the company as a going concern. if this is not reasonably achievable;

2. to achieve a better result for the company's creditors as a whole than would be likely if the company was wound up, if this is not reasonably achievable'

3. to realise the company's property in order to make a distribution to one or more secure or preferential creditors

appointment of administrator

court may appoint an administrator where the company is or is likely to become unable to pay their debts on the application of the company, the directors, a creditor, the supervisor of a CVA or a liquidator

interim moratorium

appointment of administrator effect

appointment of administrator out of court

1. directors of a company can appoint an administrator

2. holder of a qualifying floating charge may appoint one

Qualifying floating charge

a floating charge which i) together with any other security that the holder of the QFC holds relates to the whole or substantially the whole of the company's property and ii) the documents created is provides that either schedule B1 para IA applies to the charge or that the holder has the power to appoint an administrator or a administrator receiver

appointment by directors

they must file a notice of intention to appoint at court, not later than 10 business days later file a notice of appointment at court. Appointment takes effect when the second notice is filed at court

QFC appointment procedure

1. enforce its security in accordance with the terms of the QFC and this appointment will take effect when it has filed a notice of appointment at court

more than one holder of a QFC

holder of the QFC ranks below another QFC, it must give 2 business days notice to the holder of the QFC which has priority and can only proceed with the appointment if the higher ranking QFC consent

role of administrator

once appointed they have up to 8 weeks to produce a report setting out proposals for conduct of administration

12 month

fixed time limit for the completion of administrations although it is possible to obtain extensions

administrative moratorium

during which:

a. no order or resolution to wind up the company can be made

b. No administrative reciever of the company can be appointed

c. No steps can be taken to enforce security over company property

d. No legal proceedings, execution or other process can be commenced or continued against the company or its property

e. Landlord cannot forfeit a lease of the company premises

powers of administrator

to do all such things as may be necessary for the management of the affairs, business and property of the company including

- removing and appointing directors

- disposing of property subject to a floating charge

- dispose of property subject to a fixed charge

Pre-packaged sales in administration

where business and assets of insolvent company are prepared for sale to a selected buyer prior to the company's entry into administration

administration (restrictions on disposal to connected persons) regulations 2021

restrict the ability of an administrator to enter into a pre packaged sale with the company's directors/ shareholders unless the sale has been approved in advance by the creditors or the buyer has obtained an evaluator's qualifying report. report must be sent to CH and all creditors

receivership

enforcement procedure which is conducted in the interests of a secured creditor

three types of receivers

1. Administrative receivers

2. fixed- charge receivers

3. court- appointed recovers.

. Administrative receivers

Usually appointed by floating charge holders

Act as both receivers and managers of the company

Fixed charge receivers

Holder of a fixed charge over land may appoint a receiver following default by the borrower

Also known as LPA receivers

receiver does not need to be a licensed insolvency practitioner

court- appointed receiver

appointed by the court and duties are set out in the court order

duty is typically to run the business until the dispute is determined

liquidation

process by which a company's commercial life comes to an end

liquidator's function

to realise the company's assets for cash, determine the identity of the company's creditors and the amount owed to each of them and then pay dividends to the creditors on a proportionate basis relative to the size of their determined claims

pari passu

creditors of the same rank are said to rank ... to each other

two types of liquidation

1. compulsory liquidation

2. Voluntary liquidation

voluntary liquidation

further divided into

- member's voluntary liquidation; and

- creditor's voluntary liquidation

dissolution

once the liquidator has completed the liquidation, the company's life as a legal personal is generally brought to an end by dissolution

dissolution voluntary liquidation

usually occurs 3 months after the liquidator has filed the final accounts and return with the registrar at companies house

compulsory liquidation

court based process for placing a company into liquidation

official receiver

appointed by the court in the case of compulsory liquidation and will continue in office until another person is appointed. They will notify CH and all known creditors of the liquidation

who can apply for a winding up order?

1. a creditor

2. a company

3. the directors

4. an administrator

5. an administrative receiver

6. the supervisor of a CVA; and

7. the secretary of state for Business, energy and Industrial strategy on public policy grounds

key grounds court can order a company to be wound up

1. a company is unable to pay its debts;

2. It is just and equitable for the company to be wound up

consequences of winding up order

- automatic stay granted on commencing or continuing with proceedings

- all employees will be automatically dismissed; and

- the directors lose their powers and are automatically dismissed

voluntary winding up

3 situations

1. where the company's purpose according to the articles has expired and resolution of the shareholders

2. where the company resolves by special resolution to wind up the company (company must be solvent) MVL

3. where the company resolves that it is advisable to wind up the company due to its inability to carry on its business (company is insolvent) CVL

Member's voluntary winding up (MVL)

directors have to swear a declaration of solvency

members must then pass a special resolution to place company into MVL

creditors voluntary winding up (CVL)

shareholders pass a SR to place the company into CV and an OR to appoint a nominated liquidator

within 14 days of SR, directors must ask creditors to approve liquidator or to put forward their own choice

Directors must also draw up a statement of company affairs and send it to the creditors

liquidators power to avoid certain transactions

they can

- disclaim onerous property

- apply to court to set aside a transaction at an undervalue

- apply to court to set aside a preference

- apply to court to set aside or very terms of extortionate credit transaction

- claim a floating charge created for no new or inadequate consideration is invalid

- apply to court to set aside a transaction that will defraud creditors

statutory order of priority

1. Liquidator's fees and expenses of preserving and realising assets

2. Amount due to fixed charge creditor out of the proceeds of selling assets subject to the fixed charge

3. Liquidator's other renumeration, costs and expenses

4. Preferential creditors

5. creation of a the prescribed part fund

6. amount due to the creditors with floating charges

7. unsecured/ trade creditors

8. Interest owed to unsecured creditors

9. shareholders

fixed charge assets

assets subject to fixed charges are realised first

assets subject to a floating charge

(all assets)

preferential debts

two tiers :

Tier one: employee claims for unpaid renumeration in the four months before the relevant period and

ii) for certain contributions owing to the occupational pension scheme

Ties two: crown debts

prescribed part fund

increases the chance that unsecured creditors would get paid something in a liquidation