Last Updated October 08, 2019

Law and Practice

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Winston & Strawn London LLP provides a wide range of legal services through its banking and finance practice, to public and private companies, leading financial institutions, multilateral and development finance institutions, private equity and investment funds, alternative funding sources, investors and emerging companies, on investment grade, leveraged and mezzanine financings. The firm advises on high-profile transactions and matters ranging from cross-border transactions, initial public offerings (IPOs) and project finance matters, to distressed acquisitions and creative “first-of-their-kind” financings. Clients include leading international funding sources which provide senior, subordinated, secured and unsecured debt, and hybrid (equity/debt) products, as well as institutional investors who regularly participate in senior debt markets, equity sponsors, and borrowers in both developed and emerging economies. Additional thanks to partners Ed Denny and Dan Meagher and associate Shaheer Momeni, among others, for their contributions to this chapter.

Appointment of a Receiver

Unless a company is in liquidation or administration, a secured creditor can appoint a receiver to realise the assets over which it has security. The receiver is in an anomalous position in that it is appointed by the secured creditor but acts as agent of the company. The receiver will take control of the relevant assets and realise their value for the security holder.

Administration

An alternative procedure is administration. This is a court-supervised process under which the administrator owes duties to the creditors as a whole. The procedure is designed to preserve an insolvent company’s business and requires that an administrator be appointed to manage the affairs of the insolvent company. The aims of administration are set out in paragraph 3(1), Schedule B1 to the Insolvency Act 1986 (IA 1986) and are one or more of the following:

  • a) to rescue the company as a going concern;
  • b) to achieve a better result for creditors than would be achieved on a winding-up; or
  • c) to make a distribution to one or more secured creditors, if neither a) nor b) can be achieved.

In the context of an administration, the holder of a “qualifying floating charge” (as defined in paragraph 14(2) of Schedule B1 to the IA 1986 and in principle meaning a floating charge over all, or substantially all, of a company’s assets) has certain important rights, including the right to effectively veto the appointment of an administrator by the insolvent company’s directors or creditors and insist on its own appointee.

If the company has been put into administration rather than liquidation, the role of the administrator is to act in the interests of all the creditors in achieving the aims set out above. Where the administrator decides that none of the aims can be achieved, they return to court for the discharge of the administration appointment. On an administration, an automatic moratorium is put in place under paragraphs 42, 43 and 44 of Schedule B1 to the IA 1986 that prevents creditors from enforcing their security over the company without leave of the administrator or the court. Various criteria determine when leave should be given. Essentially, it is a balancing exercise between the rights of the secured creditor and the needs/aims of the administration. 

The administrator can distribute funds to the secured and preferential creditors, as well as to unsecured creditors, with leave of the court. More usually, the administrator will collate the unsecured creditors’ claims and will, once there are proceeds for distribution (including the prescribed part described below), cause the company to enter into a voluntary arrangement or liquidation. The supervisor of the arrangement or the liquidator deals with the adjudication of the proofs of debt and distribution of assets according to the statutory order of priority. The administrator can be the supervisor or liquidator if creditors do not object.

To approve the proposals in administration, a majority of creditors must vote in favour of them. A majority in this context means a simple majority of more than 50% (in value) of those creditors voting. However, a vote in favour of the proposals is invalid if more than 50% (by value) of creditors who are unconnected to the company vote against it. The proposals are then binding on all creditors.

Company Voluntary Arrangements and Schemes of Arrangement

Company voluntary arrangements (CVAs) and schemes of arrangement are additional procedures available to assist a corporate reorganisation or debt restructuring. These may form part of, or be separate from, other procedures such as administration or liquidation. 

In order for a CVA to become effective and binding on all unsecured creditors, it needs to be approved by 75% in value of unsecured creditors who vote. CVAs have been used outside of formal restructuring to reduce rent payments in retail businesses.

A scheme of arrangement is a very flexible court-sanctioned process for binding a group of creditors. For voting purposes, creditors with similar interests are grouped together in classes. Of each class, at least 75% in value and more than 50% in number of those who vote must approve the scheme. The court must also approve the scheme and confirm that it is fair and reasonable. For this purpose, the company undergoing the scheme generally produces a very full prospectus explaining the terms of the vote and its consequences. It is, however, not necessary to consult any class of creditors who have no real economic interest in the matter being voted on.

Once a scheme of arrangement becomes binding, it binds all creditors (including dissenting creditors), whereas an agreement reached under a CVA is only binding upon creditors who are eligible to vote, or who would have been eligible to vote, had they had notice of a creditors’ meeting.

As referenced in Section 6 Enforcement, enforcement in the context of an insolvency may occur as part of a formal insolvency procedure. An important exception is that if the debtor company is in administration, then its assets will be subject to a temporary moratorium and the lender will be unable to enforce its security unless that security constitutes a financial collateral arrangement. A further exception where a moratorium applies to suspend creditor action is where the debtor has been put into compulsory liquidation and where an eligible small debtor company has proposed a voluntary arrangement. The insolvency of the principal obligor does not reduce or extinguish the lender’s rights against the guarantor. 

A lender wishing to start insolvency proceedings against a borrower with interests in more than one EU member state, should consider the location of the borrower’s centre of main interest (COMI). Under the EC Insolvency Regulation (which is currently incorporated into English law but its continued effect in the UK is to be determined following Brexit), there is a rebuttable presumption that the COMI will be the place of the company’s registered office. However, there may be occasions where a borrower’s COMI is held to be located in a different EU member state, despite the registered office being located in England or Wales.

On insolvency, creditors' claims generally rank in the following order:

  • administrator’s or liquidator’s costs and expenses in realising fixed security;
  • fixed security;
  • expenses of the insolvent estate;
  • creditors preferred by statute, primarily employee claims and contributions to an occupational pension scheme (in practice, amounts may be fairly limited);
  • floating charges;
  • unsecured creditors; and
  • equity holders.

The Enterprise Act 2002 introduced the concept of a prescribed part, being a "ring-fenced pot" of money (up to a maximum of GBP600,000) which must be set aside for unsecured creditors out of the net floating charge realisations. 

The priority rules relating to the prescribed part do not apply to companies that are subject to a company voluntary arrangement or to floating charges that are financial collateral arrangements under The Financial Collateral Arrangements (No 2) Regulations 2003.

There is no concept of equitable subordination under English law. Generally, shareholders who have debts will be allowed to enforce them, although rules regarding deemed distributions may apply.

Under Section 238 of the IA 1986, a liquidator or administrator has two years from the commencement of the insolvency procedure to commence actions to unwind transactions that are at an undervalue. The term of transaction would include the grant of a guarantee or pledging of assets for security. The court will, however, not avoid a transaction entered into in good faith and with the reasonable belief that it would benefit the company. 

The insolvency practitioner also has the ability (under Section 238 of the IA 1986) to challenge transactions that occurred in the last six months before the onset of insolvency (or two years in the case of connected parties) and that give a creditor preference over other creditors, and were entered into with the desire to prefer that creditor. 

Lastly, any floating charges, other than in support of a new financing, entered into between unconnected parties and granted within one year of the onset of insolvency by an insolvent chargor (or if the chargor became insolvent as a result of it) are invalid (Section 245 of the IA 1986).

Winston & Strawn London LLP

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Authors



Winston & Strawn London LLP provides a wide range of legal services through its banking and finance practice, to public and private companies, leading financial institutions, multilateral and development finance institutions, private equity and investment funds, alternative funding sources, investors and emerging companies, on investment grade, leveraged and mezzanine financings. The firm advises on high-profile transactions and matters ranging from cross-border transactions, initial public offerings (IPOs) and project finance matters, to distressed acquisitions and creative “first-of-their-kind” financings. Clients include leading international funding sources which provide senior, subordinated, secured and unsecured debt, and hybrid (equity/debt) products, as well as institutional investors who regularly participate in senior debt markets, equity sponsors, and borrowers in both developed and emerging economies. Additional thanks to partners Ed Denny and Dan Meagher and associate Shaheer Momeni, among others, for their contributions to this chapter.

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