The Insolvency Service has reported that the second quarter of 2019 saw 4,321 company insolvencies, an increase of 11.9% on the second quarter of 2018 and the highest underlying level of insolvencies in any quarter since quarter one of 2014.
The most obvious cause is the uncertainty created by multiple Brexit false dawns, including the inability of companies to make plans for the future, and declines in consumer confidence and spending. To this may be added a declining pound and increases in inflation. There are also continuing existential threats to bricks and mortar retailers who fail to adapt to competition from online providers. The construction sector – which accounted for the highest number of new company insolvencies in 12 months, ending in quarter one of 2019 – has also attracted attention, with the high-profile collapse of Carillion and reports that other major companies, such as the Kier Group, are in difficulty.
In terms of specific insolvency types, the largest rise was in company voluntary liquidations (CVA) which rose by 6.9% as against quarter one of 2019. Quarter one of 2019 had seen a five year high for administrations and the 400 administrations in quarter two of 2019 still amounted to the second highest number since quarter one of 2014.
Notwithstanding relatively modest numbers of CVAs, 2018 and 2019 have both been labelled the year of the CVA because of the number of high-profile high-street retailers who have turned to them. Landlords have, for some time, complained about their inability to influence the outcomes of CVAs as a result of the heavy discounting of future rent and dilapidations, and often take the greatest hit in terms of rent reductions and store closures. They will, therefore, have been disappointed by the recent decision of Norris J in Discovery (Northampton) limited & Ors v Debenhams Retail Limited & Ors  EWHC 2441 (Ch). This held that rent reductions would not automatically be unfair, especially where the rent payable remained above the market rate, and that landlords could be treated differently to trade creditors so long as this was simply reflecting the differing nature of the debts owed to them.
There are no imminent changes of note.
The main statute which governs corporate and personal insolvencies is the Insolvency Act 1986, which also deals with unregistered companies, unincorporated associations, friendly societies and foreign companies. It has been amended a number of times since it came into force and substantially so by the Insolvency Act 2000 and the Enterprise Act 2002.
The Insolvency Rules provide detailed procedural provisions. The most recent version is the Insolvency (England and Wales) Rules 2016 and which came into effect from 7 April 2017, but which continue to be amended from time to time, most recently by the Insolvency (England and Wales) and Insolvency (Scotland) (Miscellaneous and Consequential Amendments) Rules 2017/1115.
The Insolvent Partnerships Order 1994 deals with insolvent general (unlimited liability) partnerships while the Limited Liability Partnerships Regulations 2001 (SI 2001/1090) deals with limited liability partnerships.
The Companies Act 2006 provides for corporate reorganisations by way of schemes of arrangement. These do not involve insolvencies. There are no such procedures for partnerships.
Directors’ duties are set out in Sections 171 to 177 of chapter 2 of part 1 of the Companies Act 2006. The duties of directors towards creditors is discussed further in chapter 12 below.
Liability of directors of an insolvent company is dealt with in the Insolvency Act 1986 (in particular in relation to fraudulent and wrongful trading in Sections 213 and 214 respectively) and possible disqualification of directors in the Company Director’s Disqualification Act 1996 (see 12 Duties and Personal Liability of Directors and Officers of Financially Troubled Companies).
The Pensions Act 2004 and the subordinate legislation made thereunder are relevant where a restructuring process affects a defined benefit pension scheme, in particular, as to how the restructuring is going to be arranged and implemented.
For cross-border cases, see 8 International/Cross-border Issues and Processes.
As to companies, there are company voluntary arrangements, administration both in and out of court, creditors voluntary liquidations and compulsory liquidations. In addition, there are schemes of arrangement.
Corporate receivership exists as a concept but is very infrequently seen now given the administration process which is available. On the other hand, property receivers are frequently appointed in respect of the realisation of property held by a company which is in financial difficulties.
For individuals, there are individual voluntary arrangements and bankruptcy.
English statute law does not compel a company to file for insolvency at a specific time. However, if a company continues to trade where there is no reasonable prospect of avoiding insolvency liquidation, the directors may find themselves liable for wrongful trading under section 214 of the Insolvency Act 1986 (see chapter 12 below). Accordingly, there is a practical requirement for the directors to commence formal insolvency proceedings at that point.
Additionally, if a company ends up in formal insolvency proceedings, the director will be the subject of a report on their conduct to the Insolvency Service, who will have to decide whether the director is fit to be concerned in the management of a company and if the Court agrees they are unfit, the director will be disqualified from their position as director or being concerned in the management of a company for a period of two to 15 years.
A company that becomes insolvent can enter formal insolvency proceedings, such as administration or creditors voluntary liquidation. Alternatively, it can seek to avoid these proceedings by entering into a Company Voluntary Arrangement with its creditors, although it does not have to be “insolvent” to enter into a CVA.
Creditors can seek an administration order or a compulsory liquidation, the latter being the more common occurrence. A creditor will have standing to do this when it has sums outstanding to it (frequently proved by having presented a statutory demand for payment which has not been met, but this is not a necessary pre-condition), which are not bona fide disputed on genuine grounds.
A company must be insolvent, ie, unable to pay its debts, to enter into administration or liquidation. This is defined in Section 123 of the Insolvency Act 1986, which contains tests on both cash flow and balance sheet bases.
The cash flow insolvency test is satisfied where a debtor is unable to pay their debts as they fall due. The balance sheet insolvency test is satisfied where the value of a debtor company's assets is shown, on the balance of probabilities, to be less than the amount of its liabilities, taking into account its contingent and prospective liabilities (see BNY Corporate Trustees Services Ltd v Eurosail-UK 2007-3BL Plc  UKSC 28).
The Banking Act 2009 governs the rescue or wind-down of banks and other similar financial institutions which are authorised to hold deposits. Provision is made for liquidation and administration similar to the Insolvency Act 1986. Possibilities are a private sector acquisition, transfer to a solvent bridge bank or temporary nationalisation, to create stability in the financial system.
The Financial Services (Banking Reform) Act 2013 introduced a preference for certain depositors on insolvency, namely deposits which are eligible for compensation under the Financial Services Compensation Scheme. It can be used to absorb the losses of a failed firm, and recapitalise that bank (or its successor) using the bank’s own resources. The claims of shareholders and unsecured creditors are written down or converted (or both) into equity to restore solvency in a manner that respects the hierarchy of insolvency claims.
The Investment Bank Special Administration Regulations 2011 (SI2011/245) and the Investment Bank Special Administration (England and Wales) Rules 2011 (SI2011/1301) apply to investment banks.
Insurance companies are dealt with separately under English law and are governed by The Financial Services and Markets Act 2000 (FSMA), which restricts the ability to enter into administration and liquidation with the involvement of the Prudential Regulation Authority (the PRA) and the Financial Conduct Authority (the FCA). They both have standing to make administration or liquidation applications to the Court for regulated entities, and they are entitled to attend creditors’ meetings and court hearings. The Insurers (Reorganisation and Winding Up) Regulations 2004 accord priority to claims by an insurer’s own policyholders over other unsecured debts (except preferential employee remuneration and pension contributions) and the FSMA provides additional provisions relating to insolvent insurance companies.
Under English law, special regimes exist for areas including air traffic transport (Transport Act 2000), railway companies (Railways Act 1993), utilities and energy companies (Energy Act 2004 and Energy Act 2011), water companies (Water Industry Act 1991) and healthcare companies (National Health Service Act 2006 and Health and Social Care Act 2012).
Restructurings can be achieved out of court through consensual arrangements agreed between creditors. These can offer a flexible and low-cost route to improved value recovery. Banks and other lenders, especially those with security for their lending, are likely to be willing to explore the viability of a consensual restructuring before enforcing their security. The end result will likely involve one or more stakeholders losing some or all of their value or protections and/or compromising certain rights.
There is no such thing as a “typical” consensual restructuring or workout, but they will invariably involve an initial phase of information gathering and a contractual negotiation phase before a final restructuring agreement is reached.
The first phase is an assessment of the company’s liquidity needs and its current and pending defaults and maturities. Each creditor will assess whether it can control the process, or at least influence its direction, appointing advisers to manage the information gathering process. It would be expected that the creditors would share financial information, but that is not always the case, see 3.4 Duties on Creditors. Typically, a first all-lender meeting will be called and co-ordinators, or a steering committee, will be appointed to manage the process and represent different groups of creditors. The Loan Market Association provides standard documents for appointing co-ordinators, although there is no requirement to use these. Indemnity provisions are a fundamental part of the appointment documentation and the most likely area for negotiation and dispute.
It is common for efforts to be made for an interim short-term moratorium on enforcement – directors will wish to protect the company’s financial position and their own exposure to personal liability (see 12 Duties and Personal Liability of Directors and Officers of Financially Troubled Companies and 13 Transfers/Transactions That May Be Set Aside), while creditors will wish to prevent unilateral enforcement by other creditors. English law-governed restructurings feature this on a regular basis, to allow all of the existing facilities to remain in place. If a standstill cannot be agreed, directors will have to consider whether the company/group can properly continue to trade.
Once standstill agreements or equivalents have been agreed, the process will move on towards agreeing a full restructuring. The form this takes will depend on, inter alia, the company’s prospects, the capital structure and the composition of creditors. Issues to be addressed may include amendment or refinancing of existing facilities, a capital raise or a debt-for-equity swap. New controls on negative covenants are likely to be imposed and new and better reporting requirements will be instituted to avoid a repeat of the circumstances. Positive covenants such as disposals, management change and an operational turnaround will also be considered.
In the negotiations between creditors, the priority of security will be respected unless such security is vulnerable as a preference or a transaction at an undervalue or as a voidable floating charge under the Insolvency Act 1986, or is otherwise vulnerable on the basis that there was insufficient corporate benefit at common law.
There is no concept of equitable subordination in English law and shareholder or affiliate indebtedness ranks as pari passu unless it is subordinated or subject to contractual or security ranking.
It is usually necessary for new money to be invested, although lenders may be willing to provide it only if they have priority over other creditors for that lending. Security may be provided over unencumbered assets, or priority can be provided contractually through a ranking and subordination agreement, although this only binds creditors' who have agreed to priority being granted.
New money may be provided by each institution in proportion to its original exposure, although in larger restructurings the entirety of the new money is often provided by the members of a steering committee or by the lead bank co-ordinator exclusively.
Various principles have been developed such as the London Approach and the INSOL Principles. There is no statutory requirement to observe such Principles at any time. For example, although INSOL’s second principle refers to all relevant creditors agreeing during a standstill period to refrain from taking any steps to enforce their claims, there is no way of generally putting a moratorium in place outside of a formal statutory process; as such, a creditor breaching an agreement would not be liable for having done so.
In National Westminster Bank plc v Rabobank Nederland  EWHC 1056 (Comm), the Court gave guidance as to the mutual duties and obligations of banks involved in restructurings. London banks usually follow the practice of disclosing relevant information about the debtor company obtained for the purposes of the workout, so as to achieve common knowledge between co-creditors in the absence of an express contractual framework to the contrary. There was no legal duty to do so. It was therefore up to each creditor to conduct its own due diligence – it was not entitled to rely on the information provided by other creditors as forming a complete picture.
Unless the terms of the intercreditor agreement or facilities agreements allow for this, an out of court restructuring cannot be imposed on dissenting creditors or shareholders without intervention of the Courts.
Under English law, there are two routes of Court intervention to impose an arrangement on dissenting creditors, a scheme of arrangement under part 26 of the Companies Act 2006 and a company voluntary arrangement under the Insolvency Act 1986 (a CVA) (see 6 Statutory Restructurings, Rehabilitations and Reorganisations).
There are four types of "pure" security interests (distinguished from absolute interests which can sometimes have a security-like function, like retention of title, but are conceptually distinct). The two forms of possessory security are the pledge and lien. The two forms of consensual non-possessory security are the mortgage and charge.
In practice, the majority of security granted is either a mortgage or charge over the asset. The type of asset being secured will indicate which form of security is most appropriate.
A legal mortgage is the most common means of securing real property. It has the effect of transferring a debtor’s interest in the land to the lender, subject to the right to repay the debt and to procure a re-transfer of the land. An equitable mortgage has the effect of charging the property with the debt, but does not convey any legal interest to the lender. There are validity and registration requirements, including that a mortgage of land must be in writing and registered with HM Land Registry and at Companies House.
A charge is a non-possessory security whereby the charged property is appropriated to the discharge of an obligation. There is no transfer of ownership to the creditor, but instead the charge creates an equitable "encumbrance" in favour of the lender. The debtor has the right to obtain the charged assets free of the security interest on payment of the secured obligation.
A charge may be either fixed or floating. A fixed charge secures the borrowing against one or more specific assets or classes of asset. A floating charge does not attach to any specific property but "floats" over the secured assets. It can be created over present and future assets falling within a defined class. Crucially, the debtor is permitted to sell, trade and dispose of the assets in the ordinary course of business, without the consent of the lender. A floating charge floats over the assets until the occurrence of an event of default or acceleration of the debt, at which point it will "crystallise" such that it converts to a fixed charge with the effect that the debtor can no longer deal with the assets.
Whether a charge is characterised as fixed or floating impacts the priority order of receiving payment should the borrowing company enter liquidation. The courts will recharacterise a fixed charge as floating if that is the true agreement. The hallmark for whether a charge is characterised as fixed or floating is the level of control exercised by the lender over those assets and whether assets can be disposed of in the ordinary course of business. In order to constitute a fixed charge, high levels of control have to be exerted over relevant assets by the lender. Whilst it is theoretically possible to create a fixed charge over stock, cash and receivables, in practice the rights given to a borrower to use and dispose of these assets in the ordinary course of business means that it is more likely that a floating charge will be created over them. A floating charge is often created over the entire assets and undertaking of a debtor.
Share security and security over cash, credit claims and financial instruments benefit from the Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003/3226) (FCARs), which simplify the process of taking security over financial collateral. The FCARs apply to (among other things) security financial collateral arrangements, which is defined as one where a security interest is created over financial collateral where ownership of the collateral is transferred on the understanding that it will be transferred back on repayment of the debt. Security granted under the FCARs is subject to fewer formality requirements.
In the absence of a stay or moratorium, a party can enforce security in accordance with the terms of the agreement (unless there are any inter-creditor agreements such as a subordination agreement). Typically, a secured party will be permitted to enforce upon the occurrence of an event of default or following an acceleration or the loan.
A fixed charge holder can appoint over the relevant asset of a debtor, who is able to take custody of, manage, receive the income from and sell the asset to discharge any underlying debt.
A mortgagee may itself take physical possession of a mortgaged asset and, without appointing a receiver, can sell the asset to discharge the debt owed to it, however, this is extremely rare in practice. Similarly, with respect to security over cash or securities constituting financial collateral under the FCARs, a lender has the right to sell, “use and dispose of the financial collateral as if it were the owner of it” and can “appropriate” the financial collateral so as enable it to become the absolute owner of the collateral should the security become enforceable.
A floating charge holder can appoint an administrator if the charge is over the whole or substantially the whole of the company’s assets and undertaking. The floating charge holder can appoint an administrator out of court, must be given notice of any intention to appoint an administrator by the company or directors and can appoint its own choice of administrator in preference to the administrator selected by the company or director.
In a compulsory liquidation, leave of the court is required to take any action or proceedings and leave will not be granted if the action raises issues that could be dealt with more properly in the liquidation.
In administration, there is an interim moratorium upon filing the application in court and a final moratorium when the order is made. Unless the administrators consent, or a court order permits it, secured creditors cannot enforce security over a company’s property and no party can take any step to repossess goods in the company’s possession under a hire purchase agreement. The administration moratorium does not apply to any security interest created or otherwise arising under a financial collateral arrangement within the meaning of the FCARs.
Unless a company is in administration or compulsory liquidation, there is no moratorium or stay on enforcement when a company is undergoing a consensual restructuring scheme or CVA. In a creditor’s voluntary liquidation or member’s voluntary liquidation a stay may be granted by the courts on the application of a member, creditor or the liquidator. The courts may also use their case management powers under the CPR to stay dissenting creditor actions, even though this is not provided for in parts 26 and 27 CA 2006.
A secured creditor can take steps immediately upon an event of default or other contractual entitlement, subject to the rules about moratoria and stays of enforcement.
There are no procedures or other impediments that hinder or discriminate against foreign secured creditors.
The secured creditors benefit from a priority position in the insolvency waterfall, see 5.8 Statutory Waterfall of Claims. They will be entitled to receive payment from the liquidator at an early stage in the liquidation process.
See 5.8 Statutory Waterfall of Claims.
It is possible to structure a CVA to deal with unsecured creditors and this has been an approach that has been utilised in connection with unsecured landlord claims on a number of English restructurings – see 6 Statutory Restructurings, Rehabilitations and Reorganisations.
Prior to insolvency proceedings, a creditor may commence debt recovery proceedings in the civil courts and in the absence of a defence proceed for summary judgment. This can typically take between three to six months.
If the debt is undisputed, an unsecured creditor may also issue a statutory demand for the amount owed and use this as evidence that a debtor is insolvent and cannot meet its liabilities as they fall due. If repayment is not made within the 21 days specified in the demand, the creditor is entitled to issue a winding-up petition.
Unless a company is in administration or compulsory liquidation, there is no moratorium or stay in English law. In a creditor’s voluntary liquidation or member’s voluntary liquidation a stay may be granted by the courts on the application of a member, creditor or the liquidator.
During insolvency proceedings, creditors interests are paramount and unsecured creditors have rights to be heard in the process. Creditor meetings are normally held at least at the start of the process and, towards the end (or annually in a more complex liquidation), to present liquidation accounts. A creditor with 10% or more of the value of the company’s debt can request further meetings. During compulsory and voluntary liquidations, unsecured creditors have the right to form a creditor’s liquidation committee to oversee the process, agree the liquidator’s fee, and monitor the liquidator’s actions.
All creditors falling in the class of unsecured creditors must be treated pari passu or equally.
In certain circumstances, unsecured creditors are permitted to claim interest on their debt.
Pre-judgment attachments take the form in English law of a freezing order, if an unsecured creditor can adduce sufficient evidence that a debtor is likely to dissipate its assets. In this scenario, the unsecured creditor will seek a court order freezing assets (usually a bank account) up to the value of the claim.
A claim can be made at any time when a debt is due and remains unpaid. If the debt is not disputed, a creditor may issue a statutory demand giving 21 days to pay. A winding-up petition can then be presented, and this will typically be heard within 21-28 days of issue following advertisement of the petition in the London Gazette. Steps must be taken to prevent advertisement by a debtor within seven days by contesting the debt and making an application to the courts to prevent its advertisement.
If a liquidation is underway, there will be a timeline set for unsecured creditors to come forward and "prove" their debt. This means that they submit the claim plus evidence of the debt for the liquidator to consider. If the liquidator rejects a claim, an unsecured creditor has 21 days in which to appeal to the court.
Landlords have statutory rights to enforce claims as they have a right to sell the possessions of a debtor tenant on the leased premises to pay up to six months' arrears of rent.
There are no special procedures or requirements that have to be satisfied by a foreign unsecured creditor, although a foreign debtor with no assets in the jurisdiction of England and Wales may be ordered to give security for the debtor’s costs if it brings a claim.
In a liquidation, sums are paid out in the following order:
Liquidator’s fees are agreed by creditors via a resolution. Both secured and unsecured creditors have the right to challenge the liquidator’s remuneration by court application, if they consider the fees to be too high.
Preferential creditors are usually the employees of the company. HMRC is currently treated as an unsecured creditor but, from April 2020, will be treated as a preferential creditor in respect of certain taxes.
Secured creditors come next – first legal mortgage/fixed charge holders, who rank in priority to those with only floating security.
A "prescribed part" is by statute required to be set aside from the sale of floating charge assets to go towards unsecured creditors’ claims. The part is 50% of the first GBP10,000 realised and then 20% of whatever is realised up to GBP600,000.
The order of priority in English law insolvency is complex. The first objective of an office-holder is to determine which assets form part of an estate. Creditors may have an absolute proprietary right in an asset, rather than a security interest (see 4.1 Liens/Security). In such a case, the creditor falls outside the insolvency process altogether and simply has the right to have their property returned to them.
Secured creditors must be ranked in priority as between each other to determine which claim get paid first. The general rule for determining priority between competing secured claims is first in time, subject to a formality requirement to register the security under Section 859A of the Companies Act 2006. In practice, however, there are a number of other rules and priority disputes are complex.
Unsecured creditors rank pari passu with each other and will all take an equal share in whatever assets are left over.
See 5.8 Statutory Waterfall of Claims. Save for the "prescribed part", unsecured claims do not have priority over secured creditor claims but will be paid behind both fixed and floating charge holders.
There are two statutory processes for a financial restructuring or reorganisation in England and Wales: a scheme of arrangement, under Part 26 of the Companies Act 2006 (a Scheme), and a creditors voluntary arrangement, under Part 1 of the Insolvency Act 1986 (a CVA).
Neither requires the company to be insolvent or unable to pay its debts. In practice, however, many CVAs are proposed when a company is insolvent in order to avoid administration or liquidation.
Schemes of Arrangement
A Scheme can be used to effect a solvent reorganisation of a company or group structure, including by merger or demerger, as well as to effect insolvent restructurings such as by a debt for equity swap or by a wide variety of other debt-reduction strategies.
A Scheme involves a compromise or arrangement between a company and its creditors and/or members, or any class of them. It requires approval in each class of voting member or creditor by 50% in number and 75% in value. Each voting class must comprise creditors whose “rights are not so dissimilar for it to be impossible for them to consult together with a view to their common interest” (Sovereign Life Assurance Co v Dodd  2 QB 753).
The court's permission must be sought to convene the meetings of members and creditors to vote on the scheme. If the requisite majority in each class vote in favour of the Scheme, the court will decide at a further hearing whether to sanction the Scheme; it has an unfettered discretion whether to do so.
If the court sanctions the Scheme, it is binding on all affected members, creditors and the company, even those who vote against it. Accordingly, claims of secured creditors can be written off or compromised without the unanimous consent of secured creditors. The Scheme will become effective when the relevant order of the court sanctioning it is delivered to the Registrar of Companies in England and Wales.
Schemes have become increasingly popular in cross-border situations and, in particular, as a means of redomiciling companies from the UK to other EU member states, an attempt to mitigate potentially adverse effects which might be caused by Brexit (Re Steris plc  EWHC 751 (Ch)). A Scheme is also a useful mechanism to apply to a non-UK company where local laws do not have an equivalent mechanism to effect a restructuring, as is the case in Germany (see, eg, Re Rodenstock GmbH  EWHC 1104 (Ch)). Because a Scheme does not involve an insolvency, the EU Insolvency Regulation does not remove the English Court’s powers to sanction and approve a Scheme.
A CVA is an arrangement usually proposed by the directors of a company in financial difficulties (although it can also be proposed by an administrator or a liquidator) to its creditors, under which the rights of creditors are replaced by new rights as set out in the CVA.
A CVA is often proposed as an alternative to administration or liquidation, typically where the company has current cashflow difficulties, but has an underlying healthy profit generating business. A CVA is classified as “Insolvency Proceedings” under the EU Insolvency Regulation, so (in contrast to a Scheme) it is only open to companies that have their Centre of Main Interests in England and Wales.
Under a CVA, creditors' claims will be crystallised, and they will share in a pot of money (often held under a trust) which the company will pay over to the supervisor of the CVA for distribution among the creditors over a number of years.
A CVA proposal has to nominate an insolvency practitioner to be supervisor of the CVA. The nominee prepares a report on the proposal which is filed in court. The proposal and the nominee’s report are then sent to the shareholders and all known creditors.
The CVA must be approved by 50% of the voting shareholders and 75% of the voting creditors by value (as long as not more than 50% in value of unconnected creditors vote against the CVA).
Once the CVA proposal is approved, it creates a statutory contract between a company and its creditors, all of whom are bound by the CVA if they were entitled to vote at the meeting. It takes effect from the date of approval. Secured creditors cannot vote and are not bound by the CVA unless they waive their security.
The CVA supervisor must send a final report on the implementation of the proposal to all shareholders and creditors who are bound by the CVA within 28 days of its approval. Their role as supervisor will be limited to monitoring compliance by the company with the terms of the CVA if it is approved.
Any aggrieved creditor can challenge the CVA on grounds of material irregularity, or that the CVA unfairly prejudices the interests of the creditor.
These challenges are not often made but recently, regarding CVAs in the retail market, challenges by landlords have become increasingly prolific as they find their interests as landlords being adversely affected by proposals which seek to vary the claims to rent, in particular as to future rent. Tenant companies have been advancing proposals which include significantly reduced or no rent for certain periods with a view to terminating the tenancies, thereby shedding lease liabilities. This led to the British Property Federation calling for government action to stop what they consider to be the abuse of the CVA system. These pleas have gone unheeded so far.
However, in September 2019, the landlords of some Debenhams stores did mount a challenge to a standard model “retail CVA” on five grounds:
The Judge rejected grounds one, two, four and five and, while upholding ground three, held that, under the terms of the CVA, the attempt to block this right could be severed and so concluded that the CVA was valid and enforceable. Permission to appeal was granted and an appeal appears likely.
As stated above, neither a Scheme nor a CVA, with the exception of smaller companies which can opt for a 28-day moratorium, though this is rarely used.
Under both a Scheme and a CVA, the directors remain in control of the company and can continue to operate the business, including borrowing money if they need it, and are able to find a lender. It is usually a key part of the proposals that they do continue to operate. They will be restricted by any terms of the Scheme or CVA as to what they can do with the proceeds of the operation of the business, for example, in a CVA, they will usually be required to pay a certain amount each month to the supervisor. If they fail to do so, the CVA can be “failed”.
The unsecured creditors in a CVA are not put into separate classes, but the shareholders do have a separate vote. Secured creditors do not have a vote in a CVA and are not bound by it. The CVA creditors receive a copy of the proposal.
For the classification of creditors in a Scheme, see 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
Dissenting unsecured creditors in a CVA are bound if the appropriate levels of creditor support are achieved, but secured creditors cannot be affected.
Both dissenting secured and unsecured creditors can be bound by a Scheme if appropriate levels of creditor support are achieved.
Generally, there is nothing to prevent claims against a company undergoing a CVA or the subject of a Scheme being traded. If the claim is traded after approval of a CVA or sanctioning of a Scheme, the purchaser of the claim will be bound, as the original creditor was, by the CVA or Scheme. In order to ensure the proper party is paid, the purchaser would have to notify the CVA supervisor it has acquired the claim.
If the claim is traded before approval of a CVA or sanctioning of a Scheme, the purchaser will be free to deal with that claim as it wishes, but will take the claim subject to any obligations attaching to it, for example, if the vendor has entered into a lock-up agreement to vote their claim in a particular way, the purchaser will usually be bound by this.
It is possible to use both a Scheme and a CVA to reorganise a corporate group, but it is much more likely that this would be done via a Scheme. A CVA will apply to each company separately, resulting in more than one CVA within a group structure, making reorganisation via a CVA more cumbersome. As set out above, in particular in relation to the Brexit cases, Schemes have been used to reorganise a corporate group, in particular to base a group in a different EU member state.
No restrictions or conditions are applied to the company’s use or sale of assets under a CVA by statute; unless the CVA itself imposes a restriction (for example, requiring a particular chattel to be used to generate income), the company can use or sell its assets as it sees fit. Any contractual requirement to obtain consent to use an asset in a particular way can be recognised in the CVA or overridden by the approval of the proposal.
Similarly, under a Scheme, the directors remain in control of the business and there are no statutorily imposed restrictions or conditions. Limits on what they can and cannot do are regulated by the terms of the pre-existing financial agreements, unless modified as part of the Scheme.
There are no asset disposition procedures which apply as a result of the Scheme or CVA other than those imposed by the terms of the Scheme or the CVA. It might be a term of the CVA that if an asset is to be sold, its proceeds should be made available to the creditors bound by the CVA and the proceeds should be paid to the supervisor.
All asset disposals would be done by the company acting by the directors and not by an office holder, the only relevant office-holder being the the CVA supervisor.
Any disposals would be on terms that the purchaser acquires good title free of any claims.
Unless the terms of the Scheme or the CVA prevent a particular creditor from bidding on an asset sale, there is nothing which arises out of the fact of being a creditor that prevents it from doing so. Similarly, there are no restrictions on acting as a stalking horse, unless that has been expressly prohibited. It would be open to a creditor to seek to utilise the sums due to it as the payment of the “price”, but if this was intended, it is the sort of thing that ought to be included in the CVA proposal to ensure that there is no claim of material irregularity or unfair prejudice.
As secured creditors do not vote on, and are not bound by, the CVA proposal, it is not possible to affect the rights of a secured creditor in any way contrary to the wishes of a secured creditor.
As to a Scheme, anything is possible provided the requisite voting percentages are achieved in the affected class and the court subsequently sanctions the Scheme. This could include releasing security creditor liens and other security arrangements. However, the court may well take the view that this would not be a proper thing to do if it amounted to an expropriation of the creditor’s rights for merely nominal consideration.
New money can be obtained by the company as part of the Scheme or the CVA. The introducer of new money will want to make the payment of the money conditional on the Scheme being sanctioned or the CVA being approved, as it will not want to risk advancing money to what might rapidly become a formal insolvency.
New money cannot be secured on assets encumbered by pre-existing secured creditors’ security in a CVA as that security cannot be affected by the CVA. There are no such problems in a Scheme if the necessary percentages of the relevant classes are obtained.
In a CVA, liquidated claims will be admitted in full. Unliquidated, unascertained and contingent unsecured claims have to be valued by the chairman, the starting point for the claim being to ascribe GBP1.00 to it. If the chairman acts if good faith in estimating the value to be put on the claim, the courts are slow to interfere if a creditor seeks to challenge it on the grounds of material irregularity.
As to a Scheme, a basis for calculating claims fairly will be set out in the explanatory memorandum. If the court were to come to the view that there had been any procedural or substantive unfairness in this regard, it might well affect the court’s decision as to whether it should sanction the scheme.
A CVA must not be unfairly prejudicial to the interests of a creditor, otherwise it will be susceptible to challenge. If the court finds it to be unfairly prejudicial, it can set aside the CVA or require a further meeting to be called. Absent a challenge, the Court does not have to approve the CVA. The CVA supervisor has no power to reject of disclaim contracts.
A Scheme has to be sanctioned by the Court. This will not occur if an honest and reasonable class member could not support such a proposal.
Under a CVA, it is possible to release a non-debtor party, such as a guarantor, provided it is part of the proposal and garners the requisite support. However, where this has been sought, for example, seeking to release the guarantor of a tenant of commercial property, the court has held this to be unfairly prejudicial to the landlord creditors as they would have been better off in a liquidation (Prudential Assurance v PRG Powerhouse  EWHC 1002).
Under a Scheme, it is perfectly possible and not unusual to release non-debtor parties from liabilities, such as those advising the debtor.
By contrast to a liquidation, in a CVA and a Scheme there is no statutory set-off imposed. As to contractual or equitable set-offs, these will need to be addressed in the CVA or Scheme proposals. As these are both consensual restructurings, it is open to the parties (subject to getting the appropriate majorities and, in the case of a Scheme, court sanction) to agree to suspend or terminate particular rights of set-off.
If a company fails to observe the terms of a CVA, it will usually come to an end. The supervisor is granted the power to issue a certificate of failure, following which they can apply for an administration or compulsory liquidation.
Upon the company going into liquidation, funds collected by the supervisor would, provided the terms of the arrangement made this clear, be held on trust exclusively for the benefit of the CVA participants. CVA creditors who have not been fully reimbursed by the trust moneys can prove for the balance in the liquidation. If the terms of the CVA do not create a trust, the monies would have to be passed over to the liquidator and be distributed in accordance with the statutory order of distribution.
A creditor who fails to observe the terms of the CVA proposal by, eg, seeking to issue proceedings to recover monies which had been the subject of the CVA, could be restrained from doing so by injunctive relief if necessary.
Once a Scheme has been sanctioned and takes effect, any failure by the company to observe the terms will be a matter of breach of contract, with the usual relief available to the party whose contract the company has breached. Likewise, a creditor who failed to observe the agreed terms would be exposed to a claim by the company for having failed to do so. If the creditor sought to assert pre-Scheme rights, they would be restrained from doing so, if necessary by injunctive relief.
Under both a CVA and a Scheme, the existing equity owners will retain ownership of the company unless modified as a result of the CVA or Scheme. It is not unusual for equity interests to be affected by either, as creditors can be asked to swap debt for equity.
There are two modes of liquidations – compulsory and voluntary. Compulsory liquidation is by order of the court, while voluntary liquidation is initiated outside of court, though may still be subject to court supervision.
Compulsory liquidation is the procedure by which the assets of a company are entrusted to an insolvency practitioner, a liquidator, who will seek to collect in and realise the value of the company’s assets before distributing the proceeds to the company’s creditors in accordance with a statutorily prescribed order of precedence. A court order is required to put a company into compulsory liquidation. At the end of the liquidation, the company is dissolved.
The process is initiated by a winding-up petition presented to the court by a company’s creditors, directors, or the company itself. Petitioning creditors normally present the petition on the basis that the company is insolvent and cannot pay its debts as they fall due. To evidence this, the creditor may have previously submitted a statutory demand to the company requesting payment of a due debt within 21 days. The petition must also be advertised in the London Gazette to enable other parties, such as creditors who may support the petition, to attend the hearing. Strict procedural time limits govern advertisement and service of the petition and if these are not complied with, the order will not be granted.
At each hearing, the courts have a number of options including dismissing the petition, adjourning the hearing, making a winding-up order, making an interim order or making any other order it thinks fit, most likely time to pay, as a last resort.
A company can request an adjournment on the basis that it will imminently repay the debt. Even if no evidence has been filed in time, in practice, if the company indicates at the first hearing of the petition that it imminently be able to repay the debt, the court will almost invariably adjourn the hearing at least once to give it the chance to do so.
A company can defend a petition on the basis that the debt is disputed, or that the company has a counterclaim. The courts will usually give directions for the dispute to be heard at trial. A petitioner who seeks a winding up order on the basis of a disputed debt risks being subject to an order for indemnity costs, as the courts are reluctant to see the winding-up procedure abused as an aggressive debt collection tactic.
If a winding-up order is made, the Official Receiver is initially appointed as liquidator, but typically the company’s creditors appoint another licensed insolvency practitioner (or two licensed individuals to act jointly) to act as liquidator(s). The liquidator is an officer of the court and has a duty to act fairly and impartially.
Once a winding up order is made, directors cease to have any powers. However, the directors must assist the liquidator and provide a statement of the company’s assets and liabilities. In due course, the liquidator will report, to the Secretary of State, any conduct of a director (or shadow director) which they believe satisfies the conditions for director disqualification.
The liquidator’s role is to realise the assets and distribute the proceeds to the company’s creditors pari passu, according to the statutory waterfall (see 5 Unsecured Creditor Rights, Remedies and Priorities). In fulfilling this objective, the liquidator has wide-reaching powers pursuant to Schedule 4 of the Insolvency Act 1986, including the power to continue the company’s business so far as he or she considers necessary for the beneficial winding-up of the company and a power of sale. A liquidator can disclaim onerous property.
A compulsory liquidation benefits from an automatic stay of legal proceedings against the company and its assets. To bring or pursue legal proceedings against the company, a creditor must first apply to the courts for permission. Where the claim is for monetary relief only, the creditor is unlikely to be granted permission and, as a general principle, only claims that have a proprietary nature are allowed to continue.
Creditors submit a proof of debt to the liquidator, setting out the particulars of their claim and the calculation of their interest. If it is a provable debt, it will be admitted in the liquidation. This includes financial and contractual obligations and can include contingent and unascertained debts. Claims are assessed and will be rejected or accepted in whole or in part. The liquidator’s decision in relation to any proof of debt may be challenged in court by a creditor.
A liquidator’s fees in a compulsory liquidation are generally paid as an expense of the winding-up. Creditors may be able to challenge the level of the liquidator’s remuneration and can also apply to the courts for an order removing the liquidator or convene a general meeting of creditors to resolve to remove them from office.
At the end of the compulsory liquidation (where the liquidator is not the Official Receiver) when the process is complete, the liquidator will summon a final meeting of creditors and present their report to them. The registrar of companies is then notified that the final meeting has been held and the company will be dissolved three months thereafter. If the Official Receiver is the liquidator, there is no meeting and dissolution occurs earlier than three months after the Official Receiver notifies the registrar of companies that the liquidation is complete or the date when the Official Receiver is satisfied that there is no further role to be undertaken and applies to the registrar for the company to be dissolved.
Under English law, there are two types of voluntary liquidation – a member’s voluntary liquidation (MVL) which is a solvent liquidation, and a creditor’s voluntary liquidation (CVL) which is ordinarily an insolvent liquidation, but which could in rare circumstances be solvent.
This is a solvent liquidation by which all creditors of a company are paid in full. The directors of the company need to swear a statutory declaration that the company is solvent. This is likely to require, in advance, a claims valuation process and expert advice. There is potential liability for the directors if the statutory declaration is incorrect.
Claims are submitted to the liquidator, who consults creditors on their claims to ensure the liquidation is solvent. Mandatory statutory set-off applies from the date of the appointment of a liquidator.
The MVL is passed by a special resolution of shareholders. The liquidator is appointed by an ordinary resolution, following which the powers of the directors terminate. The role of the liquidator is substantially the same as a court appointed liquidator. Members are able to exercise certain rights if they are concerned about how the liquidator is handling the MVL. For example, members may be able to challenge the level of the liquidator’s remuneration.
There is no automatic stay on litigation, since the company is solvent there is no need to ringfence its assets for the benefit of creditors.
If the statutory declaration proves incorrect and there are claims against the company which render it insolvent, the MVL becomes a CVL.
If an MVL is successful, the liquidator convenes a meeting of creditors to show how the liquidation has been conducted and will file the liquidation accounts with the registrar of companies. The company is then automatically dissolved three months.
A CVL can be entered into by a special resolution of shareholders. The purpose of a CVL is for the assets of the insolvent company to be sold and for the proceeds to be distributed to the company’s creditors. The liquidator will initially be appointed by the members and have limited powers until the subsequent creditors’ meeting at which point the creditors, by a majority of those present and voting, may resolve to appoint their own liquidator. In most cases, the creditor meeting is planned so it takes place on the same day as the members’ meeting. The directors must prepare a statement of affairs for the creditors’ meeting and one of the directors must chair the meeting.
All creditors need to submit a proof of debt to the liquidator, setting out the particulars of their claim and the calculation of their interest. A debt will be admitted in the liquidation if it is a provable debt – this includes financial and contractual obligations and can include contingent and unascertained debts. The liquidator will then assess all the proofs of debt. They may either accept a claim in whole or part, or reject it. The liquidator’s decision in relation to any proof of debt may be challenged in court by a creditor.
As with an MVL, there is no automatic stay, however, with a CVL this is more problematic given the insolvent status of the company. It is useful that, on application by a liquidator, the courts can stay proceedings and can give directions. A stay is typically granted.
It is possible to trade claims in a CVL. The traded claim will be recognised by the liquidator and will still prove its full value even if it has been bought for a discount.
A liquidator’s fees are generally paid as an expense of the winding-up. Creditors can challenge the level of the liquidator’s remuneration in court.
At the end of the CVL when the process is complete, the liquidator will summon a final meeting of creditors and present their report to them. The registrar of companies is then notified that the final meeting has been held and the company will be dissolved three months after registration of the notice.
Administration is not necessarily aimed at the ultimate dissolution of a company. Administration has three statutory purposes:
An administration may be a stepping stone to liquidation, or it may lead to the company recovering and returning to solvency.
Administration may be preferable to a liquidation; it enables a company to trade more normally with the benefit of a moratorium which protects the company and its assets in the period from the start of the administration process. An administration may also be desirable where creditors have lost faith in management and would prefer administrators to execute the restructuring and sale of assets.
When a company enters administration, an insolvency practitioner is appointed as the company’s administrator. The administrator takes control of the company’s business and assets from the company’s directors, in order to achieve one of the three statutory purposes of administration. The directors’ powers cease from the commencement of the administration even though they stay in office.
An administration can be commenced in-court, upon a formal application to the courts pursuant to which a court order is then made in open court. A court must be satisfied that the company is, or is likely to become, unable to pay its debts and that the administration order will meet one of the statutory purposes described above. The company, the directors or one or more creditors may make the in-court application by filing the relevant applications and documents in court.
Alternatively, an out-of-court application for administration can be made by a floating charge holder having security over the whole or a substantial part of the company’s assets and undertaking, or by the directors of the company, by electronically filing the prescribed series of documents. If a company is the subject of an outstanding winding-up petition, neither the company nor its directors can use the out-of-court route to enter administration but a floating charge holder can.
One of the key initial tasks of an administrator is to prepare a statement of how they proposes to conduct the administration, to be delivered to the registrar of companies, and all creditors and members that he or she has an address for. The proposals must set out the statutory purposes of the administration that will be pursued and how the administration will end after the achievement of that purpose.
All creditors must submit a proof of debt to the administrator setting out the particulars of their claim and the calculation of their interest. A debt will be admitted in an administration if it is a provable debt – this includes financial and contractual obligations and can include contingent and unascertained debts.
Mandatory statutory set-off applies only after the administrators have given notice of their intention to make a distribution. It is important to note that this does not preclude the operation of other types of set-off during an administration, such as contractual set-off which can be exercised in accordance with its terms.
It is possible to trade claims in an administration and this is a common occurrence. The traded claim will be recognised by the administrator and will still prove for its full value even if it has been bought for a discount. Typically, administrators on large cases will set up a claims notification process.
At various points in an administration, the administrator reports to creditors to seek approval for their proposals. Usually, in a trading administration, the creditors form a committee for this purpose to give feedback and to have a supervisory capacity. The administrator, as a court officer, has the option of applying to the courts for directions. Dissatisfied creditors can apply to the courts for relief, including the appointment of a new administrator and the removal of the existing administrator.
An administrator has wide powers, set out in Schedule 1 of Schedule B1 of the Insolvency Act 1986, but they cannot disclaim onerous property of the company and, as a matter of law, administration does not terminate contracts entered into by the company.
An administrator has a general power to distribute the assets of a company to its creditors. However, before making a distribution to unsecured creditors, the administrator must obtain a court order permitting that distribution.
Unless extended by a court order or with the consent of the company’s creditors, an administrator’s appointment automatically ceases to have effect 12 months from the day that the company entered administration. Conversely, the administrator can apply to the courts to terminate the administration at any time and he or she is obliged to end the administration if he or she thinks that: the administration can no longer achieve its purpose; the company should not have entered administration; or a resolution of a creditors’ meeting requires him or her to apply to the courts to end the administration. On the termination of an unsuccessful administration, it can be converted into a creditor’s voluntary winding-up or the company could be dissolved out of administration.
The administrator will usually make interim distributions during the term of the appointment on a periodic basis and there is an ability to adjust ongoing payments in order to "true-up" the position of creditors. Prior to terminating the administration, the administrator will seek to make a final distribution to the company’s creditors and need not place the company into liquidation solely for this purpose.
During an administration and a liquidation, it is the office-holder using the statutory power of sale who will dispose of assets. The office-holder requires consent from secured creditors before selling assets and also may seek directions from the courts. It will be a matter of negotiation as to whether the asset is sold free and clear of the fixed charge (with the office-holder accounting for the proceeds) or subject to it. An office-holder can sell free of a floating charge as if it did not exist and will account to the charge-holder for sums in excess of the office-holder’s expenses. Office-holders will typically give no representations or warranties on a sale of assets and will seek to exclude their own personal liability, as well as seeking indemnities in relation to certain assets and potential liabilities relating inter alia to retention of title, book debts and employee matters.
An office-holder may conclude that the best means of rescuing a business will be to dispose of it via a pre-pack sale. This is effectively a transaction negotiated and agreed by the buyer, before the company’s entry into the relevant insolvency process, and which completes contemporaneously with or shortly after the appointment of the office-holder. A sale of this kind is appropriate where, for example, a going-concern sale represents the best value for creditors but there are insufficient assets to trade the company’s business in administration/liquidation while a buyer is sought.
In administration and liquidation there is no rescue plan as such. Instead, there is a sale of assets and a distribution. Creditors or directors failing to observe an administrator’s or liquidator’s directions (for example, in relation to set-off or custody of assets) or information requests of an office-holder can be exposed to litigation.
In administration and liquidation, new money can be secured on unencumbered assets of a company and/or can rank behind existing fixed charge security if there is sufficient equity value and any contractual restrictions, such as negative pledges, are observed.
It is not possible to prime secured creditors or to create any priority for new money with respect to their secured assets. With respect to unencumbered assets, the new money has priority as an administration or liquidation expense over any other indebtedness. Floating charge assets (as opposed to fixed charge assets) might also be utilised to secure new money given that liquidation and administration expenses are paid out of floating charge realisations in priority to payments to floating charge-holders.
There are no procedures available under English law to deal with the administration or liquidation of a corporate group on a collective basis. Each corporate entity is dealt with on an entity-by-entity basis and there is no device which will allow for a pooling of assets. As a matter of administrative convenience, it is usually possible for the same office-holder to be appointed to a corporate group and for connected companies to be subject to combined court proceedings with the same judge.
It is not uncommon to have a creditor committee in an administration or a liquidation. The number of members varies but is typically between three to seven on larger administration cases; these members will be voted on by other creditors. In a CVL the liquidation committee can be no more than four creditors.
The role of the committees varies and is more supervisory in a liquidation where the committee will strive to agree to the liquidator’s remuneration and sanction of certain powers. An administration committee will be similarly constituted, but an administrator has broader statutory powers and will not require the same sanction or supervision from the committee. Committees can retain advisers, but they are not paid for out of an estate.
Conditions are not imposed on the use of assets under the Insolvency Act 1986 and office-holders have wide powers to take possession, use, sell and lease assets. Where an office-holder has no title to the assets or they are held on trust, the office-holder will almost always allow those assets to be repossessed in order to avoid conversion claims.
There are four avenues through which foreign insolvency proceedings can be recognised by the English courts, and through which officeholders appointed in such proceedings can obtain control over English assets or other assistance from the English courts:
English courts have power to provide relief in connection with foreign insolvency proceedings pursuant to their inherent jurisdiction under the common law. Recourse to this jurisdiction is likely to be rare in light of the statutory measures available to foreign officeholders.
This is a flexible jurisdiction depending on the needs of justice in each case, but is limited in the usual way by private international law principles which govern the scope of the English court’s jurisdiction and the circumstances in which it recognises foreign judgments. The English court will recognise foreign insolvency orders only if the debtor submitted to the jurisdiction of the foreign court, for example by participating in the insolvency proceedings or being present in the jurisdiction at the time of when the proceedings were instituted.
Section 426 Insolvency Act 1986
Under Section 426 of the Insolvency Act 1986, the courts of certain countries (mainly Commonwealth, Channel Islands and British Overseas Territories) can apply to the UK courts for assistance in insolvency proceedings. The court is free to apply the law of the requesting court and to grant a remedy available under that law but not available under English law. It is at the English court’s discretion whether to grant assistance to the requesting court.
The EU Insolvency Regulation
The EU Insolvency Regulation (“the Regulation”) is directly applicable in all EU Member States (with the exception of Denmark) and, accordingly, is part of the laws of England and Wales. In case of any conflict between the Regulation and domestic law, the Regulation will prevail. This applies for as long as the United Kingdom remains in the European Union. This would fall away in the event of a “No Deal Brexit”. In the event of a deal, it is likely to remain in place until December, 2020 in the first instance.
The Regulation automatically recognises insolvency proceedings between EU countries, and the co-operation between officeholders appointed in such proceedings. It aims to increase efficiency and lower costs of cross-border insolvency proceedings. It does not introduce any harmonisation of substantive insolvency law, but provides a procedural framework determining which court has jurisdiction, the applicable law, and the enforcement of insolvency orders.
Annex A of the Regulation sets out the insolvency proceedings to which it applies. For the UK, these include compulsory liquidation, administration, and creditors’ voluntary liquidations. However, it does not include members’ voluntary liquidations.
There is separate EU provision governing cross-border insolvency in the financial services sector, so the Regulation does not apply to the insolvency processes of certain financial institutions (Article 1(2)).
The Regulation provides for two types of insolvency proceedings: main and territorial (or secondary). Only one set of “main” insolvency proceedings can be initiated, but there may be multiple concurrent territorial proceedings.
Main insolvency proceedings can be commenced only where a debtor has a COMI (centre of main interests) and will have automatic extraterritorial effect in all other Member States (except Denmark). A COMI is defined as “the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties” (Article 3), and there is a rebuttable presumption the company’s registered office.
If a debtor has an establishment within another Member State, territorial proceedings may be instituted there in order to protect local creditors and others with rights against the debtor, such as employees. Territorial proceedings are usually initiated after main proceedings and run parallel with them, although, in limited circumstances, they may be initiated before.
The UNCITRAL Model Law is implemented in Great Britain under the CBIR (there is separate, equivalent provision implementing the Model Law in Northern Ireland). In case of conflict with domestic law or the EU Insolvency Regulation, the CBIR prevails.
CBIR provides for officeholders in foreign insolvency proceedings to apply to the English court to be recognised as a “foreign representative”. The foreign insolvency proceedings included within the scope of the CBIR are collective insolvency proceedings (including interim proceedings), which are subject to the supervision and control of a foreign court. This includes foreign processes equivalent to out of court administration and voluntary liquidations. Like the EU Insolvency Regulation, the CBIR does not apply to certain financial institutions.
CBIR recognises foreign “main” proceedings are proceedings that take place in the state where the debtor has its COMI, and foreign non-main proceedings in a state in which the debtor has an establishment.
Where foreign main proceedings are recognised, an automatic stay prevents actions being taken against the debtor or its assets. No automatic stay applies in foreign, non-main proceedings.
Insolvency protocols have been used in cross-border insolvencies to harmonise proceedings between the UK and other countries. The EU Insolvency Regulation specifically sanctions the use of protocols.
Cross-border insolvency protocols have their origin in the 1991 case of Maxwell Communication Corporation plc, which involved two primary insolvency proceedings initiated by a single debtor, one in the USA and the other in the UK, and the appointment of two different and separate insolvency representatives in the two states, each charged with a similar responsibility. The US and English judges independently raised with their respective counsel the idea that an insolvency agreement between the two administrations could resolve conflicts and facilitate the exchange of information. Under the agreement, two goals were set to guide the insolvency representatives: maximising the value of the estate and harmonising the proceedings to minimise expense, waste and jurisdictional conflict. In December 1993, both the plan of reorganisation and the scheme of arrangement were overwhelmingly approved, without a major conflict, between the two jurisdictions that required judicial resolution. The result was a Maxwell entity that was partially reorganised and partially liquidated. The case was an important milestone in international insolvency and introduced protocols as important tools in cross-border cases.
Since Maxwell, international co-operation of this kind between insolvency practitioners has become relatively common. This kind of protocol was adopted – and was crucial – in later large cross-border insolvencies such as Lehman Brothers and Madoff Securities.
A protocol or insolvency agreement may not be the appropriate solution for all cases, being case-specific as to its content and requiring time for its negotiation as well as a sufficient asset base to justify the costs associated with negotiation and co-operation between the courts and the insolvency representatives in each jurisdiction.
See 8.1 Recognition of Relief in Connection with Overseas Proceedings.
Foreign creditors are able to make claims on a debtor in English insolvency proceedings in the same manner as local creditors. Where there are concurrent insolvency proceedings, the English court will take into account recovery made in those foreign proceedings. Foreign currency debts are converted into sterling under the Insolvency Act.
Different statutory officers are appointed in different types of insolvency proceedings. When a company is in liquidation, a liquidator is (or joint liquidators are) appointed. When a company is put into administration, an administrator is appointed. Finally, a receiver is appointed to take control of specific assets so that they can be realised for the benefit of the security holder.
The main responsibility of a liquidator is the winding-up of the company’s business. The liquidator realises and distributes the company’s assets to the creditors in accordance with the statutory order of priority. A liquidator has extensive powers to manage the company and to realise its assets, investigate the company’s affairs and bring proceedings in the company’s name. It is also the liquidator’s responsibility to investigate the reason why the company failed and report on the conduct of the company’s directors.
An administrator seeks to rescue the company as a going concern or, if this is not feasible, to achieve a better result for the creditors than would be likely if the company were to be wound up. If neither of these outcomes is possible, an administrator’s role is to realise the company’s property and to make a distribution to one or more secured or preferential creditors. The administrator is given the necessary powers to take over the running of the company and manage its business in order to achieve these objectives.
Liquidators and administrators are fiduciaries; they are subject to the general duties of acting honestly, exercising their powers for a proper purpose and ensuring that personal interest does not conflict with duty. Liquidators and administrators also act as agents for the company in exercising powers to carry on the business of the company and must act in the best interests of creditors.
The primary duties of an administrative receiver are owed to the charge-holder responsible for their appointment. As appointing an administrative receiver is no longer an option for the holder of a floating charge, unless the charge was created on or before 15 September 2003 or in certain very limited circumstances, this is no longer the primary remedy for creditors with security over the majority of a company’s property. The main responsibility of an administrative receiver is to realise the relevant security in the best interests of the charge-holder, but they have a duty to act in good faith in realising the company’s charged assets.
Liquidators, administrators and administrative receivers must be authorised insolvency practitioners, ie, an individual who is authorised through membership of a recognised professional body and who has sufficient security for the performance of their functions.
The way in which a liquidator is appointed depends on the type of liquidation in question. In a members’ voluntary liquidation, the company normally appoint a liquidator at a general meeting. In a creditors’ voluntary liquidation, the liquidator is chosen by the majority of the creditors, who vote according to the value of their claims.
In a compulsory liquidation, a court makes a winding-up order and the Official Receiver usually becomes the liquidator until the creditors appoint an insolvency practitioner in their place.
On appointment, the liquidator takes control of the company and the directors’ powers cease. The liquidator will investigate why the company became insolvent and whether this was caused by the conduct of any of the directors.
The ways in which a liquidator may be removed also depends on the type of liquidation. In a members’ voluntary liquidation, a general meeting of the company may remove the liquidator. In a creditors’ voluntary liquidation, a liquidator may be removed by the company’s creditors under a procedure put in place for that purpose. In a compulsory liquidation, a liquidator may be removed by a direction of the Secretary of State, an order of the court, or a qualifying decision procedure.
The court may replace a liquidator if cause is shown, although strong grounds must be established before the court will replace a liquidator who does not wish to resign.
An administrator may be appointed by the company, its directors, a qualifying floating charge-holder or by the court. As the primary objective of an administration is to rescue the company as a going concern, the identity of the administrator is important and, ideally, they will have the confidence of the directors as well as the creditors.
Once appointed, the administrator takes control of the company’s business and its assets. However, the directors keep certain duties after a company goes into administration and remain subject to the usual fiduciary obligations, according to which they have to act in the best interests of the company. Without the consent of the administrator, the directors cannot exercise any powers which might affect the administrator’s conduct of the administration, and the administrator is able to remove and replace directors if they wish.
The appointment of an administrator comes to an end after a year, although it can be extended by the court or by the consent of every secured and a majority of unsecured creditors.
An administrative receiver is chosen by the floating charge holder responsible for their appointment once that charge becomes enforceable. As the floating charge holder’s security must be over "the whole, or substantially the whole, of the company’s property" for the creditor to be able to appoint an administrative receiver, on appointment the receiver will in practice replace the directors as the manager of the company.
There is usually power for the charge holder to remove the receiver they appointed, as well as to replace that appointment. An administrative receiver can also be removed at any time by an order of the court. When the floating charge holder’s debt has been repaid, or when the property has been sold and all the proceeds distributed, the administrative receivership is complete.
If a company has financial problems, professional advice may be sought from a number of qualified professionals including certified accountants, authorised insolvency practitioners, financial advisers and insolvency solicitors.
If a company chooses to engage any of the professionals suggested above to obtain the benefit of their advice about the company’s financial situation, then the company will be responsible for ensuring that any agreed compensation is paid.
In order to engage professional advice in these circumstances the company will need any authorisation required by the company’s constitution. Usually, this will be a decision taken by the board of directors.
Typically, professional advisors will be engaged by the company and will owe a duty of care to the company. Although the precise nature of the advice given will depend upon the profession of the particular advisor engaged, the advisors will be able use their expertise to advise the company as to the significance of its financial problems, the various options available, and what might be the best way forward for the company. The earlier advice is sought, the more options are likely to be available to the company and the greater the chance of rescuing it as a going concern.
Arbitration is not utilised in English law cases and the courts have sole jurisdiction over insolvency matters. Insolvency cases, CVAs and Schemes are dealt with by the Insolvency and Companies List, which is a specialist list within the Business and Property Courts of the High Court of Justice. It employs experienced, specialist judges. The London Insolvency District hears and manages Scheme cases and other more complex insolvency matters via, approximately, five registrars and a number of other judges. There are district registries across England and Wales.
Increasingly, the Insolvency and Companies List is concerned with international cases and to co-operate with the courts of other jurisdictions. The English courts are familiar with UNCITRAL and common law requests for recognition and assistance in foreign insolvency proceedings.
See 11.1 Utilisation of Mediation/Arbitration.
See 11.1 Utilisation of Mediation/Arbitration.
See 11.1 Utilisation of Mediation/Arbitration.
See 11.1 Utilisation of Mediation/Arbitration.
The codified duties of directors under the Companies Act 2006 are:
These duties are based on common law rules and equitable principles, to which the Court will still have regard (Section 170(4)).
The Companies Act 2006 elaborates further on certain aspects of these duties. The reasonable care, skill and diligence that a director must exercise is defined as the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company and the general knowledge, skill and experience that the director actually has (Section 174). This is the same test as applies in relation to wrongful trading under IA1986, Section 214, considered further below.
Further, an extended meaning is given to the success of the company which directors are duty bound to promote under the Companies Act 2006, Section 172, including to have regard to the long-term consequences of decisions, the interests of employees, the community and the environment and the need to foster relationships with suppliers, customers and others, as well as to maintain a reputation for high standards of business conduct and act fairly between members of the company.
Despite this codification and elaboration, the Companies Act 2006 is silent on the circumstances in which directors may come to owe duties to creditors, and what such duties may entail. Instead, Section 172(3) simply preserves pre-existing enactments and rules of law “requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company”.
In terms of when directors will come to owe duties to creditors, a wide variety of thresholds have been suggested. Included are that the company be in a dangerous or precarious financial position, doubtfully solvent, bordering on insolvency, facing a real and not remote risk of insolvency or on the verge of insolvency. This latter test gained currency for some time following the first instance decision of Rose J in BTI 2014 LLC v Sequana SA  EWHC 1686 (Ch), which contains a comprehensive summary of earlier tests.
However, when BTI 2014 reached the Court of Appeal, it was considered that the “verge of insolvency” test wrongly gave the impression that insolvency had to be temporally imminent. In the Court of Appeal’s view, creditors’ interests ought to be had regard to where a company’s situation was such that insolvency was likely to occur in the long term. The Court of Appeal also felt that regard should be had to the directors’ state of mind. The obligation to have regard to creditors’ interests was therefore said to arise “when the directors know or should know that the company is or is likely to become insolvent” (at -).
A further aspect of directors’ duties to creditors is the weight creditors’ interests are to be given. A variety of views have been expressed in relation to this by various courts over the years, ranging from creditors’ interests being paramount (Colin Gywer Associates Ltd v London Wharf Limehouse Ltd  2 BCLC 153 at ) to just one factor to be weighed in the balance with the interests of shareholders (Ultraframe Ltd v Fielding  EWHC 1638 (Ch) at ).
An alternative approach which has found favour in Australia and Guernsey is that there is a sliding scale depending on the degree of financial difficulty (Bell Group v Westpac Banking Corp  WASC 239 at 4419; Carlyle Capital Corporation Limited v Conway (Royal Court of Guernsey Judgment 38/2017, Marshall LB). The Court of Appeal in BTI 2014 expressly declined to decide this issue (it not having arisen on the facts). Notwithstanding this, it was observed that “where the directors know or ought to know that the company is presently and actually insolvent, it is hard to see that creditors’ interests could be anything but paramount” (at ).
It should be noted, in this context, that the duty on the part of the directors to act in the best interests of the company (attributing appropriate weight to the interests of creditors) remains a subjective duty. Thus, if the directors genuinely believe that they have acted in the best interests of creditors, the duty will not be breached. However, as with the operation of this duty in the solvent context, where the evidence shows no regard at all was had to creditors’ interests, the Court will adopt an objective test (established in Charterbridge Corp Ltd v Lloyds Bank Ltd  Ch 62 at 74E-74F). This involves considering whether “an honest and intelligent man in the position of a director of the company concerned could, in the whole of the existing circumstances, have reasonably believed that the transaction was for the benefit of the company”. For a recent application of the Charterbridge test where the duty to consider the interests of creditors had arisen, see Pantiles Investment Limited & Anr v Winckler  EWHC 1298 (Ch) at  and -.
A further implication of the insolvency of a company, is that breaches of duty cannot be ratified by the shareholders if the company is actually insolvent at the time of breach, or if the breach itself renders the company insolvent (West Mercia Safetywear Ltd v Dodd  BCLC 250).
Also, peculiar to the insolvency context is IA1986, Section 212, which provides a summary remedy enabling liquidators, the official receiver and any creditor or contributory to recover money or property misappropriated by directors for the company and/or to obtain a contribution to the assets of the company from directors of are guilty of any misfeasance or breach of any fiduciary or other duty (which therefore includes breach of a director’s duty of skill and care). Section 212 does not create new causes of action: it simply provides a procedural mechanism to enable the persons identified above to obtain redress for the company against a defaulting director.
Additional bases upon which a director may face liability when a company enters insolvent liquidation include fraudulent trading pursuant to IA1986, Sections 213 (liquidation) and 246ZA (administration) and wrongful trading pursuant to IA1986, Sections 214 (liquidation) and 246ZB (administration).
Fraudulent trading (which is also a criminal offence under the Companies Act 2006, Section 993) requires proof that the defendant was knowingly party to the carrying on the company’s business with the intention of defrauding creditors or for a fraudulent purpose. The liquidator or administrator claimant must therefore demonstrate actual dishonesty.
Because of the difficulties proving this, wrongful trading was introduced by the Insolvency Act 1985 and retained in the IA1986. Pursuant to the wrongful trading provisions, any de jure, de facto or shadow director will be liable to make such contribution to the assets of the insolvent company or company in administration as the court deems fit if they knew or ought to have concluded that there was no reasonable prospects that the company would avoid going into insolvent liquidation or insolvent administration, unless that person took every step with a view to minimising the potential loss to the company’s creditors as they ought to have taken. Both limbs are appraised applying the same test as pertains to the duty to exercise reasonable skill, care and diligence under Companies Act 2006, Section 174.
In appraising whether the pre-requisites of liability for wrongful trading are satisfied, English courts have recognised that directors are entitled to place reasonable reliance on specialist advisers, and ought also to be accorded a margin of discretion, not least because that directors will be criticised by shareholders and creditors if they place the company in liquidation too early (see Continental Assurance of London (No 4)  2 BCLC 287).
Liquidators and administrators are allowed to assign the causes of action available to them under IA1986, Sections 213 and 214 IA.
Alongside potential financial liabilities for directors under the common law and statutory provisions set out above, the Company Directors Disqualification Act 1986 (CDDA1986), Section 6 provides a mandatory ground for disqualifying unfit de jure, de facto and shadow directors who have acted as directors of a company which has entered insolvent liquidation for a period of between two and 15 years. Directors may instead choose to give an undertaking not to act as a director for a similar range of periods (it being up to the Secretary of State whether or not to accept the same).
While the defendant must have been a director of an insolvent company for Section 6 to be engaged, the Court is entitled to look at their conduct in relation to all previous directorships whether or not the other companies have ended up in insolvent liquidation.
Although unfitness has been held to be an ordinary word of the English language which is to be considered by reference to all of the circumstances (Re Sevenoaks Stationers (Retail)  Ch 164), CDDA1986, Sch1 lists matters to be taken into account including the extent to which the defendant director is responsible for the company becoming insolvent. As with wrongful trading, where the alleged unfitness relates to the circumstances in which the company became insolvent, the Court will grant directors a certain amount of business judgment leeway in determining whether they persevered with trading, and thereby continued to increase a company’s liabilities, for too long (see, eg, Re Digital Computer Services  BCC 611).
One of the reforms introduced by the Small Businesses Enterprise and Employment Act 2015 (SBBEA2015) was a new ground of disqualification for those influencing or instructing a director to engage in unfit conduct (see CDDA1986, Sections 8ZA-8ZE). This was designed to capture those exerting influence or providing instructions in circumstances where they did not satisfy the test for shadow directorship (addressed further below). SBEEA2015 also introduced a new regime pursuant to which a compensation order may be obtained against a disqualified director in respect of any loss to the company or individual creditors caused by the conduct demonstrating unfitness (CDDA1986, Sections 15A-15C).
Other liabilities which directors may face in an insolvency scenario include:
Even where creditors’ interests are engaged, a director’s duties will still be to the Company. Creditors are among the persons entitled to take advantage of the summary remedy allowing the pursuit of misfeasance and breach of duty claims under IA1986, Section 212. This does not, however, permit principles of reflective loss to be ignored. Where a claim is advanced in respect of a director’s breach of duty to the company, the remedy will be a requirement that compensation is paid to the company.
Although Chief Restructuring Officers (CROs) have not been a feature of the UK insolvency landscape for as long as in the US, the appoint of turnaround experts to this role by UK companies is now commonplace. Their exact title, range of responsibilities and duties will vary depending on the individual CRO, their firm and the company in question.
CROs will also fulfil a variety of functions depending on the task for which they are retained. Such tasks might include undertaking crisis management, managing a time of financial stress, identifying factors contributing to underperformance or restructuring so as to help a successful company achieve growth.
The precise role to which the CRO is appointed will inform to whom he or she reports. Ideally, the CRO will be sufficiently senior so as to be able to exercise control of the reorganisation process and to assert independence where required.
The test for shadow directorship (see 12.4 Shadow Directorship) does not have a specific carveout for a CRO or turnaround professionals in general. However, if the intention is that they are not to have the responsibilities and duties of shadow directors, they should take care to ensure they are able to take advantage of the exceptions which obtain where directors act on advice given in a professional capacity.
IA1986, Section 251 defines a shadow director as “a person in accordance with whose directions or instructions the directors of the company are accustomed to act” but adds that a person will not be a shadow director by reasons only that directors act “(i) on advice given by him in a professional capacity (ii) in accordance with instructions, a direction, guidance or advice given by that person in the exercise of a function conferred by or under an enactment; or (iii) in accordance with guidance or advice given by that person in that person’s capacity as a Minister of the Crown”.
Shadow directors are to be distinguished from de facto directors who assume to act as a director and exercise and discharge a director’s functions. While the same person may be a shadow director in respect of some acts, and a de facto director in respect of others, they cannot simultaneously act in both capacities (Smithton Ltd v Naggar  1 WLR 189 at ; Carlyle Capital Corporation v Conway (38/2017) at -; Popely v Popely  EWHC 1507 (Ch)).
Whereas a de facto director will owe all of the duties of a director, the position in relation to shadow directors is less clear. The wrongful trading and mandatory disqualification regime under IA1986, Section 214 and CDDA1986, Section 6, expressly apply to shadow directors along with certain other of the statutory liabilities described in . There is considerably less certainty as to whether shadow directors are subject to the codified duties of directors generally.
In particular, an appellate court is still to resolve the differences of approach between Lewison J in Ultraframe (UK) Limited v Fielding  EWHC 1638 (Ch) — shadow directors do not typically owe fiduciary duties, and Newey J in Vivendi SA v Richards  BCC 771 at  — shadow directors typically owe fiduciary duties in respect of instructions they give.
An attempt to square this particular circle was, however, made by Morgan J at first instance in Instant Access Properties Ltd (in liquidation) v Rosser & Ors  EWHC 756 (Ch). Morgan J went back to first principles and recognised that the question whether an individual owes fiduciary duties is a fact sensitive matter (at ). As a result, rather than focussing upon whether or not an individual had a particular role such as that of shadow director, the key question is instead “whether the individual has expressly or impliedly (from the circumstances) undertaken or assumed a position of trust and confidence or whether there is a legitimate expectation that he will not use his position in a way adverse to the interests of the other” (at ). Whether this becomes more the generally accepted approach remains to be seen.
Save insofar as owners/shareholders overstep the mark and become de facto or shadow directors, or otherwise have a relationship with creditors giving rise to liability in contract, tort, restitution or otherwise, owners/shareholders are not liable to creditors.
Alongside statutory provisions which may enable transactions to be set aside regardless of insolvency, such as the Consumer Credit Act 1974, the Unfair Contract Terms Act 1977, the Unfair Terms in Consumer Contract Regulations 1999 and the Consumer Rights Act 2015, the IA 1986 provides for the invalidation/setting aside and claw-back of monies in connection with transactions at an undervalue, preferences, floating charges other than for fresh consideration and transactions defrauding creditors. The primary motivation behind these provisions is to ensure that assets of an insolvent company’s estate are preserved for distribution pari passu, and to counteract the conferring of advantages on key creditors, directors themselves or their associates.
Transactions at an Undervalue (IA 1986, Section 238) and Preferences (IA 1986, Section 239)
A liquidator or administrator may ask the court to make such order as it thinks fit for restoring the position to that which would have pertained had the company not entered into a transaction at an undervalue or a preference at a relevant time. Possible relief includes an order require repayment of the benefit received, or for a director who caused the transaction to take place to pay compensation to the company.
A transaction at an undervalue is either a gift, a transaction for no consideration or a transaction for consideration “which, in money or money’s worth, is significantly less, in money or money’s worth, of the consideration provided by the company”. The granting of security is not a transaction at an undervalue (re M C Bacon  BCCL 324). Further, a court will not make an order in respect of a transaction at an undervalue if satisfied that it was entered into by the company in good faith for the purpose of carrying on its business and there were reasonable grounds for believing the transaction would benefit the company.
A preference involves the company doing anything, or “suffering anything to be done”, which has the effect of putting a creditor, surety or guarantor for any of the company’s debts or liabilities in a position which will be better than would otherwise have been the case in the event of the company going into liquidation. This includes granting security. Importantly, the company giving the preference must be influenced by a desire to put the preferred person in a better position (Re M C Bacon).
For preferences, there is a rebuttable presumption of a desire to prefer where the other party is a “connected person” (defined in IA 1986, Section 249 as a director, shadow director or associate of a director or shadow director, with associate including familial relationships and relationships of trustee/beneficiary and employer/employee).
As to when is a relevant time:
Floating Charges Other than for Fresh Consideration (IA1986, Section 245)
Floating charges entered into at a relevant time by a company which has entered administration or liquidation are void save to the extent that consideration is provided at the same time or after the creation of the charge.
The relevant time is:
Transactions Defrauding Creditors (IA1986, Section 423)
A transaction defrauding a creditor involves a natural person or company entering into a transaction at an undervalue for the purpose of putting assets beyond the reach of a person who is making, or may at some time make, a claim or otherwise prejudicing the interests of such a person. If these requirements are made out, the court may make such order as it sees fit to restore the position.
Section 423 is not strictly an insolvency avoidance/claw-back provision as it applies equally where the individual or company entering into the transaction to defraud his her or its creditors is solvent. There is considerable uncertainty as to whether any limitation period applies to Section 423 claims, and whether the defrauding purpose must be a dominant or merely substantial one.
See 13.1 Historical Transactions. It is not clear whether any limitation period applies in respect of transactions defrauding creditors under IA1986, Section 423.
Claims to undo the effects of transactions at an undervalue, preferences and floating charges other than for fresh consideration have to be brought by liquidators or administrators. The potential claimants for transactions defrauding creditors are far wider and include anyone who can show they are a victim of the transaction. An exception to this is that a claim under IA1986, Section 423 can only be brought against an individual who has entered bankruptcy, or a debtor company which has entered into liquidation or administration by the trustee in bankruptcy, liquidator or administrator as of right and by a victim only with leave of the court.
No information has been provided for this section.
No information has been provided for this section.
No information has been provided for this section.