There has been a downturn in insolvency and restructuring activity in the UK. Based on the Insolvency Service's Q2 2020 statistics, overall company insolvencies were down 23% based on the first quarter of the year and down 33% on the same period last year. This decline can be attributed to various factors.
Temporary measures were implemented by the Corporate Insolvency and Governance Act 2020 (CIGA) which came into force on 24 June 2020, and included suspension of liability for wrongful trading, and restrictions on presentation of statutory demands and winding-up petitions in connection with coronavirus-related debts. The Coronavirus Act 2020, which came into force on 25 March 2020, also introduced, among other things, temporary protection from forfeiture for commercial tenants.
The foregoing measures, together with financial support schemes (such as Coronavirus Business Interruption Loans and Business Bounce Back Loans), reduced court hours and general advice from financial services regulators to forebear, have likely kept the number of insolvencies and restructurings artificially low. CIGA also introduced permanent significant reforms to the English insolvency regime, including a ban on ipso facto clauses (subject to certain exclusions), a new moratorium under the Insolvency Act 1986 (IA86), and a new restructuring plan under part 26A of the Companies Act 2006 (CA06) ("Restructuring Plan").
Certain sectors have experienced more severe and immediate distress from the impact of COVID-19, including casual dining, retail, travel and leisure, aviation and oil and gas. To date, most restructurings in the UK have occurred in these areas, for example, Virgin Atlantic Airways (the first Restructuring Plan was sanctioned on 2 September 2020), Pizza Express (Restructuring Plan launched on 1 September 2020), New Look (second CVA in three years was approved in September 2020) and Intu (went into administration on 26 June 2020).
Finally, it is necessary to touch on Brexit. Further to the European Union (Withdrawal Agreement) Act 2020, the UK left the EU on 31 January 2020. There now follows a transitionary period until 31 December 2020 during which the terms of the future UK-EU relationship will be agreed including, among other things, how the recognition and enforcement of cross border insolvencies and restructurings will work.
The primary statutory regimes are as follows:
There are numerous formal and informal processes available which, depending on the route used, may or not be voluntary, which include:
There are no obligations to commence insolvency proceedings at specified times, however, there are potential implications for directors of a company where it is later subject to formal insolvency proceedings. See 10 Duties and Personal Liability of Directors and Officers of Financially Troubled Companies.
A company's creditors can commence insolvency proceedings on the basis that there are unpaid amounts due and owing to the creditor. The typical precursor for creditors is to present a formal demand for payment (a statutory demand) in accordance with Section 123(1)(a) or 222(1)(a) of IA86, for undisputed debts of more than GBP750. A company failing to comply with the demand (or does not have it set aside), is prima facie evidence of insolvency, and a basis for a creditor commencing insolvency proceedings.
Insolvency is a requirement for commencing certain proceedings, namely, administration and liquidation.
IA86 does not define "insolvency" and instead provides seven circumstances in which a company may be wound up. The court must also be of the view that it is just and equitable that the company be wound up. Typically, a company is wound up because it is unable to pay its debts as they fall due. Under Section 123 of IA86, a company is unable to pay its debts if any of the following apply:
Statutory restructuring and insolvency regimes include the following:
There are no statutory requirements requiring parties to attempt consensual work-out before issuing formal proceedings.
Although it depends on the specific facts, out-of-court or consensual approaches are generally favoured where possible because there is usually more value preservation (likely meaning greater recoveries for stakeholders), less negative PR, increased flexibility and lower costs. The success of such restructuring depends on the viability of the underlying business, debt levels, number of stakeholders and the terms of the company's finance documents. Creditors may also consider "soft" enforcement strategies, enforcing with the borrower's agreement.
In recent years, "pre-packaged administrations" have been popular in England and Wales. See 7.2 Distressed Disposals.
There is no "typical" consensual restructuring, however, the process normally begins with the troubled company engaging its stakeholders, financial advisers and gathering data (company's prospects, capital structure, creditor composition). The company will likely explore various solutions from consensual restructuring or formal insolvency to raising cash via other means, such as asset disposals.
Consensual restructuring discussions often begin with relevant stakeholders entering into a standstill agreement to give the company "breathing space" to explore restructuring options. Creditors may form groups or committees at this stage to try and control or influence the process.
Once the company has secured its standstill agreements, it will look towards agreeing a restructuring plan. Engaging financial advisers helps to determine, among other things, which creditors are effectively "out of the money" (ie, would not make a recovery in a winding-up of the company). Restructuring negotiations are invariably driven by those creditors which are in-the-money. Priority of security is respected unless the security is vulnerable for some reason.
The company may also consider lock up agreements to ensure stakeholders will support any restructuring in due course.
New money investment is usually required to turn around an ailing company. A number of tools may be employed to convince lenders to provide a capital injection at times when a company is distressed, such as giving new money lenders super priority, additional security (if the assets are encumbered, any change in priority must be agreed by existing security holders), or an equity stake in the company.
There are no statutory measures which ensure super priority for new financing in this context (equivalent to DIP financing which is fairly commonplace in the United States), however, it is possible to achieve super priority through contractual arrangements.
There are no laws which impose duties on creditors to each other, the company or third parties. Various principles have been developed such as the London Approach and INSOL Principles, however, these are observed voluntarily, or as a matter of market practice. For example, creditors may agree to refrain from taking action during a standstill period, but there is no way of enforcing a moratorium outside a formal statutory process.
Depending on the circumstances, creditors may have certain other duties, for example if a secured creditor exercises its power of sale over an asset over which it has security, it must obtain the best price reasonably possible, acting in good faith and with reasonable skill and care. Such duties would be owed to parties who have a recognised interest in the value of the equity of redemption in the relevant asset.
A consensual or out-of-court financial restructuring will not normally be binding on dissenting creditors without court intervention, unless there are express contractual provisions which provide for this. Typically, under LMA standard finance documentation, there will be provisions allowing for certain amendments to be made to a credit agreement by lender majority (being 66⅔ %). In such cases, provided the relevant threshold is met, dissenting creditors are bound. Similar thresholds of creditors will normally also be needed to give formal instructions to trustees/agents to compel them to take certain action (eg, enforcement).
The foregoing may not be sufficient for a company experiencing distress and it may be necessary to go down the CVA, Scheme of Arrangement or Restructuring Plan route, all of which provide for dissenting creditors to be crammed down provided a requisite number of creditors support the restructuring.
There are four main types of security interests in England and Wales.
Creditors usually take security by way of a charge over the debtor's assets as this does not require the creditor to take actual possession of assets. Instead, the creditor obtains an equitable proprietary interest in the asset. The debtor retains title and possession.
A charge can take the form of either a fixed charge (ie, attaches to defined and identifiable asset) or a floating charge (ie, hovers over a class/pool of assets), the difference being that a debtor cannot dispose of assets which are subject to a fixed charge (without the fixed charge holder's consent), whereas a debtor can deal with the relevant floating charge assets in the ordinary course of its business.
The type of charge held by the creditor is important if the debtor becomes insolvent as it can impact the creditor's recourse to the debtor's assets, the enforcement options and the creditor's ranking in the insolvency waterfall.
A mortgage is one of the main forms of security over real property. Title to the asset is transferred to the creditor on the basis that title will be transferred back to the debtor when the debt is repaid.
Creditor takes possession of the asset until the debt is repaid but title remains with the debtor. However, if the debtor defaults, a power of sale may arise which allows the creditor to sell the asset and apply the proceeds towards their debt. As a pledge is a possessory security, it is usually impractical in a commercial context save in the context of shares.
A lien is not a security interest but arises by operation of law. The creditor gains a right to the asset until the relevant debt has been discharged. Liens are more common in the context of trade creditors, for example, where goods are being supplied, repaired or transported.
Unless the relevant company is subject to a stay or a moratorium, a secured party can enforce its security in accordance with the terms of the security and finance agreements. Typically, this happens upon occurrence of an event of default and following acceleration of the loan. Depending on the security held by the creditor, and the rights under the security agreement, there may be several routes available to the security holder.
Fixed charge holders can usually appoint a fixed charge receiver over the relevant assets. The receiver can take custody of, manage, receive income from and sell the asset to discharge any of the underlying debt. A mortgagee can also appoint a receiver, or alternatively, take physical possession of the mortgaged asset and sell it in order to discharge the debt. In practice, mortgagees will rarely take possession themselves. A floating charge holder, provided it holds a "qualifying" floating charge, can appoint an administrator to the company. Unlike other creditors, a floating charge holder can make such an appointment out of court.
A holder of financial collateral (as defined in the Financial Collateral Arrangements (No 2) Regulations 2003), can appropriate those assets without having to account to preferential creditors, unsecured creditors or obtain a court order. Such assets typically include cash, financial instruments (such as shares, bonds and warrants) and credit claims.
Before taking enforcement action, secured creditors should undertake insolvency checks on the company. If the company is in compulsory liquidation, leave of the court is required to take action in relation to the company's assets. Similarly, if administration proceedings have been commenced, a moratorium will be triggered which prevents secured creditors from enforcing against the company's assets.
A secured creditor benefits from higher priority in the insolvency waterfall, which is as follows:
A fixed charge has priority over a floating charge (even if created at a later date).
See 7.2 Distressed Disposals.
Pursuant to the Finance Act 2020, for insolvencies started on or after 1 December 2020, Her Majesty's Revenue and Customs (HMRC) will become a secondary preferential creditor in relation to certain taxes (including PAYE, National Insurance contributions and VAT), ranking below other preferential creditors, such as employees, but above the prescribed part and floating charge holders (potentially impacting overall recoveries for stakeholders further down the insolvency waterfall).
The primary function of an administrator or liquidator is to realise the assets of the insolvent estate and distribute those realisations to creditors in accordance with the statutory order of priority. The statutory order places creditors into different classes, and the company’s assets are distributed to each class in priority, with each class being paid in full (with the exception of the prescribed part) before the next category is paid.
The status of trade creditors will depend on the terms upon which the debts are being restructured. It is possible to organise a restructuring by statutory CVA, Scheme of Arrangement or Restructuring Plan or by informal agreement between creditors, which does not affect unsecured trade creditors. However, given a CVA is designed to allow a company to compromise its unsecured creditors, the likelihood that trade creditors will remain unaffected is less likely.
Before formal insolvency is commenced, an unsecured creditor can take action against the company for unpaid debts (for example, via the statutory demand route mentioned in 2.4 Commencing Involuntary Proceedings and 2.5 Requirement for Insolvency above, or by initiating debt recovery proceedings in the civil courts). Initiating formal procedures can be risky for unsecured creditors if it results in the company going into formal insolvency – a truly insolvent company may have higher ranking secured creditors whose claims rank ahead, and will be satisfied in advance, of the unsecured creditor.
During a formal insolvency process, unsecured creditors have the same rights as secured creditors to receive information and attend and participate in meetings. A creditor has the right to challenge an administrator's conduct by applying to court on grounds of unfair harm, inefficient conduct or misfeasance.
Assuming an unsecured creditor has a provable debt, it may submit a proof of claim into the estate of the insolvent company (see 6.11 Determining the Value of Claims and Creditors). If admitted, an unsecured creditor will be paid in accordance with the statutory order of priority, pari passu with other unsecured creditors.
Generally, unsecured creditors are rarely made whole during a corporate insolvency process. For this reason, a portion of the realisations from assets subject to a floating charge are set aside for unsecured creditors, known as the "prescribed part". The prescribed part is calculated as a percentage of the company's asset value -and subject to a maximum cap which was recently increased to GBP800,000 for floating charges created on or after 6 April 2020; prior to this date, the cap was GBP600,000.
A creditor may apply to the English court for a freezing order which restrains a party from disposing of or dealing with its assets. Should the court be satisfied that a freezing order is appropriate, assets will be frozen usually up to the amount of the claim of the petitioning creditor. A freezing order is not a form of security and the petitioning creditor has no proprietary right to the assets themselves.
See 4.3 Special Procedural Protections and Rights.
Where a company has been through a Moratorium, the debts that do not benefit from a payment holiday or are incurred during the Moratorium and must be paid as they fall due are given super-priority status in any formal insolvency proceeding that commences within 12 weeks of the Moratorium ending. This includes, among other matters, the monitor's remuneration and expenses, debts for goods and services supplied, rent, wages and salaries.
In a liquidation, these super-priority debts have absolute priority over all other claims, other than the prescribed Official Receiver fees and any debts secured by fixed charge security. In administration, the administrator is obliged to make a distribution to satisfy these debts and must realise property to do so. In a CVA, Scheme of Arrangement or Restructuring Plan, the proposal cannot compromise the super-priority debts.
Moratorium under Part A1 of IA86
A Moratorium is a debtor in possession process which allows a financially distressed company breathing space from enforcement by creditors while it attempts to organise its affairs. It is available to "eligible" companies (excluding, among others, companies which are party to capital market arrangements) where it is considered that a Moratorium is, or is likely, to result in the rescue of the company as a going concern. A Moratorium can be a stand-alone procedure, or it can precede the procedures set out below.
The Moratorium is usually effected by filing relevant documents with the court or, in limited cases, by order of the court (for example, in the case of an overseas company). It becomes effective from the time of filing.
Restrictions which automatically come into force include:
The Moratorium initially lasts 20 business days but can be extended without creditor consent by a further 20 business days, or up to a year with consent. The court has discretion to extend the period for an indefinite time.
The company’s eligibility for, and compliance with, a Moratorium is supervised by a licensed insolvency practitioner (a “monitor”).
CVA under Part I of IA86
A CVA is a compromise or arrangement between a company and its creditors which deals with the rescheduling or reduction of a company's debt. The arrangement is supervised by a licensed insolvency practitioner (the “supervisor”) and may result in the company avoiding terminal insolvency proceedings, such as liquidation or administration.
A proposal document must be prepared, setting out the proposed terms of the CVA, which is delivered to the nominated supervisor, together with a statement of affairs detailing the company’s creditors, debts, assets and liabilities. Any proposal must allow for payment of any preferential debts in priority to other unsecured creditors, unless the preferential creditors agree otherwise.
The supervisor has 28 days to report to the court outlining whether, in their view, the company's creditors and members should consider the proposed CVA, following which the supervisor will seek a decision of the company’s creditors (and members). To be implemented, the CVA proposal must be approved by at least 75% in value of the company's creditors, and cannot be opposed by more than 50% in value of the unconnected creditors. The CVA may also be approved by at least 50% in value of the company's members who have voting rights, however, the CVA will be implemented if the creditors approve it, but the members do not.
A CVA takes effect from the date it is approved by creditors and it is binding on all of the company's unsecured creditors who were entitled to vote – it cannot bind secured creditors without their express consent. The directors remain in control of the company but under the supervision of the supervisor, whose powers will depend on the terms of the CVA.
A CVA may be challenged for up to 28 days after its implementation (or where a creditor did not receive notice, within 28 days of becoming aware of the decision having taken place) on the basis of unfair prejudice or material irregularity. The challenge may be brought by a member or creditor, the nominated supervisor or the company’s administrator or liquidator.
There is no automatic moratorium following a CVA being implemented, but a CVA can be combined with the formal Moratorium procedure.
Scheme of Arrangement under Part 26 of CA06
A Scheme of Arrangement allows a company to reach a compromise or arrangement with its members and/or creditors (or any class thereof). While not an insolvency procedure, and can be used by both solvent and insolvent companies, it is often used as a restructuring tool to compromise company debts. The agreement reached must be a two-way compromise, meaning that both the company and its members or creditors receive some benefit from the scheme that compensates them for any alteration of their rights.
The first step is to make an application to court to summon a meeting of the relevant class(es) of members and/or creditors, which may be made by the company itself, any of its creditors or members, a liquidator or an administrator, as applicable. The company then sends notice to the members and/or creditors, together with an explanatory statement setting out the terms and effects of the proposed scheme.
The Scheme of Arrangement must be approved by 75% in value representing more than 50% in number of those voting at the relevant meetings. The chairman of each meeting must lodge with the court a report confirming that the requisite majority of members and creditors approved the Scheme. The court will then decide whether to sanction the Scheme. At the final sanction hearing, the court will consider whether the approach of the scheme is reasonable, each class was fairly represented by those attending, the statutory majority acted bona fide, and the statutory provisions have been properly complied with.
A Scheme of Arrangement becomes effective upon delivery of the court’s sanction and is binding on all creditors, members and the company itself.
There is no automatic moratorium prior to a Scheme of Arrangement being sanctioned, but the court may exercise its discretion to implement one.
Restructuring Plan under Part 26A of CA06
The Restructuring Plan looks much like a Scheme of Arrangement with the key differences being (i) a cross-class cram down power granted to the court to sanction a plan even where dissenting classes of creditors attempt to block it, and (ii) only being available to companies that have encountered or are likely to encounter financial difficulties that are or are likely to affect their ability to carry on trading as a going concern.
Like a Scheme of Arrangement, a Restructuring Plan allows a company to reach a compromise or arrangement with its creditors and/or members.
Broadly, the process for applying for a Restructuring Plan is the same as a Scheme of Arrangement, the key difference being that a Restructuring Plan must be approved by 75% in value of each class of creditors, and members if applicable, but there is no number threshold.
The procedure gives the court discretion to sanction the Restructuring Plan where there is a dissenting class(es) and bind that dissenting class(es) to the Restructuring Plan (ie, “crams them down”).
The court may only use this power where:
The plan becomes effective and binding on all creditors and members (including any dissenting class where relevant and sanctioned) upon delivery of the court’s order sanctioning the Restructuring Plan to the registrar.
See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
Part A1 Moratorium
The company continues trading, with the directors retaining control (subject to supervision by the monitor) but is subject to certain statutory restrictions and requirements around borrowing, granting security, continuing to pay debts as they fall due, etc.
There is no automatic moratorium in a CVA, although it can be combined with a Moratorium, or with administration, which brings the benefit of the statutory moratorium. The directors retain control of the business, under the supervision of the supervisor. Subject to the terms of the CVA and/or with appropriate supervisor and creditor consent, the company can continue to borrow and grant security during a CVA.
Scheme of Arrangement and Restructuring Plan
There is no automatic moratorium in either case, but the court may sanction a moratorium, and they may both be combined with a Moratorium, or with administration. As with a CVA, the directors retain control and may deal with the finances and assets of the company subject to appropriate permissions and consents.
Under a Scheme of Arrangement and a Restructuring Plan, creditors are separated into different classes according to similarity of their rights. The court will consider whether the classes have been correctly constituted.
In each of the CVA, Scheme of Arrangement or Restructuring Plan procedures, creditors will receive details of the proposed arrangements in advance of casting their votes. Following implementation, there are no creditor committees required, but one may be established under the terms of the arrangements.
A CVA is binding on all creditors who were entitled to vote in the decision procedure, provided the CVA is approved by the requisite majority. A CVA does not apply to secured creditors or preferential creditors unless they agree to it.
Under a Scheme of Arrangement, provided the relevant threshold of each class of creditor approves the Scheme, the dissenting creditors in that class will be bound by its terms.
Under a Restructuring Plan, the court has “cram-down” power and may sanction the Restructuring Plan even if one or more classes of creditors has dissented.
Subject to any specific restrictions which may apply to a creditor who holds debt in respect of a publicly traded company, creditors in a CVA, Scheme of Arrangement or Restructuring Plan may trade their claims against the company.
If the claim is traded after approval of the relevant procedure, the purchaser of the claim will be bound, as the original creditor was, by the terms of that procedure. If the claim is traded before approval of the relevant procedure, 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, any lock-up agreement already entered into.
In order to ensure the proper party is paid, the purchaser would have to notify the relevant party that it has acquired the claim.
Each company in a corporate group is a separate legal entity. However, it is possible for a restructuring to be effected across an entire corporate group by drafting individual CVAs for multiple companies within the group to work together. Equally, a Scheme of Arrangement and Restructuring Plan can be prepared to apply to a corporate group, not just an individual company, and can be used to restructure those groups in conjunction with restructuring the debt (for example, by inserting new companies within the group and effecting a debt-for-equity swap).
While the Moratorium has a different purpose, the breathing space offered can be used to plan for a group restructure, which may be implemented by formal, or informal, procedure.
The terms of a CVA, Scheme of Arrangement and Restructuring Plan will each detail any restrictions on the company and directors, and what the company needs to do, if anything, to obtain permissions. These terms may also provide advance consent to certain matters.
During a Moratorium, certain statutory restrictions are in place, including around obtaining credit, granting security, entering into market contracts, and disposing of property. A company may dispose of its property which is not subject to security if:
Where assets are subject to security or a hire-purchase agreement, those assets may only be disposed of with the permission of the court or in accordance with the terms of the relevant agreement.
See 6.7 Restrictions on a Company's Use of Its Assets.
Unless specifically set out under the terms of the CVA, Restructuring Plan or Scheme of Arrangement, there are no asset disposition procedures which must be applied. It is possible to pre-agree within the terms of the procedure a pre-negotiated sale (the terms of which would be approved by the creditors at the time of approving the proposal) and there may be specific terms incorporated requiring supervisor, monitor and/or creditor consent where a disposition is not in the ordinary course of business or is above a certain value, and that if an asset is sold, its proceeds should be paid to the supervisor or monitor and made available to the creditors.
Any asset disposal is effected by the company acting by its directors, not by any appointed supervisor or monitor.
There are no statutory restrictions on creditors credit bidding for an asset or acting as a stalking horse. However, if a creditor has been a stalking horse pre-arrangement, this is usually disclosed to the court and/or creditors to ensure there is no claim of material irregularity or unfair prejudice.
A CVA does not affect the rights of a company's secured creditors, unless the secured creditor specifically agrees to the contrary.
Under a Scheme of Arrangement or Restructuring Plan, security or liens will be dealt with in accordance with the terms of the sanctioned proposals. This may involve the release (in whole or in part) of security or liens - any change to the creditors rights must be balanced by some advantage in entering into the arrangement; a court may take the view that releasing security would not be proper if it amounted to an expropriation of the creditor’s rights for nominal consideration.
A company can incur debts during a Moratorium, however a Moratorium will be terminated if such Moratorium debts are not paid when due. A company may grant security if the monitor consents.
New money may be made available to a company under a CVA, a Scheme of Arrangement or a Restructuring Plan, provided relevant consents are secured in accordance with the terms of the relevant plan documents.
As secured creditors are not affected by a CVA, any such new money may be secured in the usual way, subject to requisite consents. Under a Scheme of Arrangement or Restructuring Plan, new money may be secured against assets subject to pre-existing security, provided the relevant class of creditors approve it.
In a CVA, to be counted in the decision procedure, a creditor must submit a proof of debt in respect of its claim. Where a creditor submits contingent or unquantified claims, for voting purposes, such claim will usually be valued at GBP1, otherwise the claim will be given full value.
In a Scheme of Arrangement or Restructuring Plan, the explanatory statement should set out the basis for proving and calculating value, but typically involves submission of a proof of debt.
CVAs can be challenged by a creditor on grounds of unfair prejudice. On hearing the challenge, the court can set aside the CVA, or call a further meeting of creditors, if it finds it to be unfairly prejudicial.
Each class of creditors in a Scheme of Arrangement or Restructuring Plan must be fairly represented in order that the court may uphold the majority decision of any class who approves the arrangement. The decision on whether to sanction a Scheme of Arrangement or Restructuring Plan is at the court's discretion. See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
A non-debtor party such as a third-party guarantor may be released under a CVA, provided that is part of the proposal and properly approved. The release of a non-debtor party must not, however, be unfairly prejudicial to any creditors under the CVA.
Under a Scheme of Arrangement, a third-party non-debtor may be released from its liabilities, provided that:
It is likely that a Restructuring Plan would follow the same principles.
There are no set-off rights imposed by statute under these procedures but set-off arrangements may be included in the relevant proposals. The parties under each procedure may agree to suspend or terminate such set-off rights.
If a company does not comply with the requirements of the Moratorium, a monitor can bring the Moratorium to an end. Separately, a creditor or member may apply to court on grounds of unfair harm (whether actual or proposed). The court may make such order as it thinks fit, including requiring certain actions be undertaken, creditor consents be sought, or the Moratorium be terminated.
If a company does not comply with the terms of a CVA, it will usually fail and the supervisor will issue a certificate of failure. A creditor who fails to observe the terms of the CVA proposal may be restrained by injunctive relief if necessary.
Failure to comply with the terms of a Scheme of Arrangement or Restructuring Plan is a breach of contract. The relevant creditors (or the company) will have the usual contractual remedies available to them.
The existing equity owners of a company will retain ownership under a CVA, Scheme of Arrangement or Restructuring Plan, unless their equity interests are modified under the arrangement.
Creditors may also gain shares under any of these procedures by way of debt-for-equity swap.
Liquidation is a terminal insolvency procedure whereby a licensed insolvency practitioner is appointed as liquidator to collect assets of the company, distribute to creditors (and members where funds allow (see MVLs below)) in accordance with the statutory waterfall and dissolve the company. There are two different types of liquidation:
A liquidator has a duty to act in good faith, exercise reasonable care and skill, and act for the benefit of the creditors of the company as a whole (not just the appointor).
Compulsory liquidation is often seen as the last resort. There is asset value depletion risk (which impacts creditors' recoveries) and also a real risk that other creditors can step in and appoint their own liquidator. Unlike a voluntary liquidation, the control of the petitioning creditor is limited.
Compulsory liquidation is a court-based procedure, whereby a winding-up petition is presented to court on specified statutory grounds, including:
The simplest way to demonstrate an inability to pay debts is for a creditor to issue a statutory demand, wait the requisite 21 days and initiate compulsory liquidation proceedings if payment is not received.
The company itself, its directors or contributories may also commence the liquidation, or the Secretary of State may file a petition for compulsory liquidation for public interest reasons. Once the petition has been filed, and notice of the petition advertised in the Gazette, a hearing date is set at which time the court can make a winding-up order if it is appropriate to do so, or it may dismiss or adjourn the petition, or make any other order it thinks fit. If an order is made, the winding-up is deemed to have commenced at the time of the presentation of the petition.
The Official Receiver becomes the liquidator unless and until the creditors appoint another insolvency practitioner as liquidator. Both the Official Receiver and any subsequently appointed liquidator are officers of the court and must act fairly and impartially. The liquidator takes control of the company's assets and the directors cease to have any control over the company, although remain under an obligation to provide information to the liquidator on request. The company's papers and website must state that the company is in liquidation. There is no moratorium on enforcement in a compulsory liquidation, however, there is a stay on commencing or continuing proceedings against the company without the court's consent.
The liquidator has wide-ranging powers, including carrying on the business, commencing or defending court proceedings in the company's name, challenging antecedent transactions, selling property, executing contracts etc. The liquidator also has a duty to investigate the failure of the company and to report on the company's directors' conduct.
Creditors must submit a proof of debt to the liquidator, setting out the particulars of their claim into the company’s estate. The liquidator must then verify and admit the claim into the liquidation, or it may reject the claim or seek to compromise the debt.
When the compulsory liquidation process is complete, the liquidator will call a final meeting of the company's creditors and present its report. The company will then be dissolved three months later. If the Official Receiver is the liquidator, there is no final meeting and the company is dissolved sooner.
Creditors' Voluntary Liquidation
CVL is a procedure for insolvent companies whereby the company’s members pass a special resolution agreeing that the company should be wound up and a liquidator be appointed. After the resolution is passed, the company’s directors must deliver a notice to the creditors seeking their decision on the appointment of the company’s liquidator, and the creditors may appoint an alternative liquidator. Typically, the directors and the primary creditors work together to effect the CVL and agree the proposed liquidator.
The liquidation commences once the special resolution is passed and the directors cease to have any control over the company. The directors must send a statement of affairs to the company's creditors within seven days of the members' resolution. The liquidator’s powers are substantially the same as for compulsory liquidation, and creditors must submit a proof of debt to the liquidator to be assessed.
While there is no automatic stay in a CVL, the liquidator can apply to court for an order that proceedings are stayed. This is usually granted.
Once all assets have been collected in and distributed to creditors, the company is dissolved.
Members' Voluntary Liquidation
An MVL is a solvent procedure whereby all the company’s creditors will be paid in full before the company is dissolved and, as such, the directors of the company must swear a statutory declaration of solvency.
When making a statutory declaration, the directors must reasonably believe that, having made a full inquiry into the company’s affairs, the company can meet its liabilities (including prospective/contingent liabilities) as they fall due for a period of 12 months. There are serious consequences for directors who swear a statutory declaration which is unfounded. However, if it becomes clear during the liquidation that the company cannot pay its debts, the MVL can be converted into a CVL, with no adverse consequences on the directors if their statutory declaration was properly made at the time.
Provided the company is truly solvent at the time of the MVL, the liquidator does not have a duty to report on the directors’ conduct.
Administration is not necessarily a terminal insolvency procedure, but allows a company to be reorganised or rescued as a going concern or for its assets to be realised under the protection of a statutory moratorium. Administration is designed to achieve one of the three statutory objectives, which are, in order of priority:
An administrator may be appointed either (i) in-court, by court order following a formal application to the court, or (ii) out-of-court, by filing certain documents at court. Either of these routes may be undertaken by the company itself, its directors or its creditors, however, only a creditor which is the holder of a qualifying floating charge over the whole or a substantial part of the company's assets and undertaking may appoint an administrator via the out-of-court route. An administrator will be chosen by the company and/or creditors in advance of an appointment.
A company may, in certain circumstances, file a notice of intention to appoint an administrator. This gives the company the benefit of a ten-day interim moratorium while it prepares to appoint administrators. Once appointed, the company receives the benefit of a statutory moratorium (and any interim moratorium continues where it did not expire), which protects the company against third parties seeking to enforce claims against it, giving the company breathing space during which the administrator can reorganise the company or realise its assets without pressure from creditors.
Once appointed, the directors cease control of the company. The administrator will take control of the company's assets and prepare proposals for the conduct of the administration, including detailing the relevant statutory objective to be achieved. These proposals are put to the creditors, who will decide whether to approve them. As with liquidation, the creditors must submit a proof of debt to the administrator to be assessed. Statutory set-off applies after the administrator has given notice of an intention to make a distribution.
An administrator must carry out their functions in the interests of creditors and is granted wide-ranging statutory powers to achieve their objective and manage the affairs, business and property of the company, similar to those powers of a liquidator. The administrator may also investigate antecedent transactions and take such action as they deem necessary in respect of those transactions. An administrator cannot, however, disclaim onerous property nor bring proceedings in respect of misfeasance on the part of an officer of the company.
Unless extended by creditor consent or court order, an administrator's appointment terminates automatically after one year. An administrator may also apply to bring an administration to an end at any time if they believe that the statutory objectives can no longer be achieved, the company should not have entered administration, or following a resolution of a creditors’ meeting requiring the administration to end.
An administrator may make interim distributions during the administration and, prior to termination, the administrator will make a final distribution to the company’s creditors.
An administrator or liquidator has a statutory power of sale, but will only have the benefit of the information provided by the directors or such information as is available on appointment. Any sale will be negotiated by the administrator or liquidator and signed by them on behalf of the company. As a result of the limited information, an administrator or liquidator will not give a comprehensive picture of the business or asset(s) of the company, nor give guaranteed title (only such title as the seller may have, if any), covenants or warranties. An administrator or liquidator will also exclude all personal liability, and seek a full suite of indemnities in relation to assets and liabilities - all risks and all liabilities are placed onto the buyer.
Fixed Charge Sale of Assets
Where the sale is of assets subject to a fixed charge, the relevant secured creditor must consent to the sale and release of security, or it must be authorised by court order. Where security is not released, the charges will continue to burden the assets. Where assets are subject to a floating charge, those assets may be sold as though the charge did not exist, however, a secured creditor does not lose their priority in terms of the proceeds from the disposal of the assets (subject to the prescribed part being set aside, as required).
A pre-pack sale may take place to maximise value of the business and assets and, in the context of administration, typically results in a smooth transfer of a business as a going concern. An arrangement will have been made to sell all or part of the company’s business or assets before an appointment. Immediately after appointment, the administrator or liquidator will effect the sale. This is more typical in an administration.
If a pre-pack administration sale is undertaken, the administrator must meet certain compliance standards in their preparatory work before executing the sale and report to the company's creditors, detailing the sale, within seven days of the transaction. In a liquidation, the liquidator is not subject to the same requirements but is likely to follow a similar practice.
Creditors’ committees may be formed in both liquidation and administration, consisting of, typically, three to five creditor members. In both cases, the purpose of the committee is to assist with the discharge of the liquidator’s or administrator’s functions and approve remuneration, among other matters, such as approving disposals to connected persons and the continuance of certain director powers.
The below routes are available for recognition and relief in the English courts:
Regulation 2015/848 on Insolvency Proceedings (recast) (the “Recast Insolvency Regulation”)
The Recast Insolvency Regulation is directly applicable in all EU Member States (except Denmark) and, as such, the UK automatically recognises specified insolvency proceedings (being compulsory liquidation, CVL, administration and CVA). Schemes of Arrangement and MVLs are not recognised under these regulations. The Recast Insolvency Regulation recognises “main” proceedings (ie, proceedings initiated where the debtor has its COMI) which have universal effect and encompass all of the debtor’s assets and creditors, and “secondary” proceedings (ie, proceedings initiated after main proceedings have been opened in a place where the debtor has an “establishment”), which, if opened, run in parallel to the main proceedings.
It should be noted that, at present, the applicability of the Recast Insolvency Regulation in the UK following the end of the Brexit transition period on 31 December 2020 is uncertain while the terms of the UK-EU relationship continue to be negotiated.
Cross-Border Insolvency Regulations 2006 (CBIR), Which Implements the UNCITRAL Model Law on Cross-Border Insolvency (“Model Law”) in Great Britain
The purpose of the Model Law is to provide uniform legislation to deal with the recognition of foreign insolvency proceedings and the coordination of concurrent proceedings. Under CBIR, a foreign representative administering foreign insolvency proceedings, which are collective insolvency proceedings subject to the supervision and control of a foreign court, can apply to the British courts for recognition of those insolvency proceedings.
Similar to the Recast Insolvency Regulation, the British courts may recognise foreign “main” proceedings and foreign “non-main” proceedings. Where foreign main proceedings are recognised, an automatic stay will prevent enforcement against or in respect of the debtor and its assets. There is no automatic stay for non-main proceedings, but discretionary relief may be granted.
Section 426 of IA86
Under Section 426 of IA86, the courts in the Channel Islands, Isle of Man and countries designated by the Secretary of State may apply to the English courts for assistance in insolvency proceedings, which can exercise its discretion in deciding whether to co-operate with foreign courts. The proceedings can be conducted under English insolvency law or the laws of the relevant foreign jurisdiction. The English courts will not grant assistance under Section 426 which conflicts with Regulation 15A of the Financial Collateral Arrangements (No2) Regulations 2003.
English law recognises that insolvency proceedings apply universally so that there is only ever one primary insolvency proceeding in which all creditors are entitled to prove, and the English courts have power to provide relief pursuant to their inherent jurisdiction under common law. This jurisdiction is limited by private international law principles.
There are various statutory provisions which require cross-border co-ordination, including:
Parties may also voluntarily adopt co-ordination principles, including:
See 8.1 Recognition or Relief in Connection with Overseas Proceedings.
If there is a conflict between the provisions of CBIR and the Recast Insolvency Regulation, the Recast Insolvency Regulation will prevail. The CBIR prevails over Section 426 of IA86, however, there is no express provision that it prevails over existing English common law.
Note that Regulation 1215/2012 on jurisdiction, recognition and enforcement (the “Recast Brussels Regulation”) does not apply to proceedings relating to the winding-up of an insolvent company, judicial arrangements, compositions and analogous proceedings.
Foreign creditors must prove for their debt in an English insolvency procedure in the same way local creditors must. A claim made in a foreign currency will be converted to pound sterling in accordance with IA86.
Equally, a distribution to foreign creditors in English insolvency procedures is the same as distributions to English creditors.
The statutory officer appointed in insolvency proceedings depends on the type of procedure. In an administration, an administrator is appointed, and in a liquidation, a liquidator is appointed.
In each of these cases, the appointee will be a licensed insolvency practitioner and, typically, more than one statutory officer will be appointed.
See 7.1 Types of Voluntary/Involuntary Proceedings.
See 7.1 Types of Voluntary/Involuntary Proceedings.
A liquidator may be removed by a court order, by a qualifying decision procedure of the company's creditors or by a direction from the Secretary of State.
In an MVL, the liquidator may be removed by way of a member resolution at a general meeting.
An administrator’s conduct may be challenged on the basis of unfair harm or inefficient conduct, or misfeasance, and a challenge may be made by way of application to court for the removal of the administrator.
Directors owe statutory and fiduciary duties to the company. A director's general duties are codified in Sections 171 to 177 of CA06.
Fundamentally, directors have a primary duty to act in the best interests of and promote the success of the company for the benefit of the members of the company as a whole.
This duty is displaced when the company is, or is likely to become, insolvent, at which point directors’ duties shift such that they must act in the best interest of the company’s creditors. The precise point at which the duty shifts has been much debated in case law. The current position is that the duty arises when the directors know or should have known that the company is or is likely to become insolvent, and “likely” means probable, although this position is being challenged.
Directors’ duties apply to executive and non-executive directors, shadow directors and de-facto directors.
Breach of Directors' Duties
When a company enters into an insolvency process, the insolvency practitioner appointed is required, except in an MVL, to submit a report to the Secretary of State on the conduct of the directors and certain former directors of the company, as well as investigate events leading up to the insolvency, including certain antecedent transactions undertaken by the directors, which may then be challenged, including:
Wrongful Trading (Section214 IA86)
A director can be found personally liable for company losses where a court finds that at some time before liquidation commenced, the director knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation and thereafter, the director failed to take every step to minimise the potential loss to the company's creditors which he ought to have taken. A director will only be liable if, on a net basis, it is shown that the company is worse off as a result of the continued trading.
Fraudulent Trading (Section 213 IA86)
A person can be found personally liable to contribute to the company’s assets where the court finds that the business of the company was continued with the intention to defraud creditors or for any fraudulent purpose. To be liable, it is not enough to show that the company continued to incur debts when the directors knew it was insolvent; there has to be actual dishonesty involving real moral blame. Only those who were knowingly parties to fraudulent trading may be liable, "parties" being not limited to directors.
Misfeasance (Section 212 IA86)
a director can be found personally liable to repay, restore, account for money or property, or contribute to the company’s assets where the court finds that a director misapplied or retained, or became accountable for, any money or other property of the company, or is guilty of any other misfeasance, breach of fiduciary or other duty.
In addition to transactions detailed in 11 Transfers/Transactions That May Be Set Aside, directors may be liable for fraud in anticipation of winding up, misconduct, falsification of books and records, material omission from the company’s statement of affairs and false representations to creditors, some of which carry criminal consequences with imprisonment or a fine.
Additionally, under the CDDA the court may make a disqualification order against a person, prohibiting them from being a director of a company in any way, or being concerned with or take part in the promotion, formation or management of a company for a specified period. The minimum disqualification period is two years, and the maximum is 15. The insolvency practitioner’s conduct report will flag if it appears that the conditions for disqualification are satisfied.
Only a liquidator or administrator can bring a claim for wrongful or fraudulent trading. However, they may assign the right of action to a creditor.
Both liquidators and creditors may bring a claim for misfeasance in their own right; an administrator can only bring a substantive claim for misfeasance in the company’s name. An unsecured creditor must bring any claim of misfeasance in its capacity as creditor of the insolvent company, and cannot use a misfeasance claim to recover loss arising from an alleged breach of a duty owed to the creditor in his personal capacity.
It should be noted that the court’s powers are restricted to ordering a contribution to the company’s assets, which may not achieve the desired result for the creditor.
The IA86 sets out that certain antecedent transactions may be subject to challenge, being set-aside or invalidated. The power to challenge exists to protect the pari passu principle that assets should be shared equally, and to help the insolvency practitioner achieve the best possible return to creditors.
These transactions include:
Transactions at an Undervalue (Section 238 IA86)
A liquidator or administrator may apply to court requesting a transaction at an undervalue be set aside, or such other appropriate order be made. A transaction is at an undervalue if:
An order may include, among other matters, requiring property transferred as part of the transaction, or the proceeds received, to be re-vested in the company, the granting, release or discharge of security or requiring any person to pay to the administrator or liquidator the benefit received by them from the company.
Preferences (Section 239 IA86)
a liquidator or administrator may apply to court requesting a preference be set aside, or such other appropriate order be made. A company gives a preference to a person if:
Remedies granted are substantially similar to those granted for a transaction at an undervalue.
Invalid Floating Charges (Seciton 245 IA86)
a floating charge created before the onset of insolvency will be automatically invalid if:
Transactions Defrauding Creditors (Section 423 IA86)
a transaction may be set aside if:
The court must be satisfied that the person actually had the purpose, and the aim of entering into the transaction must be more than a mere hope of gaining advantage.
An application may be made by a liquidator, administrator, any other victim prejudiced (or capable of being prejudiced) by the transaction, the FCA and the Pensions Regulator. The Limitation Act 1980 applies to claims brought for transactions defrauding creditors.
An order may include requiring any property transferred as part of a transaction to be vested in any person.
Extortionate Credit Transactions (Section 244 IA86)
a liquidator or administrator may apply to court requesting an extortionate credit transaction be set aside. A transaction is extortionate if, having regard for the risk accepted by the person providing the credit:
its terms require grossly exorbitant payments to be made (conditionally or unconditionally); or
it otherwise grossly contravenes ordinary principles of dealing.
The court can make an order in relation to a transaction which was entered into up to three years before the day the company went into liquidation or administration.
See 11.1 Historical Transactions.
See 11.1 Historical Transactions.