The main domestic legislation governing restructuring and insolvency matters of companies and partnerships in England and Wales is:

• the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016 (in each case, as amended by the Corporate Insolvency and Governance Act 2020 (CIGA));
• the Companies Act 2006 (as amended by CIGA), in relation to schemes of arrangement and restructuring plans;
• the Cross-Border Insolvency Regulations 2006, which implement the UNCITRAL Model Law on Cross-Border Insolvency in Great Britain, with certain modifications; and
• the Company Directors Disqualification Act 1986.

These laws are supplemented by other legislation and principles of common law.

The key procedures under the Insolvency Act are:

• administration;
• company voluntary arrangement;
• liquidation (also known as winding-up);
• moratorium; and
• administrative receivership.

Additionally, schemes of arrangement and restructuring plans are available under the Companies Act 2006.

Finally, receivership is available as an enforcement remedy for secured creditors (in part drawing on provisions under the Law of Property Act 1925).

Special regimes apply for certain types of companies such as financial institutions, certain regulated entities and charities.

Each proceeding is summarised below.

Administration

Although administration is designed as a rescue process, in practice it rarely results in the rescue of the company itself (though it may result in a sale of the underlying business to a new owner). A company in administration is protected by a statutory moratorium, curtailing creditors’ rights. Existing management lose control of the company to the administrators, who are licensed insolvency practitioners. The administrator will seek to rescue the company as going concern in the first instance, but if that is not possible, the goal of the administration is to achieve a better result for creditors than in a liquidation (or, failing that, a realisation of the company’s assets). The administrators’ duties are owed to the creditors as a whole.

“Pre-Pack” Administrations Are Particularly Prevalent in the UK

This is an arrangement under which the sale of all or part of the company’s business or assets is negotiated with a purchaser (by putative administrators) prior to the appointment of administrators. Historically, the administrators have effected the sale almost immediately after appointment, without the sanction of the court or creditors. However, from 30 April 2021, substantial disposals by administrators of the company’s business or assets to connected party purchasers (defined broadly and including by reference to certain former connections) within the first eight weeks of an administration require advance approval from either the creditors or an independent evaluator.

Company Voluntary Arrangement (CVA)

This insolvency procedure permits a company to make a binding compromise with its creditors. A CVA cannot compromise secured creditors without their consent. A CVA is implemented out of court unless it is challenged. A CVA requires the consent of at least 75% in value of unsecured creditors; the CVA will not be approved if more than half of the total value of unconnected creditors vote against the CVA. A CVA does not trigger a moratorium of claims or proceedings. Prior to the introduction of the restructuring plan proceeding in June 2020, CVAs were used extensively to compromise companies’ leasehold obligations to landlords, especially in the retail and casual dining sector.

Liquidation/Winding-Up

This is a dissolution procedure involving the termination of the company and, ultimately, its removal from the register. It involves the appointment of liquidators (licensed insolvency practitioners) who collect and sell the company’s assets and distribute the proceeds to creditors (and members, in the unlikely event of a surplus). Accordingly, existing management lose control. The liquidators’ duties are owed to the creditors as a whole. There are three types of liquidation in the UK:

• compulsory liquidation by court order;
• creditors’ voluntary liquidation (CVL); and
• members’ voluntary liquidation (MVL).

Moratorium

There is a standalone moratorium proceeding which can benefit distressed companies by giving them various protections from creditors, providing them with “breathing space” to formulate a rescue. This is a “debtor-in-possession” process: a company in a moratorium remains under the management of its directors, but the moratorium is supervised by an insolvency practitioner, called a “monitor”. Owing to various constraints as to eligibility for and effectiveness of the moratorium, this process is rarely used for large capital structures.

Administrative Receivership

If a company grants a “qualifying floating charge” to a party for the purposes of English insolvency law, that party will be able to appoint an administrative receiver if the qualifying floating charge falls within one of the limited exceptions under the Insolvency Act to the prohibition on the appointment of administrative receivers, or if the security document pre-dates 15 September 2003. Administrative receivers have a similar status to office holders in a collective insolvency regime (such as administration), except that administrative receivers owe their duties to their appointer, and not to creditors as a whole.

Schemes of Arrangement/Restructuring Plans

A company may utilise a scheme or restructuring plan to reach a compromise with creditors (and/or shareholders) whilst existing management continue to operate the business. These are in-court processes. The key difference between schemes and restructuring plans is that the court can approve a restructuring plan which not every class has approved, whereas a scheme requires every class to vote in favour. Both schemes and restructuring plans have proven effective to implement a variety of restructurings, including amends-and-extends, standstills, debt-to-equity swaps and other comprehensive reorganisations. These processes do not automatically trigger a moratorium of claims or proceedings.

Receivership

A secured creditor may enforce its security by appointing a receiver over any specific secured asset(s), in accordance with the terms of the security document. The appointment can be made without court involvement. Following the appointment, the receiver will have broad powers specified in the security document, including to collect any income from the asset and to sell it.

Administrators

Licensed insolvency practitioners are appointed when a company goes into administration. The administrators take control of the company and have broad powers to manage its affairs. Their primary duty is to achieve one of three statutory purposes:

• rescue the company as a going concern;
• achieve a better result for creditors than liquidation; and
• realise property to make a distribution to secured or preferential creditors.

Administrators are appointed by the court, the company or its directors, or a qualifying floating charge holder.

Liquidators

Licensed insolvency practitioners are appointed when a company goes into liquidation. Their role is to realise the company’s assets and distribute the proceeds to the company’s creditors. Liquidators are appointed by the court in a compulsory liquidation and chosen by creditors or members in a voluntary liquidation.

CVA Chair

The licensed insolvency practitioner is responsible for reporting to creditors and the court after CVA meetings.

CVA Supervisor

A CVA supervisor is appointed by creditors in a CVA to oversee the implementation of the arrangement agreed between the company and its creditors.

Moratorium Monitor

A moratorium monitor is a licensed insolvency practitioner appointed during a moratorium to protect creditors’ interests. The directors otherwise continue to run the business. The monitor must bring the moratorium to an end if rescue of the company is no longer likely or if the company is not paying debts it must pay within the process.

Receivers and Administrative Receivers

Receivers and administrative receivers are appointed by secured creditor(s) to protect and manage secured assets. Their primary duty is to act in the interest of the appointing secured creditor. They have limited duties to other creditors.

Secured Creditors

These are creditors with security over the debtor’s assets. This may be fixed or floating charge security (or both). Fixed charge holders have sole entitlement to the proceeds of assets over which a fixed charge has been granted (until their debt has been discharged in full), subject to paying the costs of realisation.

Preferential Creditors

Preferential creditors include certain limited employee claims and the UK tax authority (HMRC) in respect of certain tax debts, including value added tax and “pay as you earn” (PAYE).

Unsecured Creditors

These are creditors that do not have any security and are not preferential under statute. Unsecured creditors are entitled to share in the prescribed part carved out of the proceeds of floating charge realisations, which is made available to satisfy unsecured debts, up to a cap of GBP800,000.

General Ranking

On the insolvency of a debtor, the proceeds from the realisation of assets must be distributed, in simple terms, as follows:

• fixed charge holders (to the extent of the realisations from the secured assets, less costs of realisation);
• expenses in the insolvency proceedings (these include the office holder’s fees and expenses, as well as new liabilities that the office holder causes the debtor to incur during the insolvency process);
• preferential creditors;
• prescribed part distribution to unsecured creditors;
• floating charge holders (to the extent of the realisations from the secured assets, less costs of realisation and the prescribed part noted above);
• unsecured creditors;
• statutory interest on provable debts;
• subordinated creditors (where appropriately worded); and
• shareholders.

Subordination

Subject to the above order of priority, subordinated creditors are ranked according to the terms of the subordination language in the relevant documentation. There is no concept of equitable subordination in England and Wales.

No claims have priority over secured creditors with fixed charge security. However, the following claims have priority over creditors with floating charge security:

• prescribed fees and expenses of the official receiver (if applicable);
• unpaid moratorium debts and unpaid priority pre-moratorium debts, where proceedings are begun within 12 weeks following the end of a (standalone) moratorium proceeding;
• expenses of the proceedings (ie, the fees and costs incurred by the insolvency practitioners in managing the insolvency process);
• ordinary preferential debts – owed by the insolvent company in relation to:
1. contributions to occupational and state pension schemes;
2. wages and salaries of employees for work done in the four months before the insolvency date, up to a maximum of GBP800 per person;
3. holiday pay due to any employee whose contract has been terminated, whether the termination takes place before or after the date of insolvency; and
4. bank and building society deposits eligible for compensation under the Financial Services Compensation Scheme (FSCS) up to the statutory limit;
• secondary preferential debts – include claims by HMRC in respect of certain taxes including VAT, PAYE income tax (including student loan repayments), employee National Insurance contributions and Construction Industry Scheme deductions (but excluding corporation tax and employer National Insurance contributions) which are held by the company on behalf of employees and customers as well as bank and building deposits eligible for compensation under the FSCS to the extent such claims exceed the statutory limit; and
• prescribed part – as noted, part of the assets subject to a floating charge is set aside for unsecured creditors (up to GBP800,000).

Credit extended to a company in administration may be given priority over unsecured claims by virtue of classification as an administration expense. Rent for periods after the commencement of an administration is treated as an expense of the administration (ie, payable before unsecured creditors/those with floating charges) as long as the company remains in occupation. However, rent arrears that accrued prior to the administration are treated as an unsecured claim.

The type of security granted over an asset in England largely depends on whether legal title (ie, ownership in the ordinary sense) to the secured asset is intended to be transferred to the secured party. Security can be in the form of a mortgage or security assignment (transfer of title – security provider retains possession) or a charge (no transfer of title – security provider retains possession). There are also other types of security which apply where the secured party is in possession of the secured asset; eg, liens and pledges.

Mortgages

To create a mortgage, the legal or beneficial title to the secured asset must be transferred to the security holder. Mortgages are most commonly granted over real estate, but are also seen in movable property such as ships and airplanes. Legal mortgages must be in writing and executed as a deed by the security provider (the mortgagor). To take effect as a legal mortgage, a mortgage over registered land must be registered at the Land Registry. If the security is not registered, it will usually take effect as an equitable mortgage, which can undermine the strength of the security in the case of competing claims.

Charges

Charges may be taken over a broad spectrum of assets including movable property, shares, intellectual property (and other intangible assets) and bank accounts. A charge may be either “fixed” or “floating”; secured lenders will usually aim to ensure that as much of their security is fixed as possible. A fixed charge requires the security provider (the chargor) to hold the charged asset (eg, shares) to the order of the secured party (the chargee), while a floating charge permits the chargor to deal with the asset in the ordinary course of business (the floating charge “hovers” above a shifting pool of assets such as cash, stock and inventory). Charges are easier to grant than legal mortgages as there are fewer formalities involved. Charges must be in writing and signed by the security provider.

Registration and Formalities

Securities granted by an English company or LLP must be registered at Companies House within 21 days of creation or it may be void on insolvency and against third parties. Other types of security, eg, over intellectual property, may require further formalities; certain mortgages and charges over interests in land must be executed as a deed.

Enforcement options depend on the nature of the security and the provisions of the security document, amongst other matters.

Receivership

A secured creditor may enforce its security by appointing a receiver (usually an insolvency practitioner) over the specific secured asset(s), in accordance with the terms of the security document. The appointment can be made without court involvement. Following the appointment, the receiver will have broad powers specified in the security document, including to collect in any income from the asset and to sell it. (Administrative receivership – which involves the appointment of an insolvency practitioner over, substantially, the whole of the company’s property – is now available in only limited circumstances.)

Power of Sale

A creditor may also exercise its power of sale under the security document (if they have a legal mortgage or if the terms of the security document otherwise permit). This permits the creditor to sell the secured asset, without needing to apply to court, and use the proceeds to settle the secured liabilities. A receiver or a creditor selling secured assets is obliged to get the best price reasonably obtainable in the circumstances; no public auction is required unless required by the security document. One advantage of appointing a receiver is that the lender is not usually responsible for the receiver’s conduct.

Appropriation

The enforcement option of appropriation is available where the security constitutes a “financial collateral arrangement”, under the Financial Collateral Arrangements (No 2) Regulations 2003. “Financial collateral” includes cash and financial instruments (including shares); the security arrangement must constitute the requisite degree of “possession or control” to qualify as a “financial collateral arrangement”. The remedy of appropriation permits the secured creditor to appropriate (essentially, take possession of) the financial collateral, without applying to court. The power depends on the terms of the security document. If the value of the financial collateral appropriated exceeds the secured debt, the secured creditor must account to the security provider for the excess.

Foreclosure

In theory, the possibility of foreclosure constitutes an additional enforcement option, but this is uncommon in practice for various reasons.

Additionally, a qualifying floating charge-holder has the power to commence administration of the relevant debtor out-of-court.

Outside of restructuring or insolvency, unsecured creditors benefit from the following.

Retention of Title

Most trade creditor contracts include a retention of title clause allowing the trade creditor to retain ownership of goods supplied until payment is made in full. If the debtor fails to pay, the creditor can reclaim the goods (provided the company is not protected by a moratorium).

Right of Set-Off

This allows an unsecured creditor to offset a debt owed by the creditor to the debtor against amounts owed by the debtor to the creditor. There are mandatory set-off rules in administration and liquidation. Outside a restructuring or insolvency context, contractual provisions on set-off will apply.

Pre-Judgment Attachment

Unsecured creditors may be able to obtain a freezing injunction if they have a strong case and there is a real risk of dissipation.

Out-of-court or consensual restructurings are common in the UK. These restructurings are normally negotiated directly between the debtor and its key stakeholders without involvement from insolvency practitioners or the court. There are no formal requirements other than the requisite consent levels in the relevant contractual documentation. Participation is voluntary but debtors often use a combination of “carrots” and “sticks” to drive consent. Once the requisite majority of creditors agree, the terms are documented in a legally binding agreement and used to bind all creditors.

Additionally, a CVA (company voluntary arrangement) is an out-of-court process by which a debtor can bind a dissenting minority of its unsecured creditors, if at least 75% by value (of those voting) approve the proposed compromise. However, a CVA will not be approved if more than half of the total value of unconnected creditors vote against it and a CVA cannot bind secured or preferential creditors without their consent. As noted, a CVA is a formal insolvency process; it is out-of-court unless challenged.

It is not mandatory to enter into consensual restructuring negotiations before the commencement of a formal statutory process. Parties cannot generally be forced to co-operate in an out-of-court restructuring, nor held liable for not co-operating.

A consensual restructuring binds all parties to the documentation provided the majorities required by the debt documents are reached.

A CVA binds all unsecured creditors if at least 75% by value (of those voting) approve the proposed compromise. As noted, the CVA will not be approved if more than half of the total value of unconnected creditors vote against it.

No Obligation to File

There is no obligation to initiate a restructuring or insolvency procedure. However, if a company is insolvent or bordering on insolvency, or an insolvent liquidation or administration is probable, then directors’ general duty to promote the success of the company extends to a duty to consider the interests of the company’s creditors as a whole. This requires directors to consider risks to creditors of continuing trading. Directors may be held liable for breach of their directors’ duties, among other matters.

Schemes and Restructuring Plans

A scheme or restructuring plan is initiated by an application to court for an order summoning a meeting or meetings of the relevant class or classes of creditors. Although the application can be made by the debtor, any creditor, any member, an administrator or a liquidator, it is usually made by the debtor. The consent of the company (through either the board of directors or a simple majority of members) is required for the court to sanction a scheme or restructuring plan.

Eligibility for restructuring plans is restricted to companies in some present or prospective financial difficulties affecting the company’s ability to carry on business as a going concern, which the plan must be intended to eliminate or reduce. No such requirement applies for a scheme; it is possible to have a fully solvent scheme.

Administration

Administration can be commenced either:

• by court order, upon the application of the debtor, its directors or any creditor; or
• out-of-court, by the debtor, its directors, or a qualifying floating charge holder (QFCH).

The instigating party can select the identity of the administrator, except that if the out-of-court route is chosen, notice must be given to QFCHs, which may intervene to appoint a different individual as administrator (where the instigating party is a QFCH, only if the other party holds a prior qualifying floating charge). The administrators will need to be satisfied that they can achieve one of the statutory purposes of the administration before taking the appointment. It is also a prerequisite that the debtor is or is likely to become unable to pay its debts (save in the case of a QFCH out-of-court appointment).

Company Voluntary Arrangement

Directors may propose a CVA to the company’s shareholders and creditors; if the company is in administration or liquidation, then the administrators or liquidators may propose a CVA. A proposal for a CVA should nominate a person to supervise its implementation, who must be a qualified insolvency practitioner. When an administrator or liquidator makes a proposal for a CVA, they will normally also act as the nominee/supervisor. A CVA is proposed by delivering the relevant proposal to court, accompanied by a report from the nominee stating that the CVA has a reasonable prospect of being approved and implemented.

Eligibility/Group Companies

Administration, schemes, restructuring plans and CVAs are available to corporate entities and LLPs. There are different procedures for individuals. Each company in a corporate group is treated as a single entity and its directors are required to consider the interests of creditors in relation to that particular company (rather than the group as a whole). We do not have a formal concept of group proceedings/joint debtors, nor substantive consolidation. However, the authors anticipate that the UK will adopt the UNCITRAL Model Law on Enterprise Group Insolvency in the near future.

Scope of Potential Compromise

Schemes and restructuring plans can effect a broad range of compromises including of financial and operational creditors (including secured creditors) and shareholders. They can also compromise claims against third parties (non-debtors), eg, guarantors within the group. Only affected stakeholders are invited to vote on the scheme/plan; the company can select those to whom it proposes the compromise, but must disclose which of its stakeholders it has excluded and any such exclusion must be on reasonable commercial grounds.

Typical Timeline/Milestones

A scheme or restructuring plan typically proceeds as follows.

• The restructuring terms are agreed and a lock-up agreement is typically executed. Scheme/plan documents and key restructuring documents are drafted over four to eight weeks (depending on the complexity of the transaction).
• About three weeks before the first court hearing (known as the “convening hearing”), a practice statement letter is circulated to affected stakeholders, which provides a high-level overview of the proposed scheme/plan and proposed voting classes.
• The first convening hearing is held, at which the debtor seeks an order to convene the meeting(s) of creditors/shareholders for voting purposes. Affected stakeholders can raise challenges in court.
• Notice of creditor meetings and scheme/plan documentation are provided to scheme/plan creditors shortly after the convening hearing. This includes a detailed explanatory statement describing the proposed scheme/plan.
• Stakeholder meeting(s) are held three to four weeks later, at which affected stakeholders vote on the scheme/plan.
• The second court hearing (known as the “sanction hearing”), at which the court is requested to approve or “sanction” the scheme/plan, is held a week or so after the stakeholder meeting(s). Again, affected stakeholders may appear to raise challenges.
• If the court sanctions the scheme/plan, the scheme/plan will generally become effective once the relevant order is delivered to Companies House for registration, or otherwise in accordance with its terms. (The English court is cautious to ensure that its order is not in vain and therefore any remaining conditions precedent must be limited to none; otherwise, the court may decline to sanction the scheme/plan unless and until the remaining conditions precedent have been satisfied or waived.)

This timetable assumes that affected stakeholders are sophisticated financial institutions with experienced advisers. Longer timetables may be necessary – for example, if seeking to compromise individual stakeholders or if stakeholders have not locked up in advance to support the scheme/plan.

Role of the Court

Even if the scheme/plan is approved (or set to be approved) by the requisite majority, the English courts will rigorously assess the process, both at the convening hearing and at the sanction hearing, and will need to be satisfied as to a number of aspects in order to sanction the scheme/plan, including whether:

• the classes of stakeholders are correctly constituted;
• the court has jurisdiction to approve the scheme/plan;
• procedural requirements have been met (including due notice and disclosure to those affected by the scheme/plan); and
• the scheme/plan is otherwise fair and there is no “blot” on the scheme/plan.

Affected stakeholders may appear in court to oppose the scheme/plan; this has become much more common in the last couple of years.

New Money

There is no formal provision for interim or exit financing. New funding must comply with permissions under existing debt documentation, or otherwise be approved under the scheme or plan itself.

Moratorium

There is no automatic moratorium in a scheme or plan. An equivalent position is usually achieved through use of lock-up agreements and inter-creditor agreement standstills.

Class Constitution

Stakeholders vote in classes according to their rights both before and following the scheme/plan. If there are material differences in the legal rights of affected stakeholders either before a scheme/plan or as modified by the scheme/plan (such that they cannot consult together with a view to their common interest), they are likely to be required to vote in separate classes. Differences in the interests of affected stakeholders (eg, cross-holdings across multiple debt instruments) are unlikely to “fracture the class”, but can lead to fairness challenges at the sanction hearing stage.

Voting Threshold – Scheme

The court has discretion to sanction a scheme if it has been approved by at least 75% in value and over 50% by number of those voting, in each class. If sanctioned, the scheme binds all affected stakeholders, whether secured or unsecured and whether or not they consented or voted.

Voting Threshold – Restructuring Plan

A class approves a plan if it has been approved by at least 75% in value of those voting. For the court to have power to sanction a restructuring plan which not every class has approved:

• at least one class that would receive a payment or have a genuine economic interest in the company in the event of the relevant alternative (ie, the hypothetical counterfactual to the plan) must have voted in favour; and
• the court must be satisfied that no member of a dissenting class would be any worse off under the plan than they would be in the event of the relevant alternative.

An application can be made to exclude classes of creditors/shareholders from voting where the court is satisfied that no member of that class has a genuine economic interest in the company – ie, the class is disenfranchised.

If sanctioned, the plan binds all affected stakeholders, whether secured or unsecured and whether or not they consented or voted. The court will consider its discretion even more carefully if it is to bind dissenting class(es).

A scheme or restructuring plan will generally become effective upon the delivery of the sanction order for registration at Companies House. This generally marks the conclusion of the process unless the scheme or plan is appealed. As noted, the court retains discretion as to whether to sanction a scheme or plan (somewhat akin to a “fairness” test) and will exercise this discretion particularly carefully for a plan which not every class has approved. A failure to observe the terms of an agreed scheme or plan will constitute a breach of contract.

A CVA will terminate upon the supervisor checking that all conditions of the arrangement have been fulfilled and may terminate early if the debtor fails to comply with its obligations. As noted, there is no court involvement unless the CVA is challenged (which principally occurs on the grounds of “unfair prejudice” or “material irregularity”).

An administration terminates automatically after one year (unless extended). There are also a number of ways to end an administration:

• administrators’ application;
• creditors’ application;
• conversion to winding-up; or
• dissolution.

There is generally no court involvement unless the administrators’ conduct is challenged or the administrators seek the court’s directions.

Schemes and Restructuring Plans

Directors will remain in control of the company’s business unless an administrator or liquidator has been separately appointed.

There are no restrictions on the debtor’s use of its assets. The debtor can borrow money/seek new funding during a process but must comply with permissions under existing debt documentation or include approval for the new funding under the scheme or plan. Following sanction, affected creditors will be able to enforce their claim only as compromised or varied by the scheme/plan.

Administration

Administrators – who are licensed insolvency practitioners – have wide powers to conduct the business of the company in administration, including sale of assets and borrowing in the name of the company. Directors generally lose their usual management powers (except in a so-called “light-touch” administration in which administrators consent to the company’s management continuing to exercise certain management powers).

CVA

Directors continue to manage the business as normal; there are no restrictions on the debtor’s use of its assets. However, the CVA is overseen by a nominee/supervisor, who must be a licensed insolvency practitioner.

Schemes and Restructuring Plans

These processes do not involve office holders as such, unless the company is also in administration or liquidation.

Administration

Administrators – who are licensed insolvency practitioners – take control of the company and have broad powers to manage the affairs of the company in administration. They owe their duties to the creditors generally. Their primary duty is to achieve one of three statutory purposes:

• rescue the company as a going concern;
• achieve a better result for creditors than liquidation; and
• realise property to make a distribution to secured or preferential creditors.

CVA

The CVA proposal is overseen by the “nominee”, who must be a licensed insolvency practitioner. The proposed nominee is given notice of the proposal for a CVA (although in practice, the directors and nominee work closely together to draft the CVA proposal). Within 28 days, the nominee must submit a report to the court as to whether the proposed CVA has a reasonable prospect of being approved and implemented. After the CVA has been voted on and approved, it becomes effective. Its implementation is then overseen by a “supervisor”, who must also be a licensed insolvency practitioner. In practice, the supervisor is usually the same person as the nominee.

Schemes and Restructuring Plans

Shareholders

The role of the shareholders in schemes and restructuring plans varies depending on the transaction. For example:

• they may retain full control of the company (particularly if providing new money);
• their shareholding may be diluted through a debt-for-equity swap; or
• they may be disenfranchised entirely.

The shareholders owe no duties to the company’s creditors and may act in their own interests. There are certain routes by which shareholders may attempt to disrupt the process.

Secured creditors

Schemes can bind secured creditors, if the relevant class(es) of creditors approve the scheme. A restructuring plan can also bind an entire class of secured creditors without their consent, given the court’s ability to sanction a plan which not every class has approved. However, it is likely to be more difficult to persuade the court to sanction a plan that secured creditors do not support, given their senior position within the creditor hierarchy and the nature of the “no worse off” condition. Creditors’ rights with respect to their security are unaffected by the launch of the scheme/plan, though may be compromised through the scheme/plan.

Unsecured creditors

Schemes can be used to bind unsecured creditors, provided that the relevant class or classes of creditors approve the scheme. It is usual to leave unsecured trade creditors outside schemes of arrangement. Under a restructuring plan, it is possible to bind whole classes of dissenting unsecured creditors.

No moratorium or set-off

There is no automatic statutory moratorium or automatic set-off in a scheme or plan. However, the court has certain discretionary case management powers to stay proceedings where a scheme or plan is already underway and appears to have a good chance of success.

Administration

Automatic moratorium

Within administration, a statutory moratorium is imposed such that no step may be taken to enforce security or a guarantee over the company’s property except with the consent of the administrators or leave of the court. The same requirements for consent or permission apply to the institution or continuation of legal process (including legal proceedings, execution, distress and diligence) against the company or property of the company.

Shareholders

Shareholders are entitled to be notified when a company goes into administration. The administrators’ primary duty is to act in the best interests of the company’s creditors. Shareholders can apply to court if they believe the administrator is acting unfairly or improperly. If there is a surplus once all debts and expenses have been paid, shareholders are entitled to this residual value; however, this is very rare.

Secured creditors

The statutory moratorium in an administration means that creditors cannot generally enforce their security (subject to certain exceptions, eg, enforcement of financial collateral arrangements). Administrators may dispose of or take action relating to property subject to a floating charge without the prior consent of the charge holder or the court; however, the floating charge holder retains the same priority in respect of the proceeds from the disposal of the asset subject to the floating charge. An administrator may use the proceeds to meet administration expenses if the value of the debtor’s unsecured assets is not sufficient to cover such expenses in full. Only with the prior approval of the court can an administrator deal with property subject to a fixed charge, provided that disposing of the property is likely to promote the administration’s purpose and the administrators apply the proceeds from the disposal towards discharging the obligations of the company to the fixed charge holder.

Unsecured creditors

Creditors will be notified of the administrators’ appointment. If there are sufficient funds for a distribution to unsecured creditors, they usually have the right to approve the administrators’ proposals at creditors’ meetings and to appoint a creditors’ committee.

Set-off

A mandatory insolvency set-off regime applies once the administrators have announced an intention to make a distribution to creditors. This involves an account being taken of what is due from each party to the other in respect of their mutual dealings; only the resulting net balance is either provable by the creditor (if amounts remain due to the creditor) or, conversely, is payable by the creditor to the company (if amounts remain due to the company).

CVA

Shareholders

Shareholders are entitled to vote on a CVA. The members’ decision is made at a meeting of the company, ie, by a simple majority of those voting, subject to any express provision to the contrary in the company’s articles. If the decision of the creditors and the members differ, the decision of the creditors prevails, but subject to a right of challenge for members. Shareholders can retain their equity interests if so provided by the CVA.

Secured creditors

A CVA cannot compromise secured (or preferential) creditors without their consent, as noted.

Unsecured creditors

A CVA is approved by creditors if at least three-quarters (in value) of those responding vote in favour of it, unless more than half of the total value of unconnected creditors vote against it. Once approved, a CVA binds every person who was entitled to vote on it, irrespective of whether they voted for or against (or abstained).

No moratorium or set-off

There is no automatic statutory moratorium or automatic set-off within a CVA.

Liquidation applies to corporate entities and LLPs, not individuals. It is a dissolution procedure involving the termination of the company and, ultimately, its removal from the register. It involves the appointment of liquidators who collect and sell the company’s assets and distribute the proceeds to creditors (and members, in the unlikely event of a surplus); the directors lose control. There is no obligation to initiate liquidation.

There are three types of liquidation:

• members’ voluntary liquidation (MVL);
• creditors’ voluntary liquidation (CVL); and
• compulsory liquidation.

Voluntary Liquidation

Both forms of voluntary liquidation are commenced by a debtor’s members (requiring a 75% majority of votes). In the case of an MVL, the shareholders choose the identity of the liquidator. In the case of a CVL, both the shareholders and creditors may nominate a liquidator and, if different persons are nominated, the person nominated by the creditors will be appointed. An MVL requires the directors to make a statutory declaration with respect to the debtor’s solvency. If they do not, a voluntary liquidation will commence as a CVL. An MVL may be converted into a CVL if the liquidators form the view that the debtor is in fact unable to pay its debts in full.

Compulsory Liquidation

Winding-up petitions for the compulsory liquidation of a debtor are commonly presented by a creditor (often HMRC). Petitions may also be presented by other parties, including the company itself, its shareholders and its directors. Petitions are typically based on the insolvency of the company, on a cash-flow or (more infrequently) balance-sheet basis. In this regard, a company will be deemed insolvent if it fails to pay a statutory demand within 21 days. Once a winding-up order has been made, the Official Receiver (an officer of the UK Insolvency Service) is appointed as liquidator. If most of the creditors wish, a private practitioner can be appointed liquidator, who must be a licensed insolvency practitioner.

A voluntary liquidation may commence swiftly, given that only a shareholders’ resolution is required. It is likely to take materially longer to obtain a winding-up order, particularly where the petition is contested.

Liquidators are appointed to protect and preserve the assets of the company, collect in debts and generally gather money (including bringing claims) together to pay off the company’s debts in accordance with the statutory hierarchy of claims. The directors’ powers cease; the liquidators take over the management of the company. The liquidators may also challenge past transactions and reclaim company property, exercising powers under the Insolvency Act 1986.

The length of the liquidation varies depending on the complexity of the case and the time it takes to realise the debtor’s assets. Contracts do not automatically terminate on liquidation; however, the liquidators have a power to disclaim onerous property, including unprofitable contracts. Liquidators must have regard to the interests of all creditors.

Compulsory Liquidation

The business of the debtor ceases, except as necessary for the purposes of the winding-up. Employee contracts are automatically terminated. Any disposition of the debtor’s property after the commencement of the winding-up will be automatically void unless a validation order is obtained from the court.

Once all assets have been collected in and distributed, and the debtor’s affairs have otherwise been fully wound up, the liquidators must make an account of the winding-up and file a final return with Companies House. The debtor will be automatically dissolved three months later. If the liquidator is the Official Receiver (in a compulsory liquidation), the liquidation will end three months after the Official Receiver notifies Companies House that the liquidation has concluded.

In certain circumstances, a company may be restored to the register following dissolution, in which case it will remain subject to any liabilities that were not discharged at the time of dissolution.

Shareholders

The shareholders of a debtor have limited involvement in liquidation (except that a voluntary liquidation is commenced by a shareholders’ resolution).

Secured Creditors

Secured creditors are entitled to receive realisations from their secured assets (less costs of realisation and, in the case of assets secured by a floating charge, after payment of expenses of the proceedings, preferential claims and the prescribed part set aside for unsecured creditors). To the extent that secured creditors’ claims are “under-secured”, they rank with unsecured creditors in respect of any shortfall.

Unsecured Creditors

As noted, in a CVL, creditors are invited to nominate the liquidators; in a compulsory liquidation, the Official Receiver will act as liquidator unless a third-party insolvency practitioner is appointed at the invitation of the Official Receiver or at the instigation of a creditor representing 25% in value of the creditors. Unsecured creditors are entitled to share in the prescribed part (maximum GBP800,000, from realisation proceeds of assets secured by a floating charge). Aside from the prescribed part, unsecured creditors only receive a distribution if/once higher-ranking creditors have been repaid in full.

Exercise of creditors’ rights:

• Compulsory liquidation – no action or proceedings can be continued or raised against the company except with the court’s permission, although there is no stay on enforcement of security.
• Voluntary liquidation – there is no moratorium on legal proceedings against the company; it is for the liquidators (among others) to apply for a stay to prevent the continuation of legal proceedings and enforcement of security.
• Retention of title – creditors may take steps to repossess assets which are not actually owned by the company, such as goods subject to a retention-of-title clause. Properly drafted, a retention-of-title clause will survive an insolvency filing.

Set-Off

Mandatory, automatic insolvency set-off applies in liquidation.

The UK has adopted the UNCITRAL Model Law on Cross Border Insolvency via the Cross Border Insolvency Regulations 2006. This permits recognition of the international proceedings and assistance for foreign insolvency office-holders (including a moratorium), upon application to the court, provided the proceedings are in a jurisdiction where the debtor has its COMI or an establishment. Section 426 Insolvency Act 1986 also enables UK courts to assist courts in certain designated countries and territories in insolvency and restructuring proceedings. Recognition and assistance may also be available under the common law based on principles of modified universalism and comity.

Critically, however, such recognition/assistance does not necessarily extend to recognition/enforcement of the plan of reorganisation with the foreign proceedings. Owing to the so-called “Rule in Gibbs”, English courts consider that, where a contract specifies that it is governed by a particular country’s law, it cannot be compromised or discharged by insolvency proceedings under a different law unless the affected parties have taken part in the proceedings or otherwise submitted to them (eg, by voting) or were present in the foreign jurisdiction when the proceedings were commenced. A parallel UK process may therefore be required to compromise English law debt (or shareholder rights), if not all stakeholders are “subject” to the foreign proceedings and if parties require certainty.

The UK has adopted the Cape Town Convention and related Aircraft Protocol, which provide certain and uniform rules relating to the purchase, sale, lease and financing of aircraft objects.

The Chancery Division of England and Wales has also adopted the Judicial Insolvency Network (JIN) Guidelines on court-to-court communication and co-operation for use in cross-border insolvency matters.

Jurisdictional eligibility varies according to the relevant procedure.

Administration or CVA

This is available to companies incorporated in England, Wales, Scotland or a member state of the European Economic Area (EEA), in addition to those registered under the Companies Act 2006 in England and Wales or Scotland and those not incorporated in an EEA member state but with their centre of main interests (COMI) in the UK or an EU member state (other than Denmark). It is also available upon request from courts in certain other designated countries and territories.

Scheme or Restructuring Plan

This is available to companies with a “sufficient connection” to the UK. This is often established by the debtor having its COMI in the UK, or where the debt subject to the scheme/plan is governed by English law and/or contains an English jurisdiction clause. There are a variety of ways for a foreign debtor to access the UK jurisdiction, including, eg, by shifting the company’s COMI to the UK or changing governing law to English law. The court must also be satisfied that the scheme/plan is likely to be substantially effective in relevant jurisdictions, eg, the jurisdiction(s) of incorporation of the debtor and guarantors.

Liquidation

This is available to companies with a “sufficient connection” to the UK. There must be a realistic possibility of benefit to those applying for the winding-up order. One or more persons interested in the distribution of the company’s assets must be persons over whom the court can exercise jurisdiction. (However, if the company is being wound up on the public interest/“just and equitable” ground, only a “sufficient connection” is required.)

There is no overarching regime for determining applicable law now that the UK is no longer an EU member state and therefore outside the applicable law regime under the European Insolvency Regulation. Applicable law varies according to the specific facts of the relevant case.

See 6.2 Jurisdiction regarding recognition of foreign restructuring/insolvency procedures.

Foreign judgments can be enforced:

• under the Hague Convention on Choice of Court Agreements, where there is an exclusive choice of court agreement and the judgment is from a court in a jurisdiction which is also party to that Convention;
• from 1 July 2025, under the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters, where the judgment is from a court in a jurisdiction which is also party to that Convention; or
• by bringing proceedings applying for the recognition and enforcement of the foreign judgment under the common law regime – this requires that the defendant was present in the foreign country when the proceedings were commenced or agreed to in the relevant jurisdiction, voluntarily appeared in the proceedings, or otherwise submitted to the foreign jurisdiction.

The English courts will generally seek to co-operate, both substantively and procedurally, with their counterparts in other jurisdictions, subject to certain tenets of common law. The legal bases for co-operation include the CBIR, Section 426 of the Insolvency Act 1986 and the principle of comity under common law. Broadly, the courts favour a policy of “modified universalism”.

As noted, the UK has adopted the Judicial Insolvency Network (JIN) Guidelines on court-to-court communication and co-operation for use in cross-border insolvency matters. It is also planning to adopt the UNCITRAL Model Law on Enterprise Group Insolvency.

Foreign creditors are not dealt with in a different way in insolvency proceedings in the UK. They have the same rights as other creditors.

Company directors owe certain statutory duties to the companies of which they are directors. Directors owe a duty to the company to act in the way they consider, in good faith, would be most likely to promote the success of the company. In doing so, they should have regard to:

• the likely consequences of any decision in the long term;
• the interests of the company’s employees;
• the company’s business relationships with suppliers, customers and others;
• the impact on the community and the environment;
• the desirability of maintaining a reputation for high standards of business conduct; and
• the need to act fairly as between members of the company.

Once a company enters the “zone of insolvency”, the directors’ duty to promote the success of the company extends to a duty to consider the interests of the company’s creditors as a whole. Directors should consider creditors’ interests, balancing them against shareholders’ interests where they may conflict. A company enters the zone of insolvency when it is insolvent or bordering on insolvency or an insolvent liquidation or administration is probable.

At all times, the directors of an English company owe fiduciary duties to the company itself, and not to any stakeholder of the company directly.

Breach of duty claims are brought against individual directors rather than the board collectively. Each director is personally responsible and will be held to a different standard depending on their experience, though all must reach the minimum standard of competence expected of a company director. Even when a claim is brought against the board, the court has discretion whether to impose liability on directors individually or collectively.

Wrongful and fraudulent trading applications can be brought by a liquidator, an administrator or a third party to whom the claim has been assigned. Individual creditors cannot bring these claims. Misfeasance claims cannot be assigned and must be brought by the liquidator(s) or administrator(s).

A breach of directors’ duties can lead to a director incurring personal liability, or being disqualified from acting as a director or being involved in the management of a company for a specified period. In extreme cases, it may even lead to a criminal prosecution.

There is no obligation on directors to commence insolvency proceedings when a company is insolvent. However, directors may be personally liable if they breach certain duties. For example, directors can be liable for wrongful trading where they knew or ought to have concluded that there was no reasonable prospect that the debtor would avoid insolvent liquidation or administration and failed to take every step to minimise losses for creditors. In these circumstances, a court may order a director to contribute some or all of the deficit between the amount that would have been available for distribution to creditors had the debtor ceased to trade earlier and the amount that was actually available.

There are also potential criminal sanctions, including for fraudulent trading if the business was carried on with the intent to defraud creditors.

At all times, the directors of an English company owe fiduciary duties to the company itself, and not to any stakeholder of the company directly. See also 7.1 Duties of Directors and 7.2 Personal Liability of Directors.

Directors found guilty of breach of duty may be ordered to repay, restore or account for money or property (with interest) to the company by way of compensation.

A disqualification order may be made against directors (including executive, non-executive and shadow directors) if the company becomes insolvent and their conduct as a director makes them unfit to be concerned in the management of a company. Disqualification can last for up to 15 years. Directors may voluntarily give disqualification undertakings without the need for court proceedings.

The court can make a compensation order against a director subject to a disqualification order if their conduct caused quantifiable loss to creditors of a company that has entered into formal insolvency proceedings or been dissolved. Compensation proceedings may also be settled by voluntary undertaking.

The Finance Act 2020 introduced potential personal liability for directors for a company’s tax liabilities (including penalties), if HMRC considers that avoidance or evasion has taken place or there is evidence of “phoenixism”.

The Insolvency Service will also bring matters of possible unfit conduct to the attention of any other relevant regulator, for them to consider.

Grounds for Challenge

Possible grounds for challenge of pre-insolvency transactions include:

• transactions at an undervalue;
• preferences;
• extortionate credit transactions;
• avoidance of floating charges;
• transactions defrauding creditors; and
• property dispositions after the commencement of a winding-up.

Each of these grounds essentially aims to unwind transactions that would otherwise have frustrated or allowed the company to avoid the payment of creditors on insolvency in accordance with the statutory priority of claims. In most cases, only administrators or liquidators may bring a claim challenging a reviewable transaction (although, claims for transactions at an undervalue and preferences can be assigned by the office holder to any third party). However, where there is fraud, any party that is a victim of the transaction may make a challenge.

The entry into of such transactions by the company may also be viewed as a breach of the directors’ duties.

Look-Back Period

The look-back period ranges between:

• two years prior to the commencement of insolvency proceedings where the transaction was with a connected party (including directors, shadow directors, and associated persons and companies); and
• six months for other parties.

Court Involvement

Most grounds for challenge require an office holder (or their assignee) to commence court proceedings. However, a floating charge entered into during the look-back period will be void automatically, save to the extent of any new money provided on or after the charge was granted. The court generally has a wide discretion to make any order it thinks fit to restore the position to what it would have been but for the relevant antecedent transaction.

Defences include that:

• the company was not insolvent at the relevant time (for a number of actions);
• the debtor did not have a desire to prefer the recipient (for preferences); and
• the transaction was entered into in good faith and for the benefit of the company (for transactions at an undervalue).

There are protections for third parties that acted in good faith, for value and without notice of the relevant circumstances.

See 8.1 Circumstances for Setting Aside a Transaction or Transfer. Such claims can only be brought in administration or liquidation and not in restructuring proceedings (except that a transaction defrauding creditors can also be challenged outside administration or liquidation).