The Insolvency Act 1986 (“IA1986”) is the primary legislation governing corporate insolvency and personal insolvency in England and Wales. The Insolvency (England and Wales) Rules2016 (“IR2016”) are secondary legislation and provide detailed procedures to support the IA1986.
The main formal corporate insolvency procedures available to companies in financial distress and governed by the IA1986 are:
Compulsory Liquidation: this is a court-supervised procedure which occurs when a court orders the liquidation of a company, often after a creditor has presented a winding up petition to the court for payment of an outstanding debt, or alternatively as an exit strategy for a company administration in circumstances where a transition to creditors’ voluntary liquidation is not possible. A liquidator (who often in the first instance is the Official Receiver) is appointed to wind down the company, realise any available assets (including bringing claims against the director(s) of other third parties) to distribute to creditors in accordance with the statutory hierarchy of payments. There are six circumstances in which a company may be wound up by the court, which are detailed in Section 122(1) IA86. These include:
A compulsory liquidation provides broader powers to a liquidator to pursue claims on behalf of the company compared to creditors’ voluntary liquidation (“CVL”). This includes recovering void dispositions for the benefit of creditors. In addition, the date on which a company is deemed to be insolvent is often earlier in a compulsory liquidation. For example, in a compulsory liquidation, the “onset of insolvency” is the date on which the winding up petition was presented, whereas in a CVL that is when the resolution to winding up the company is passed by its shareholders.
Creditors’ Voluntary Liquidation (“CVL”): this happens when the directors of a company decide that the business is insolvent and not in a position to avoid formal insolvency. A general meeting of the company’s shareholders will be held to pass a special resolution to wind up the company on a voluntary basis (requiring 75% of votes in favour) and an ordinary resolution appointing a nominated licensed insolvency practitioner to be appointed as liquidator (requiring a simple majority). This process needs to occur in accordance with the company’s articles of association. The liquidator’s appointment is deemed to have occurred upon the passing of the resolution to wind up, however, the appointment must subsequently be ratified by creditors at a duly convened creditors’ meeting.
In advance of the creditors’ meeting, the directors are required to lay a statement of affairs before creditors detailing the company’s assets and liabilities and details of all known creditor claims and any security held by them. The nominated liquidator will also provide a SIP 6 Report to creditors explaining the company’s trading history, the reason(s) why the company resolved to enter liquidation and further financial information for creditors to consider. The ‘decision date’ to ratify the nominated liquidator’s appointment must be notified to creditors no earlier than three business days after the notice is delivered and no later than 14 days after the shareholders resolution was passed to wind up the company.
The creditors’ decision to ratify the nominated liquidator’s appointment may take place via a deemed consent procedure or by a physical meeting of creditors under Section 246ZE IA86 and Rule 15.6 IR2016 if sufficient objections to the deemed consent procedure are received. The objection threshold to the deemed consent procedure is either (i)_10% in value of claims, (ii) 10% of the total number of creditors, or (iii) 10 creditors in number.
At the creditors’ meeting, a simple majority is required to ratify the nominated liquidator’s appointment. Alternatively, creditors may wish to nominate an alternative liquidator. In either case, the liquidator must be a qualified insolvency practitioner, who has a duty to act in good faith and to exercise their powers with reasonable care and skill and for proper purposes only.
Following their appointment, the liquidator will then seek to wind down the company and distribute its assets to pay creditors; including bringing any claims against the company’s directors and/or any third parties, if appropriate, that may have caused or contributed to the company’s insolvency, depending on the circumstances.
Members Voluntary Liquidation (“MVL”): this is where a company’s shareholders decide to place it into liquidation on a solvent basis and there are sufficient assets to pay all creditor claims in full.
The processed is managed by a licensed insolvency practitioner and the company will be dissolved at the end of the process.
The distinguishing feature is that all creditors are paid in full and the directors are required to swear a statutory declaration of solvency in this regard, containing details of the company’s assets and liabilities, under section 89 IA86. Shareholders must pass a special resolution for its winding up within five weeks of the statutory declaration of solvency (otherwise it is deemed to be invalid), in addition to passing an ordinary resolution appointing a liquidator.
If it appears to the liquidator during the course of the MVL that the company is unable to pay all creditor claims (including interest) in full within the period specified in the declaration of solvency (typically 12 months), the MVL will be converted to a CVL.
Administration: this is, essentially, a process designed to rescue a business or achieve a better return for creditors than liquidation whilst under the protection of a statutory moratorium, preventing creditors from commencing or continuing enforcement action against the company during its administration absent the permission of the appointed administrator or with the permission of the court.
A licensed insolvency practitioner is appointed to take control of the company and its business and assets to achieve one of the three statutory purposes of administration as detailed in Paragraph 3 of Schedule B1 IA86, being (i) to rescue the company as a going concern, (ii) to achieve a better result for the company’s creditors as a whole than if the company were wound up (without first being in administration), or (iii) to realise property to make a distribution to one or more secured or preferential creditors.
An administrator can be appointed by either the company’s directors (via an out-of-court procedure or by way of an application to court), by the holder of a qualifying floating charge which is enforceable against the company or by creditors of the company by applying to court.
An administrator effectively steps into the shoes of the company’s directors, who can no longer exercise any management powers of the company without the consent of the administrator whilst it remains in administration.
Unlike compulsory liquidation, employment contracts do not terminate automatically and the administrator has 14 days from their appointment to adopt any employment contract or to dismiss the employees.
An administrator has far reaching powers as prescribed by Schedule B1 and Schedule 1 of the IA86. In short, an administrator can do anything necessary or expedient to manage the affairs, business and property of the company and acts as agent of the company in performing his or her powers. Some of the administrator’s powers include:
Administration lasts for 1 year but can be extended with the consent of creditors for a further year. Any additional extensions must be approved by the court.
Receivership: this is when a secured creditor (usually a bank but can include other secured lenders with the power to appoint receivers in their security documents) appoints a receiver to take control over specific company assets in order to recover the debt owed.
An LPA (Law of Property Act) Receiver is appointed by the holder of a fixed charge to deal with only the specific property assets that the lender has a charge over. A Fixed Charge Receiver is appointed by the holder of a fixed charge to with the particular charged assets in question.
In either case, the receiver acts as agent of the borrower, however, unlike in administration, a receiver only owes statutory duties to the secured creditor in question and not the company’s wider creditor body. The role of the receiver is to realise the secured asset(s) in question for the best price reasonably obtainable to discharge the secured liabilities in addition to paying the costs of the receivership.
2. SCHEMES OF ARRANGEMENT
Company Voluntary Arrangement (“CVA”): a CVA is a formal agreement between a company and its creditors to discharge its unsecured debts over a period of time. It allows the company to avoid a formal insolvency process (such as administration or liquidation) and continue trading. Unlike administration, the directors of the company maintain day-to-day control of the company’s operations albeit under the supervision of a licensed insolvency practitioner.
A CVA comes into force at the time when the company’s creditors approve a CVA proposal made in respect of the company. However, it is common for the CVA documentation to specify a different date from which its provisions apply.
A proposed CVA is considered and voted on by the company’s creditors by way of one of a number of permitted procedures, which include e-mail, correspondence and internet meetings. A CVA cannot, however, be approved by a deemed consent procedure, unlike many other creditor decision processes (section 3(3), Insolvency Act 1986 (IA 1986).
A CVA will be approved and binding on all unsecured creditors if at least 75% of creditors by value vote in its favour and no more than 50% of creditors by value who are connected to the company vote against it. Any proposal must provide for the payment of any preferential creditors in priority to unsecured creditors and a CVA typically lasts for five years, but can be for a reduced period subject to its proposals. It’s often used by distressed companies looking for time to turn around their financial position and which are not hopelessly insolvent.
Once approved, the CVA binds all unsecured creditors entitled to vote, meaning those creditors are unable to take action against the company contrary to the terms of the CVA.
The CVA proposal will detail what happens if the company fails to comply with the terms of the CVA, which typically include:
The Corporate Governance and Insolvency Act 2020 came into force as a result of Covid-19 and introduced a further formal process for financially distressed companies:
Restructuring Plan (“RP”): RPs provide companies with an opportunity to restructure their debts to avoid formal insolvency. The operating provisions are contained in Part 26A of the Companies Act 2006. It allows the company to propose a compromise or arrangement to its creditors that can include and bind secured creditors, preferential creditors, unsecured creditors, objecting creditors also compromise shareholders’ rights. The company and its creditors can agree on a plan to reduce or restructure its debt, or extend the timeline for repaying it, in a way that enables to company to continue trading. RPs must be approved by the court, but it can be voted on by creditors and other stakeholders. If the creditors approve the RP, it must be ratified by the court.
A RP requires two hearings before the court in order to be approved. First, the company proposes its plan to one or more classes of creditors and there will be a court hearing to determine jurisdiction and class composition only. Following this hearing, meeting of creditors and shareholders take place to consider the proposals (including details of the company’s assets and liabilities) to vote on the plan. Determining how classes of creditors can be a balancing act and met with resistance.
Second, in circumstances, where the creditors vote in favour of the plan, a further hearing is required for the court to sanction the plan. A minimum of 75% in value of each class of creditor must vote in favour (subject to cross-class cram down) for the plan to be sanctioned. At the sanction hearing, the court will consider whether the plan is fair and whether creditors are no worse off if the plan is approved. If approved, the RP is binding.
‘Cross-class cram down’ is the most notable feature of an RP. The court has the power to crawn down dissenting creditors or shareholders providing it is satisfied they would be no worse off then the relevant alternative and the plan is agreed by a class of creditors that would receive payment under the plan, if sanctioned. It essentially, limits the ability of objecting creditors to block a proposal which has the consent of such creditors that retain an economic interest in the company.
Part A1 Moratorium: this is an insolvency process introduced into the IA86 by the Corporate Insolvency and Governance Act 2020 from June 2020. It was introduced as part of emergency legislation during the pandemic to permit financially distressed companies a short breathing space from certain creditor enforcement actions whilst they organise their affairs to make their rescue viable under the protection of a short moratorium.
The moratorium lasts for an initial 20 business day period which can be extended for a further 20 business days by the directors making a court filing (provided the terms of the moratorium are still being met). It can also be extended with creditor consent for up to 12 months. Alternatively, it can be extended by the court.
The process is overseen by a licensed insolvency practitioner who acts as the company’s ‘monitor’ although the directors maintain control of the day-to-day operations (referred to as a ‘debtor-in-possession’). It was intended to provide a streamlined procedure keeping administrative steps to a minimum and not cause the company to incur the significant costs associated with administration. However, they are infrequently used in practice.
The moratorium created is very similar to the statutory moratorium in administration. Although, the company must continue to pay the on-going costs of running the business and pay the following pre-moratorium debts which do not benefit from a payment holiday during the process:
The broad definition of ‘financial services’ which includes loan repayments and sums owed under a guarantee significantly restricts the tangible benefits of the process and explains their infrequent use. If the monitor is of view these liabilities cannot be met, he or she must terminate the moratorium.
The main formal personal insolvency procedures available to individuals in financial distress and governed by the IA1986 are:
Bankruptcy: this is a legal process for individuals that are unable to repay their debts. It involves the appointment of a trustee in bankruptcy (“TiB”) (either the Official Receiver or a licensed insolvency practitioner) to sell the individual’s assets, with proceeds used to pay creditors. The default duration of bankruptcy is one year, however individuals can have their release from bankruptcy discharged if they do not cooperate with their TiB. Whilst most of the individual’s debts will be discharged following their release from bankruptcy, it can have a significant impact on the individual’s credit rating and financial future.
Individual Voluntary Arrangement (“IVA”): an IVA is a formal, legally binding agreement between an individual and their creditors to pay back part of their debts over a fixed period. It can be a good option for people with a regular income but are struggling with debts. The IVA must be approved by at least 75% of creditors (by value), and it provides protection from legal action while the individual is making payments.
While English insolvency procedures are favourable to senior lenders, most restructurings involve negotiations outside of any statutory procedure between a company and its key creditors. If an agreement cannot be reached on a consensual basis, a CVA, scheme of arrangement (“Scheme”) or restructuring plan may then be proposed as a means of imposing a restructuring on any non-consenting creditors. A proposed CVA or Scheme can be defeated if the statutory majorities of creditors do not vote in favour of it. The restructuring plan may be used to “cram-down” dissenting classes of creditors provided that:
None of the members of a dissenting class would be any worse off under the restructuring plan than they would be in the event of the “relevant alternative”.
At least one class who would receive a payment or would have a genuine economic interest in the company in the event of the “relevant alternative” must have voted in favour of the restructuring plan.
Company Voluntary Arrangement
A company voluntary arrangement (“CVA”) is a form of statutory composition between a company and its unsecured creditors.
A CVA can be commenced by a company’s directors, or if the company is already in administration or liquidation, by the company’s administrators or liquidators.
A copy of the proposed arrangement is filed with the court, but, unless the CVA is challenged, the court has no active involvement in the procedure. While it does not need to be prefaced by an administration, it is often used in conjunction with administration because CVA does not itself provide for a moratorium. Since 26 June 2020, companies which are not in administration can use the Part A1 moratorium in conjunction with a CVA.
A CVA is available to the same companies as for administration.
Substantive tests: there are no formal requirements that a company must satisfy to be placed into this procedure. Therefore, the company does not need to demonstrate that it is, or is likely to become, insolvent (even though a CVA is a procedure available to companies under the IA1986).
Consent and approvals: a CVA must be approved by creditors holding at least 75% by value of the claims held by all unsecured creditors who respond to the CVA supervisor’s invitation to vote on the proposal. At least 50% (by value) of those voting in favour of the CVA must be unconnected with the company. Shareholders may also approve the CVA by a simple majority by value vote, but if the creditors approve the CVA and the shareholders do not, the creditors’ approval prevails (although dissenting shareholders can challenge the CVA by applying to the court on the grounds of unfair prejudice or procedural irregularity).
Supervision and control: if a proposal for a CVA is approved, it is normally implemented under the supervision of a licensed insolvency practitioner (known as the “supervisor”). The company’s directors must do everything possible to put the relevant assets of the company into the hands of this supervisor. However, the directors do otherwise remain in control.
Protection from creditors: there is no CVA-specific moratorium on legal processes, including enforcement of security. Since the introduction of the Part A1 moratorium procedure, companies that are eligible for the Part A1 moratorium procedure may use that moratorium in parallel with the CVA. A CVA may also be proposed by administrator(s); in which case, administration moratorium will apply.
In relation to company contracts, the default position is that a CVA will not interfere with the contracts of the company unless specifically provided for by the terms of the CVA. Ipso facto protection will apply from the date an approved CVA takes effect.
Length of procedure: the duration of a CVA depends on its terms. Conclusion: the CVA binds the company and all unsecured creditors, irrespective of whether they responded to the CVA supervisor’s invitation to vote or received notice of the vote(although any creditor who did not receive notice of the vote is entitled to treatment under the CVA as if they received notice of it, and has 28 days to challenge the CVA from the date they become aware of it). However, the CVA does not bind preferential or secured creditors unless they consent to be bound by it.
A CVA has no direct impact on employees, unless the terms of the CVA provide for sums owed to them.
A CVA is concluded once its terms have been implemented. Once completed, the company reverts to its former status and control returns to its directors and shareholders.
The most common forms of security over immovable property are:
Mortgage: a mortgage is a transfer of ownership in land or other property to secure the payment of a debt or to discharge some other obligation. The debtor has a right of redemption, under which the mortgagee must transfer title back to the debtor when the debt is repaid or the obligation discharged. The transfer of title in the assets to the lender enhances the lender’s ability to release the secured assets and prevents the mortgagor (borrower) disposing of the charged asset(s) in question. Physical possession of the charged asset is not required and mortgages can be created over both tangible and intangible assets.
There are two types of mortgage available under English Law.
A legal mortgage is by far the most comprehensive form of security available to a lender. Legal title in the secured asset(s) is transferred to the lender preventing the borrower from dealing with those assets until the security in question has been redeemed.
A legal mortgage over land does not enjoy a legal estate in the land but is put in the same position as if it was granted a lease of 3,000 years (section 87(1) Law of Property Act 1925).
Formalities:
The formalities required for creating a legal mortgage are subject to the nature of property being secured:
Intangible property assets:
A legal mortgage cannot be created over all assets. Generally, a legal mortgage cannot be given over most types of intangible property (such as goodwill or intellectual property rights). However, there are two exceptions:
An ‘equitable mortgage’ is the transfer of the beneficial title in an asset to a lender as security for the secured liabilities in question and generally applies where the formalities to create a valid legal mortgage have not been complied with. There must be some evidence that the borrower intended to transfer the beneficial title to the lender as the assets in question must be sufficiently identifiable.
Fixed charge: a fixed charge is typically taken over a specific, valuable asset (such as land, machinery, ships or aircraft) and attaches immediately to the charged asset. Title and possession of the asset remain with the borrower, but the borrower usually cannot dispose of the asset without the lender’s permission or until the secured liabilities have been repaid. This can cause difficulties where the relevant assets (for example, accounts receivables) are used in the ordinary course of the borrower’s business and therefore a fixed charge in these circumstances could instead be characterised as a floating charge. A lender holding a fixed charge has recourse to the asset if the borrower defaults under the loan. The lender usually has a power of sale over the asset, or the power to appoint a fixed charge receiver to deal with and realise the asset on its behalf. The lender therefore has a claim over the proceeds of sale of the asset in priority to other creditors. Where the sale proceeds are less than the amount of the loan, the lender has an unsecured claim for the balance, but if there is a surplus after repayment of the loan, the balance must be returned to the borrower.
It is important to create a valid fixed charge that the assets in question can be identified as precisely as possible and a fixed charge can extend to future assets.
A fixed charge can be created by anyone, including the following:
The key to create a valid fixed charge is to demonstrate that the lender has control over the fixed charge assets in question. If the lender cannot demonstrate it has control over the asset in question, it likely the purported fixed charge will instead by a floating charge. The description of a fixed charge in the security document is immaterial – control of the asset is a matter of fact, regardless of the intention of the parties. If a borrower is free to dispose of assets purportedly subject to a fixed charge, it is more likely than not that the charge will be floating.
Generally. In determining whether a fixed charge is valid, the courts will consider, (i) the nature of the rights and obligations intended to be created, and (ii) whether the charge is consistent with this rights and obligations, which depends on the commercial nature and arrangements in place at the time of creation of the charge.
A fixed legal mortgage or charge is the best security interest available as it gives the secured lender a proprietary interest in the asset ahead of the costs and expenses of officeholders appointed on an insolvency (other than those of the receiver appointed by the lenders), and the claims of floating charge holders, preferential creditors and unsecured creditors.
The most common forms of security over movable property are:
Floating charge: a floating charge secures a group of assets, which fluctuate with time, such as cash in a trading bank account. Assets secured by a floating charge are identified generically rather than individually (for example, a borrower’s undertaking and assets or inventory).
Unlike a fixed charge, a floating charge allows the borrower to deal with the charged assets in the ordinary course of business without the charge holder’s consent. If certain events occur (usually events of default set out in the charging document), the floating charge crystallises into a fixed charge in relation to all assets over which it previously “floated”, and which remain in the borrower’s possession. From this point onwards, the borrower is unable to dispose of the assets without the lender’s consent. The crystallisation of a floating charge does not however change the ranking or priority of that floating charge, which will continue to be treated as a floating charge for the purposes of insolvency legislation. In the order of payment on an insolvency, floating charge holders rank behind fixed charge holders and certain other creditors.
Whilst a fixed charge can be created by anyone, a floating charge can only be created by:
It is not possible for individuals to grant a floating charge over their assets.
A disadvantage of floating charges is the borrower’s ability to dispose of assets without any involvement of the lender and leaving the company as a shell; particularly in an insolvency context. Lenders therefore generally prefer to take a fixed charge over specific assets, to the extent possible.
Pledge: a pledge is a way to create security by delivering an asset to a creditor to hold until an obligation is performed (for example, a debt is repaid). The creditor takes possession of the asset while the debtor retains ownership. The creditor can sell the pledged asset if the obligation is not performed. This is distinct from a mortgage which allows a debtor to remain in possession but with ownership and title in the asset passed to the creditor.
Lien: a lien is the right to retain possession of another person’s property until a debt is settled. Liens arise automatically under English law in certain types of commercial relationships, such as a client’s relationship with its solicitors or bankers. They can also be created contractually. A lien does not confer a right on the holder to dispose of the relevant asset if the debt is not paid.
Lenders should be aware of any liens affecting assets which they seek to take security over because a lien could rank a head of the lender’s security.
The three main types of lien are:
It is also possible to create a contractual lien. This typically extends a legal lien, under a contract between the parties, by providing for enforcement rights (such as a power of sale over the goods) if there is a default. However, a contract can also be used to create a lien in favour of a creditor who would not otherwise be entitled to a lien under general law.
Formalities
Formalities for creating a security interest depend on the nature of the asset over which security is to be granted and the nature of the security interest to be granted. To be effective against liquidators, administrators and buyers of relevant assets for value, most mortgages and fixed charges, and all floating charges, created by a company must be registered with Companies House within 21 days from the day after the date of their creation. Registration is not a requirement for attachment; an unregistered charge is effective against the company provided it is not in liquidation or administration.
Pledges and liens do not require registration.
Security over certain assets (for example, land, certain intellectual property rights, ships and aircraft) may also require registration at specialist registers.
In a liquidation or administration, if these security interests are not registered, these charges will be void for want of registration against an insolvency practitioner and other unsecured creditors.
Where a distribution is to be made in a liquidation or administration, creditors and shareholders are paid in the following order of priority:
Fixed charge holders: fixed charge holders are paid up to the amount realised from the assets covered by the fixed charge (net of the costs of realising those assets). If the value of the charged assets is less than the amount of the debt, the charge holder can claim the balance as an unsecured creditor (or under any valid floating charge in its favour).
Liquidators’ and administrators’ fees: liquidators’ and administrators’ fees and expenses have priority over preferential creditors and floating charge holders (subject, in the case of liquidators, to restrictions relating to certain expenses which have not been authorised or approved by floating charge holders, by preferential creditors or the court).
Preferential creditors: ordinary preferential debts are mainly employee or labour related (such as contributions to occupational pension schemes). For financial institutions, they include debts owed to the Financial Services Compensation Scheme (“FSCS”) and eligible deposits where an amount is FSCS-protected.
Secondary preferential debts for financial institutions include deposits that are not eligible for FSCS protection. Ordinary preferential debts rank equally between themselves and ahead of secondary preferential debts, which also rank equally between themselves.
UK HM Revenue and Customs (“HMRC”) is a secondary preferential creditor in insolvency procedures that commenced on or after 1 December 2020. This preferential status only applies to specified taxes that are collected by a company on HMRC’s behalf, such as VAT, pay as you earn (“PAYE”) and employee National Insurance Contributions (“NICs”). This status means that, in respect of those specified tax debts only, HMRC ranks behind ordinary preferential creditors but ahead of Prescribed Part creditors.
Floating charge holders: floating charge holders are paid up to the amount realised from the assets covered by the floating charge, however part of the proceeds from realising assets covered by any floating charge created on or after 15 September 2003 must be set aside and made available to satisfy unsecured debts (“the Prescribed Part”). The Prescribed Part is calculated as 50% of the first GBP10,000 of net floating charge realisations and 20% of the remainder, subject to a cap of GBP600,000 (where the first ranking floating charge was created before 6 April 2020) or GBP800,000 (where the first ranking floating charge was created on or after 6 April 2020). The Prescribed Part must not be distributed to floating charge holders, unless the claims of unsecured creditors have been satisfied and there is a surplus. The insolvency officeholder can choose not to pay the Prescribed Part if both: – the company’s net property is less than GBP10,000; and– the officeholder considers the cost of making a distribution to unsecured creditors to be disproportionate to the benefits.
Unsecured creditors: unsecured creditors are creditors who do not have a security interest in the debtor’s assets.
Interest: interest incurred on all provable unsecured debts post-administration or liquidation.
Shareholders: any surplus goes to the shareholders of the debtor according to the rights attached to their shares.
Scheme of Arrangement
Like a CVA, a scheme of arrangement (“Scheme”) enables a company to reach a compromise or arrangement with its creditors or with certain classes of its creditors.
A Scheme can be initiated by the company itself, any of the company’s creditors or shareholders or by the company’s administrator or liquidator (although in almost all cases, will be initiated by the company). The process is relatively complex, time consuming and can be costly, as it involves two applications to court and meetings of the various classes of creditors and/or shareholders who may be affected by the Scheme. Since the preparatory steps of a Scheme are not protected from creditor actions, when they are used in restructuring scenarios, they may be used in tandem with administration which provides a moratorium or the Part A1 moratorium procedure. However, a Scheme is not an insolvency proceeding.
A Scheme is generally available to companies registered in England and Wales. However, it may also be available in the case of a foreign company which could be wound up in England and Wales and which has a sufficient connection with England and Wales. The English courts have found that a sufficient connection can exist where the COMI of a foreign incorporated company is located in England and Wales. The courts have also found, in cases where a Scheme is proposed solely to amend finance documents, that a sufficient connection exists on the basis that English law is the governing law of the documents. The English courts have confirmed that there is sufficient connection even where the finance documents were originally governed by foreign law and jurisdiction and were amended to English governing law and jurisdiction purely to give the English court jurisdiction over the Scheme. The courts will require expert evidence that the Scheme of a foreign entity is likely to be recognised and given effect in its jurisdiction of incorporation and the jurisdictions in which the group primarily operates.
Substantive tests: the company must be liable to be wound up in England and Wales, but does not need to show that it is (or is likely to become) insolvent.
Consent and approvals: all classes of creditors affected by the Scheme must approve it. Aclass approves the scheme if at least 75% by value and more than half in number of the creditors in that class present and voting at the scheme meeting (in person or by proxy) vote in favour of it. Once all required classes have approved the Scheme at the scheme meetings, the company requests the court to sanction or approve it.
Supervision and control: the directors of the company remain in control.
Protection from creditors: a Scheme does not create an automatic moratorium, but companies that are eligible for the Part A1 moratorium procedure may use it in parallel with the Scheme. Schemes may also be used in tandem with an administration, which would provide moratorium protection.
In relation to company contracts, the default position is that a Scheme will not interfere with the contracts of the company. Ipso facto protection does not apply when a company proposes a Scheme or when a Scheme becomes effective.
Length of procedure: the duration of a scheme depends on its terms.
Conclusion: once the Scheme has been sanctioned by the court and a copy of the sanction order filed at Companies House, it binds the company and all of its creditors, including any creditors who:
Voted to reject the Scheme.
Did not attend the Scheme meeting.
Did not receive notice of the Scheme.
Secured creditors can also be bound if they are included as a class and the Scheme is sanctioned.
There is no direct impact on employees and the procedure does not interfere with company contracts.
Once the Scheme is concluded in accordance with its terms, the company reverts to its former status.
Restructuring Plan
The restructuring plan was introduced by the Corporate Insolvency and Governance Act2020 (“CIGA”). Like a Scheme, a restructuring plan enables a company to reach a compromise or arrangement with its creditors or members or with certain classes of its creditors or members. The restructuring plan is similar in many respects to a Scheme and the courts have already begun to apply the wealth of Scheme case law to many aspects of the restructuring plan. However, there are a number of critical differences.
A restructuring plan can be initiated by the company itself, any of the company’s creditors or members, or by the company’s administrator or liquidator (although in almost all cases, will be initiated by the company). As is the case with a Scheme, the process is relatively complex, time consuming and can be costly, as it involves two applications to court and meetings of the various classes of creditors and/or members who may be affected by the restructuring plan. Further, the preparatory steps of a restructuring plan are not protected from creditor actions so, when they are used in restructuring scenarios, they may be used in tandem with administration which does provide a moratorium or the Part A1 moratorium procedure.
Like Schemes, restructuring plans are generally available to companies registered in England and Wales and any foreign company which could be wound up in England and Wales and which has a sufficient connection with England and Wales. The “financial difficulties” test set out below must also be met by the relevant company.
Substantive tests: restructuring plans are generally available to companies registered in England and Wales and any foreign company which could be wound up in England and Wales and which has a sufficient connection with England and Wales. However, unlike Schemes, the following further conditions must also be met in connection with the proposal of a restructuring plan:
The company has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern.
A compromise or arrangement is proposed between the company and its creditors or members (or any class of them) and the purpose of such compromise or arrangement is to eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties.
Consent and approvals: a Scheme requires the approval of each class voting on it. In contrast, the restructuring plan includes a “cross-class cram down” mechanism that will allow dissenting classes of creditors or members to be bound to the restructuring plan, provided that:
None of the members of a dissenting class would be any worse off under the restructuring plan than they would be in the event of the “relevant alternative”.
At least one class who would receive a payment or would have a genuine economic interest in the company in the event of the “relevant alternative” must have voted in favour of the restructuring plan.
The “relevant alternative” is whatever the court considers would be most likely to occur in relation to the company if the restructuring plan were not sanctioned. While administration or liquidation will often be the “relevant alternative”, that will not always be the case.
The approval threshold for a class of creditors or members is 75% by value. There is no numerosity requirement for a restructuring plan, whereas a Scheme also requires approval by a majority in number (of each class).
Once the requisite classes have approved the restructuring plan at the restructuring plan meetings, the company requests the court to sanction or approve it.
A company can apply to the court to exclude a class or classes of creditors or members from voting on a restructuring plan on the basis that none of the members of that class (or classes) has a genuine economic interest in the company.
Supervision and control: the directors of the company remain in control.
Protection from creditors: as is the case with a Scheme, a restructuring plan does not create an automatic moratorium. Companies that are eligible for the Part A1 moratorium procedure may use that procedure in parallel with the restructuring plan. In relation to company contracts, ipso facto protection automatically applies from the date the court makes an order to convene creditor meetings to vote on the restructuring plan.
Length of procedure: like a Scheme, the duration of a restructuring plan depends on its terms.
Conclusion: once the restructuring plan has been sanctioned by the court and a copy of the sanction order filed at Companies House, it binds the company and all of its creditors in accordance with its terms, including, in the case of a cram down restructuring plan, any dissenting creditors or members who were crammed down under the cross-class cram down mechanism.
Secured creditors can also be bound by a restructuring plan.
There is no direct impact on employees.
Once a restructuring plan has been concluded in accordance with its terms, the company reverts to its former status.
Administration
The administration procedure is a way of facilitating a rescue of a company or the better realisation of its assets. It allows an insolvent company to continue to trade with protection from its creditors through a statutory moratorium.
The main objective of administration is to rescue the company as a going concern. However, if the administrator thinks this is not reasonably practicable or that a better result can be achieved for creditors as a whole, the second objective is to achieve a better result for the company’s creditors than is likely if the company is wound up (without first being in administration).
The third objective, which only applies if the administrator thinks it is not reasonably practicable to achieve the first two objectives and if it will not “unnecessarily harm” the interests of the creditors as a whole, is to realise property to distribute the proceeds to the secured or preferential creditors.
An administrator can be appointed by court order, following the making of an application usually made by the company, the company’s directors or one or more creditors of the company.
There is also an out-of-court procedure for placing a company into administration, which is available to both a company through its directors or shareholders; and qualifying floating charge holders.
Administration is potentially available to both UK and foreign-registered companies. The rules concerning cross-border insolvencies are complex but the availability of the administration procedure generally depends on a company’s centre of main interest(“COMI”) being located in the UK. A company’s COMI depends on where it administers its interests on a regular basis and should be ascertainable by third parties.
Substantive tests: in most cases, an administration cannot begin unless it can be demonstrated that both: 1) the company is, or is likely to become, unable to pay its debts; and 2) administration is likely to achieve one of the purposes.
If a qualifying floating charge holder appoints an administrator, there is no requirement for the company to be insolvent, although the floating charge underlying the appointment must be enforceable.
Consent and approvals: where the court appoints the administrator, the applicant must notify any qualifying floating charge holder. If a qualifying floating charge holder has already appointed an administrator or administrative receiver, the court does not usually grant an administration order. Where the appointment is made out of court, the company or its directors must give all persons holding a qualifying floating charge five business days’ written notice of their intention to appoint an administrator, who must also be identified in the notice. This is to enable a qualifying floating charge holder to appoint its own administrator, rather than the prospective administrator chosen by the company or the directors. A qualifying floating charge holder who wishes to appoint an administrator must also give two business days’ written notice of their intention to make the appointment to any person holding a prior ranking qualifying floating charge.
Supervision and control: one or more licensed insolvency practitioners can be appointed as administrators. The administrators are officers of the court (whether or not appointed by the court) and act as the company’s agent with extensive management powers, and investigatory and enforcement powers, including powers to apply to the court to unwind pre-insolvency transactions.
The directors’ management powers generally cease although the administrator may leave some or all of the powers with the directors of the company.
Protection from creditors: since 26 June 2020, the commencement of an administration will likely prevent many trade creditors from exercising termination rights that they may have under contracts with the company in administration.
The administrator is given no power to disclaim onerous property. However, an administrator can cause the insolvent company to breach the terms of the contract and allow the counterparty to sue for damages. If successful, the counterparty would rank as an unsecured creditor.
Length of procedure: the administrator’s appointment terminates one year after the date the appointment took effect. However, the appointment can be extended by the court for a specified period, or with the creditors’ consent, for a period not exceeding one year.
An automatic statutory moratorium, which comes into effect when an application for administration or a notice of intention to appoint an administrator is filed, helps the administrator achieve the objectives of the administration. The moratorium is a stay on creditors from taking any legal action or enforcing their security against the company or its property. There is no direct impact on employees if an administrator is appointed and the procedure does not interfere with company contracts (subject to the point made above with respect to ipso facto protection).
The way in which an administration is concluded depends on its objective. Administration usually results in one or more of the following:
The administrator selling the company’s assets and distributing their proceeds to creditors and shareholders.
A composition of creditors’ claims through a company voluntary arrangement, a scheme of arrangement or a restructuring plan.
Liquidation and dissolution of the company.
Part A1 Moratorium
CIGA introduced a standalone moratorium procedure in Part A1 of the IA1986. The key objective of the Part A1 moratorium is to facilitate the rescue of a company in financial distress by providing it with a payment holiday in respect of certain debts and protection from action from certain types of creditors, so that the company has breathing space in which to explore its rescue and restructuring options.
The Part A1 moratorium is available to “eligible” companies, including eligible overseas companies with a sufficient connection to England and Wales. A company is eligible unless itis excluded from being eligible because:
On the date of filing for a Part A1 moratorium, it is or has been subject to an insolvency procedure or moratorium in the preceding 12 months.
It is an excluded entity, the list of which includes any entity that is:
an insurance company;
a bank;
an electronic money institution;
an investment bank or investment firm;
a party to market contracts or subject to market charges;
a participant in designated systems;
an authorised payment institution;
an operator of payment systems;
a recognised investment exchange;
a recognised clearing house;
a recognised CSD;
a securitisation company;
a party to certain capital market arrangements;
a public-private partnership project company.
Certain overseas companies are also not eligible companies.
The Part A1 moratorium is also available to limited liability partnerships, certain charitable incorporated organisations and certain co-operative and community benefit societies.
The Part A1 moratorium is obtained by an eligible company filing papers at court (and, in certain circumstances, requires the grant of a court order) and lasts for an initial period of 20business days. The Part A1 moratorium period may be extended by the company for a further 20 business days, or for a longer period with the agreement of the company’s creditors or the court.
In order to qualify for the Part A1 moratorium, the relevant eligible company must be unable to pay its debts or be likely to become so, but it must still be capable of being rescued. The Part A1 moratorium is a standalone procedure (meaning it does not need to be used in conjunction with another restructuring or insolvency process).
Consent and approvals: in certain circumstances, a court order is required to obtain a PartA1 moratorium. Extensions of the Part A1 moratorium period beyond 40 business days also require the agreement of the company’s creditors or the court. At each extension, all moratorium debts and pre-moratorium debts that are not subject to a payment holiday must have been paid or discharged and the monitor must confirm that the Part A1 moratorium is likely to ultimately result in the rescue of the company as a going concern.
Supervision and control: during the period of the Part A1 moratorium, the directors will remain in charge of the company. However, the Part A1 moratorium will be overseen by a qualified insolvency practitioner who will act as monitor. The monitor must bring the moratorium to an end if all moratorium debts and pre-moratorium debts that are not subject to a payment holiday are not paid as they fall due or if there is no longer a prospect of the company being rescued as a going concern. To help the monitor form a view on this, the directors must provide the monitor with any information that the monitor requires in order to carry out their functions.
Protection from creditors: during the Part A1 moratorium, the company will have a payment holiday for its pre-moratorium debts, being its debts that fall due before or during the moratorium by reason of an obligation incurred before the moratorium. However, the payment holiday does not extend to pre-moratorium debts that consist of amounts payable in respect of the following:
The monitor’s remuneration or expenses.
Goods or services supplied during the moratorium.
Rent in respect of a period during the moratorium.
Wages or salary arising under a contract of employment.
Redundancy payments.
Debts or other liabilities arising under a contract or other instrument involving financial services.
The category relating to debts or other liabilities arising under a contract or other instrument involving financial services is significant as it means that the company must continue to pay its financial creditors throughout the moratorium. The company will also not have a payment holiday in respect of any moratorium debts, being its debts that fall due during or after the moratorium by reason of an obligation incurred during the moratorium.
The other aspects of the Part A1 moratorium are similar to the moratorium that applies in an administration. For as long as the moratorium applies, unless the court permits otherwise, the moratorium prevents the:
Enforcement of security (other than financial collateral or collateral security charges).
Crystallisation of floating charges.
Commencement of insolvency proceedings or other legal proceedings against the company.
Forfeiture of a lease.
The company also cannot dispose of property (other than in the ordinary course of business) or grant security over its assets without the consent of the monitor or, in the case of a disposal, the court.
Length of procedure: the maximum length of a Part A1 moratorium is 12 months from its commencement in the case of extensions to a moratorium with creditor consent (rather than with the approval of the courts). However, it is possible for directors to apply to court for a longer period or to request a further extension once the 12 months are over.
Conclusion: the key objective of the Part A1 moratorium is to rescue the company. If that is achieved, the company reverts to its former status at the end of the moratorium.
If administration or liquidation proceedings are begun within 12 weeks from the end of the Part A1 moratorium, there is an impact on the priority of creditors. Both of the following will have priority over all other debts except those of fixed charge holders (to the extent those fixed charge holders can be paid out of the assets which are subject to the fixed charge) and any fees and expenses of the official receiver:
Moratorium debts, being the debts that fall due during or after the moratorium by reason of an obligation incurred during the moratorium.
Priority pre-moratorium debts, being the pre-moratorium debts for which a company does not have a payment holiday during the moratorium.
Debts under financial services contracts will only constitute priority pre-moratorium debts to the extent that they fell due as scheduled before or during the moratorium, rather than falling due by way of acceleration or under an early termination clause.
If a Scheme, restructuring plan or CVA is proposed within 12 weeks of the end of any Part A1moratorium of a company, and the affected creditors include creditors with moratorium debts or priority pre-moratorium debts, the relevant procedure may not be sanctioned/approved without the agreement of each of the creditors of those affected moratorium debts or priority pre-moratorium debts.
Ipso Facto Protection
CIGA introduced provisions into the IA1986 to protect a company’s contracts for the supply of goods and non-financial services (supply contracts) in the event it goes into a corporate insolvency process. This will mean that, subject to certain exceptions, suppliers will not be able to terminate or amend their supply contracts with companies which are subject to relevant insolvency procedure, with the hope being that this will allow companies to trade through those processes.
This protection applies to companies that become subject to a relevant insolvency procedure, specifically:
This protection does not apply to companies which propose or enter into a Scheme, because it is not an insolvency procedure. However, this protection does not apply to supply contracts where either the company or the supplier is involved in financial services (which is extensively defined in the legislation).
Protection from creditors: the protection relates to a provision of a supply contract that either:
Provides for the termination of, or which would entitle the supplier to terminate, the contract because the company has become subject to any of the relevant insolvency proceedings.
Provides for any other thing to take place or would entitle the supplier to do any other thing, because the company becomes subject to any of the relevant insolvency proceedings.
The protection also restricts a supplier from exercising an entitlement to terminate a supply contract where the entitlement arose because of an event occurring before the start of the insolvency proceedings, but that entitlement was not exercised before the start of the insolvency proceedings.
There are some safeguards for suppliers. For instance, the supplier may apply to court to terminate the supply contract on grounds of hardship.
Liquidation
There are two types of liquidation:
Voluntary liquidation. This is not a court proceeding and can be started in relation to a solvent company (members’ voluntary liquidation (MVL)) and an insolvent company(creditors’ voluntary liquidation (CVL)).
Compulsory liquidation. This is a court managed liquidation.
Liquidation is used to wind up a company, and realise and distribute its assets to creditors and shareholders.
Voluntary liquidation is initiated by a shareholders’ resolution to wind up the company. Compulsory liquidation is started by the presentation of a petition to the court by any of the following:
A company and its directors are not required to file for liquidation on insolvency but may wish to do so to avoid incurring liability for wrongful or fraudulent trading.
While the rules relating to cross-border insolvencies are complex, CVL and compulsory liquidation are potentially available to both UK and foreign-registered companies, provided they can demonstrate that their COMI is in, or they have an establishment in, the UK (for both CVLs and compulsory liquidation) or potentially some other sufficient connection (for compulsory liquidation only). MVL is only available to companies incorporated in the UK.
The most common ground on which creditors petition the court for a compulsory winding-up order is that the company is unable to pay its debts, which is deemed if any of the following occur:
A creditor who is owed more than GBP750 by the company serves a statutory demand on the company and the company fails to pay the demanded amount within three weeks.
A judgment remains unsatisfied.
It is proved to the court that the company is unable to pay its debts as they fall due.
It is proved to the court that the company’s liabilities (including contingent and prospective liabilities) are more than the company’s assets.
A court can also wind up a company if it can be shown that it is just and equitable to do so.
A MVL must be supported by a statutory declaration sworn by the directors that the company will be able to pay its debts in full, together with interest, within 12 months after the start of the MVL.
Consent and approvals: resolutions for MVL and CVL must be approved by 75% of shareholders voting at the relevant shareholders’ meeting, at which the shareholders nominate a liquidator. In a CVL, the directors must also seek creditors’ nomination for the liquidator either by the deemed consent procedure or a virtual meeting.
Under the deemed consent procedure, the decision maker (typically the insolvency officeholder, but, in a CVL, the directors) gives notice of the decision taken to creditors (who would otherwise be entitled to vote). The creditors will be treated as having made the particular decision if less than 10% of those entitled to vote (by value) object to the decision.
Alternatively, the company must hold a physical meeting to seek creditors’ nomination for liquidator if at least 10% of the company’s creditors object to the shareholders’ choice of liquidator.
At the physical (or virtual) meeting, a majority in value of creditors present and voting must approve the nomination of the liquidator. If the shareholders and creditors nominate a different individual to be liquidator, the creditors’ choice will prevail. A court order is required to place a company into compulsory liquidation.
Length of procedure: this depends on the substance of the liquidation and the company’s situation.
Conclusion: compulsory liquidation (unlike a MVL or CVL) provides for an automatic stay or moratorium by prohibiting any action or proceedings from being started or continued against the company or its property, without leave of the court. The liquidation moratorium does not prohibit out-of-court enforcement of security by a secured creditor or forfeiture of a lease. Once the court makes a winding-up order, the company’s directors are automatically dismissed and replaced by the liquidator, who is vested with extensive powers to act in the name of the company.
On a compulsory liquidation and CVL, employees’ service contracts are automatically terminated, unlike in an MVL.
Company contracts are not automatically terminated. Ipso facto protection applies from the date the liquidator is appointed. A liquidator also has the ability to terminate onerous contracts under section 178 of the IA1986 to facilitate a winding-up.
The company is dissolved once the liquidator has realised all the company’s assets and, where applicable, made distributions to creditors and shareholders.
As the Insolvency Regulation and Recast Insolvency Regulation no longer apply within the UK, for insolvency proceedings commenced in an EU member state after 11pm on 31December 2020, recognition will now most likely be sought under the Cross-Border Insolvency Regulations 2006 (“CBIR”) (which implement the UNCITRAL Model Insolvency Law on Cross-Border Insolvency into domestic legislation), as is the case for other foreign insolvency proceedings.
Under the CBIR, the foreign representative of the debtor (which may be the debtor itself or one of its directors) can apply to the court for recognition in the UK of foreign proceedings as either “foreign main proceedings” (if the proceedings are taking place in the state where the debtor’s COMI is) or “foreign non-main proceedings” (if the debtor has an establishment within the state where the proceedings have commenced). The difference between foreign main proceedings and foreign non-main proceedings is that in relation to the former, an automatic stay on individual actions or proceedings concerning the debtor’s assets will apply whereas in relation to the latter, the foreign representative of the debtor must apply for discretionary relief.
In general, the CBIR provide uniform legislative provisions to deal with cross-border insolvency and promote:
Co-operation between the courts and competent authorities involved in cases of cross-border insolvency.
Fair and efficient administration of cross-border insolvencies that protect the interests of all creditors and other interested persons, including debtors.
The protection and maximisation of the value of the debtors’ assets.
The rescue of financially troubled businesses.
However, English case-law has held that relief under CBIR is a procedural mechanism only and should not be used to provide recognition of the substantive aspects of a foreign insolvency proceeding.
Additionally, section 426 of the Insolvency Act 1986 provides a statutory framework for the reciprocal co-operation with English courts in relation to a number of former UK colonies and dependencies. The procedure to obtain recognition under section 426 involves an application to the local court for a letter of request of assistance from the English court, and an application to the English court to obtain such assistance. When considering whether to provide assistance, the court can apply substantive English insolvency law or the law of the foreign jurisdiction if it is consistent with English law.
Finally, under the common law principle of comity, the court has the power to recognise and grant assistance to foreign insolvency proceedings.
From 1 January 2021 the recognition of, and assistance with, UK insolvency proceedings in EU member states will be determined by the domestic rules governing cross-border insolvencies in each EU member state. For all EU member states except for Denmark, this means that the Insolvency Regulation and Recast Insolvency Regulation will continue to determine how those member states deal with insolvencies falling within the scope of those Regulations. If a member state’s court finds a debtor’s COMI to be in an EU jurisdiction, insolvency proceedings commenced in that jurisdiction would be recognised across the EU irrespective of any insolvency proceedings commenced in the UK and regardless of whether a UK court had determined that the debtor’s COMI is in the UK.
The UNCITRAL Model Law on Cross-Border Insolvency provides recognition of UK insolvency proceedings in a number of countries. However, it has to date only been implemented in five European countries (Poland, Slovenia, Romania, Serbia and Greece).There is currently no other legislative basis for recognition of UK insolvency proceedings in other EU member states.
Where the facts allow it, an alternative route to automatic recognition in the EU may be the initiation of parallel proceedings in an EU jurisdiction, although this may add complexity and cost.
Pre-Brexit, the English courts typically relied on the Recast Brussels Regulation to satisfy the requirement that English schemes will be recognised in the jurisdiction of incorporation of the companies whose liabilities are subject to the scheme.
As the UK has now left the EU, the Recast Brussels Regulation has ceased to apply to it. The English courts will now need to be satisfied that the relevant Scheme or restructuring plan will be recognised in EU jurisdictions on the basis of private international law, unless:
The Governing law of the contract is English law, in which case it is expected that the contractual effect of an English scheme or restructuring plan to vary or discharge English law-governed debt will continue to be recognised across the EU under the Regulation (EC) 593/2008 on the law applicable to contractual obligations (Rome I).
Contract contains an exclusive jurisdiction clause in favour of the UK courts, in which case recognition may be available under the:
HCCH Convention on Choice of Court Agreements 2005 (Hague Convention), to which the UK acceded in its own right with effect from 1 January 2021; or
Lugano Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters 2007 (Lugano Convention).
The following international treaties apply:
UNCITRAL Model Law (implemented under the CBIR).
Hague Convention.
Procedures for Foreign Creditors: generally, foreign creditors can file claims for debts due to them in UK insolvency proceedings in the same manner as local creditors. Foreign currency debts are converted into sterling. However, to ensure that local creditors are not prejudiced, if there are concurrent proceedings abroad, any recovery made in the foreign insolvency proceedings will be taken into account.
Edwin Coe LLP
Lincolns Inn, 2 Stone Buildings, London,
WC2A 3TH,
United Kingdom
Call: +44 20 7691 4000
Sophia Bompas
Partner
Email: sophia.bompas@edwincoe.com
Call: +44 (0)20 7691 4184
