17 - Corporate Rescue

Question 1

What is the purpose of administration?

Answer 1

Schedule B1, para 3(1) of the IA1986 provides that the administrator of a company must perform their functions with the objective of:

• rescuing the company as a going concern; or
• achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration); or
• realising property in order to make a distribution to one or more secured or preferential creditors.

These three objectives are collectively referred to as ‘the purpose of administration’.

Question 2

What are the three methods of appointing an administrator?

Answer 2

1. By the company or its directors;
2. By a qualified floating chargeholder;
3. By court order.

Question 3

Briefly outline the effects of administration.

Answer 3

• Depending on the method of appointment, any pending winding up petition will be dismissed or suspended;
• Any administrative receivers will vacate office;
• There is a moratorium of insolvency proceedings and certain other legal processes;
• The powers of the directors are effectively suspended; and
• The business documents and websites of the company must state that it is in administration.

Question 4

What is a pre-pack?

Answer 4

Paragraph 1 of Statement of Insolvency Practice 16 defines a pre-pack as ‘an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator and the administrator effects the sale immediately on, or shortly after, appointment’.

Question 5

When will a company cease to be in administration?

Answer 5

When the administrator’s appointment ceases (Schedule B1, para 1(2)(c)), which can occur in a number of ways.

Question 6

What is a CVA?

Answer 6

A company voluntary arrangement is an insolvency procedure that allows a company to enter into a binding arrangement with its creditors.

Question 7

Who can propose, and act as nominee for, a CVA?

Answer 7

The process of implementing a CVA begins with a proposed arrangement between the company and its creditors. A proposed CVA comes from:

• the company’s directors, providing that the company is not in administration or liquidation (s. 1(1));
• the company’s administrator, if the company is in administration (s. 1(3)(a)); or
• the company’s liquidator, if the company is in liquidation (s. 1(3)(b)).

Question 8

How is a CVA approved?

Answer 8

The proposed CVA will need to be approved by the company and its creditors.

As regards obtaining the company’s approval, the nominee must invite the company’s members to a meeting to consider the proposed CVA (IR2016, r 2.25(1)). The members, who must be provided with at least 14 days’ notice of the meeting, will approve the proposal if a majority of them (in value) vote in favour of the proposal (IR2016, r. 2.36(1)).

The creditors will approve the proposal by way of a qualifying decision procedure (IA1986, s. 3(3)), and the details of this procedure (e.g. venue, how the decision is to be decided) will be determined by the nominee (IA1986, s. 246ZE(2)). Alternatively, the ‘deemed consent procedure’ can be used, under which the proposal will be approved unless 10% of the creditors in value object to the proposal (IA1986, s. 246ZF).

Question 9

When will a company be eligible for a CVA with a moratorium?

Answer 9

A CVA with a moratorium is currently available to small companies (although the government has stated that it plans to abolish this moratorium).

Question 10

What are the effects of the moratorium?

Answer 10

While the moratorium is in effect:

• no petition may be presented to wind up the company, and no resolution may be passed to wind up the company;
• no meeting of the company can be called, except with the consent of the nominee or leave of the court;
• no administrator can be appointed by the company, its directors or by a qualifying floating chargeholder, nor can an administrative receiver be appointed; and
• no other steps may be taken to enforce any security over the company’s property, or to repossess goods in the company’s possession under any hire-purchase agreement, except with the leave of the court and subject to such terms as the court may impose (Schedule A1, para 12(1)).