Chapter 8: Insolvency law: corporate and personal

Question 1

When is administration relevant?

Answer 1

Administration is relevant where a company is in financial difficulties but not necessarily insolvent or close to insolvency.

Question 2

What moratorium does administration result in?

Answer 2

Administration results in a moratorium on actions against the company.

Question 3

What is an administration order?

Answer 3

An administration order is an order of the court which puts an insolvency practitioner in control of the company, principally to insulate the company from its creditors and with a view to rescuing the company as a going concern.

Question 4

What is the role of the administrator?

Answer 4

The role of the administrator is to carry out the following, in the order set out:

1. To rescue the company as a going concern.
2. If this is not reasonably practicable, to achieve a better result for the company’s creditors as a whole than would be likely with a winding-up.
3. If neither is reasonably practicable, and provided the administrator does not unnecessarily harm the interests of the creditors as a whole, then to realise the company’s assets to make a distribution to one or more preferential or secured creditors.

Question 5

In what two ways may an administrator be appointed?

Answer 5

1. By the court

2. Out of court

Question 6

How may a company appoint an administrator?

Answer 6

By passing an ordinary resolution.

Question 7

How may directors appoint an administrator?

Answer 7

By a majority decision.

Question 8

How may a company or directors appoint an administrator by court?

Answer 8

Apply to the court and show that:

1. The company is or is likely to be unable to pay its debts and
2. An administration order is reasonably likely to achieve the purpose of administration

Must give notice to Qualifying Floating Charge Holders (QFCH) who may intervene.

Question 9

How may a company or directors appoint an administrator out of court?

Answer 9

Cannot appoint in specified circumstances, including where the company is already in liquidation or administration or where applications are pending.

Otherwise must give five days’ prior notice to any QFCH. Must file at the court:

1. Notice of the intended appointment and actual appointment.
2. Statutory declarations that the company is likely to become unable to pay its debts and as to the appointment being lawfully and properly made.
3. Statement from administrator that purpose of administration reasonably likely to be achieved and that they consent to the appointment

Question 10

How may creditors appoint an administrator?

Answer 10

By applying to the court.

Creditors cannot appoint an administrator out of court.

Question 11

What is a Qualifying Floating Charge Holder (QFCH)?

Answer 11

At least one floating charge which on its own or together with other fixed or floating charges amounts to a charge over the whole or substantially the whole of the company’s property.

The floating charge must contain power to appoint an administrator (or administrative receiver).

Question 12

How may a Qualifying Floating Charge Holder (QFCH) appoint an administrator by court?

Answer 12

Must show that:

1. the floating charge is a qualifying floating charge; and
2. it is enforceable

A QFCH may apply even if the company is in liquidation.

Must notify any other QFCH.

Question 13

How may a Qualifying Floating Charge Holder (QFCH) appoint an administrator out of court?

Answer 13

Must give two days’ prior notice to any prior QFCH before any appointment is made.

Must file in court:

1. Notice of appointment.
2. Statutory declaration as to lawfulness of appointment and enforceability of the charge.
3. Statement by administrator that purpose of administration likely to be achieved and that they consent to the appointment.

No appointment can be made out of court if the company is in liquidation or administration (or administrative receivership).

Question 14

What is the primary duty of the administrator?

Answer 14

As soon as they takes office, the administrator must take control of the company’s property and use their powers to manage the company in accordance with any proposals that have been approved by creditors or according to any directions given by the court.

Question 15

What are the steps that the administrator should take within 7 days of appointment?

Answer 15

File notice of their appointment with the Registrar of Companies.

Require any of the company’s officers and employees to provide a statement of affairs (who have 11 days to comply with any such request).

Question 16

What are the steps that the administrator should take within 8 weeks of appointment?

Answer 16

Submit a statement of their proposals for achieving the aim of administration to:

1. the Registrar
2. the company’s creditors
3. the company’s members

The administrator should seek creditor acceptance of their proposals by the deemed consent procedure or another authorised consent method.

The administrator is also required to invite creditors to form a creditor’s committee and to ask for nominations to such a committee.

Question 17

What are the steps that the administrator should take within 1 year of appointment?

Answer 17

The administrator’s appointment is terminated unless extended by the court or (once only) by a prescribed majority of the creditors.

Question 18

What are the powers of the administrator?

Answer 18

The administrator takes on the powers previously enjoyed by the directors and generally “may do anything necessarily expedient for the management of the affairs, business and property of the company.”

Specifically, they may:

1. remove or appoint a director
2. call a meeting of members or creditors
3. apply to court for directions regarding the carrying out of their functions
4. make payments to secured or preferential creditors
5. make payments to unsecured creditors, if the administrator feels that to pay the unsecured creditor will help the achievement of the administration, and otherwise with the permission of the court.
6. present or defend a petition for the winding up of the company

Any creditor or member of the company may apply to the court if they feel that the administrator has acted or will act in a way that has harmed or will harm their interest.

Question 19

During the period of administration and from the presenting of a petition for an administration order, what consequences take effect?

Answer 19

Moratorium. There can be:

1. no resolution or court order to wind up the company.
2. no enforcement of fixed charges or other security over the company’s property (except with the consent of the administrator or the court).
3. no recovery of property which the company has on a HP or leasing arrangement or enforcement of retention clauses (without the consent of the administrator or the court).
4. no other legal proceedings (including forfeiture of a lease) can be commenced against the company (except with the consent of the administrator or the court).

Assets subject to a floating charge:

The administrator can sell property which is subject to a floating charge and use the proceeds for the business without obtaining the chargee’s consent.

Assets on HP or subject to fixed charged

The administrator can sell such assets with approval of the court and proceeds must be used to pay off the owner or chargee

Directors

Directors’ powers are suspended but they remain in office. The administrator may choose to remove existing directors or appoint new ones.

Employees

Employees are not automatically dismissed (since the administrator is the agent of the company which continues to be the employer) but the administrator may terminate contracts of employment

Transactions at an undervalue and preferences

These may be avoided

Question 20

What are the advantages of administration?

Answer 20

Administration may be preferable to liquidation for the following reasons:

1. For the company, it does not necessarily cease to exist at the end of the process and it also provides temporary relief from creditors to allow breathing space to formulate rescue plans.
2. For the members, as they will continue to have shares in the company. If the administration is successful, regenerating the business should enhance share value and will restore any income from the business.
3. For the creditors, who should obtain a return in relation to their past debts.

Question 21

Who usually has the power to appoint a receiver?

Answer 21

A secured creditor with a charge over land usually has the power to appoint a receiver in the event of the borrower’s default.

Question 22

What does a receiver do?

Answer 22

A receiver will realise the charged asset in order to pay off the chargeholder’s debt.

Question 23

Can floating charge holders appoint administrative receivers?

Answer 23

With some exceptions, administrative receivers can no longer be appointed by floating chargeholders.

Question 24

What is an administrative receiver?

Answer 24

An ‘administrative receiver’ is appointed by a floating chargeholder and is essentially a manager with control over the whole, or substantial part, of the company’s property and wide powers over its business.

Subject to any conflicting provision contained in the charge document, their powers are extensive and include the power to borrow, to take legal proceedings, to appoint professional advisers and to pay off creditors with preferential rights

Question 25

What are other terms commonly used for ‘receiver;?

Answer 25

The term ‘receiver’ may also indicate a ‘non-administrative receiver’ or ‘LPA receiver’ (Law of Property Act).

Question 26

Who may appoint a receiver?

Answer 26

A receiver may be appointed by the holder of a fixed charge over land in the event of the borrower’s default.

Question 27

What is the role of a receiver?

Answer 27

Their role is to collect rent and/or sell the property.

Unlike liquidators, administrators and trustees in bankruptcy, a receiver does not need to be a qualified insolvency practitioner.

However, they also owe a duty of care to the borrower to act prudently and to have regard to their interests.

Question 28

How is appointment of a receiver convenient for the lender?

Answer 28

The appointment of a receiver may provide a relatively quick and inexpensive remedy for a lender and may be attractive where a straightforward exercise of their power of sale is not appropriate.

Question 29

Will fixed charges crystallise and become fixed charges upon the appointment of a receiver?

Answer 29

Yes. The appointment of a receiver will normally cause floating charges to crystallise and become fixed charges (although they are ranked as floating charges on a winding up, since they were created as such).

Question 30

When a company is in administrative receivership, how can an administrator be appointed?

Answer 30

Where a company is in administrative receivership, an administrator can only be appointed by the court and only in specific circumstances.

The appointment of an administrator automatically dismisses the administrative receiver and prevents any future appointment of an administrative receiver.

Question 31

What is the aim of Company Voluntary Arrangements (CVAs)?

Answer 31

Company voluntary arrangements (CVAs) were introduced by the Insolvency Act 1986 and are intended to avoid a company being wound up.

Question 32

What is a CVA?

Answer 32

A CVA is an agreement between the company and its creditors, which sets out how the company’s debts are to be paid and in what proportions.

Question 33

Is a company entitled to continue trading for the duration of the CVA?

Answer 33

Yes.

A company is entitled to continue trading for the duration of the CVA, although existing creditors are likely to renegotiate the terms of their dealings with the company and seek greater protection.

Question 34

What may a CVA comprise of?

Answer 34

A CVA may comprise either one or both of a ‘composition of debts’ (where the company agrees to pay a limited proportion of its total debt, eg, 60p in the pound) or a ‘scheme of arrangement’ (where the company agrees to pay its debts over a defined period, typically 3–5 years).

A CVA may result in one or more creditors taking an interest in the company by way of a debt-equity swap.

Question 35

Is a CVA often part of the administration process?

Answer 35

In practice, a CVA is often part of the administration process but it need not be.

Question 36

When can a company appoint a nominee to consider its proposals for a CVA?

Answer 36

This may be at any time, whether the company is solvent or not, and the nominee will be required to report to the court as to whether they consider the proposed CVA has a reasonable prospect of being approved and implemented.

Question 37

Is creditor approval of a CVA required?

Answer 37

Yes.

Creditor approval of a CVA is required, either by the deemed consent procedure or an alternative consent method.

Question 38

What are the consequences on creditors upon approval of a CVA?

Answer 38

If approved, the CVA becomes binding on all unsecured creditors.

Preferential creditors, however, retain their priority, and secured creditors remain entitled to enforce their security against the company (unless they agree otherwise).

Question 39

How may any creditor entitled to vote challenge the approval of the CVA?

Answer 39

Any creditor entitled to vote may also challenge the approval of a CVA within 28 days of the court being notified of the results of the creditors’ and members’ meetings.

Such a challenge must be on the grounds:

1. that the CVA unfairly prejudices their interests; and/or
2. that there has been some material irregularity at or in relation to the meetings at which the proposed CVA was considered.

In the event of a successful challenge, the court may revoke or suspend the approval of the CVA and/or give directions regarding further meetings to consider a revised proposal or to reconsider the original proposal.

Question 40

How may a company seek a moratorium when they wish to propose a CVA?

Answer 40

Prescribed documents must be submitted to the court, including the proposed CVA, a statement of the company’s affairs and confirmation that the nominee believes the proposal to have a reasonable prospect of being approved and implemented.

Once these documents are filed, a moratorium of 28 days will come into effect, subject to extension of up to two months with the agreement of both the members and creditors’ meetings.

The existence of the moratorium must be advertised and stated on all business documents. It should also be notified to the Registrar of Companies.

Question 41

What do the effects of the moratorium include?

Answer 41

1. No winding up or other insolvency proceedings can be commenced during the moratorium period.
2. No security over the company’s property be enforced, or any legal process undertaken.
3. Any winding up petitions presented before the moratorium will be stayed and a floating charge cannot crystallise.
4. The company cannot requisition or hold any meeting without the consent of the nominee or court.
5. Other than in the ordinary course of business, the company can only sell property or pay off pre-moratorium debts, with the approval of the nominee or creditors’ committee (if there is one) and, if the property is charged, the consent of the charge-holder or court.
6. The nominee must monitor the company’s affairs during the moratorium and the moratorium will be terminated if the nominee withdraws their consent to act, provided they do so properly and on specified grounds.

Question 42

What is winding up or liquidation?

Answer 42

Winding up, or liquidation, is the process of terminating the life of a company and is carried out by a liquidator.

Question 43

When is a company most likely to be wound up?

Answer 43

A company is most likely to be wound up where it has become insolvent.

Question 44

How may liquidation proceed?

Answer 44

Liquidation may proceed as a members’ voluntary winding up (where the company is solvent) or as a creditors’ voluntary winding up.

Alternatively, liquidation may be imposed compulsorily on the company by the court.

Question 45

What is the liquidator bound to do?

Answer 45

The liquidator is bound to realise the company’s assets and apply the proceeds in a particular order, including distributing any surplus to contributories once creditors have been satisfied.

Question 46

How may members voluntarily resolve to wind up the company?

Answer 46

1. by ordinary resolution where the articles provide for dissolution on the expiry of a fixed term or the happening of a specified event.
2. by special resolution for any reason whatsoever.

The winding up is deemed to commence when the resolution is passed and notice must be given in the Gazette within 14 days.

Question 47

What is a declaration of solvency?

Answer 47

A voluntary winding up is a members’ voluntary winding up only if the directors make and deliver to the registrar a declaration of solvency.

This is a statutory declaration that the directors have made full enquiry into the affairs of the company and are of the opinion that it will be able to pay its debts in full, together with interest (at the applicable rate), within a specified period not exceeding 12 months.

The declaration must be made by all the directors or, if there are more than two, by a majority of them and include a statement of the company’s assets and liabilities as at the latest practicable date before the declaration is made.

The declaration must be:

1. made not more than five weeks before the resolution to wind up is passed; and
2. delivered to the registrar within 15 days after the meeting

Question 48

How does a liquidation proceed as a creditors’ voluntary liquidation?

Answer 48

Where a company intends to wind up voluntarily (and passes an ordinary or special resolution to
that effect as the case may be) but the directors are unable to make a declaration of solvency,
the liquidation proceeds as a creditors’ voluntary winding up, even if in the end the company
pays its debts in full.

Despite its label, this type of liquidation is not initiated by the creditors.

If less than 10% of the creditors in value object, the proposal is deemed to be approved..

Question 49

What are the grounds for compulsory liquidation?

Answer 49

1. That the company is unable to pay its debts: Creditor owed more than £750 and unpaid within 21 days of demand for payment.
2. That it is just and equitable to wind up the company

Question 50

How may the BEIS (Department for Business, Energy and Industrial Strategy) petition for the compulsory winding up of a company?

Answer 50

1. If a public company has not obtained a trading certificate within one year of incorporation
2. Following a report by BEIS inspectors that it is in the public interest and just and equitable for the company to be wound up

Question 51

What are the consequences of liquidation?

Answer 51

Any disposition of the company’s property and any transfer of its shares subsequent to the commencement of liquidation is void unless the court orders otherwise.

Any legal proceedings in progress against the company are halted (and none may be commenced) unless the court gives leave

Any seizure of the company’s assets after commencement of liquidation is void.

The employees of the company are automatically dismissed and the liquidator assumes the powers of management previously held by the directors.

Any floating charge crystallises.

The assets of the company may remain the company’s legal property but under the liquidator’s control, unless the court orders the assets to be vested in the liquidator.

The business of the company may continue, but it is the liquidator’s duty to continue it with a view only to realisation, for instance by sale as a going concern.

Question 52

What are the roles of the liquidator?

Answer 52

1. settle the list of contributories (ie, members who have a liability to contribute in the event of a winding up)
2. collect and realise the company’s assets
3. discharge the company’s debts
4. redistribute any surplus to the contributories according to the entitlement rights attached to their shares

Question 53

Once a liquidation is complete, how must the liquidator act?

Answer 53

In a voluntary winding up, they must prepare an account showing how the winding up has been dealt with and lay it before a meeting of the members and/or creditors. Within the following week they should then file details with the Registrar.

In a compulsory winding up, the liquidator must go back to the court which then makes an order dissolving the company.

Question 54

How may charged or transactions entered into or debts incurred by the company be invalidated?

Answer 54

Charges - Charges not registered within 21 days are void against the liquidator and creditors (and the chargee becomes an unsecured creditor)

Transactions at an undervalue - A transaction ‘at an undervalue’ is a gift or a transaction in the two years before liquidation unless it is in good faith, reasonable and for the purpose of carrying on business.