Corporate Insolvency 1

Question 1

What’s the principal statute dealing with corporate insolvency?

Answer 1

Insolvency Act 1986 (IA 1986)

Has been significantly amended by various legislation including:
• the Enterprise Act 2002 which aimed to promote the rescue of companies and introduced, amongst other things, a new administration procedure;
• the Small Business Enterprise and Employment Act 2015;
• the Insolvency (England and Wales) Rules 2016; and
• the Corporate Insolvency and Governance Act 2020 (CIGA 2020) which commenced on 26 June 2020.

Question 2

What two key insolvency procedures did IA 1986 and CIGA introduce?

Answer 2

IA 1986: key procedures - company voluntary arrangements (CVAs) and administration.

CIGA 2020: pre-insolvency moratorium and the restructuring plan also aimed at rescuing the company.

Question 3

What’s the meaning of “insolvency” and where’s it set out??

Answer 3

s 122(1)(f) IA 1986 which states that a company may be wound up:
".....if it is unable to pay its debts".

Question 4

What are the four tests for insolvency?

Answer 4

1. The Cash Flow test: An inability to pay debts as they fall due (s 123(1)(e))
2. The Balance sheet test: The company’s liabilities are greater than its assets (s 123(2))
3. Failure to comply with a statutory demand for a debt of over £750 (s 123(1)(a))
4. Failure to satisfy enforcement of a judgment debt (s 123(1)(b))

Question 5

Directors’ have obligations towards companies in financial difficulties to review the financial performance: what are examples of financial difficulties?

Answer 5

1. The company has many unpaid creditors who are putting pressure on the company to pay its bills.
2. The company has an overdraft facility that is fully drawn and the bank is refusing to provide further credit.
3. The company has loans and other liabilities that exceed the value of its assets.

Question 6

What are the options for a company facing financial difficulties?

Answer 6

1. Do nothing - the directors risk personal liability under IA 1986 and breach of directors’ duties under the Companies Act 2006.
2. Apply for a pre-insolvency moratorium – this gives the company some “breathing space”.
3. Do a deal - reach either an informal or formal agreement with the company’s creditors with a view to rescheduling debts.
4. Appoint an administrator - this is a collective formal insolvency procedure (a procedure which considers the interests of all creditors) which aims, if possible, to rescue the company. Administration will be considered later in this topic.
5. Put the company into liquidation - this a collective formal insolvency procedure under which a company’s business is wound up and its assets transferred to creditors and (if there is a surplus of assets over liabilities) to its members. Liquidation will be considered later in this topic.

Question 7

What are the different insolvency procedures?

Answer 7

• Informal arrangements
• Formal arrangements
  * Company Voluntary Arrangement
  * Restructuring Plan
• Administration
• Liquidation

Question 8

What are the informal agreements? Why would this be used?

Answer 8

To avoid the time and cost of formal insolvency proceedings. Not regulated by IA 1986 or CA 2006. Difficulty is getting creditors to agree at the same time.

i. e.: if a company needs to persuade a bank to keep lending money to enable it to keep trading, the company or its directors could offer the bank to:
1. make additional payments or offer the bank additional security;
2. reschedule outstanding debts; and/or
3. reduce or hold over employees’ salaries for a set period.

Creditors, including banks, could enter into Standstill Agreements where they agree not to take enforcement action for a certain period of time to give the company a breathing space to reach agreement with its other creditors. However, it is anticipated that the use of Standstill Agreements will decline with the introduction of the pre-insolvency moratorium under CIGA 2020.

Question 9

What is a ‘pre-insolvency moratorium’?

Answer 9

CIGA 2020 introduced: or struggling companies that are not yet in a formal insolvency process.

A “moratorium” is a period during which creditors are unable to take action to enforce their debts, any existing court proceedings are stayed (ie paused) and the company may not be wound up. It creates a breathing space for the company to attempt to resolve the situation.

Lasts for 20 business days - but can be extended by the directors for a further 20 business days.
– Further extensions are possible with the consent of a requisite majority of creditors and/or court order. The maximum period is one year subject to a court order to extend further.

Automatically comes to an end when the company enters into a formal arrangement or insolvency procedure (CVA, restructuring plan, administration or liquidation).

Question 10

What’s the procedure for obtaining the pre-insolvency moratorium?

Answer 10

Directors of the company must apply to court (s A3 IA 1986).
Application must be accompanied by (s A6):
1. A statement that the company is, or is likely to become, unable to pay its debts as they fall due.
2. A statement from a licensed insolvency practitioner (a specialist external individual, usually an accountant), known as a Monitor for these purposes, stating that:
a. the company is an eligible company (see Sch
ZA1), and
b. it is likely that a moratorium will result in the
rescue of the company.
The moratorium comes into force at the time that the documents are filed at the court (s A7(1)(a)). The Monitor then has the responsibility to notify the Registrar of Companies and all the creditors of the company that the moratorium is in force (s A8).
The Monitor has a supervisory function during the pre-insolvency moratorium.

Question 11

What’s a Company voluntary arrangement (CVA) and where is this laid out? (FORMAL AGREEMENT 1)

Answer 11

CVAs are defined in s 1(1) IA 1986 as:
“a composition in satisfaction of its debts or a scheme of arrangement of its affairs”.

Essence of a CVA is that the creditors agree to part payment of the debts or to a new timetable for repayment. The agreement must be reported to court but there is no requirement for the court to approve the arrangement (s 4(6)).

Supervised and implemented by an Insolvency Practitioner - but company’s directors say in post, & are involved with implementation of CVA.

Can be used together with administration/liquidation.

Question 12

Setting up a CVA?

Answer 12

1. Provided the company is not in liquidation or administration, the directors draft the written proposals and appoint a nominee (an insolvency practitioner). If the company is in liquidation or administration, the administrator or liquidator drafts the proposals.
2. The directors submit the proposals and a statement of the company’s affairs to the nominee.
3. The nominee considers the proposals and, within 28 days, must report to court on whether to call a meeting of company and creditors – s 2(1) and s2(2).
4. Nominee gives 14 days’ notice of meeting to creditors. A meeting of the members must take place within 5 days of the creditors’ decision.
5. Voting – the proposals must be approved by:
   • 75% in value of creditors (excluding secured creditors); and
   • a simple majority of members.
6. Nominee reports to court on approval.
7. Nominee becomes supervisor and implements proposals.

Question 13

Effect of a CVA?

Answer 13

A CVA, once approved by the requisite majorities is binding on all unsecured creditors, including those who did not vote or voted against it.

However, secured or preferential creditors are NOT BOUND unless they unanimously consent to the CVA (s 4 IA 1986) – this is a major disadvantage of the CVA procedure.

Question 14

How are CVAs used?

Answer 14

Either used alone or within administration - attempt to reach a compromise with creditors (particularly landlords). Particularly common for retail.

Advantage: directors remain in control.
Disadvantage: cannot bind secured or preferential creditors.

RARELY USED: why?
- complex procedure - and disadvantage.
- Remains to be seen how CVAs develop in pandemic.
Recent examples: All Saints, New Look (CVAs with landlords).

Envisaged use will decline and be replaced by CIGA 2020 Restructuring Plan –>

Question 15

What is a Restructuring Plan and where is this laid out? (FORMAL AGREEMENT 2)

Answer 15

Purpose - compromise creditors/shareholders and restructure liabilities.

Unlike CVA - can bind secured creditors - likely to displace CVAs.

Part 26A CA 2006 (as amended by CIGA 2020): can only be used by company that have/likely to encounter financial difficulties.

Features:
• Creditors and members must be divided into classes and each class that votes on the Plan must be asked to approve it. The Plan must be approved by at least 75% in value of each class voting.
• The court must sanction the Plan and it will then bind ALL creditors.

Question 16

What parties can apply for a restructuring plan?

Answer 16

The company;
Any creditor;
Any member;
The liquidator (if the company is in liquidation);
Or the administrator (if the company is in administration).

Question 17

Advantages of Restructuring Plan?

Answer 17

The court can sanction a Plan if it is just and equitable to do so even if:
• one or more classes do not vote to approve the plan;
• it brings about a cross class cram-down – where a class of creditor can force the Plan on another class of creditor who has voted against the Plan;
• it brings about a cram-down of shareholders – this means forcing shareholders to accept the Plan, diluting equity, creating debt for equity swaps.

A Plan is likely to be used by directors alongside the pre-insolvency moratorium but can also be used by administrators and liquidators.

A Plan may be better than a CVA because it can compromise the rights and claims of secured creditors and shareholders. A CVA cannot do this.

Question 18

What’s administration and what are the objectives of the administrator?

Answer 18

A procedure which aims to rescue a company which is insolvent if at all possible, or to achieve a better result for creditors if not. It is a “collective” procedure, meaning that the administrator acts in the INTERESTS OF THE CREDITORS AS A WHOLE than on behalf of a particular creditor.

Outcomes: will differ depending on the circumstances: administrators may be able to rescue some companies which will then continue trading, perhaps in a streamlined fashion (eg Cath Kidston, which went into administration in 2020 resulting in the closure of their high street shops, but the continuation of the online business), but other companies may proceed into liquidation (eg BHS which went into administration in 2016 and ultimately into liquidation).

Administrators are qualified insolvency practitioners who may be appointed by the court or under the out of court procedure (see below). They are required to perform their functions in the interests of the company’s creditors as a whole and owe duties to both the court and to the creditors collectively.

Question 19

Statutory objectives of administration?

Answer 19

s 8 and sch B1 IA 1986 set out the objectives of the administration, stating that an administrator:
“…must perform his functions with the objective of:

(a) rescuing the company as a going concern, or
(b) achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up…, (MOST IMPORTANT)
(c) realising the property in order to make a distribution to one or more secure or preferential creditors.”

EXTREMELY important - guide actions of the administrator throughout the process.

Question 20

Court procedure for the appointment of an administrator?

Answer 20

2 procedures:

• Court procedure
• Out of court procedure

Court may appoint an administrator where the company is or is likely to become unable to pay its debts (Sch B1 para 11(a)) on the application of:
• The company
• The directors
• One or more creditors
The appointment may only be made where the order is reasonably likely to achieve the purpose of the administration (Sch B1 para 11(b)).

AA Mutual International Insurance Co Ltd:
– Applicant was an insurance company which sought an administration order. The court found that it was probable that the applicant would be unable to pay its debts as it had no income. The administration was also held to be reasonably likely to achieve better results for the creditors as a whole than winding up, therefore the application was granted.

Question 21

Appointment of administrator – out of court procedure?

Answer 21

Following parties may appoint an administrator using the out of court procedure:

• The company or the directors (Sch B1 para 22 IA 1986); or
• A qualifying floating charge holder (‘QFCH’ - this means the holder of a floating charge created after 15 September 2003 relating to the whole or substantially the whole of the company’s property) (Sch B1 para 14 IA 1986). This is often a bank.

MOST COMMON: by directors using out of court procedure -
HOWEVER: important to note - directors CANNOT use out of court procedure where creditor has presented petition for winding up of the company.
–> In these circumstances - directors can apply to court for administration order or qualifying floating charge holder can use out of court procedure to appoint administrator.

Question 22

What’s the role of the administrator?

Answer 22

Officer of the court - owes duty to ALL company’s creditors.

Directors unable to exercise any of their management powers without the consent of
the administrator. The administrator takes on the running of the business with the aim of achieving the purpose of the administration.

Once appointed: up to eight weeks to produce a report setting out proposals for the future of the company’s business. This must be put to all creditors for their approval. If the administrator’s proposals are rejected, the company will usually be put into liquidation. However, if the administrator’s proposals are accepted, the administrator has several options including restructuring the creditors’ rights under a scheme of arrangement or implementing a CVA so that the company exits administration.

There is a 12-month fixed time limit for the completion of administrations, although it is possible to obtain extensions. The administrator must report the outcome of the administration to the court.

Question 23

What’s one key benefit of administration?

Answer 23

During administration, the company has the benefit of a moratorium (Sch B1 para 42-44 IA 1986). During this time, all business documents and the company’s website must state that the company is in administration.

During the moratorium (except with consent of the court or the administrator in each case):

1. No order or resolution to wind up the company can be made or passed;
2. No administrative receiver of the company can be appointed;
3. No steps can be taken to enforce any security over the company’s property or to repossess goods subject to security, hire purchase and retention of title;
4. No legal proceedings, execution or other process can be commenced or continued against the company or its property, and
5. A landlord cannot forfeit a lease of the company’s premises by means of peaceable re- entry.

Question 24

What powers does the administrator have?

Answer 24

Wide powers under IA 1986 to “do all such things as may be necessary for the management of the affairs, business and property of the company” (s 14(1) IA 1986).

These include the powers to:
• Remove and appoint directors (s 14, Sch 1 and para 61 Sch B1);
• Dispose of property subject to a floating charge (para 70 Sch B1);
• Dispose of property subject to a fixed charge (with the court’s consent) (Para 71 Sch B1)

In addition, the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015) granted additional powers to administrators to allow them to bring proceedings against directors for fraudulent and wrongful trading (see Topic 10).

Question 25

Key case for the approach of the court re. administration?

Answer 25

Re T & D Industries Ltd: Neuberger J set out the approach that the court should take towards the administration process.
FACTS: Joint administrators of two connected companies applied for a direction under s 14(3) IA 1986 that no direction of the court was necessary before they could dispose of assets belonging to the companies, even though the proposed sale had not been disclosed to the creditors.

HELD: intention was that administration proceedings should be a cheaper and more informal alternative to liquidation and therefore the administrators did not require the court’s leave.
– Neuberger J held that although an administrator needs time to obtain the necessary information, this should be done as quickly as possible and administrators should call a meeting of creditors as soon as reasonably feasible. Commercial decisions are for the administrator and NOT THE COURT and an application for directions should ONLY be made where there is a point of principle in issue or a dispute as to the appropriate course of action to be taken. Where an administrator needs to make an urgent decision, they should CONSULT THE CREDITORS TO THE EXTENT POSSIBLE.

Question 26

What’s a pre-packaged sales in administration?

Answer 26

Where the business of an insolvent company is prepared for sale to a selected buyer prior to the company’s entry into administration. The agreed sale is carried out by an insolvency practitioner shortly after their appointment.

Often the pre-pack purchaser will be one or more of the existing owners or directors of the insolvent company.

They are controversial - particularly where sale is to existing members or management.

• Concern: is that creditors given insufficient info to know whether sale was in best interests.
• Led to calls of greater transparency - Association of Business Recovery Professionals issued a Statement of Insolvency Practice (SIP) in 2013, requiring clear, comprehensive and timely explanations to creditors following pre-packaged sales.

Question 27

Examples of administration?

Answer 27

Debenhams (position as at May 2020)
- appointed administrators once again in May 2020 to protect itself from its creditors. Creditors were considering using winding-up orders to get paid. Although the company closed 22 stores in 2020 and is expected to close 28 in 2021, the new administration is likely to hasten the demise of many more of its outlets in the longer term. Although its online operations were supplying customers, all its stores were in lockdown. It had heavy debts of around £600m. The company was loss-making and without the sales revenue from its existing stores it was in deep trouble. Debenhams closed its Irish division permanently, which had eleven stores, 958 staff and 300 concessions, and also closed its Hong Kong and Bangladeshi subsidiaries.

Cath Kidston (position as at May 2020)
- The fashion and accessories chain appointed administrators in April 2020. In May 2020 it announced that it would close its UK branches, concentrating on Asia, the wholesale business and online sales. Like many fashion retailers, the company had longstanding problems in maintaining sales and profitability. It lost £27m between 2018 -2020, resulting in its closing stores and cutting head-office staff. There were 200 stores globally. All 60 UK sites closed, with only 32 of its 941 UK staff being retained.
The company's owners, Barings Private Equity Asia, bought it out of administration on a pre-pack basis, having previously tried to sell it. Finances were so poor towards the end that initially Cath Kidston announced that they would only be paying part of the wages owed to employees. After intense adverse publicity, the company agreed to make payments in full, but up to a week late.
The company continued to trade in the UK as an online-only retailer.

Question 28

What’s administrative receivership?

Answer 28

RARE

Procedure which allows a secured creditor to appoint an administrative receiver to seek repayment of the secured debt. It is an individual procedure (benefitting only the appointing creditor) rather than a collective procedure which looks to benefit all creditors such as administration.

No statutory moratorium with administrative receivership which means that the procedure often leads into liquidation.

This procedure has been restricted in use since 15 September 2003 when the Enterprise Act 2002 came into force. Administrative receivers can only be appointed by qualifying floating charge holders:
• Where the charge was created prior to 15 September 2003 or
• Where one of the statutory exceptions applies.

Question 29

What is liquidation?

Answer 29

Process by which a company’s business is wound up and its assets transferred to creditors and (if there is a surplus of assets over liabilities) to its members.

Company will then be removed from register and dissolved.

MOST COMMON type of insolvency procedure: 2019 more than 87% of company insolvencies were liquidations.

Can be solvent companies too.

Liquidation is not a rescue mechanism and a liquidator has only very limited powers to carry on the business of a company. They will usually close a company’s business and dismiss employees very soon after their appointment. They will usually sell assets on a piece-meal basis rather than selling the assets and business as a going concern. The statutory moratorium which applies in a liquidation is very limited.

For these reasons, it is common for companies to enter into liquidation after having been through a different insolvency procedure (eg administration) first.

Question 30

Liquidator’s function?

Answer 30

To realise the company’s assets for cash, determine the identity of the company’s creditors and the amount owed to each of them and then pay a dividend to the creditors on a proportionate basis relative to the size of their determined claims (creditors of the same rank are said to rank “pari passu”).

Question 31

Where is the ranking of creditors’ claims set out?

Answer 31

IA 1986, IR (Insolvency Rules) 2016 and general law.

Question 32

Types of liquidation? (2)

Answer 32

1. Compulsory liquidation - dissolution 3 months after notice by liquidator to Registrar of winding up.
2. Voluntary liquidation – which is further subdivided into: dissolution 3 months from filing to liquidator of final accounts and return.
   • Members’ voluntary liquidation
   • Creditors’ voluntary liquidation.

On dissolution - company ceases to exist.

Question 33

What’s 1 COMPULSORY LIQUIDATION? What’s the process?

Answer 33

Court-based process for placing a company into liquidation.

Applicant presents winding up petition to court - applicant requests court to make order on a number of statutory grounds.

When court grants petition; order operations in favour of all the creditors and contributories.

Official Receiver will become liquidator and continue until another person appointed (s 136(2) IA 1986. Official Receiver will notify Companies House and all known creditors of the liquidation. The Official Receiver has the power to summon separate meetings of the company’s creditors and contributories for the purpose of choosing a person to become the liquidator of the company in their place (s 136(4)).

Question 34

Who can apply for a winding up order? (7)

Answer 34

1. a creditor;
2. the company (acting by the shareholders; this would happen where there are insufficient assets in the company to fund a voluntary liquidation);
3. the directors (by board resolution); again, this would happen where there are insufficient assets to fund a voluntary liquidation;
4. an administrator;
5. an administrative receiver; 6. the supervisor of a CVA; and
6. the Secretary of State for Business, Energy & Industrial Strategy (on public policy grounds).

Question 35

Grounds for compulsory winding-up petition? (7)

Answer 35

s 122(1) IA 1986:
• The company is unable to pay its debts.
• It is just and equitable for the company to be wound up.
• The company has passed a special resolution that it is to be wound up by the court.
• The company is a public company and has not issued the requisite share capital and more than a year has passed since its registration as a public company.
• The company is an old public company within the meaning of the Consequential Provisions Act.
• The company does not commence its business within a year from its incorporation or suspends its business for a whole year.
• There has been a moratorium for the company under s. 1A IA1986 which has come to an end and no voluntary arrangement has been approved in relation to the company.

Question 36

More detail on • The company is unable to pay its debts.

Answer 36

MOST COMMON GROUND: s 122(1)(f): evidenced by (s 123):

1. Failure by company to comply with a creditor’s statutory demand (written demand in a prescribed form requiring the company to pay a specific debt).
   - -> The statutory demand can only be used if the debt exceeds £750 and is not disputed on substantial grounds. Company 21 days in which to pay the debt, failing which the creditor has the right to petition the court to wind up the company.
2. The creditor sues the company, obtains judgment and fails in an attempt to execute the judgment debt.
3. Proof to the satisfaction of the court that the company is unable to pay its debts as they fall due (the “CASH-FLOW TEST”). The cash flow test is usually satisfied by going through the statutory demand process in 1 above but that is not essential.
4. Proof to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account contingent and prospective liabilities (the “BALANCE SHEET TEST”) (Re Cheyne Finance plc).

BNY Corporate Trustee Services Ltd v Eurosail-UK 2007-3BL plc [2013]: court considered meaning of “unable to pay its debts” and particularly the distinction between the cash flow and balance sheet tests.

• Court held that the cash-flow test must include a consideration of debts falling due in the reasonably near future.
• However, once the court has moved beyond the reasonably near future, then the balance sheet test becomes the only sensible test. The burden of proof must be on the party asserting balance-sheet insolvency.

Question 37

Consequences of a winding up order?

Answer 37

s 127 IA 1986: certain dispositions of a company’s property, transfers of its shares and changes to its members will be void if made after the commencement of the winding up (i.e. during period between presentation of winding up petition and winding up order being made) – this is to prevent an insolvent company from transferring its assets to third parties at
the expense of its creditors.

Includes:
• Disposition of the company’s property;
• Transfer of the company’s shares;
• Altering the status of the company’s members.
Once a compulsory winding up order has been made:
• an automatic stay will be granted on commencing or continuing with proceedings against the company;
• all employees will be automatically dismissed, and
• the directors lose their powers and they are automatically dismissed from office.

Question 38

2 VOLUNTARY LIQUIDATION: 3 situations?

Answer 38

1. Where the company’s purpose according to the articles has expired and resolution of the shareholders: RARE
2. Where the company resolves by special resolution to wind up the company. The company must be solvent: MVL
3. Where the company resolves that it is advisable to wind up the company due to its inability to carry on its business. Here the company is insolvent: CVL

Question 39

MVL: Members’ voluntary winding up?

Answer 39

ONLY USED FOR SOLVENT COMPANIES.

Directors are required to swear a declaration of solvency stating that they have made a full enquiry into the company’s affairs and they have formed the opinion that the company will be able to pay its creditors in full, together with interest at the official rate, within a period not exceeding 12 months from the commencement of the winding up (s 89(1) IA 1986). - must also contain statement of company’s assets/liabilities as latest predictable date before making declaration.
– Any director making declaration of solvency who does not have reasonable grounds for opinion is liable for fine/imprisonment (s 89(4) IA 1986).

Members must then pass a SPECIAL RESOLUTION to place the company into MVL and an ORDINARY RESOLUTION to appoint a liquidator. The winding up commences when the special resolution is passed (s 84(1) and s 86 IA 1986).

Question 40

Conversion of MVL to CVL?

Answer 40

If on MVL liquidator considers company will be unable to pay debts in full together with interest within period in declaration; must change from MVL to CVL by going through procedural conditions in s 95.
–> involves the liquidator preparing and sending a statement of the company’s affairs to the company’s creditors.

Creditors may then nominate person to be liquidator - most cases will be insolvency practitioner who was appointed to deal with the MVL. CVL takes effect from date of nomination of liquidator.

Question 41

CVL: creditors’ voluntary winding up?

Answer 41

Form of insolvent liquidation commenced by resolution of the shareholders, but under the effective control of the creditors who can choose the liquidator.

–> when directors’ declaration of solvency has not been made, the liquidation will be a creditors’ voluntary liquidation.

Procedure is for shareholders to pass special resolution to place company into CVL. May also nominate person to be liquidator; but in any event within 14 days of the special resolution being passed the directors of the company must ask the company’s creditors to either approve the nominated liquidator or put forward their own choice of liquidator. Where the creditors’ choice of liquidator differs from that of the company’s shareholders, the creditors’ nomination will take precedence.

The directors must also draw up a statement of the company’s affairs (setting out the company’s assets and liabilities) and send it to the company’s creditors.

Question 42

Role of the liquidator?

Answer 42

Terminates the management powers of the company’s directors
Powers are transferred to the liquidator together with their fiduciary duties, meaning that liquidators must act in good faith, avoid conflicts of interest and not make a secret profit (Silkstone and Haigh Moore Coal Co v
Edey

Liquidator must be either a qualified Insolvency Practitioner (s 230 IA 1986) or the Official Receiver (appointed by the court in the short term) and acts as an officer of the court.
The liquidator in both a CVL and a compulsory liquidation have extensive statutory powers. The principal functions of a liquidator in a winding up by the court are:
• To secure and realise the assets of the company then distribute to the company’s creditors (s 143 IA 1986); and
• To take into his custody or under his control all the property of the company (s 144 IA 1986).

Question 43

Liquidator’s powers to manage the company?

Answer 43

Part I to III Sch 4 IA 1986:
• Sell any of the company’s property;
• Execute deeds and other documents in the name of the company;
• Raise money on the security of the company’s assets;
• Make or draw a bill of exchange or promissory note in the name of the company;
• Appoint an agent to do any business that the liquidator himself is unable to do;
• Do all other things that may be necessary to wind up the company’s affairs and to distribute its assets.
• Carry on the business of the company, but only to the extent that is necessary for the beneficial winding up of the company.
• Commence or defend court proceedings in the name of the company, for example to recover debts owed to it or dispute debts alleged to be owed by the company.
• Pay debts and compromise claims.

Question 44

Liquidator’s powers to avoid certain transactions?

Answer 44

Have a duty to preserve the company’s property and to maximise the value of the company’s assets available for distribution. They are empowered to avoid certain antecedent transactions in order to maximise the amount of assets available for distribution to creditors as follows:
▪ Disclaim onerous property (s178 IA 1986);
▪ Apply to court to set aside a transaction at an undervalue (s238 IA 1986);
▪ Apply to court to set aside a preference (s 239 IA 1986);
▪ Apply to court to set aside, or vary the terms of, an extortionate credit transaction (s 244 IA 1986);
▪ Claim that a floating charge created for no new, or inadequate, consideration is invalid (s 245 IA 1986);
▪ Apply to court to set aside a transaction that will defraud creditors (s 423 IA 1986). Note that many of these powers also apply to administrators.

Question 45

Statutory order of priority on winding up? - where are the rules laid out?

Answer 45

Complex rules: these rules have no single source: found in different parts of;

• IA 1986
• IR 2016
• General law

Administrators may also pay dividends to unsecured creditors if they have court permission to do so and the rules set out below will also apply to them. It should also be noted that the statutory order of distribution can be affected by priority or subordination agreements entered into by creditors under which one class of creditor agrees to rank behind another.

Question 46

What is the statutory order of priority on winding up?

Answer 46

This is a generic summary;
—–> summarises the cumulative effect of these rules. This order assumes that that there is a qualifying floating charge (QFC) granted on or after the Relevant Date (15 September 2003).

1. Liquidator’s fees and expenses of preserving and realising assets subject to fixed charges.
2. Amount due to fixed charge creditor out of the proceeds of selling assets subject to the fixed charge.
3. Other costs and expenses of the liquidation.
4. Preferential creditors (the first tier and then the secondary tier).
5. Creation of the prescribed part fund (if available) for unsecured creditors.
6. Amount due to creditors with floating charges.
7. Unsecured/trade creditors (including payment of the prescribed part). 8. Interest owed to unsecured creditors.
8. Shareholders.

Question 47

What are 1. Fixed charge assets under (1)?

Answer 47

1. Liquidator’s costs of preserving and realising assets subject to a fixed charge
2. Fixed charge creditors (in respect of assets subject to a fixed charge)

The proceeds of selling assets which are subject to a fixed charge (or mortgage) must first be used to pay off the debt secured by such charge (or mortgage). The proceeds will be paid net of the liquidator’s costs and associated fees of realising the assets (that is, net of sums falling into the first category of priority above). If the proceeds are not sufficient to discharge the debt in full, then the creditor must await payment of the balance at an appropriate later point in the order of priority – which will depend on whether or not the same debt was also secured by a floating charge.

Question 48

2. Assets subject to the floating charge (all assets)?

Answer 48

Next in line is remaining assets - they are realised and the following proceeds applied—»

Question 49

3. Other costs and expenses of the liquidation?

Answer 49

All other costs and expenses of the liquidation, including the costs of selling assets secured by a floating charge and the costs and expenses incurred in pursuing litigation (such as actions in respect of wrongful trading or voidable transactions). Such litigation will require prior approval from preferential creditors and floating charge holders, or alternatively from the Court, otherwise the liquidator cannot claim the costs of litigation.

The reason for this rule is that it is these creditors who will effectively pay the costs of litigation should it fail.

Question 50

4. Preferential debts (Schedule 6)?

Answer 50

The Enterprise Act 2002 removed the preferential status of certain Crown debts, previously payable ahead of other creditors, but this has now been reinstated. For insolvencies occurring on or after 1 December 2020, there will be two tiers of preferential debts….

FIRST TIER:

• employees remuneration - due in the four months before the ‘relevant date’ (generally the date of the winding up resolution or petition), but subject to a maximum of £800 per employee, plus accrued holiday pay and certain contributions owing to an occupational pension scheme.
• If company is bank or building society - certain retail deposits that are insured by the Financial Services Compensation Scheme will also be preferential debts in the first tier.

SECONDARY TIER:
- debts due within certain periods to HM Revenue and Customs in respect of PAYE, employee national insurance contributions and VAT.

Question 51

5. Prescribed part fund?

Answer 51

The Enterprise Act 2002 introduced the “prescribed part” fund into the IA 1986 to increase the chance that unsecured creditors would get paid something in a liquidation - the ‘ring-fenced’ fund.

Calculated by reference to a certain percentage (the ‘prescribed part’) of the company’s ‘net property. Set aside for distribution to company’s unsecured creditors - s176A. ‘Net property’ means the proceeds of selling property other than that which is subject to a fixed charge, after deduction of the liquidator’s expenses and any preferential debts.

Pot of money is reserved at this stage to be shared rateably among the unsecured creditors when they are paid (ie at step 7) — should be noted that for this purpose, a floating charge holder who suffers a shortfall on floating charge realisations does not share in the prescribed part fund, although the shortfall does constitute an unsecured claim against the company.
Note: the ring-fencing provisions only apply to realisations from floating charges created on or after the Relevant Date.

Question 52

6. Floating charge creditors?

Answer 52

Remaining realisations from assets subject to floating charges to floating charge holders themselves.

Question 53

7. Unsecured creditors?

Answer 53

i.e.:
· ordinary trade creditors who have not been paid;
· secured creditors to the extent that the security is invalid or assets subject to the security have not realised sufficient funds to pay off the secured debt.

Unsecured creditors rank/abate equally: “pari passu” rule.

i.e. - if company has only two creditors (A and B) and creditor A has a claim against the company of 100 and creditor B has a claim against the company of 50 (making total claims of 150) but the assets available for distribution to the creditors are 75, creditor A will receive 50 and creditor B will receive 25.

Note that secured creditors who have not been paid in full from the realisation of assets subject to their security can only claim as unsecured creditors against realisations from unsecured assets, so they are not eligible to any payment from the prescribed part fund.

Question 54

8. Interest on unsecured (including preferential) debts?

Answer 54

Interest accruing on unsecured debts from the commencement of the winding up.

Question 55

9. The shareholders?

Answer 55

The shareholders who participate in the equity of the company will rank last. However, their rights, as between themselves, will depend on the rights attributable to their particular class or classes of shares. This will be written into the Articles of Association. For example, preferential shareholders may have preferential rights to a return of their capital on a winding up in priority to ordinary shareholders.

It is clear that in most insolvent liquidations, the shareholders are unlikely to receive any value from their shares, since they are the last to be paid in the statutory order of priority.

The benefit of fixed charges is also clearly illustrated – fixed charge holders receive their value first and are therefore more likely to receive their money back in a liquidation.