Corporate Insolvency Flashcards
What is the meaning of insolvency?
When a company is unable to pay its debts (and a court may make a winding up order in respect of the company)
What are the 4 situations in which a company may be deemed unable to pay its debts?
I.e. insolvent
- Unable to pay debts as they fall due (cash flow insolvent)
- Liabilities greater than assets (balance sheet insolvent)
- Does not comply with statutory demand for debt of over £750
- Has failed to pay creditor to satisfy enforcement of a judgement debt
What are directors’ obligations towards companies in financial difficulties?
- Must continually review financial performance of company and recognise when facing financial difficulty (e.g. unpaid creditors putting pressure on, bank refusing to increase overdraft facility etc.)
- Need to decide what action to take on behalf of company
What are the options a director has for a company facing financial difficulties?
- Do nothing (risk of personal liability and breach of directors’ duties)
- Do a deal - informal/formal arrangement with some/all of company’s creditors (less/more time to pay)
- Appoint administrator - collective formal insolvency procedure
- Request appointment of receiver - secured creditor enforces security by appointing receiver who sells secured assets with a view to paying sale proceeds to secured creditor
- Place company into liquidation
What is the difference between an informal and formal arrangement?
- Informal = not governed by statute (but contractually binding)
- Formal = governed by statute (and can bind creditors even if they did not vote against)
Why would a company use an informal arrangement?
Avoid time/cost of formal insolvency arrangements and consequences (i.e. bringing company to end)
What is a creditor agreement and what are the benefits?
Informally negotiating with creditors to avoid the time and cost of formal insolvency arrangements or proceedings or the consequences where they might bring the life of the company to an end
What may a company have to do to obtain a creditor agreement?
- Grant new/additional security
- Replace directors/senior employees
- Sell failing businesses/subsidiaries or profitable ones to raise cash
- Reduce costs (redundancy, closing unprofitable business)
- Issue new shares to creditors (debt for equity swap)
What is a moratorium?
A period in which creditors cannot exercise their usual rights/remedies:
- No creditor can enforce proceedings
- Stay of all legal proceedings and no new proceedings can be brought
- No winding up/administrative procedures can be commenced
Creates breathing space for company to resolve situation
What types of companies are excluded from applying for statutory moratoriums?
Financial service firms (banks and insurance companies), and companies which are party to capital markets arrangements of over £10m
When would a pre-insolvency moratorium be used?
For struggling companies not yet in an insolvency process
Buys time to reach informal/formal arrangement with creditors
What two statements must a company file at court to obtain a pre-insolvency moratorium?
Filing documents at court inc:
- Statment that a company is (likely to become) unable to pay debts as they fall due
- Statement from a Monitor (licensed insolvency practicioner - usually accountant) that a moratorium will result in the rescue of the company in their view
What does a Monitor do re application and during pre-insolvency moratorium?
- In application: submits statement that a moratorium in their view will result in rescue of company
- During: supervises moratorium
How long will a pre-insolvency moratorium last? How is it further extended and by who?
- For 20 business days - can be extended by directors for further 20
- Further extension possible with consent of requisite majority of creditors or a court order
What is the maximum period for a pre-insolvency moratorium?
One year (subject to a court order to extend further)
When will a moratorium automatically terminate?
- Company enters liquidation/administration; or
- When CVA approved or court sanctions restructuring plan
What is the difference between pre-moratorium and moratorium debts?
- Pre-moratorium debt = debts which have fallen due before/during moratorium from obligation incurred before it started
- Moratorium debt = debts which fall due during or after moratirum from obligation incurred during
Moratorium debt usually relate to payments for goods/services ordered by company during moratorium period
Must both pre-moratorium and moratorium debts be repaid during mortatorium?
- Pre-moratorium debts = do not have to be paid (‘statutory repayment holiday’)
- Moratorium debts = must be paid (so company must be ‘cash flow solvent’ to pay its way through moratorium period)
What does the statutory repayment holiday not apply to?
I.e. what pre-moratorium debts do still have to be paid?
- Loans under a contract involving financial services (company remains liable to pay back sums to a bank which made a loan to it before moratorium)
- Monitor’s remuneration/expenses
- Goods and services supplied during moratorium
- Rent re period during moratorium
- Wages/salary/redundancies
What is the main advantage of a formal agreement?
Will be legally binding if requisite majorities of creditors/shareholders vote in favour even if some of those creditors:
- Voted against
- Did not vote at all
- Did not receive notice of relevant procedure
What are the 2 types of formal arrangement and what is the difference between them?
- Company Voluntary Agreement (CVA) - creditors agree to part payment of debt and/or a new extended timetable for repayment
- Restructuring Plan - compromises company’s creditors and shareholders and restructures liabilities so company can return to solvency
How is the court involved in a CVA?
No requirement for court approval - but CVA proposal must be reported to court
Who implements and supervises a CVA? What happens to the company directors?
- The supervisor (an insolvency practicioner) supervises/implements
- The company directors remain in office and run affairs subject to CVA’s terms
What can a CVA be used together with?
Administration or liquidation
E.g. agree reduction in rent for retail brand as they attempt to continue trading
How is a CVA set up?
What will directors do? What will nominee do? How will voting happen?
- Directors draft CVA proposal and submit it to nominee they have appointed
- Nominee reports to court on whether company’s creditors and shareholders should be asked to vote on CVA proposal
- Creditors vote on proposal and meeting of shareholders takes place after
- Nominee reports to court that CVA has been approved and becomes supervisor
How long must a nominee give to creditors to vote on CVA proposal?
At least 14 days
When must a meeting of the shareholders take place after the creditor’s decision?
Within 5 days of the creditors’ decision
How is a CVA approved (voted on)?
3 requirements
CVA will be approved if:
1. At least 75% in value of debts owed of those voting on proposal vote in favour
2. 50% of unconnected creditors don’t vote against; and
3. A simple majority of shareholders vote in favour
Creditors’ votes always prevail even if members vote against
Unconnected creditor = not a shareholder or director of company proposing CVA or a related company
Is the CVA binding on all creditors?
- Binds on all unsecured creditors (whether voted for or against)
- Secured and preferential creditors not bound unless unanimously consent
Major disadvantage of CVA
Until when can a creditor challenge a CVA and on what grounds?
Can challenge within 28 days of CVA approval on grounds of unfair prejudice
I.e. CVA treats one creditor unfairly, material procedural irregularity
When does a CVA become binding?
At the end of the 28 day challenge period
What is the supervisor’s role during CVA?
- Agree creditors’ claims
- Collect in unsecured funds to pay dividends (sums/proportions of sums owed)
- Ensure company complies with CVA obligations
What will a supervisor do once a CVA has been completed?
Send a final report on implementation of proposal to all shareholders/members and creditors who are bound by the CVA
What is the main advantage and disadvantage from the company’s POV of a CVA?
- Advantage = directors remain in control, company can continue to trade subject to CVA proposal terms
- Disadvantage = cannot bind secured or preferential creditors without consent
Why would trade creditors or landlords prefer a CVA?
- Trade creditors likely to recover more than if company goes ito administration/liquidation
- Landlords may prefer to received reduced rent than have empty properties generating no income at all
Does a restructuring plan require court approval?
Yes - will only then become binding
Who will a restructuring plan bind?
All creditors including secured creditors
How is a restructuring plan voted on?
- Creditors and members split into classes
- Each class votes on plan
- Plan must be approved by at least 75% on value of those voting in each class
Who is a court able to exclude from voting on a restructuring plan?
Creditors and shareholders if they have no genuine economic interest in the company even if they are affected by the plan
What is a cross class cram down?
Where one rank of creditor can force the plan on another class of creditor who voted against the plan
Can a court sanction a cross class cram down even if one or more classes do not vote to approve the plan?
Yes if it is just and equitable to do so
What is a cram down of shareholders?
Forcing shareholders to accept a debt for equity swap in which creditors are able to hold new shares in company in place of their debt claims
Why might a restructuring plan be used over a CVA?
- Can compromise rights/claims of secured creditors and shareholders (CVA cannot)
- Can be sanctioned by the court to bind all creditors even if requisite majority approval is not obtained in every voting class
Restructuring advantage!
What can the restructuring plan be used alongside?
- Pre-insolvency moratorium
- Administration/liquidation
Why would a CVA be used over a restructuring plan?
No court sanction required so can be quicker and cheaper to implement
CVA advantage!
What is the difference between a CVA and restructuring plan in terms of who they bind?
Advantage and disadvanatage
- CVA binds all unsecured creditors
- Restructuring plan binds all creditors and shareholders
What is the difference between a CVA and restructuring plan in terms of who can initiate?
- CVA = directors, liquidator or administrator
- Restructuring plan = company, creditor, member, liquidator or administrator
Advantages and disadvantages of CVA and restructuring plan?
CVA
+ Advantage: No court sanction (quicker and easier)
- Disadvantage: Only binds unsecured creditors
Restructuring plan
+ Advantage: Binds all creditors and shareholders even if some classes do not approve
- Disadvantage: Court process can be costly and time-consuming
What is administration?
In whose interests does the administrator act?
A collective procedure whereby administrator acts in interests of creditors as a whole rather than interest of particular creditor
What are administrators officers of and to whom do they owe duties?
The court - owe duties to court and creditors even if they are appointed out of court
Must be licensed insolvency practicioners
What are the three (descending) statutory objectives of administration?
- Rescue company as a going concern, if not achieveable then…
- Achieve a better result for company’s creditors as a whole than would be likely if company wound up, it not reasonably achieveable…
- Realise company’s property to make a distribution to one or more secure or preferential creditors
2nd one most likely to be achieved
What are the 2 different procedures for the appointment of an administrator and what is the main difference?
- Court procedure (appointed by court)
- Out of court procedure (not appointed by court, but still filed)
Where the company is/is likely to become unable to pay its debts, who can apply for the court procedure for appointment of administrator?
The company, directors, creditor, supervisor of CVA or liquidator
What must court consider when deciding to make administration order?
If that appointment is reasonably likely to achieve the purpose of administration
When does an interim moratorium come into effect and last until in context of a court procedure administrator appointment?
- Comes into effect = on application to court
- Lasts = until administration order made/court dismisses application
When would the out of court procedure be unavailable to directors (and so the court procedure would have to be used)?
As court procedure fairly uncommon
- Where creditor has begun winding up proceedings against company and directors wish to appoint administrators before court makes winding up order
- If court makes administration order = pending winding up proceedings are automatically dismissed
For the out of court procedure for appointment of an administrator, which two persons can appoint?
- Directors/company
- Holder of a qualifying floating charge (QFC)
What 2 features make a qualifying floating charge (QFC)?
A floating charge which:
- Together with any other security holder of floating charge holds relates to the whole/substantially the whole of company’s property; and
- The document creating it provides that the holder has the power to aappoint an administrator
Most floating charge held by creditors will be QFCs e.g. if a bank lends to a company, it will usually request a QFC to secure the loan
How would the directors/company appoint an administrator out of court if they have not granted a QFC? When would administrator’s appointment take effect?
- File a notice of intention (NOI) at court
- Not less than 10 business days later, file a notice of appointment at court (appointment takes effect)