Receivership and Administration

Question 1

What is receivership?

Answer 1

A way for secured creditors to enforce their security and take control of the company’s assets through their appointed receiver.

Trumps the other insolvency proceedings.

A receiver is appointed under the terms of a floating charge
it is a swift process and control of the company is passed from the management to the receiver.

Question 2

What are the receiver’s powers?

Answer 2

Contained within the terms of the debenture and in Schedule 1 of the IA86:

• to manage a company’s business
• to borrow money
• to take possession of assets
• to institute legal proceedings.

Directors are not relieved of their statutory duties - must co-operate with receiver.

Question 3

What is the role of directors in receivership?

Answer 3

Directors are not relieved of their statutory duties - must co-operate with receiver.

Question 4

What is the position of the receiver in the company?

Answer 4

Receivers act on the behalf of the floating charge holder and for the company.

Primary purpose is to realise the assets of the company for the benefit of the floating charge holder.
• The case of Medforth v Blake
• Introduced idea of reasonable competence
• Duty to manage property with due diligence

Question 5

What are the duties of the receiver?

Answer 5

To ensure preferential creditors are paid

A duty to prepare a report within 3 months of appointment and to call a meeting of unsecured creditors.

Question 6

What order must the receiver pay creditors?

Answer 6

Secured creditors (fixed charges)
Preferential creditors (unpaid wages, accrued holiday pay)
The floating charge holder

Question 7

Describe the case of WH Brown Construction

Answer 7

• Dundee based firm entered receivership in August 2012
• Entered receivership at the request of directors
• Trading has ceased
  
  • No attempt at rescue
  • Receivers will confirm debts and then realise assets to make distributions to secured and preferential creditors
• According to employee reports, there were problems within the company for the past 12 months

Question 8

What are the issue with ranking of claims, agency and receiver motivation?

Answer 8

• Ranking of claims naturally has implications for the amount each class of creditor receives
• In addition, the unique agency relationship may lead to collective asset realisations failing to be maximised
  
  • Performance ratio may fall as security ratio decreases
• The losers would be the unsecured creditors

Question 9

What are the solutions to the issues with ranking of claims, agency and receiver motivation?

Answer 9

• Reduce preferential claims
○ But low security ratio lowers the performance ratio
• Set aside part of floating charge asset realisations for unsecured creditors

Question 10

What is the relationship between receivership and rescue?

Answer 10

There is no moratorium on enforcement of creditor claims.
The receiver is not obliged to rescue the company. - Outcomes may be driven by the interests of the secured creditor.

However, receiver can step in quickly to the distressed company - may be able to preserve value, many companies in receivership are sold as a going concern (may be better for creditors in the long run).

Question 11

What is the relationship between receivership and governance?

Answer 11

The idea of debt as an ex-ante corporate governance mechanism.

Corporate governance is enhanced through concentrated debt holdings.
- Main lender acts as a whilstleblower.

Question 12

Why is it hard to monitor corporate governance?

Answer 12

monitoring and information gathering is costly.

There may be too many creditors:

• individuals face higher information gathering costs
• there may be hold out problems (race to the finish)

Question 13

What is the control based theory of receivership?

Answer 13

Receivership ensures high quality of decision making.
Ability to breach pre-receivership contracts
Control vs priority.

Question 14

What are the problems with receivership?

Answer 14

Lack of accountability to unsecured creditors.
Narrow aims
Collective procedure and the European Insolvency Regulation.
Not a collective procedure - the relationship between the receiver and the floating charge creditor was seen as too “cosy” and wasn’t in the other creditor’s interest.

Question 15

What is administration?

Answer 15

A form of rescue procedure.
Gives a company breathing space to allow a return to financial health.
Once the petition seeking the administration order is presented to the court, creditors are prevented from taking any actions to recover their debts

• Has become more streamlined and hence should be cheaper and more accessible
  
  • An ‘in court’ procedure and ‘out of court’ procedure

• 2002 legislation streamlined the procedure - made it cheaper and more acceptable.
Management are displaced.

Question 16

How is the process of administration started?

Answer 16

• The following parties can apply for an administration order
  
  • The directors
  • A floating charge creditor
  • The company itself
  • The creditors - have to use in court procedure. Have to demonstrate to the directors or the shareholders that the company is unable to pay its debts.

The company must be insolvent in all applications except those made by the floating charge creditor

Question 17

Who can use the out of court procedure for administration?

Answer 17

floating charge creditor and the directors.

Question 18

When can administration be filed when the company is solvent?

Answer 18

Only when filed by the floating charge creditor - just have to show that the company has breached the terms of lending.

Question 19

What is the position of the floating charge creditor in administration?

Answer 19

○ The floating charge creditor is an effective monitor, in a better position to monitor and know when to take action. Ideally want to take action before insolvency.
○ Floating charge creditors still have a lot of control (fairly powerful control rights).

Question 20

Describe the in court procedure for administration.

Answer 20

As soon as the petition is made to court, the company is given a legal breathing space.

Needs a statement from the proposed administrator - has to form a statement of whether or not the administration process is likely to be a success.

Any winding up petitions are dismissed.

Company is protected straight away.

Question 21

Describe the out of court procedure for administration.

Answer 21

(Only directors and floating charge holders)
Lodge papers in court.
Notice of intention to appoint administrator.
Moratorium immediately effective.
Administrator tends to be appointed on the same day.
Directors should know what is going on in the company, offering cheaper, less cumbersome procedure potentially leads to a better outcome.

Company is protected straight away. Creditors cannot recover their debts

• The floating charge creditors choice of administrator that takes precedence. Gives them control.

Question 22

What is the role of the administrator?

Answer 22

To manage the affairs, business and property of the company.
Take charge of the company.
Must prepare proposals - outline objectives of administration and how they will achieve them (must be approved by creditors)
Administrators must achieve the objective of administration.

Question 23

What are the powers of administrators?

Answer 23

Displace management.

Power to remove/appoint directors.

Question 24

What is the role of a creditors committee?

Answer 24

Creditors’ committee may be established - should approve administrators fees, and monitor insolvency practitioners but in practice this rarely happens.

Question 25

What is the main problem with insolvency in the UK?

Answer 25

having effective oversight of insolvency practitioners. Who does this? - most likely financial institutions.

Question 26

When will the court grant the administration order?

Answer 26

When the company is unable to pay its debts.

Question 27

What are the three potential objectives of administration?

Answer 27

• The purpose of the administration order will achieve one of the following objectives:
○ The rescue of the company as a going concern or
○ A better realisation of assets than would be likely if the company was wound up or
○ To realise the property of the company in order to make a distribution to secured or preferential creditors

HIERARCHY OF OBJECTIVES. Can only move down if preceding objective is not achievable.
Administrator has to justify why they are not pursuing each objective to move onto the next one - hierarchy.

The objectives apply in and out of court.
In court - you have to show that the company is insolvent and cannot pay its debts.

Question 28

What are the decisions required when choosing what objective to follow?

Answer 28

Achievement of objective 1 may be significantly influenced by the administrator’s perception of existing management.

Can only move down to objective 2 if administrator thinks it is not “reasonable practicable” to achieve objective 1 or objective 2 would bring better return for the creditors.

Would only consider objective 3 if there was no going concern surplus or if the main lender is unwilling to fund.

Question 29

How must the administrators make his decisions in terms of the objectives of administration?

Answer 29

• Must perform his functions quickly and efficiently

* Must act in the interests of creditors as a whole.

Question 30

Describe objective 1, including problems

Answer 30

rescuing existing company in its existing form and returning it to existing shareholders. May bring in new management. Administrator will be significantly influenced by their perspective of management (skills, ability).

Problem - needs a lot of funding, need a viable company. DO not want a zombie entity (why would you try and save a company that is not economically viable)

Very few administrators pursue objective 1.

Question 31

Describe objective 2

Answer 31

The administration order is going to produce a better return on asset realisation than if we just liquidated the company. Aligned with the idea of business rescue.

Differentiate between company rescue (legal entity) and business rescue (underlying value).

Does usually achieve rescue in terms of business rescue rather than saving the legal entity.
Very similar to what is happening in receivership. Usually where most administration orders are pitched.

In order to save the business, the administrator will quite often continue trading the business.
What are the profitable parts of the business (to save) and package up the parts to sell.

Question 32

Describe objective 3

Answer 32

Only consider if no value in the business or company and make payments to secured/preferential creditors or both.
Objective 2 has a higher return to creditors than 3.
Administrator owes a duty of care to all creditors.

Question 33

How does an administration end?

Answer 33

• The administration ends at the earlier of
  
  • The date the purpose has been achieved or
  • 12 months from the date of the order (but can apply to court for an extension)

Question 34

What happens at the end of an administration?

Answer 34

• Company may be returned to control of directors
• The company may be liquidated or placed into a voluntary arrangement – process of winding up and striking off from company house records. If transferred continues trading from whatever entity it is in.
• In contrast to receivership which could go on for a long time, with little value created.
• Very difficult to complete an administration within 12 months. (quickly and efficiently.
• Can apply for extension but have to go to court which costs money.
• If have achieved objective 1 administration, you can return control to directors. Or if management are deemed unsuitable, they can be changed.
• Administration before CVA, gives breathing space but then try to get a CVA and agree terms for CVA.

Question 35

Describe the case of Rangers FC

Answer 35

Entered into administration on 14th Feb 2012.
They were clearly in financial distress.
They had an unsuitable business model.
The directors instigated the appointment.
‘Scottish Premier League’ imposed 10 points penalty for entering administration.

Administrators have to try and rescue the company:
- SPL rules effectively require this (each club owns a share in the league)

Administrators tried to agree a Company Voluntary arrangement.

High profile case, with HMRC (unsecured creditor) involved.

• Directors approached administrators.
• Offer from Charles Green was £8.5m
  
  • Would have given unsecured creditors a dividend of 9p per £
• At the creditors meeting to approve the CVA, HMR&C voted against it
  
  • Therefore not approved
  • HMRC have different agendas to pursue, in terms of creditors they should have approved, but couldn’t have because of the tax issues involved. Moral division.
  • Can’t be seen to support a company that doesn’t comply to tax rules.

• Administrators forced to sell club business and assets to newco and liquidate Rangers FC.
• Implication being that removed from what was then the ‘Scottish Premier League’
Newco had to start again

Question 36

What is the super creditor rule in football?

Answer 36

If a clube enters into insolvency, football creditors are paid in full in priority to any other creditor.
Only applies in football, means that certain creditors (super) are paid before others (anyone critical to maintaining the league).

Bypasses the insolvency act hierarchy.

Question 37

Who is a “football creditor”?

Answer 37

The league itself, other clubs, the club’s players and managers.

Question 38

What happens to a football club on insolvency?

Answer 38

• The Football League requires a club to transfer its share in the event of insolvency
  
  • The share is required in order to participate in the league
  • Maintain a competitive league – don’t have one club overspending and creating problems for other clubs in the league.

Question 39

What is the issue with HMRC in relation to football cases?

Answer 39

• PAYE and VAT used to take priority, however they are now unsecured claims.
• HMRC taking more cases to court. Say that the payment of football creditors contradicts insolvency law.
• HMRC pursuing more cases against football clubs since the loss of their preferential status
• Argue that payment of football creditors in priority contradicts insolvency law
  
  • Football creditors are unsecured creditors along with HMRC and other non-football creditors and should therefore rank equally with these creditors (the pari passu principle)

Question 40

What are recent developments in for football insolvency?

Answer 40

• R3 made a number of recommendations regarding the football rule – e.g. reducing the scope of the rule and a minimum dividend to unsecured creditors.

• The Football League responded by taking on board some of R3’s suggestions:
  * Removal of requirement for exit through the CVA procedure
  * On exit, the purchaser is required to pay creditors a minimum of 35p in the £ over 3 years (or face a further 15 point deduction in the next season)
  * Football creditor rule still in existence
  
  • In Scotland, the football creditor rule exists, although it has not been as tried and tested as it has been south of the border