Restructuring and insolvency

Question 1

• CIGA has introduced restrictions on the enforceability of termination (and other) clauses in most types of supply of goods and services contracts. A supplier may not terminate or rely on a contractual provision allowing it to do any other thing on grounds that:

Answer 1

· the counterparty has obtained a pre-insolvency moratorium,
· or the counterparty has entered into administration, liquidation or administrative receivership,
· or the counterparty’s creditors have approved a CVA,
· or the court has sanctioned a restructuring plan or a scheme of arrangement in relation to the counterparty.

• There is also a prohibition on suppliers making it a condition of any future supply that pre-insolvency debts owed to them must be paid. The effect of this prohibition is that suppliers must continue making supplies under the terms of the contract notwithstanding the company has entered one of the procedures listed provided that the company pays for any supplies made after the counterparty becomes subject to the relevant procedure.

Question 2

When do the CIGA prohibitions apply?

Answer 2

· apply to loans and most other types of financial contracts,
· prevent termination of a contract on other grounds, for example if the counterparty commits a default after it becomes subject to a restructuring/insolvency procedure, or where the supplier is entitled to terminate the contract pursuant to a contractual clause allowing termination by the giving of a notice (e.g. a three months’ notice termination provision).

Question 3

Entry requirements for pre-insolvency moritorium?

Answer 3

· directors must believe that the company is/likely to become unable to pay its debts; and
· the monitor must be of the view that rescue of the company as a going concern is likely.

Question 4

• Pre-insolvency Moratorium * Creditors’ rights are delayed or suspended while the moratorium exists, and the creditors cannot exercise those rights unless the court or the monitor allows. This includes the following:

Answer 4

· no creditor can enforce its security against the company’s assets;
· there is stay of legal proceedings against the company and a bar on bringing new proceedings against it;
· no winding up procedures can be commenced in respect of the company (unless commenced by the directors) and no shareholder resolution can be passed to wind up the company (unless approved by the directors);
· landlords cannot forfeit leases;
· retention of title creditors and lessors cannot take possession of their assets;
· no administration procedure can be commenced in respect of the company (other than by the directors); and
· no action can be taken to crystallise a floating charge (that is, turn it into a fixed charge).

Question 5

Types of restructuring arrangements?

Answer 5

• These procedures can be proposed alone or in combination either with a liquidation or, more commonly, an administration.
  · a Scheme of Arrangement under ss.895 - 901 (Part 26) CA 2006
  · a Restructuring Plan under Part 26A CA 2006 (introduced by CIGA 2020)
  · a Company Voluntary Arrangement under ss.1-7 IA 1986 (‘CVA’)

Question 6

• Scheme of Arrangement under ss.895 – 901 (Part 26)CA 2006?

Answer 6

• A scheme of arrangement is a formal arrangement or compromise made between the company and one or more classes of creditors and/or members.

Question 7

Requirements for a scheme of arrangement?

Answer 7

• The compromise or agreement must be agreed by three-quarters in value and a majority in number of each relevant class of creditors and/or members at a meeting (for which permission to convene is obtained from the court) and then sanctioned (i.e. approved) by the court.
• • Although there is no automatic moratorium on creditor actions or legal proceedings when a scheme is proposed, companies often succeed in obtaining formal/informal support from financial creditors before the scheme process begins. It is also possible to seek protection from the court against individual creditor action in certain circumstances.

Question 8

Who is a scheme of arrangement binding on?

Answer 8

The scheme will become binding on all the company’s creditors affected by it (including those who voted against it)when the court order sanctioning the scheme is delivered to the Companies Registry.

Question 9

Who uses scheme of arrangement?

Answer 9

because of the cost and complexity, in part due to the court’s involvement, schemes of arrangement have tended to be used to restructure debt obligations of companies with significant secured liabilities and/or complex funding arrangements with tiers of secured and/or unsecured debt, including by foreign companies which have borrowed money from lenders or other creditors under English law financing agreements.

Question 10

Key distinctions in a restructuring plan?

Answer 10

• Key distinctions are that:
  · Restructuring plans can only be used by companies which have or are likely to encounter financial difficulty. Restructuring plans must consist of a compromise or arrangement used to eliminate prevent or mitigate the impact of financial difficulties that a company is facing. The plan must be approved by at least 75% of each class voting, but there is no majority in number requirement (as there is for schemes). It may be possible to impose a restructuring plan on a dissenting (or, in some cases, disenfranchised) class in certain circumstances:
• the court may be able to exclude creditors and members from voting even if they are affected by the plan if they have no genuine economic interest in the company.
• the court may still sanction a plan if the requisite majority is not obtained in one of more classes if: none of the dissenting class would be worse off than in the relevant alternative; and at least one class who would have a genuine economic interest in the relevant alternative, votes in favour.
  · A restructuring plan can be thought of as more powerful than a CVA because it can compromise the rights and claims of secured creditors and shareholders. A CVA cannot do this.
  · The restructuring plan can also be thought of as more powerful than a scheme because in general, a scheme is only binding on those classes of creditors or shareholders who vote in favour of it.
  · Schemes of arrangement can be used by companies not facing distress. Restructuring plans can only be used by companies facing actual or prospective financial difficulty. In contrast, a scheme can be used by any company, solvent or otherwise.
  · An administrator and liquidator have the power to propose a restructuring plan, but in most cases it will be the directors who will do so. In certain circumstances, the directors might consider seeking the protection of a pre-insolvency or administration moratorium before commencing the restructuring plan procedure but, as with schemes, this rarely happens in practice.

Question 11

What is a CVA?

Answer 11

• A CVA is another procedure for achieving a compromise or arrangement between a company and its creditors but can only bind non-preferential unsecured creditors. A CVA is usually less costly and quicker than a scheme of arrangement or restructuring plan, mainly because it does not require the sanction of the court.

Question 13

Why are CVAs used?

Answer 13

• Often, the purpose of a CVA is to seek to put in place a timetable for the repayment (usually only in part) of liabilities owed to (usually) unsecured creditors. Alternatively, where rescue is not feasible, CVAs can be used to achieve a more efficient asset realisation and distribution to creditors than would be the case in a winding up.

Question 14

What do you need to implement a CVA?

Answer 14

• To implement a CVA, the directors of the company, usually advised by an Insolvency Practitioner acting as a nominee, formulate a written proposal for the repayment or restructuring of the company’s liabilities. The proposal will include a term that the nominee will act as the supervisor of the CVA once it has been approved.
• Note that a liquidator and an administrator have the power to propose a CVA. If they do so, they will be the nominee and supervisor of the CVA.

Question 15

What happens once a CVA proposal is finalised?

Answer 15

• Once the proposal has been finalised the nominee will seek creditors’ approval for the CVA using one of a number of permitted decision-making procedures provided for under the IR 2016.
• Once the creditors’ decision has been made, the nominee must call a separate meeting of the company’s shareholders.

Question 16

• Two creditor majorities are required if the CVA proposal is to be approved:

Answer 16

· (1) At least three-quarters in value of those creditors who vote on the nominee’s chosen decision procedure vote in favour of it. There is no requirement for a majority in number of creditors to vote in favour (in contrast to a scheme).
· (2) Those voting against the proposal must not be more than 50% in value of unconnected creditors(e.g. the claims of related companies must be ignored for this purpose). The members approve the CVA by passing an ordinary resolution.
* For voting purposes, a debt of an unliquidated or unascertained amount is valued at £1 unless the chair places a higher value on it. This has been key to allowing CVAs to be used to restructure leasehold liabilities.

Question 17

Effect of a CVA?

Answer 17

the CVA proposal binds all creditors: those who voted for the CVA, those who voted against it, those who did not vote at all and those creditors who did not receive notice of the decision-making procedure adopted to approve the CVA All those creditors’ claims are then dealt with in accordance with the terms of the CVA.
* A CVA cannot compromise the rights of a secured creditor (including the right to enforce security) or the rights of a preferential creditor without that creditor’s consent.

Question 18

• A creditor can challenge a CVA within a 28 day period (commencing with the date of filing at court of the nominee’s report on the approval of the CVA, or within 28 days of the day on which the creditor became aware of the decision procedure having taken place) on grounds of:

Answer 18

· ‘unfair prejudice’: i.e. one creditor has been treated unfairly under the CVA (compared to another creditor or to what the creditor’s position would have been if the company had entered into an insolvency procedure).
· OR
· ‘material irregularity’: relating to the procedure which the company has followed in seeking the approval of the CVA (such as the way that creditors’ votes were calculated).
* A CVA becomes binding on all creditors at the end of the 28 day challenge period.

Question 19

• The supervisor’s role in a CVA?

Answer 19

where the directors propose a CVA, the directors remain in place during the CVA and will be able to exercise their usual powers unless the CVA proposal provides otherwise. The supervisor’s role will be to agree creditors’ claims, collect in the funds which the company is to use to pay dividends to the creditors on their agreed claims and generally ensure that the company complies with its obligations under the CVA. When a CVA has been completed, the supervisor will send a final report on the implementation of the proposal to all members and creditors who are bound by the CVA, then step down from their position and the company will carry on under the management of its directors in the normal way.

Question 20

• CVAs used in conjunction with other pre-insolvency and insolvency procedures?

Answer 20

A company may consider obtaining a pre-insolvency moratorium or going into administration or liquidation before proposing a CVA because a liquidator and an administrator have the power to propose a CVA. This is to receive the benefit of a moratorium to prevent creditors from taking hostile action during the period between the sending out of notice to the creditors of the CVA decision procedure and the holding of the procedure itself which will be at least 14 days. This has not been a frequent occurrence in practice to date.

Question 21

Moratorium during administration?

Answer 21

• An important feature of administration is the creation of a moratorium which continues throughout the period of the administration. This provides the company in administration with a breathing space to achieve the purpose of the administration, as the moratorium prevents creditors without court or administrator consent from exercising their usual rights and remedies. Examples of creditor actions prevented during a moratorium include: the right to enforce their security; or in the case of a landlord, from attempting to terminate a lease by exercising a right of re-entry; or in the case of a creditor who has supplied goods on retention of title, from attempting to take possession of the goods to which it has title.

Question 22

How can administrators be appointed?

Answer 22

• Administrators can be appointed either by court order or out of court

Question 23

Administrator’s primary objective?

Answer 23

• The primary objective of the administrator is the rescue of the company as a going concern.
• administrator’s objective will be to achieve 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.
• Only when neither of the first two options are reasonably practicable and provided an administrator does not unnecessarily harm the interests of the creditors as a whole, then the final objective of the administrator will be to realise property in order to make a distribution to one or more secured or preferential creditors (Schedule B1 paragraph 3(1) IA 1986).

Question 25

Qualifying floating charge?

Answer 25

• The debenture holder has the right to appoint an administrator only if the floating charge created by its debenture is a Qualifying Floating Charge (‘QFC’). This is defined in Schedule B1, paragraph 14 IA 1986 and includes a floating charge over the whole or substantially the whole of the company’s property (either alone or in conjunction with other security which the holder of the floating charge has) and the charging document either states that paragraph 14 applies to the floating charge or purports to give the holder of the floating charge the right to appoint either an administrator or an administrative receiver. The holder of such a charge is called a Qualifying Floating Charge Holder (‘QFCH’). Debentures created in practice are nearly always QFCs.

Question 26

• A floating charge has the following characteristics:

Answer 26

· it is a charge over a class of assets of the debtor/chargor;
· the particular assets within the class change from time to time in the ordinary course of the chargor’s business; and
· the chargor remains free to deal with those assets in the ordinary course of its business until crystallisation of the charge (e.g. on winding up or other event specified in the debenture).

Question 27

Which parties can apply to the court for an administration order:

Answer 27

· the company itself (i.e. acting with the authority of a resolution passed by the members in general meeting);
· the directors of the company (by board resolution);
· a QFCH;
· a creditor (who is not a QFCH);
· the supervisor of a CVA; and
· a liquidator.

Question 28

Which parties can use the out-of-court procedure to appoint an administrator:

Answer 28

· the directors of the company;
· a QFCH; and
· the company acting through its members.

Question 29

Out of court procedure?

Answer 29

• The out-of-court procedure differs depending on who appoints the administrator.
  · If a QFCH appoints the administrator, it files a notice of appointment at court and the appointment commences on the date of the filing (subject to serving notice on any prior QFCH and to the rules on out of hours appointment). This is only possible where the QFC is valid and has become enforceable.
  · The QFC will become enforceable if
• (i) the debenture and/or the loan agreement provides that the lender’s security is enforceable following the occurrence of an event of default,
• (ii) the lender accelerates the loan so that all advances under the loan are immediately due and payable and are repayable on demand,
• (iii) the lender makes written demand on the borrower for immediate repayment and
• (iv) the borrower fails to satisfy the demand
  · If the directors or the company appoint the administrator, then they must file notice of intention to appoint an administrator at the court and serve it on any QFCH, identifying the proposed administrator and giving the QFCH five business days’ notice of its intention to file a notice of appointment with the court. The QFCH then may appoint its own choice of administrator within the five business day period (assuming its security is enforceable, and it has the right to appoint administrators at this point of time) or it will liaise with the directors in relation to the appointment process. The directors may only appoint an administrator if the company is/likely to become unable to pay its debts.
• Appointing an administrator – out of court (directors)
• The directors will file a notice of appointment with the court within a further five business day window. The administrators are appointed immediately on the filing of the notice of appointment.
• The QFCH is usually able to override the directors’ or company’s choice of administrator. In practice the appointment of an administrator usually takes place at a time decided upon by the QFCH and the QFCH will liaise with the directors when it is ready and request the directors to appoint the administrators which it has chosen.
• In such a case, the appointment can take place very quickly and it is usually possible for the directors to file the notice of intention to appoint administrators, to obtain the consent of the QFCH to the appointment and then to file the notice of appointment within a few hours.
• Appointing an administrator – court appointments
• In certain circumstances, a court appointment will take place, including appointment by a creditor who is not a QFCH (though these are rare as such creditors will find presentation of a winding-up petition more straight forward).
• The most common situation when an administrator is appointed by the court is when a creditor has presented a winding up petition against the company and the directors then seek to appoint administrators. They can only do so by making a court application.

Question 30

• The appointment of an administrator creates an immediate moratorium on certain creditor action whereby (except with consent of the court or the administrator in each case):

Answer 30

· no order or resolution to wind up the company can be made or passed;
· no administrative receiver of the company can be appointed;
· 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;
· no legal proceedings, execution or other process can be commenced or continued against the company or its property; and
· a landlord cannot forfeit a lease of the company’s premises by means of peaceable re-entry.
* There is also an interim moratorium if an application is made to court for the appointment of an administrator or a notice of intention to appoint the administrator is filed. Neither of these steps prevents a QFCH from appointing its own choice of administrator out-of-court (assuming its security is then enforceable and gives it the right to appoint an administrator).

Question 31

Administratos’ duties?

Answer 31

the administrator will manage the company and its business with the aim of achieving the purpose of the administration. The directors are unable to exercise any management power without the consent of the administrator. The administrator acts as agent of the company and incurs no personal liability on contracts he causes the company to enter into provided he acts within his powers. The administrator is an officer of the court (even if appointed using the out-of-court procedure) and has a duty to the court and a duty to act in the interests of all the creditors

Question 32

administrators have wide powers set out in paragraph 1 of Schedule B1 to the IA 1986. These powers include:

Answer 32

· the carrying on of the business of the company;
· taking possession of and selling the property of the company;
· raising money on security;
· and executing documents and deeds in the company’s name.
* As a general rule administrators do not have the power to pay a dividend to unsecured creditors without obtaining court permission. They can (and often do) pay a dividend to secured creditors out of the proceeds of the creditor’s security and can now (as result of the changes brought about by the Small Business Enterprise and Employment Act 2015) pay the prescribed part dividend to unsecured creditors out of the “prescribed part” (or ring-fenced) fund.
* If there is a dividend to be paid to unsecured creditors, this will be paid in the statutory order of priority and either the administrator will have to seek permission from the court to make the payment, or the administration will convert into a liquidation and the liquidators will then make a distribution to creditors. In a more complex case, the administrator will propose a restructuring plan, a CVA or a scheme on terms that the administrator has the power to make dividend payments.

Question 33

• Powers and duties of the administrator- swelling the assets of the insolvent estate?

Answer 33

• The administrator (like a liquidator) has powers under the IA 1986 to apply to court and ask the court to make an order to set aside (avoid, or “claw back”) certain voidable transactions which occurred in defined periods before the start of the administration.
• They are known as “antecedent transactions”. One example is a transaction at an undervalue.
• These orders are sought with the aim of increasing the pool of the company’s assets available to creditors.
• Under the changes brought about by the Small Business, Enterprise and Employment Act 2015, administrators, like liquidators, now also have the power to bring claims against directors for wrongful or fraudulent trading.

Question 34

How long does administration last?

Answer 34

• The administrators’ appointment terminates automatically after 12 months. This period can be extended once by up to one year if the creditors agree. The court can also sanction any other extensions (which may be for more than one year).

Question 35

Fixed charge reciever?

Answer 35

• A fixed charge receiver (“FCR”) is, as the name suggests, appointed by the holder of a fixed charge in the circumstances set out in the loan or security documentation (e.g. on the occurrence of the usual types of events of default found in loan agreements). The FCR will have certain limited powers set out in the Law of Property Act 1925 (‘LPA 1925’) and any additional powers (which are generally fairly extensive and include a power of sale) set out in the security documentation.
• A fixed charge receiver becomes the receiver only of the property charged and is only entitled to deal with that property. The FCR is not normally entitled to deal with any other property of the company or to manage the company’s business. Fixed charge receivers are sometimes referred to as “LPA receivers”. Technically speaking, they are different. Fixed charge receivers are appointed pursuant to powers contained in a fixed charge or mortgage whereas an LPA receiver is appointed under the terms of the Law of Property Act 1925. Most receivers encountered in practice are fixed charge receivers because, as referred to above, this type of receiver has a more extensive set of powers.

Question 36

When can a fixed charge reciever not be appointed?

Answer 36

· A fixed charge receiver cannot be appointed while a pre-insolvency moratorium subsists or if the company is in administration

Question 37

Administrative recievers?

Answer 37

• Until the implementation of the EA 2002, debentures generally provided lenders with a quick and (compared with administration) cheaper method of enforcement, through the appointment of an administrative receiver (‘AR’). Technically, the appointment of an AR is not an insolvency procedure but a ‘self-help’ procedure to enable a secured creditor to enforce its security by the realisation of the assets secured by the debenture.

Question 38

Who do administrative recievers ower their duties to?

Answer 38

• As the AR owes their duty primarily to their appointor, charge holders which took their security before the Relevant Date may be considered in a better position than holders of QFCs created after the Relevant Date, who can only appoint an administrator.

Question 39

When can an administrative reciver not be appointed?

Answer 39

• An AR cannot be appointed if a pre-insolvency moratorium subsists or if the company is in administration.

Question 40

• Appointment of administrative receivers

Answer 40

• The holder of a floating charge created before the Relevant Date can appoint an AR without much formality, provided that in essence the floating charge together with any other security the holder has is over the whole/substantially the whole of the company’s property and expressly provides that the holder may appoint an administrative receiver (s.29(2) IA 1986).
• The appointment can be made very quickly (usually within a few hours on a business day) either
  · (i) following the occurrence of an event of default under the terms of the relevant loan agreement and the charge holder accelerates the loan and makes demand for immediate repayment and the debtor does not satisfy the demand, or
  · (ii) where the loan is repayable on demand (such as an overdraft), following the charge holder making demand for immediate repayment and again, the debtor does not satisfy the demand.

Question 42

• Powers of administrative receivers:

Answer 42

• All the express powers are set out in the debenture (the security documentation incorporating the floating and fixed charges); and unless expressly excluded, the AR also has extensive powers set out in Schedule 1 to the IA 1986 (these are the same powers that are granted to an administrator).
• The AR’s most important power is to take possession of and sell the assets of the company and repay the debenture holder. An AR does not have the benefit of a moratorium. This means that during the receivership, a creditor has the right to seek to exercise its rights and remedies e.g. to petition to wind up.

Question 43

• Role and duties of the administrative receiver

Answer 43

• The AR is required to be a licensed insolvency practitioner.
• Although nominally the agent of the company, the AR owes a primary duty to their appointor, and generally owes only a limited duty to the company and other creditors. The company as principal is not able to give instructions to the AR.
• The AR is both a receiver and a manager (you will recall that fixed charge receivers are receivers only and are not normally entitled to manage a company’s business). The AR’s role is to take possession of the assets secured by the charge under which he is appointed. Usually the assets are sold (preferably on a going concern basis), with the AR and his staff in the meantime running the business with the assistance of existing workforce (and perhaps the existing management).
• The order of priority for payments on the realisation of assets by the AR is essentially the same as on winding up.

Question 44

What is the liquidator’s function?

Answer 44

The liquidator’s function is 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 45

Why is administration preferable to liquidation?

Answer 45

• In a compulsory winding up, there is a very limited statutory moratorium involving a bar on bringing or continuing legal proceedings against the company. For this reason, administration is usually preferable, at least initially, if sufficient funds are available to fund the administration. In particular, the ability of an administrator to maximise value for creditors by selling a business as a going concern is an important advantage of administrations over liquidations.

Question 46

• There are two types of liquidation:

Answer 46

· Compulsory
· Voluntary

Question 47

• Voluntary liquidations are further divided into:

Answer 47

· Members’ voluntary liquidations (which are solvent liquidations) and
· Creditors’ voluntary liquidations (which are insolvent liquidations)

Question 48

What is compulsary liquidation?

Answer 48

• Compulsory liquidation is a court-based process for placing a company into liquidation.

Question 49

Compulsary liquidation process?

Answer 49

• To begin the process an applicant presents a winding up petition to the court under which the applicant requests the court to make a winding up order against the company on one of a number of statutory grounds.
• The court issues the petition and fixes a date for the hearing of the petition. The applicant then serves the petition on the company. There are restrictions on the directors’ ability to take certain actions between the service of the winding up petition and the court hearing.

Question 50

• The following can apply to the court for the issue of a winding up petition:

Answer 50

· a creditor;
· the company (acting by the shareholders; this would happen where there are insufficient assets in the company to fund a voluntary liquidator);
· the directors (by board resolution); again, this would happen where there are insufficient assets to fund a voluntary liquidator;
· an administrator;
· an administrative receiver;
· the supervisor of a CVA; and
· the Secretary of State for Business, Energy & Industrial Strategy (on public policy grounds).
* Given the ability of a QFCH to appoint an administrator, where the QFC becomes enforceable, it is usually an unsecured creditor who will apply to the court for a winding up order.
* A secured creditor which holds only fixed charges (and so is not a QFCH) will usually enforce against the assets subject to its fixed charges by appointing a fixed charge receiver and will not usually resort to issuing a winding up petition.

Question 51

• Grounds of petition for liquidation?

Answer 51

• The usual grounds are:
  · the company’s inability to pay its debts (s.122(1)(f) of IA 1986); or
  · the court being of the opinion that it is just and equitable that the company be wound up (s.122(1)(g) of IA 1986).
• Technically, the just and equitable ground to wind up a company is not an insolvency situation.

Question 52

Liquidation

• Demonstrating inability to pay debts – s.123 of IA 1986
• There are a number of ways in which a company may be deemed to be unable to pay its debts for the purposes of a winding-up petition:

Answer 52

• Failure by the company to comply with a creditor’s statutory demand. A statutory demand is a 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. The company has 21 days in which to pay the debt, failing which the creditor has the right to petition the court to wind up the company. This is the most common route basis for a winding-up petition.
• The creditor obtains a judgment against the company and fails in an attempt to execute the judgment debt.
• 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.
• 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” although case law shows this is not a pure accounting exercise).

Question 53

• Creditors’ voluntary liquidation (‘CVL’)?

Answer 53

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

Question 54

Procedure for CVL?

Answer 54

• The procedure is for the shareholders to pass a special resolution to place the company into a CVL. The shareholders may also nominate a 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 55

• Effect of the pre-insolvency moratorium

Answer 55

• A company cannot be placed into any type of liquidation while a pre-insolvency moratorium subsists (unless approved by the directors)or if the company is in administration.

Question 56

• The liquidator acts as agent of the company and has extensive statutory powers. Generally, the directors lose their powers upon the liquidator’s appointment. The liquidator’s powers include:

Answer 56

· To collect in and realise the company’s assets and to distribute them in the statutory order of priority.
· To make any compromise or arrangement with creditors.
· To bring in or defend any action or legal proceeding in the name of and on behalf of the company.
· To maximise the assets available for distribution to the company’s creditors by:
* challenging voidable antecedent transactions or bring a claim against one or more of the directors for wrongful or fraudulent trading. Liquidators (and administrators) also have the power to assign the right to wrongful and fraudulent claims as well as preference and transactions at an undervalue causes of action. This allows them to realise some money for the benefit of the estate without assuming the risk of litigating the claims; and
* disclaiming onerous property (s.178) e.g. onerous, unsaleable or unprofitable contracts. This is available equally in both solvent and insolvent liquidations. The most important example of onerous property is a lease of land. When notice of disclaimer is given by the liquidator, all rights, interests and liabilities of the company in respect of the property cease. A person who suffers any loss resulting from a disclaimer is entitled to prove in the liquidation as an unsecured creditor, or in certain circumstances, to apply to the court for an order to have disclaimed assets vested in him.

Question 57

• Proceedings against the company?

Answer 57

• After presentation of a petition and before a winding up order is made, the company, or any creditor or contributory, can apply to the court to request it to make a provisional order to stay any action or proceedings then current against the company.
• The effect of a winding up order will be automatically to stay any action or proceedings against the company, unless the court otherwise determines.

Question 58

• Members’ voluntary liquidation (‘MVL’)?

Answer 58

the MVL procedure can only be used if the company is solvent because a necessary part of its procedure is that the directors must make a statutory declaration. Under the declaration, they must state the company will be able to pay its debts in full within a period specified in the declaration (not exceeding 12 months from the commencement of the winding up) with the risk of criminal liability if a director makes a declaration without reasonable grounds.

Question 59

Procedure for MVL?

Answer 59

listing and giving values for the company’s assets and liabilities and showing that the assets exceed the liabilities.
* The shareholders pass:
· a special resolution to place the company into an MVL; and
· an ordinary resolution appointing a liquidator.
* Notice of intention to put a resolution for voluntary liquidation to the shareholders must be given in advance to any QFCH. The MVL will be converted into a creditors’ voluntary liquidation if the company becomes unable to pay its debts within the period (invariably one year) specified in the statutory declaration.

Question 60

• Order of priority in an insolvent liquidation or administration:

Answer 60

• Insolvency office holder’s costs of preserving and realising assets subject to a fixed charge
• Fixed charge creditors in respect of assets subject to a fixed charge
• Other costs and expenses of liquidation/administration
• Preferential debts (there are two tiers of preferential debts)
• Prescribed part fund
• Floating charge creditors
• Unsecured creditors
• Interest on unsecured (including preferential) debts
• The Shareholders

Question 61

• Fixed charge creditors (in respect of assets subject to a fixed charge)?

Answer 61

• The proceeds of selling assets which are subject to a fixed charge (or mortgage) must first be used to pay the insolvency office-holder’s costs and associated fees of realising those assets, then to pay off the debt secured by such charge (or mortgage).
• If the proceeds are not sufficient to discharge the debt in full, then the creditor must seek payment of the balance at an appropriate later point in the order of priority. This will depend on whether or not the same debt was also secured by a floating charge.
• The proceeds of selling the fixed charged assets will form the fixed charge fund. Only elements 1 and 2 in the statutory order of priority may be paid out of the fixed charge fund.

Question 62

• Other costs and expenses of liquidation?

Answer 62

• This includes all other fees, costs and expenses of the administration/liquidation, including the costs of selling assets secured by a floating charge, debts arising out of contracts entered into by the liquidator or administrator or arising from litigation which the liquidator or administrator has brought.

Question 63

• Preferential debts?

Answer 63

• For insolvencies occurring on or after 1 December 2020, there will be two tiers of preferential debts.
• The first tier must be paid in full before the secondary tier can be paid. The first tier consists of mainly (i) employees for remuneration due in the four months before the ‘relevant date’ (generally the date of the commencement of the liquidation or administration) but subject to a maximum of £800 per employee, plus accrued holiday pay and (ii) certain contributions owing to an occupational pension scheme.
• The secondary tier consists of debts due within certain prescribed periods to HM Revenue and Customs in respect of PAYE, employee national insurance contributions and VAT. These represent taxes which companies collect on behalf of HMRC from third parties (employees and customers).

Question 64

Prescribed part fund?

Answer 64

• The EA 2002 introduced the ‘prescribed part’ fund into the IA 1986 to increase the chance that unsecured creditors would get paid something in a liquidation or administration. The prescribed part fund is sometimes referred to as the “ring fenced” fund.
• The prescribed part fund is calculated by reference to a certain percentage (the ‘prescribed part’) of the company’s ‘net property’. This is set aside (ring-fenced) for distribution to the company’s unsecured creditors; s.176A. ‘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 (s. 176A (6) IA 1986).
• The amount of the company’s net property that will be ring-fenced is 50% of the first £10,000 and 20% thereafter up to a maximum fund of £600,000 for floating charges created before 6 April 2020 and £800,000 for floating charges created on or after that date. The ring-fencing provisions do not apply where the net property of the company is less than £10,000 as the cost of distributing the fund would be disproportionate to the benefit; see the Insolvency Act 1986 (Prescribed Part) Order 2003. This pot of money is set aside for distribution rateably among the unsecured creditors when they are paid. It 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.

Question 65

Floating charge creditors?

Answer 65

• After payment of the general expenses of the insolvency process, paying preferential debts and dealing with the prescribed part, the office holder then pays any remaining realisations from assets subject to floating charges to the floating charge holders themselves (according to the priority of their security, if there is more than one floating charge holder).
• The proceeds of selling the company’s assets not subject to a fixed charge constitutes the floating charge fund. Elements 3 to 6 (other costs and expenses of liquidation, preferential debts, prescribed part fund and floating charge creditors) of the statutory order of priority will be paid out of the floating charge fund.

Question 66

Unsecured creditors?

Answer 66

• For example:
  · 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; and
  · employees’ outstanding remuneration, to the extent that it does not rank preferentially.
• All the unsecured creditors rank and abate equally. This is known as the ‘pari passu’ rule. For example, if a 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 67

• Interest on unsecured (including preferential debts)

Answer 67

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

Question 68

• Shareholders

Answer 68

• 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.

Question 69

An online retailer company owes its main supplier of paper packaging a significant money for goods supplied which is overdue. The supplier has been pressing the company to pay the sums due for some time. The company also has a debenture with a bank under which the company granted floating charges over all the company’s assets. The company needs time to pay and is considering a pre-insolvency moratorium. The company does not want to notify the bank and has sought your advice on whether it must seek court consent in a formal hearing for a pre-insolvency moratorium.

Which of the following statements best describes your advice to the company?

The company does need to notify the bank as the bank is a QFCH, and it does need to seek court consent in a formal hearing.

The company does need to notify the bank as the bank is a QFCH but does not need to seek court consent in a formal hearing.

The company does not need to notify the bank but does need to seek court consent in a formal hearing.

The company does not need to notify the bank, nor does it need to seek court consent in a formal hearing.

Answer 69

The company does not need to notify the bank, nor does it need to seek court consent in a formal hearing.

Correct
Correct. Under a pre-insolvency moratorium the company does not need to notify the bank who holds a QFCH. The company also does not need court consent in a formal hearing as all it needs to do is to file some documents at court.

Question 70

A small independent supermarket company sells its own brand organic produce supplied by a long-standing farm company. The supermarket is notoriously slow in paying the farm company and is often several months late. Last week the farm company learnt that that the supermarket is in financial difficulties and just entered pre-moratorium due to competition by a larger new entrant to the market. The farm company cannot survive without payment so has told the supermarket that unless it receives payment in full for all its outstanding invoices it will stop supplying it with organic produce. The farm company has sought your advice as to whether it is within its rights to do so and whether it can terminate the contract.

Which of the following statements best describes the legal position you would advise to the company?

The farm company can withhold supplying the supermarket and can terminate the contract for either non-payment of a pre or post moratorium debt.

The farm company cannot withhold supplying the supermarket but can only terminate the contract for non-payment of a pre-moratorium debt.

The farm company can withhold supplying the supermarket but can only terminate the contract for non-payment of a post moratorium debt.

The farm company cannot withhold supplying the supermarket and can only terminate the contract for non-payment of a post-moratorium debt

Answer 70

The farm company cannot withhold supplying the supermarket and can only terminate the contract for non-payment of a post-moratorium debt

Correct. A supplier cannot refuse to supply goods and services due to a company not paying a pre-moratorium debt. A supplier cannot also terminate the contract unless the debt is post-moratorium.

Question 71

A well-known green enterprise delivery company has not paid its electricity supplier bill due to rising electricity charges. The company has received several reminders for payment from the electricity supplier. The delivery company granted its bank a floating charge over the company’s fleet of pure electric vans in a debenture. The company is considering a pre-insolvency moratorium but is concerned that the bank could crystallise the floating charge it has over its pure electric vans into a fixed charge. The company wants to know if the bank can crystallise the floating charge if it secures a pre-insolvency moratorium.

Which of the following statements best describes the advice you would give to the company?

The bank can crystallise the floating charge it has over the pure electric vans providing the bank is stated to be a Qualifying Floating Charge Holder in the debenture.

The bank can crystallise the floating charge it has over the pure electric vans even if the bank is not stated to be a Qualifying Floating Charge Holder in the debenture.

The bank cannot crystallise the floating charge it has over the pure electric vans.

The bank cannot crystallise the floating charge it has over the pure electric vans unless 20 business days has passed since the pre-moratorium.

Answer 71

The bank cannot crystallise the floating charge it has over the pure electric vans.

Correct. A pre-insolvency moratorium prohibits the crystallisation of a floating charge into a fixed charge.