Insolvency Law – Company

Insolvency Procedures –
Part 1
Dr Alisdair MacPherson
[email protected]
 Overview
 Introduction
 Free-standing moratorium
 Company voluntary arrangements (CVAs)
 Pt 26 arrangements
 Pt 26A arrangements
 Receivership
 Administration
 Liquidation
 Thecompany and its officers during insolvency
proceedings
Introduction
Company Insolvency Procedures
There can be debate about what exactly
constitutes an insolvency procedure (which has
certain consequences)
Some processes and mechanisms undoubtedly
qualify as insolvency procedures but for others the
position is more uncertain
We shall consider a range of procedures with
varying claims to being insolvency procedures
Most are focused on the “rescue” of a
company/business but sometimes it cannot be
saved
  Liquidation (Insolvency Act 1986)
 Administration (IA 1986)
 (Administrative) Receivership (IA 1986)
 Company voluntary arrangement (IA 1986)
Company  Part
26A restructuring plan (Companies Act
2006)
Insolvency  Notealso the following for dealing with
Procedures financially distressed companies:
Pt 26 arrangement (schemes of
arrangement) (CA 2006)
Free-standing moratorium (IA 1986)
Less formal arrangements (e.g. compromises
with creditors)
Free-Standing
Moratorium
Free-Standing Moratorium
The free-standing moratorium was
introduced by the Corporate
Insolvency and Governance Act 2020
CIGA 2020 s1 introduced a new Part
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A1 to the Insolvency Act 1986

“eligible companies” – all
companies, subject to specified
exclusions (e.g. companies
currently or recently subject to
insolvency procedures, insurance
companies, banks etc) (Sch ZA1)
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 Procedure
 Directors
of the company may obtain a
moratorium by:
Filing documents with court (s A3)
By application to the court, if company
subject to winding-up petition (s A4), or
By applying to the court if it is an
overseas company and no winding-up
petition (s A5)
 Conditions
 See s A6 for the “relevant documents”
 Theseinclude a statement from “the proposed monitor” that
they are a qualified person and consent to act as monitor
 And statements that the company is an eligible company and
in their view it is likely that a moratorium would result in the
rescue of the company as a going concern
 Thedirectors must also provide a notice that they wish to
obtain a moratorium and provide a statement that in their
view the company is, or is likely to become, unable to pay its
debts
 Commencement and Duration
A moratorium is commenced upon the relevant documents
being filed or a court order being made (as appropriate) (s A7)
 The initial period of the moratorium is 20 business days (s A9)
 But there are various ways in which it can be extended:
By directors without creditor consent (s A10)
By directors with creditor consent (s A11)
By court on application of directors (s A13)
While proposal for CVA pending (s A14)
By court in course of other proceedings (s A15)
 Under some of the provisions there can be multiple extensions
 End of Moratorium
 Moratoriums can end in various ways:
 By the expiry of the initial or extended period
 Where the company enters into a compromise or
arrangement under Pt 26 or Pt 26A of the
Companies Act 2006 or (other) insolvency
procedure (s A16)
 By the monitor (an IP) (s A38) - if e.g. they think
the moratorium is no longer likely to result in the
rescue of the company as a going concern or the
objective of rescuing the company has been
achieved
Moratorium Effects
 The moratorium has various effects, such as:
 Payment holiday for certain pre-moratorium
debts (s A18)
 Restrictions on insolvency proceedings (s
A20)
 Restrictions on enforcement and legal
proceedings (s A21)
 Restrictions on obtaining credit (s A25)
 Restrictions on grant of security (s A26)
 Restrictions on payment of certain pre-
moratorium debts (s A28)
 Restrictions on disposal of property (s A29)
 Note as well the protection of goods and
services under IA 1986, s 233B
 Company Voluntary
Arrangements (CVAs)
 Definition and Procedure
 Theprovisions for CVAs are in the Insolvency Act 1986
Part I and in secondary legislation
A CVA is “a composition in satisfaction of [a company’s]
debts or a scheme of arrangement of its affairs” (s 1(1))
A proposal is made to the company and its creditors by
the directors (if the company is not in administration or
liquidation) or by an administrator or liquidator (s 1(1)
and (3))
 Theproposal will provide for a person (an IP) to be “the
nominee” who may act as trustee or otherwise
supervise the implementation of the proposal (s 1(2)) –
becomes “supervisor”
Process for Approving
CVA
 The court has some oversight – e.g.
nominee’s report to court (s 2)
 There are voting rules for the approval of
a CVA (ss 4-4A and Insolvency (Scotland)
(Company Voluntary Arrangements and
Administration) Rules 2018):
 Members (approval requires simple
majority in value) (r 2.35)
 Creditors (approval requires 75% in
value and more than 50% in value of
unconnected creditors) (r 5.31)
 Consent of secured/preferential
creditors is required (if their rights are
to be affected) (s 4(4) and (5))
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 Effect of Approval
 Under s 5, the voluntary arrangement takes
effect as if made by the company at the time
the creditors decided to approve the
voluntary arrangement
 Itbinds every person who was entitled to
vote or would have been so entitled if they
had notice of it
 There is protection for supplies of utilities (s
233) and contracts for essential supplies of
goods and services (ss 233A and 233B)
Challenge of Decisions
 CVA decisions can be challenged on
the grounds of unfair prejudice (in
relation to the interests of a creditor
or member) and material irregularity
(s 6)
 The challenge needs to be made
within 28 days (s 6(3))
 The effect of a successful challenge is
to revoke/suspend the decision
approving the CVA or to direct further
consideration of the proposal (s 6(4))
 See e.g. Discovery (Northampton) Ltd
v Debenhams Retail Ltd [2019] EWHC
244
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 Implementing the Proposal
 The proposal will be implemented according
to its terms
 Thedirectors can continue to manage the
company but the supervisor has oversight
(and may have control of assets) and can
apply to the court for directions or for a
winding up or administration order (s 7)
 Creditorsor others dissatisfied with an act,
omission or decision of a supervisor can
apply to court (s 7(3))
 Pt 26 & Pt 26A
Arrangements
(Companies Act 2006)
Pt 26 Arrangements
 These
are also known as
“schemes of arrangement”
 They involve a compromise
or arrangement with a
company’s creditors or
members or any class of
creditors or members (CA
2006, s 895)
 Procedure
 An application is made to the court for an order to call
meeting(s) of creditors/members (s 896)
 The application is made by:
 The company
 A member or creditor of the company, or
 An administrator or liquidator
 Creditors/members are divided into classes (based on type of
shareholders/type of creditors)
 Voting takes place and a majority in number and 75% in value
in each class is required (s 899(1))
 The court may then sanction the compromise or arrangement
(s 899)
 Procedure
 Shandon Hydropathic Co Ltd 1911 SC 1153
“What the court has to do is to see first of all
that the statutory provisions have been
complied with, and secondly, that the
majority has been acting bona fide. The court
also has to see that the minority is not being
overridden by a majority having interests of
its own clashing with those of the minority
whom they seek to coerce. Further than that,
the court has to look at the scheme and see
whether it is one as to which persons, acting
honestly and viewing the scheme laid before
them in the interests of those whom they
represent, take a view which can be
reasonably taken by businessmen.”
 See also Premier Oil plc and Premier Oil UK Ltd,
Petitioners [2020] CSOH 39
 Effect
 Ifthe court sanctions the compromise or
arrangement, it is binding on all relevant
classes of creditors/members as well as on
the company (s 899(3))
 There is no need for the consent of all
affected secured/preferential creditors
(just the overall consent of relevant
classes)
 Pt 26A Arrangements
 These are also known as “restructuring plans”
 CIGA 2020, s 7 and Sch 9 inserted Pt 26A
(Arrangements and reconstructions: companies
in financial difficulty) into the Companies Act
2006
 Likeschemes of arrangement, they are a
compromise or arrangement with a company’s
creditors or members or any class of creditors
or members (s 901A)
 But there are some crucial differences…
 Conditions
 Condition A is that the company has
encountered, or is likely to encounter, financial
difficulties that are affecting, or will or may
affect, its ability to carry on business as a going
concern (s 901A(2))
 Condition B is that a compromise or
arrangement is proposed between the company
and its creditors/members or any class of them
and the purpose is to eliminate, reduce or
prevent, or mitigate the effect of those
financial difficulties (s 901A(3))
 Procedure
 An application is made to the court for an order to
call meeting(s) of creditors/members (s 901C)
 The application is made by:
 The company
A member or creditor of the company, or
 An administrator or liquidator
 Creditors/members are divided into classes
 Any class of creditors/members with no “genuine
economic interest” in the company is excluded (s
901C(3)-(4))
 Procedure and Effect
 Voting
is by 75% in value in each class (s
901F(1))
 Thecourt may then sanction the compromise or
arrangement (restructuring plan) (s 901F)
 The effect is generally the same as for schemes
of arrangement but, where one or more classes
dissent, note the possibility of “cross-class
cramdown”, whereby the court can bind the
dissenting classes in relation to the plan (s
901G)
 Cross-Class Cramdown
 Thecourt must be satisfied that none of
the members of the dissenting class would
be any worse off than they would be in the
event of the relevant alternative; and
 Theplan must have been agreed by 75% in
value of a class of creditors who would
receive a payment, or have a genuine
economic interest in the company, in the
relevant alternative
Pt 26A Arrangements –
Cases
 Re Virgin Atlantic Airways Ltd
[2020] EWHC 2376 (Ch) (sanction of
first restructuring plan)
 ReDeepOcean 1 UK Ltd [2021] EWHC
138 (Ch) (cross-class cramdown)
 ReHurricane Energy Plc [2021]
EWHC 1418 (Ch) and [2021] EWHC
1759 (Ch) (court refused to sanction
restructuring plan)
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 CVA, Pt 26 Arrangement, or Pt 26A
Arrangement?
 Many companies faced with financial difficulties
have to weigh up which restructuring option is most
suitable
 There are various factors to consider:
 Speed  Involvement of IP
 Cost  Voting thresholds
 Level of court  Availability
of cross-
involvement class cramdown
 Who can initiate  Effects
Receivership
Receivership
 Receivership
in Scots law is an enforcement
mechanism for floating charges
 Forfloating charges granted before 15 September
2003 (i.e. when the Enterprise Act 2002 came
into force), (administrative) receivership was
(and is) the main enforcement method
 Due to the effects and wide-ranging coverage of
receivership, it is often equated with an
insolvency procedure
 Thisis particularly true for administrative
receivership, as the relevant floating charge
covers the whole (or substantially the whole) of
the debtor’s property (see Insolvency Act 1986, s
251)
 Appointment of Receiver
A receiver can be appointed by a floating charge
holder or by the court (on the application of a
floating charge holder) (Insolvency Act 1986, s 51)
 The circumstances justifying appointment are
outlined in the floating charge instrument and in s 52
and may include:
Default by the chargor company
The appointment of a receiver by another floating
charge holder
The position of the charge holder being
prejudiced/in jeopardy
Restrictions on Appointment of Receiver
 Thereis now a general prohibition on
the appointment of administrative
receivers (s 72A)
 However, there are some exceptions
(ss 72B-72H)
 And it is still possible to appoint a
non-administrative receiver (if the
floating charge’s coverage is limited)
 Somepre-15 September 2003 floating
charges also remain in existence, and
would allow for the appointment of
an administrative receiver
 Effects
 On appointment of a receiver, a floating charge
attaches “as if” it is a fixed security (IA 1986, s 53(7)
and s 54(6))
 The floating charge is considered to be a real right in
security upon attachment (see National Commercial
Bank v Telford Grier Mackay & Co 1969 SC 181)
 Itattaches as if it were the relevant form of security
for the property in question (e.g. an assignation in
security for incorporeal moveable property – Forth
and Clyde Construction Co Ltd v Trinity Timber &
Plywood Co Ltd 1984 SC 1)
 The Receiver
 The receiver acts as agent of the company in
relation to property attached by the charge
(1986 Act, s 57(1), (1A))
 Theirfunction/duty is to pay monies received
to the floating charge holder in settlement of
their debt, after first paying certain other
creditors (s 60(1))
 Unsecured creditors of the company can form a
“creditors’ committee” (s 68)
 The Receiver and
Property
 Thereceiver’s control of property
extends to the property attached
by the floating charge (cf Sharp v
Thomson 1997 SC (HL) 66)
 Propertyheld on trust by the
chargor company is excluded (Tay
Valley Joinery Ltd v CF Financial
Services Ltd 1987 SLT 207)
 There is no vesting of property in
the receiver but they can recover
property/documents (s 234 and
Sch 2) and information (ss 66(1)
and 235-236)
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The Receiver and Property
A receiver is not able to challenge
transactions such as gratuitous alienations
and unfair preferences (however, a floating
charge holder could do so as a creditor)
A receiver’s powers are subject to the rights
of those who have effectually executed
diligence on property prior to the receiver’s
appointment (s 55(3)(a)) (and see the
material below)
 Managing and Realising the
Company’s Property
A receiver has various powers, specified in the
charge instrument (s 55(1)) and statutory powers (s
55(2) and Sch 2))
 The powers include:
Power to take possession of, collect and get in
the property
Power to sell and hire out the property
Power to bring or defend any legal action
Power to carry on the business of the company
or any part of it
 Managing and Realising the
Company’s Property
A receiver’s powers are subject to the rights of:
Creditors with effectually executed diligence
(s 55(3)(a))
Holders of fixed security or floating charges
ranking prior to/equally with the floating
charge (s 55(3)(b))
Other receivers (s 56)
Residual powers of directors
 Effectually Executed Diligence
 This is a concept that has been discussed previously in relation to
diligence and floating charges
 Itincludes a bare diligence executed validly and not struck down due
to its proximity to liquidation e.g. 60 days for arrestments and
attachments (see equalisation of diligence)
 Therefore, the following are included:
Arrestment, even without furthcoming or release of funds
Attachment, even without requiring the sale of items first
Inhibition, without needing a subsequent adjudication
 SeeMacMillan v T Leith Developments Ltd [2017] CSIH 23; and
MacPherson 2018 Jur Rev 230, for discussion
 Contracts
Existing contracts ordinarily
continue in force (s 57(4)) but
there may be contractual
provisions on termination
Receiver can decide whether to
adopt a contract or not proceed
with it (which can lead to a claim
for damages for breach)
Contracts for essential supplies
(see ss 233 and 233B)
The receiver can enter into new
contracts
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Sale of Property
 The receiver can sell individual
assets or groups of assets or they can
sell the business as a going concern
 There are special rules where the
receiver is selling property subject to
security/effectual diligence (s 61):
The court’s permission will be
required for such a sale free of
the encumbrance, where the
creditor does not consent
Proceeds require to be used to
pay secured creditors ranking
ahead of the charge holder

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 Payment of Debts
 Debts are paid in the following order (IA 1986, s 60):
Prior/equal ranking fixed securities (see CA 1985, s 464)
Effectually executed diligence
Liabilities etc incurred by receiver
Expenses/remuneration/indemnity of receiver
Preferential creditors (IA 1986, s 386 and Sch 6)
The prescribed part (see next slide)
The floating charge holder
 Anysums remaining are to be paid to any other
receiver/holder of a fixed security/liquidator (as
appropriate)
 The Prescribed Part
 The prescribed part is a ringfenced fund for the
benefit of unsecured creditors, to give some priority
over a floating charge holder (see IA 1986, s 176A and
Insolvency Act 1986 (Prescribed Part) Order 2003)
 Itis calculated with reference to “net property” – the
property that would otherwise go to a floating charge
holder (s 176A(2) and (6))
 Itamounts to 50% of net property up to £10,000 and
20% of the remainder up to a maximum of £800,000
 The prescribed part may be disapplied where the cost
of making a distribution would be disproportionate to
its benefits (s 176A(3)-(5))
 End of Receivership
 Thereceiver will complete the
process (including making
payments) and resign
 The floating charge re-floats one
month after the receiver’s
resignation (s 62(6))
 Next steps:
Company returned to control of
directors?
Most likely outcome –
liquidation
Another insolvency procedure is
also possible
Questions?