#3186 - Corporate Insolvency - Business Law and Practice

Company Law – Private Limited Companies

Corporate Insolvency

Insolvency and enforcing a security

Key changes in the law

Insolvency Act 1986 [IA]
Enterprise Act 2002 [EA]

Fundamental changes:

Promoting Administration
Restricting Administrative Receivership
Abolished ‘Crown Preferences’
Ring Fencing [for recoveries under floating charges]

Key Date: 15^th December 2003 [EA corporate Insolvency provisions came into force].

Insolvency

No definition provided within EA.

S.123 IA 1986 uses the phrase: ‘inability to pay debts’

When is a company unable to pay debts =

The company has not paid, secured or compounded a claim for a sum due to a creditor exceeding 750 within three weeks of having been served with a written demand in the prescribed form [the statutory demand].
An execution or judgment is unsatisfied
It is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due [the cash flow test]
The value of the company’s assets is less than its liabilities, taking into account contingent and prospective liabilities [the balance sheet test].

Why is it important to determine whether company is insolvent or not?

Transactions may be open to challenge

It will determine whether a voluntary liquidation is controlled by its creditors or members
It impacts the duties of directors
Certain procedures require ‘Declaration of Solvency’ [e.g. buy back shares].

Insolvency practitioner = anyone acting as a liquidator, administrator, administrative receiver, supervisor of a voluntary arrangement or a trustee in bankruptcy must be a I.P.

S.389 IA: criminal offence to act as an I.P when not qualified to do so.

What can a lender do if borrower is in default?

It depends on whether the debt is secured or unsecured.

Secured	Unsecured
Action for debt – court Petition for winding up Enforcement of security	Action for debt – court Petition for winding up

How to enforce security

Five methods to consider:

Possession
Sale
Foreclosure
Appointment of receiver
Appointment of administrator

Possession	Pledgee – already has possession Legal Mortgagee entitled to take possession irrespective of default Court can order possession Precursor to sale
Sale	Pledgee can sell on default Mortgage / charges – can sell asset pursuant to the security document
Foreclosure	Order by Court Court brings end to the mortgagor’s equity of redemption mortgagee becomes absolute owner.
Appointment of receiver	Appointed by secured lender / creditor [pursuant to the rights under the security document] Types of receivers: Receivers over specific assets Administrative receivers
Appointment of administrators	Encouraged by EA 2002 reforms

Enforcing a floating charge

Recoveries of floating charges are subject to:

Rights of preferential creditors;

Preferential debts: Defined Sch.6 IA 1986

Ring fencing

S.176A IA 1986 [introduced by EA 2002]

Apply to floating charges created on / after 15^th December 2003

Any liquidator, administrator or receiver shall set aside a prescribed part of the company’s net property for distribution to unsecured creditors.

[net property = the amount of property which (but for the ring fencing) would be available for the floating charge holder].

When will ring fencing apply?

R.F will not apply if:

The net property is less than the prescribed minimum [10,000]; AND
The liquidator / receiver thinks that the cost of making a distribution to unsecured creditors would be disproportionate to the benefits.

Qualified floating charge holders [QFCH] and their power to appoint administrative receiver.

Definition: a person holds a QFC if he holds security over the whole or substantially the whole of the company’s property (by way of QFC alone or by way of QFC together with other security)

What can a QFCH do?

Pursue out-of-court administration

He may be able to appoint an administrative receiver so long as FC was created BEFORE 15^th September 2003.

If not a QFCH: not able to pursue out-of-court administration and cannot appoint an administrative receiver [but he can appoint a receiver].

Appointing Receivers / Administrative receivers

What is a receiver?

A neutral court officer.

Powers and duties will be set out in the court order under which he is appointed

Appointed to assist with financial difficulty in company / insolvency. BUT also can be appointed if there is some dispute within company [not always a financial problem].

Powers and duties of receivers:

From security document

Administrative receivers have additional powers pursuant to IA 1986

To appoint administrator

Deemed to act as an agent of the company

Receivers appointed pursuant to a security document:

Receiver over a specific asset

Administrative receiver

Is security document is by deed – S.101 LPA

Receiver over specific assets:

“Fixed charge receiver”
Appointed by holder of charge in relation to a fixed asset, in circumstances specified in security document
Receiver does not need to be an insolvency practitioner
Duties: manages, receiver income from, and can sell the assets subject to the charge, in order to discharge the debt owed to appointer.
NOT able to deal with other property.

Administrative receiver:

S.29(2)IA 1986 Definition: a receiver and manager of the whole (or substantially the whole) of a company’s property.
Who can appoint? QFCH created before 15^th September 2003 [see definition above].
Replace directors in management of the company
Objective – to act for the benefit of the appointer. [Take possession of, and sell assets in order to repay appointer, and runs the business in the meantime].
No Moratorium
Appointment will crystallize the floating charge
Will often try to sell business as a going concern
Will repay appointer [but MUST pay any creditors with priority first (i.e. fixed charges over relevant assets and preferential creditors).

Limitation of ARs: [reforms by Enterprise Act 2002]

Administrative receivership and administration are mutually exclusive – [they cannot occur at the same time].
S.72A IA 1986: abolished rights to appoint an AR by a QFCH created on or after 15^th September 2003. [there are some EXCEPTIONS – capital market arrangements where debt exceeds 50million and other large complex transactions]
General aim of EA 2003 = for administration to replace AR as the main way of enforcing security over the whole of a company’s property.

Procedure of appointing administrative receivers

Appointment [power to appoint under security document must have arisen]
Administrative receiver sends notice of appointment to company and all known creditors within 28 days [S.46 IA]
Director’s give statement of company’s affairs to administrative receiver [S.47 IA]
Within 3 months of appointment, AR sends report on current financial position [and his proposed actions] to Companies House and creditors [S.48 IA]
Meeting of creditors to consider report
Assets sold and appointer paid [subject to preferential debts and ring fencing]
AR sends final reports to Companies House and creditors before ceasing to act
Company survives or is wound up.

Administration

Definition: A collective insolvency procedure whereby a company may be reorganized, or its assets realised, under the protection of a statutory moratorium.

Main concern – to rescue company as a going concern
Collective – administrator must have regard to interests of the creditors as a WHOLE
Moratorium – a freeze on proceedings by creditors against the company.
Schedule B1 of the IA 1986 – includes an out-of-court route to administration.

Key features of administration:

Moratorium on enforcement action; It prevents the following without consent of court or administrator

1	No order or resolution to wind by can be made or passes
2	No administrative receiver can be appointed
3	NO steps can be taken to enforce security or repossess goods
4	No legal proceedings an be instituted or continued, and a landlord cannot forfeit a lease of the company’s premises

Moratorium preserves the assets of the company so administrator has a better chance of rescuing it as a going concern.

Effect of administration on Winding UP:

W.U petition will be dismisses if court makes administration order instead

Company / directors cannot appoint a administrator out of court if a W.U petition has been made

If QFCH appoint an administrator = W.U petition will be suspended!

Effect of administration on receivership:

Administrator cannot be appointed if administrative receiver already in place [UNLESS court appoints, with consent of creditor who appointed AR].

Administrator may require any receiver [of specific assets] to vacate office.

Who can appoint an administrator?

The company / its directors

Ordinary resolution
Must give 5 business days notice of intention to appoint to any QFCH
Copy of notice filed at court, accompanies by statutory declaration that the company is / likely to become unable to pay its debts.

QFCH

QFC must be enforceable
Must give 2 business days notice of intention to appoint to any prior QFCH
Copy of notice must be filed at court

The court

Following application made by the company / its directors / one or more creditors [secured or unsecured]
Application by a supervisor or CVA [under S.7(4)(b) IA]
Court must give notice to any QFCH as soon as reasonably practicable after making the application.
Court will only make the administration...

#3186 - Corporate Insolvency - Business Law and Practice

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