W2 – MAXIMISING ASSETS ON INSOLVENCY

Co = company

MA = model articles

TA = table articles

OUTCOME 1 – Advise on the options available to a secured creditor of a co which is in financial difficulty

Options on insolvency (Creditor related)
Fixed charge holders	LPA Receivership	By power in security document – or if none then by LPA ss 101-109
	CVA (creditors voluntary arrangement)	Formal agreements which have been sanctioned by the court but allow the company to continue trading
	Wait for another party to put co into liquidation
	Informal agreement	Might agree to extended credit terms, reduced payments, or payment by instalments – Disadvantage is if company breaches agreement, it is no longer binding on creditors
	Scheme of arrangement
	Liquidation	BUT it can only prove in the bankruptcy for an unsecured balance after the sale of the asset subject to the fixed charge
Floating charge holders post-15.09.03 (n/b pre would have had administrative receiver option)	Administrator (possibly with CVA as below)	Out of court route
	CVA
	Scheme of arrangement
	Wait for another party to put co. into liquidation
	Informal agreement
Unsecured creditors	Liquidation	Serve statutory demand (IA 1986 s 123(1)(a) or sue the company under s 123(1)(b).
	Administrator	COURT ROUTE ONLY
	Suggest a CVA
	Informal agreement
Directors	Administrator	Out of court route OR court route
	Liquidation
	CVA

RECEIVERSHIP: OPTIONS FOR SECURED CREDITORS ONLY – insolvency unnecessary

Appointing a LPA receiver – FIXED CHARGE HOLDER (ss.28-49 IA 1986)
When do you need this?	Enforcing any fixed security taken over the company’s property. Traditionally appointed under LPA (s.109) but now usually express power in security doc. (also sets out duties and powers of the receiver) – creditor able to appoint in event of default.
Duty of the Receiver	Solely for the charge holder to recover money owed to them (case law) On appointment the Receiver: Takes possession of the charged asset and deals with it solely for the charge-holder Sells asset Pays expenses Repays fixed charge holder If shortfall – claimed as unsecured debt from company If exceeds proceeds – return remaining money to company. After this has been done the Receiver has no further interest in the company (though if he is appointed under a floating charge, he does have a duty to pay preferential creditors (IA86 s 40)
Advantages/disadvantages from client’s point of view	Advantages Quick realisation of amount secured No notice required Duty to charge holder only (as opposed to administration where duty to all creditors equally)	Disadvantages LPA receiver pays outstanding expenses including receivership fees first If asset has gone down in value, the amount secured may not be recovered in full and the shortfall will be claimed as an unsecured creditor The company may find it very difficult to trade after this, especially if it loses its premises – so if there are other amounts outstanding this could jeopardise ability to recover those
What does the security document say?	Prima facie the lender has the powers given to it under s 101 LPA 1925, which only discusses income. s101(3) LPA allows it to extend its powers by mortgage deed need to do this in order to cover all assets. The prep task SD does this: Power to appoint: Cl 15.1 of the example document: lender may appoint a receiver in writing signed by an officer or manager or other authorised person/by deed: when requested by Chargor i.e. borrower; when any action is taken to put co. into administration; when an Enforcement Event is continuing. NB: “Enforcement Event” = Event of Default (cl 1.1). “Event of Default” = (i) failure to make any payment when due (ii) breach of covenant, warranty or undertaking (iii) commencement of insolvency proceedings (Facility Agreement) Notice required: None: Cl 14.3 excludes the application of s 103 LPA to the deed (s.103 requires lender to serve notice on borrower) Cl 15.1 reiterates that no notice is required Powers of the receiver: The receiver is the agent of the company and must apply the proceeds to the discharge of the debt (s 109 LPA; cl 15.4) Schedule 1 of the document extends the powers that the receiver has under s 101 LPA – and they are very broad. Key power given: to take possession and realise capital. Under s 101(1)(iii), can only appoint a receiver to receive income – the chargee itself has to take possession to realise capital under the LPA

Appointing an administrative receiver (also ss.28-49 and 72A) - FLOATING CHARGE HOLDER pre 15.09.2003
When do you need this?	Enforcing a floating charge granted before 15 September 2003. Better option than appointing an administrator – as powers v. broad Administrative receivers may be appointed under IA86 s 29 by a floating charge holder who has a FC over the company’s undertaking. But through the Enterprise Act 2002, this can only be done for floating charges created before 15 September 2003 -> now must use administration.
Duty of the administrative receiver	Duty of the administrative receiver Only to the floating charge holder: as opposed administrator owes duty to all creditors
Adv/dis from client’s point of view	Advantages Administrative receiver has very broad powers Only owes duty to chargee - not to others (cf. administration)	Disadvantages Charge must have been granted before 15 September 2003 otherwise can’t use Charge has to be over whole/substantially whole of co’s assets
What does the security document say?	Loan document will specify events to trigger appointment, might include: Failure to meet a demand to pay capital or interest; Presentation of a winding-up petition; Presentation of a petition for administration or a CVA; Levying of distress or execution against the company’s assets; Failure to comply with restrictions in the loan documentation, e.g. by granting a new charge over assets; The company ceasing to trade; The assets being in jeopardy; or The inability of the company to pay its debts.
Requirements	The charge must be over the whole, or substantially the whole of the company’s property and must be a floating charge (s 29(2)(a)) The charge must have been created before 15 September 2003 (s 72A) - since that time s 72A has excluded the availability of administrative receivers to qualifying floating charge holders.
Powers of the admin receiver	S 42(1) - the administrative receiver has the powers set out in Sch 1 Sch 1 powers (p 1387 SB) are very broad Essentially takes over the running of the co, purely with view to selling the charged assets, paying his costs and repaying charge holder. Then will resign. Relevant leg = IA ss.42 -49 (powers, liability, requirement to give report etc)
Effect of administrative receivership	Effect In theory, once receiver has completed his work, he returns the company to the management of the directors who may continue to run the business. In practice, receivership is frequently followed by liquidation as there are few assets left once the chargeholder has been paid.

Appointing an administrator – Schedule B1 IA 1986

Revised regime implemented on 15 September 2003 to replace ‘AR’ for those charges that come into existence on or after this date.

When do you need this?

Co. is in financial difficulties and these are likely due to executive incompetence rather than external matters - you then effectively replace them with the administrator who tries to rescue the co. or at least improve the situation.

IF difficulties arise due to external pressures on the co. – e.g. one of its main customers has gone bust, then consider alternative methods – it would probably not be cost effective to appoint an administrator when you could enter into a CVA, etc.

What is an administrator?

Para 1(1) Schedule B1 Insolvency Act 1986: a person appointed to manage the company’s affairs, business and property.

Para 6: He must be a qualified insolvency practitioner.

What is his role?

Para 59: to manage the company and rescue it

Administrator must follow the hierarchy of aims (IA 86, Sch B1, Para 3(1)):

Rescue the company as a going concern; or
Achieve best result for the company’s creditors as a whole than would be likely if the company were wound up; or
Realising property in order to make a distribution to one or more of the preferential creditors.

Para 3(2): must act in the interests of the creditors as a whole.

Para 3(3): Must start by aiming for objective (a) and move down the list only if the alternative is not reasonably practicable, or if options (b) or (c) is better for the creditors as a whole or will not unnecessarily harm them

Para 4: carry out his functions as quickly and efficiently as reasonably practicable.

Advantages/disadvantages from client’s point of view

Advantages

Can combine with a CVA to cap the level of debt
Options very broad – could include layoffs, sell premises and lease back, realise assets etc.

Disadvantages

Duty is owed to the creditors as a whole (Para 3(2))
(cf receivership/administrative receivership)

Effect of administration

Creates statutory moratorium Paras 42 & 43

Prevents winding up petition commencing
Lasts throughout the administration
Restricts the ability of third parties to enforce their rights without the consent of the administrators
Gives administrator vital breathing space to assess state of the company finances and investigate the possibility of the selling the company as a going concern and thus protecting sum or all of...

#10472 - Maximising Assets On Insolvency - Insolvency and Liquidation

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