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Insolvency procedures

Procedures
What are the main insolvency procedures applicable to companies in your jurisdiction?

  • Administration
  • Liquidation
  • Company voluntary arrangements (“CVAs”)
  • Schemes of arrangement

Administration – A flexible procedure that can be used to achieve a range of outcomes for a distressed company, from a restructuring to a liquidation of the company’s assets. It is frequently used in order to achieve a sale of the business of the company as a going concern (the terms of which have often been agreed in advance of the administrators being appointed, known as a “pre-packaged” sale or “pre-pack”). In order to protect the business and preserve its value, the company is protected by a statutory moratorium whilst in administration. Administrators can be appointed by the company itself or a creditor holding a floating charge filing a notice of appointment at court; alternatively, an application for an administration order can be made to the court by the company or by any creditor.

Liquidation – Intended to facilitate the realisation of the company’s assets, the fair assessment and payment of the claims of its creditors and, in the case of a solvent liquidation, the division of any surplus among the shareholders. It can be commenced by an order of the court (compulsory liquidation) – generally on the petition of a creditor – or by a resolution of the company’s shareholders (voluntary liquidation).

CVAs – Allow the company to propose a restructuring plan to its creditors which will be binding on those creditors if approved by the relevant majority of them (75% by value including at least 50% of creditors unconnected with the company). Secured or preferential creditors cannot be bound without their consent. A creditor can apply to court to challenge a CVA that it considers to be unfair.

Schemes – Like CVAs, the schemes allow the proposal of a restructuring plan to creditors, but they are also used to effect a wide range of other compromises and arrangement between the company and its creditors or shareholders. Unlike CVAs, schemes can bind secured creditors. Creditors or members whose interests are similar are divided into classes, and the scheme only becomes effective if approved by the relevant majority (at least 75% by value and 50% in number) of the members of each class.

Moratorium
Can a company obtain a moratorium whilst it prepares a restructuring plan?

No - English law does not provide for any “free-standing” restructuring moratorium and a company does not have the protection of a moratorium while formulating or awaiting the creditors’ approval of a CVA or scheme (with the limited exception of CVAs proposed by small companies). As a result, where a company needs a moratorium to protect it from creditor action whilst a restructuring is effected, it will generally go into administration, with the administration being discharged once the restructuring plan has been approved.

Directors
To what extent do the directors of the company remain in control of its affairs during any of the above procedures?

In an administration or liquidation the powers of the directors cease, and the administrator or liquidator takes control of the company.

In a CVA or scheme the directors remain in control of the company (although, in the case of a CVA, subject to supervision by an insolvency practitioner).

Timeline to commence liquidation
How quickly can a creditor generally commence the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?

Between six and ten weeks, depending on the process followed.

Overseas proceedings
Do your courts recognise insolvency proceedings commenced in the courts of another jurisdiction?

Yes - insolvency proceedings commenced in the courts of other EU members states will be automatically recognised under the EC insolvency regulation.

Insolvency officeholders appointed in other jurisdictions can obtain recognition under the Cross- Border Insolvency Regulations 2006 (which implements the UNCITRAL model law) or section 426 Insolvency Act 1986.

Note, however, that judgments obtained in actions arising from insolvency proceedings (such as claw-back claims) abroad will not generally be enforceable against a defendant in England unless the defendant has submitted to the foreign jurisdiction.

Position of creditors

Forms of security
What are the main forms of security over movable and immovable property?

Security over immovable property is taken by:

  • fixed charges including mortgages
  • floating charges

Security over moveable property is taken by:

  • fixed charges
  • floating charges

Security over tangible property is taken by possessory security:

  • pledges
  • liens

Preferential status
Which classes of creditor are given preferential status? Are any classes subordinated?

Preferential debts rank after debts secured by fixed charges and ahead of detbs secured by floating charges:

  • contributions to occupational pension schemes
  • unpaid wages up a maximum of £800 per employee
  • accrued holiday pay

Sums due to the shareholders of the company in their character as shareholders are subordinated to the claims of unsecured creditors.

Treatment of foreign creditors
Are foreign creditors treated equally to domestic creditors?

Yes.

Termination of contract by reason of insolvency
Are contract terms permitting termination of the contract by reason of insolvency valid?

Yes.

Retention of title
Are retention of title clauses effective?

In principle yes, providing that the clause is incorporated into the contract between the parties and the goods in question can be identified. Retention of title can secure all monies due from the company to the supplier and is not limited to sums due under the particular order in question.

Setting aside transactions

Transaction avoidance provisions
What are the main transaction avoidance provisions, and who can challenge transactions?

An insolvency officeholder can challenge:

  • transactions at an undervalue (concluded in the two years prior to the commencement of insolvency proceedings)
  • preferences (concluded in the six months prior to the commencement of insolvency proceedings (two years where the preferred creditor is connected to the company))
  • floating charges granted in respect of pre-existing indebtedness (in the year prior to the commencement of insolvency proceedings (two years where the chargeholder is connected
  • to the company))
  • transactions defrauding creditors (no time limit on bringing a challenge)

Position of directors

Risks for directors
What are the risks facing the directors of an insolvent company?

Directors can be held civilly liable for:

  • wrongful trading - once the directors know or ought to know that the company cannot avoid insolvent liquidation, failing to take every step with an eye to minimising the losses to creditors
  • fraudulent trading – trading while insolvent with the intention of defrauding creditors (this is difficult to prove)
  • misfeasance – any breach of directors’ fiduciary duties, including causing the company to enter into avoidable transactions, that causes a loss to the company

In theory directors can be held criminally liable for a number of insolvency related offences including fraudulent trading, but in practice prosecutions are very unusual.

Directors whose conduct indicates that they are unfit to be company directors can be disqualified from acting as such or being involved in the management of a company for up to 15 years.