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Legal framework


What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

The Insolvency Act 1986 and the Insolvency Rules 1986 constitute the legislative framework of English insolvency law. On October 24 2016 the latter rules were replaced by the Insolvency Rules 2016, which will come into force on April 6 2017.

This framework is supplemented by other legislation, including the Companies Act 2006 (containing the statutory provisions relating to schemes of arrangement used in restructurings) and the Company Directors’ Disqualification Act 1986, as well as by principles of the common law.

While EU law has only a limited impact on the domestic insolvency framework, it continues at the time of writing to govern jurisdiction and recognition in EU cross-border cases. The most significant EU legislation in this regard is the EU Regulation on Insolvency Proceedings (1346/2000). 

Regulatory climate

On an international spectrum, is your jurisdiction more creditor or debtor friendly?

England and Wales is seen as an attractive restructuring and insolvency jurisdiction for both creditors and debtors. 

Until recently, the restructuring and insolvency regime was considered secured creditor friendly due to the wide-ranging and effective protections given to secured creditors. Many of its features continue to attract creditors, including the ability for the holder of a comprehensive security package that includes a qualifying floating charge to:

  • choose between a number of enforcement options;
  • benefit from recovery at the top of the waterfall of payments; and
  • influence control over the choice of formal insolvency process.

However, debtors are also attracted to the jurisdiction by the flexibility of the various restructuring and insolvency procedures ‒particularly the scheme of arrangement. In many instances, companies incorporated elsewhere seek to restructure in England and Wales in order to take advantage of this flexibility and the expertise of the English courts and insolvency industry.

Sector-specific regimes

Do any special regimes apply to corporate insolvencies in specific sectors (eg, insurance, pension funds)?

Modified insolvency procedures apply in certain sectors. Perhaps most significantly, the Banking Act 2009 introduced a number of modified insolvency regimes for failing banks, building societies and other financial institutions. Special regimes also exist for:

  • insurers;
  • postal services;
  • water and sewerage companies;
  • certain railway companies;
  • air traffic control companies;
  • London Underground public-private partnership companies;
  • bodies licensed under the Energy Act 2004; and
  • operators of systemically important interbank payment systems and securities settlement systems. 

These special regimes attempt to balance the typical concerns of creditors and debtors with broader public interest concerns. Accordingly, insolvency practitioners appointed to companies that fall within a special insolvency regime must usually pursue an additional objective over and above the objective of maximising recoveries for creditors.


Are any reforms to the legal framework envisaged?

In May 2016 the government sought views on whether the United Kingdom’s corporate insolvency and restructuring regime needs updating in light of:

  • international principles developed by the World Bank and the United Nations Commission on International Trade Law;
  • recent large corporate failures; and
  • an increasing European focus on facilitating company rescue.

The consultation focused on proposals to:

  • introduce a restructuring moratorium for distressed businesses;
  • widen the scope of legislation prohibiting the termination of contracts for essential supplies; and
  • introduce a new restructuring procedure with the ability to bind creditors to a restructuring plan and increase the availability of rescue finance.

It remains to be seen whether the government will introduce legislation based on these proposals.

It is also unclear whether and how the upcoming Great Repeal Bill – which will end the jurisdiction of the European Court of Justice and transpose current EU law into domestic law – will change the recognition framework, and whether any transitional arrangements may be put in place.

Director and parent company liability


Under what circumstances can a director or parent company be held liable for a company’s insolvency?

Directors or shareholders are not strictly liable upon the insolvency of a company. However, as a company’s financial position worsens, directors must refocus their duties from the interests of existing shareholders to the company’s creditors. This transition is required before the point at which the company is unable to pay its debts. Where a company is of doubtful solvency, the directors must consider the creditors’ interests.

Once a company is unable to pay its debts, a number of ways in which directors could become liable for the company’s position begin to arise. In particular, directors can become liable for ‘wrongful trading’, which applies when the directors know, or ought reasonably to have concluded, that there is no reasonable prospect of avoiding an insolvent liquidation or administration. At this point, unless the directors place the company into an insolvency process, they must take every step that is available to them in order to minimise the potential loss to the company’s creditors. A director’s failure to comply with the wrongful trading test or with his or her duties (under the Companies Act 2006 or under common law) may lead to personal liability or disqualification as a director.

Subject to  rare exceptions (eg, fraud), a shareholder will not be liable for the debts of an insolvent subsidiary. However, it may become subject to some of the same liability regimes discussed above if it is acting as a shadow director (ie, if the directors of the subsidiary are accustomed to acting on its directions or instructions). 


What defences are available to a liable director or parent company?

Directors will not be liable for wrongful trading if they can show that they have taken every step that they ought to have taken with a view to minimising the potential loss to the company’s creditors. Whether this requires ceasing to trade and placing the company into an insolvency process depends on the circumstances; in some situations, it may be in the creditors’ interests for the company, despite being insolvent, to continue trading for a short period if other funding options are available to the company.

In practice, directors are likely to be given some protection against personal liability for non-fraudulent activity by their directors’ and officers’ liability insurance. However, directors should check the insurance terms carefully in order to avoid taking false comfort.

Due diligence

What due diligence should be conducted to limit liability?

Breach of directors’ duties or wrongful trading can lead to personal liability for directors, and even to disqualification and fines. 

A prudent director should thus obtain advice on these and other types of potential liability regimes (eg, breaches of duty caused by transactions which are voided) at an early stage if financial difficulties are anticipated, in order to develop strategies to mitigate these risks.

Position of creditors

Forms of security

What are the main forms of security over moveable and immoveable property and how are they given legal effect?

The most common forms of security are mortgages and fixed and/or floating charges. 

A ‘mortgage’ is a transfer of title to an asset, subject to a right of re-transfer (known as the ‘equity of redemption’). A mortgage must be in writing and executed as a deed, and is subject to certain registration requirements. If these are not met, the mortgage may be void.

A ‘fixed charge’ involves no transfer of legal or beneficial title, but is an encumbrance on an asset. A fixed charge is created over an ascertainable asset, over which the lender will have a degree of control (eg, a right to consent before the asset is sold). 

A ‘floating charge’ is an encumbrance over an asset which may change from time to time (eg, cash in a fund or stock) and over which the lender does not have the same control as a fixed charge.

All floating charges and most mortgages and fixed charges (depending on the asset being secured) must be registered with the registrar of companies within 21 days, failing which they will be void. Certain exceptions apply, including for security taken over financial collateral.

Ranking of creditors

How are creditors’ claims ranked in insolvency proceedings?

A combination of domestic legislation and common law establishes a hierarchy or ‘waterfall’ of claims. A key principle underlying insolvency law in England and Wales is that debts rank pari passu – or equally among themselves, according to their priority.

The order of priorities applicable in administration or liquidation is broadly as follows:

  • the liquidator’s or administrator’s costs and expenses of realising fixed charge assets;
  • the fixed charge holders (to the extent of their security);
  • the obligations incurred under new contracts and the pay of employees whose contracts have been adopted;
  • the general expenses and costs of administration;
  • preferential debts (these relate almost exclusively to employees’ rights);
  • the ‘prescribed part’ (ie, a certain amount of the proceeds of realising assets, subject to any floating charge which must be set aside to settle the claims of unsecured creditors. Currently set at 50% of the first £10,000, plus 20% of anything thereafter, subject to a cap of £600,000;
  • the claims of floating charge holders (to the extent of their security);
  • the claims of unsecured creditors (that remain after payment of the prescribed part);
  • interest accrued on unsecured debts since commencement of the process; and
  • the claims of shareholders.

Can this ranking be amended in any way?

Yes. Parties commonly agree in subordination or inter-creditor agreements that debts that would otherwise rank pari passu may be subordinated to one another.

Foreign creditors

What is the status of foreign creditors in filing claims?

Foreign creditors may file claims in the same manner as domestic creditors (ie, by filing a proof of debt with the liquidator or administrator).

Unsecured creditors

Are any special remedies available to unsecured creditors?

As noted above, the prescribed part is given priority over the security of floating charge holders.

Debt recovery

By what legal means can creditors recover unpaid debts (other than through insolvency proceedings)?

Unsecured creditors whose debts are due may apply for summary judgment in court. 

Secured creditors hold a particularly strong position because they can exercise (or threaten to exercise) significant rights once their security has become enforceable, which could be long before the company is insolvent. Where a creditor has a fixed charge or mortgage over certain assets, it is often possible to appoint a receiver to sell those assets outside of an insolvency process.

Is trade credit insurance commonly purchased in your jurisdiction?

Trade credit insurance is very common, particularly in the small to medium-sized enterprise (SME) market. In 2015 60% of trade credit insurance policies sold in the United Kingdom were to SMEs (Association of British Insurers, May 2016).

Liquidation procedures


What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?

The term ‘insolvent’ has no strict definition. Rather, the law asks whether a company is unable to pay its debts. This usually entails an assessment of whether:

  • the company is unable to pay its debts as they fall due (a cash-flow test); or
  • the value of the company’s assets is less than its liabilities, taking into account its contingent and prospective liabilities (a balance-sheet test).

In the case of liquidation, a liquidator can be appointed where the company is, or will become, unable to pay its debts. However, liquidation can also be used to wind up a solvent company.

In the case of administration, the applicable entry criteria depend on the person applying to place the company into administration. If the administration is initiated by a qualifying floating charge holder (a person holding a floating charge covering all or materially all of the company’s assets), the company need not be unable to pay its debts. In such a situation, it is sufficient that the floating charge holder has a contractual right to enforce the security. If the company or its directors apply for administration, the company must be, or be likely to become, unable to pay its debts (on a cash-flow or balance-sheet basis). 

In either case, the administrator-in-waiting must be satisfied that one of three statutory objectives is achievable. The primary statutory objective of administration is the rescue of the company as a going concern. If this is not possible, the administrator must pursue the objective of rescue of the business, rather than the company. In such circumstances, it is more common for the administrator to sell the company’s business or assets, by way of pre-pack or otherwise. Failing that, the administrator must pursue the objective of realising property to make a distribution to at least one secured or preferential creditor.

Restrictions on entry to administration or liquidation are imposed on certain companies which are subject to special insolvency regimes.


What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?

Liquidation Liquidation is the primary procedure used to wind up companies. It can take a number of forms (see below), but in each case the liquidator is under a duty to collect in and realise the assets of the company for distribution to its creditors. Once this has been done, the company is usually then dissolved.

Administration Although originally designed as a company rescue mechanism, administration is also frequently used as a type of winding-up procedure. An administrator may make distributions to creditors in broadly the same way as a liquidator would. Where no assets are available for distribution, a company may move straight from administration to dissolution.

How are liquidation procedures formally approved?

In liquidation, one or more liquidators are appointed and take over the management of the company to realise its assets for distribution. A liquidator can trade the business in only limited circumstances, because rescue is not the objective.

Compulsory liquidation A compulsory liquidation is commenced by the court if it is satisfied that the company is unable to pay its debts, or that it is just and equitable to do so. A petition to court can be made by the company, the directors, any creditor or any person liable to contribute to the assets of the company in the event of a winding up.

Voluntary liquidation In contrast, a voluntary liquidation is commenced out of court by resolution of the company’s shareholders. However, the process is controlled by the shareholders only if the company is solvent and this is confirmed by the directors in a statutory declaration. If no such declaration can be made, it becomes a creditors’ voluntary liquidation, in which the creditors confirm the appointment and control the choice of liquidator.

What effects do liquidation procedures have on existing contracts?

Parties have no automatic right to terminate contracts on entry into insolvency processes. However, parties commonly include contractual termination rights triggered by entry into an insolvency process. These rights are exercisable on entry into an insolvency process, except in relation to certain essential supplies (eg, information technology, water, gas, electricity and communications). However, the commencement of winding-up proceedings may have the following effects on contracts:

  • Disclaimer – a liquidator has the power to unilaterally terminate or disclaim onerous contracts to avoid future liabilities. If the counterparty suffers loss as a result of a disclaimer, it may claim for damages in the winding up (although this is likely to be an unsecured claim).
  • Non-performance – an administrator does not have a power of disclaimer, but may delay or decide not to perform a contract if performance is not in the interests of the creditors and would impede the administrator from achieving the objective of the administration.

What is the typical timeframe for completion of liquidation procedures?

A liquidation can take as little as three to six months if the insolvent company’s trading history is short and simple, although it is likely to take longer if the trading history is longer and more complex. 

An administration may be completed in a year, but will take longer if the trading history is complex.

Role of liquidator

How is the liquidator appointed and what is the extent of his or her powers and responsibilities?

Once appointed, the administrator has wide-ranging powers to manage the administration process, but may seek directions from the court. The objective of an administration depends on the circumstances, but may include keeping the company trading as a going concern. The administrator has the power to continue trading the business (although in practice, he or she will want certainty regarding the continued funding of the business).

In liquidation, one or more liquidators are appointed and take over the management of the company to realise its assets for distribution. The powers of a liquidator are narrower than those of an administrator (eg, a liquidator can trade the business only in very limited circumstances because rescue is not the objective).

Court involvement

What is the extent of the court’s involvement in liquidation procedures?

Compulsory liquidation

The court acts as a ‘gate keeper’ to compulsory liquidation, as an application to court is required to commence the process.

Voluntary liquidation A voluntary liquidation is commenced out of court, by resolution of the company’s shareholders. There is usually no need to involve the court.

Creditor involvement

What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?

Secured creditors

The rights of secured creditors are largely unaffected by any liquidation process. They are free to enforce their security, including appointing a receiver. The position is different in an administration, in which a stay is automatically imposed on the rights of all creditors, including secured creditors.

Unsecured creditors A stay is automatically imposed on the commencement or continuation of legal proceedings against a company that is in liquidation or administration. In a compulsory liquidation, this is automatic, but the liquidator in a creditors’ voluntary liquidation must apply to the court for protection. In administration, a stay is also imposed. 

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in liquidation procedures?

In liquidation, the directors’ powers of management automatically cease and the liquidator assumes them. In an administration, the directors’ powers do not automatically cease, although the directors are unable to exercise any powers that might interfere with the administrator’s conduct of the administration. Occasionally, the administrators may consider giving powers back to the directors; there are no fixed rules regarding when it is appropriate to do so.

Restructuring procedures


What are the eligibility criteria for initiating restructuring procedures? Are any entities explicitly barred from initiating such procedures?

Schemes Although not strictly an insolvency procedure (the rules relating to schemes being based in the Companies Act), schemes are commonly used for companies in financial distress. The company need not be insolvent, although its finances will be relevant, for example, in considering how creditors will be affected by the scheme.

Pre-packs There are no special-entry requirements for a ‘pre-pack’ administration over and above any other administration (see above).


What are the primary formal restructuring procedures available in your jurisdiction and what are the key features and requirements of each?

The most common restructuring tools are schemes of arrangement, pre-pack administrations and company voluntary arrangements (primarily used by small and medium-sized enterprises in financial distress).

A ‘scheme of arrangement’ is an extremely flexible court-based procedure, which can be used to implement a variety of arrangements between a company and its creditors or its shareholders. Schemes can be used simply to amend and extend debt facilities while a wider restructuring is agreed, or to implement a complex restructuring involving debt transfers and debt for debt/equity swaps.

In a pre-pack administration, the sale of a distressed company's business is negotiated before it enters into administration and is executed shortly after the administrator is appointed. The aim is to minimise the disruption and costs that would otherwise be incurred during a full restructuring process. Another advantage is that debts owing to out-of-the-money junior creditors can be left behind in the insolvent company, as long as the inter-creditor agreement provides for the release of guarantees and/or security on a security enforcement.

A ‘company voluntary arrangement’ (CVA) is an informal but binding agreement between a company and its unsecured creditors in which the company’s debts are compromised. It may be used to avoid or supplement other insolvency procedures (eg, administration or liquidation) and is supervised by an insolvency specialist (normally an accountant), who acts as a nominee. 

How are restructuring plans formally approved?

A scheme must be approved by the class or classes of creditor to which the scheme proposal is put. Any creditors unaffected by the scheme can be excluded. Approval requires a simple majority in number of those voting in person or by proxy and a three-quarters majority in value.

In the case of a pre-pack administration, the support of secured creditors is usually necessary to allow the administrator to deal with secured assets. However, no formal meeting of creditors is convened by the administrator until after the pre-pack has been executed. Unsecured creditors are unlikely to be informed of the transaction before it takes place.

A CVA proposal requires the approval of three-quarters or more (in value) of the creditors present (in person or by proxy) and voting on the resolution. In calculating majorities at a creditors’ meeting, certain votes are excluded, including where notice of the claim has not been given and where the claim, or part of it, is secured. A separate members’ meeting is also held, which requires a simple majority to approve the CVA ‒ although if the result differs from that of the creditors, the creditors’ vote prevails.

What effects do restructuring procedures have on existing contracts?

It is common for contracts to include termination provisions that are triggered if a party enters into a restructuring process. However, in restructuring contexts, it is common to negotiate a standstill with certain creditors to prevent them from terminating as a restructuring deal is settled.

In a pre-pack, there is a moratorium on enforcing security or commencing a legal process. This would, for example, prevent a creditor from suing a company in administration for non-payment. However, it may be possible for a company dealing with a company in administration to novate a contract to another party with the administrator’s consent.

What is the typical timeframe for completion of restructuring procedures?

This depends on the complexity of the restructuring and the support it has from stakeholders in the company. 

Once a scheme proposal document has been finalised and circulated, the procedure can be completed in approximately six weeks, subject to court availability. A pre-pack administration can be completed as soon as the administrator has been appointed, while a CVA is effective immediately after the resolution to approve it has been passed at the creditors’ meeting, for which 14 days’ notice is required.

Court involvement

What is the extent of the court’s involvement in restructuring procedures?

A scheme requires two court hearings. At the first hearing (the convening hearing), the court considers whether to grant permission for meetings of creditors to be convened. If the scheme is approved by the scheme creditors, the court will consider in a second hearing whether to sanction the scheme, taking account of a number of factors, including fairness.

The appointment of an administrator on a pre-pack administration can be made either on application to the court or by filing the relevant papers with the court to document an out-of-court appointment. In complex cases or those with a cross-border element, a court appointment may be preferable. Once appointed, the administrator has wide-ranging powers to manage the process, but may seek directions from the court.

A CVA requires the nominee to report to the court on whether, in its opinion, the proposed CVA has a reasonable prospect of being approved and implemented. Notice of the CVA’s approval must also be filed with the court, after which a creditor or member will have 28 days to challenge the CVA on the grounds of unfair prejudice or material irregularity.

Creditor involvement

What is the extent of creditors’ involvement in restructuring procedures and what actions are they prohibited from taking against the company in the course of the proceedings?

In practice, a scheme is usually proposed by the company itself, although it is possible for creditors or an administrator to make a scheme proposal. The company will negotiate with the creditors to which the scheme is being put in order to obtain their support to approve the terms of the scheme.

A pre-pack requires the support of secured creditors in advance, with the administrator-in-waiting also being involved in negotiations. He or she is subject to a number of duties ‒ most notably to act in the interests of creditors as a whole, but only to the extent that such creditors have an economic interest in the company. However, directors must be comfortable with the terms of the proposal.

Creditors cannot propose a CVA, but will negotiate and approve its terms if they are subject to it. Certain small companies may take advantage of an optional moratorium of between one and three months to protect them from creditor actions while the proposals are put in place. 

Under what conditions may dissenting creditors be crammed down?

A scheme can bind dissenting creditors in a class if the requisite majority or majorities vote in favour of the proposal. Indeed, they are often used to compromise the debts of overseas companies, provided that they have a sufficient jurisdictional connection, in circumstances where such companies cannot obtain the requisite level of consent to approve the compromise under local law. Unlike a US Chapter 11 process, a scheme of arrangement cannot involve the cram-down of a deal by one class of creditors on a dissenting class.

If a CVA is approved, it binds all creditors which were entitled to vote, including dissenting creditors and creditors whose votes are left out of account. However, secured and preferential creditors are not bound, unless they have consented.

A pre-pack administration can be used to cram down a class of dissenting junior creditors by stranding them in an insolvent company and transferring its business to a new company, although the terms of the inter-creditor agreement should be checked carefully to ensure that it provides for the necessary releases of security and guarantees to make this is possible.

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in restructuring procedures?

Directors are heavily involved in negotiations regarding the terms of a scheme or CVA, and must act in a way that fulfils their duties owed to the company and potentially its creditors. Shareholders will generally be kept informed during these negotiations, although only a CVA requires a shareholders’ meeting to be convened.

Informal work-outs

Are informal work-outs available for distressed companies in your jurisdiction? If so, what are the advantages and disadvantages in comparison to formal proceedings?

Informal work-outs usually take the form of entirely consensual deals, depending on the consent levels required by the relevant financing documents for the deal to be implemented. Senior secured creditors can exercise their rights under increasingly sophisticated inter-creditor agreements to implement a restructuring. Informal arrangements (eg, lock-up and standstill agreements) may also be used to provide breathing space during negotiations. A scheme of arrangement can also be used to implement a deal where unanimous consent is required and the vast majority of creditors are in favour of the deal, but where a small minority of creditors are non-responsive or constitutionally unable to vote in favour of a deal.

These work-outs can reduce the delay, costs and destruction of value often associated with more formal restructuring processes, although they may not be appropriate for complex contentious restructurings. Even when it is not necessary to resort to a formal procedure, the possibility of doing so is likely to have been considered during the contingency planning process and is often used as leverage to encourage agreement.

Transaction avoidance

Setting aside transactions

What rules and procedures govern the setting aside of an insolvent company’s transactions? Who can challenge eligible transactions?

It is not unusual for a company in financial distress to seek to take action by adjusting payment terms, selling assets or repaying loans. Prudent directors should consider advice in doing so, as they may face personal liability if an administrator or liquidator subsequently applies to court for an order  to unwind the transaction. Such powers arise where:

  • the transaction occurred within specified periods before the company entered into administration or liquidation (between six months and two years, depending on the type of transaction); and
  • the company was unable to pay its debts on a cash-flow or balance-sheet basis at the time of the transaction,, or became unable to do so as a result of the transaction.

Two types of transaction are particularly vulnerable to challenge: preferences and transactions at an undervalue.

Preferences A ‘preference’ is given if the company does anything, or allows anything to be done, that puts a creditor or a guarantor of the company’s debts in a better position than it would otherwise have been in had the company gone into insolvent liquidation. The repayment of an unsecured debt at maturity could fall within this wide definition. However, the company must also have been influenced by a desire to produce the preferential effect in order for the transaction to be vulnerable (which is difficult to prove). Such desire is presumed to be the case if the transaction was with a connected person.

Transactions at an undervalue If a company enters into a transaction where it receives no consideration, or consideration of significantly less value than the consideration that it provides, this constitutes a ‘transaction at an undervalue’. A defence is available where the transaction was entered into in good faith to continue the company’s business, and where there were reasonable grounds to believe that it would benefit the company.

The same definition applies in respect of transactions defrauding creditors. There is no prescribed period within which a challenge must be mounted and the company need not be subject to an insolvency process.

However, such a claim is harder to establish because the transaction must have been entered into in order to put the assets beyond the reach of the claimant or otherwise to prejudice its interests.

Operating during insolvency


Under what circumstances can a company continue to conduct business during an insolvency procedure?

An administrator has wide-ranging powers which include continuing to trade the business if he or she considers that the objective of rescuing the company as a going concern can be achieved. However, in practice, trading administrations are rare. A liquidator’s ability to continue trading is very limited.

Stakeholder and court involvement

To what extent are relevant stakeholders (eg, creditors, directors, shareholders) and the courts involved in any business conducted during an insolvency procedure?

No fixed rules apply to managing a company in administration, although trading administrations are increasingly rare. A key concern for the administrator is whether there is sufficient funding to continue trading the business. This will be unlikely where a comprehensive security package is in place, as the administrator is likely to be limited to floating charge assets and any stock which is not subject to retention of title clauses. The administrator may apply to court to obtain directions on whether to continue trading and must consider whether the administration’s objectives are served by continuing trading.


Can an insolvent company obtain further credit or take out additional secured loans during an insolvency procedure?

Financing of a company in administration is treated as an expense of the administration, and is thus given a priority in the recoveries waterfall ahead of floating charges. In practice, however, the consent of any holder of a comprehensive security package must be obtained, as a lender to an insolvent company will wish to have priority over existing secured lenders.


Effect of insolvency on employees

How does a company’s insolvency affect employees and the company’s legal obligations to employees?

Entry into liquidation usually results in redundancies. Employment contracts are automatically terminated by entry into a compulsory liquidation. A creditors’ voluntary liquidation often involves fairly prompt redundancies, as it is unusual for the company to continue trading.

The position in an administration is different. Whether redundancies occur depends on which statutory objective the administrator pursues. The administrator has 14 days to consider whether to terminate employment contracts, failing which the wages of employees who are retained will be given preferential status in the administration. Certain pension contributions will also be given preferential status.

Obligations to consult are not overridden by insolvency law, although some legal uncertainty remains in this area, which is under review by the government.

Cross-border insolvency

Recognition of foreign proceedings

Under what circumstances will the courts in your jurisdiction recognise the validity of foreign insolvency proceedings?

Insolvency procedures commenced elsewhere may be recognised (and/or other relief or assistance provided) in a number of ways. The key routes are as follows:

  • EU Insolvency Regulation – this applies to all collective insolvency proceedings and some restructuring proceedings relating to a company with its centre of main interests (COMI) in the European Union. The EU Insolvency Regulation provides for automatic recognition in England and Wales; and
  • The United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency Proceedings – where proceedings are commenced outside the European Union, it may be possible for the insolvency officeholder to apply for recognition in England and Wales under the UNCITRAL Model Law on Cross-Border Insolvency Proceedings if the proceedings are main insolvency proceedings (defined by reference to a concept of COMI, which is similar to that found in the EU Insolvency Regulation).

Other forms of assistance may be granted under domestic legislation and common law (see below in relation to cross-border cooperation).

Winding up foreign companies

What is the extent of the courts’ powers to order the winding up of foreign companies doing business in your jurisdiction?

Companies incorporated elsewhere commonly seek to restructure in England and Wales, particularly in order to use a scheme or pre-pack.

Administration and liquidation Administration and liquidation proceedings fall within the scope of the EU Insolvency Regulation. So-called ’main’ insolvency proceedings can be opened only in the member state where a debtor has its COMI. This means that any company which has its COMI in England and Wales, even if it is incorporated elsewhere, can enter into liquidation or administration. A number of companies have moved their COMI for this purpose, particularly to use the pre-pack procedure. Companies whose COMI is located outside the European Union can enter into administration only if they are incorporated in a European Economic Area state. Such companies may enter liquidation regardless of their place of incorporation, as long as they meet certain criteria, including a “sufficient connection” to England and Wales.

Schemes Schemes remain outside the scope of the EU Insolvency Regulation and therefore a company need not have its COMI in England and Wales to take advantage of this procedure. A modified version of the ‘sufficient connection’ test provides the jurisdictional threshold. In recent years, this has commonly been achieved through the inclusion of an English governing law and jurisdiction clause in the relevant finance documents, but the presence of assets or operations may also suffice.

Centre of main interests

How is the centre of main interests determined in your jurisdiction?

A company’s COMI is presumed to be the location of its registered office, unless proof can be shown to the contrary. In showing proof, the courts will look closely at what third parties would consider to be the place where the company conducts the administration of its interests on a regular basis. One specific factor that may have a bearing on this is the address from which the company negotiates and corresponds with its creditors.

Cross-border cooperation

What is the general approach of the courts in your jurisdiction to cooperating with foreign courts in managing cross-border insolvencies?

The recast EU Insolvency Regulation provides for the coordination of insolvency proceedings concerning different members of the same group by obliging the liquidators and the courts involved in the different main proceedings to cooperate and communicate with each other. In addition, it gives the liquidators involved in such proceedings the procedural tools to request a stay of the various other proceedings and to propose a rescue plan for the members of the group that is subject to insolvency proceedings.

Under the Insolvency Act 1986, insolvency officeholders in a limited number of designated jurisdictions (mainly Commonwealth countries) may apply to the courts of England and Wales for certain relief and assistance. In circumstances where the EU Insolvency Regulation, the UNCITRAL Model Law and national legislation are not applicable, the insolvency officeholder may still apply for relief in England and Wales on the basis of common law principles developed by the courts.