Answer ... (a) Debtor
Generally, a debtor’s contractual obligations remain enforceable upon the commencement of an insolvency proceeding (subject to limited exceptions such as employment contracts in a compulsory liquidation), although a moratorium may apply as further detailed in question 4.4. However, a breach of obligations arising prior to the proceeding will give rise only to an unsecured claim (unless the insolvency officeholder has taken action to ‘adopt’ the contract for the benefit of the estate). New obligations that the officeholder causes the company to incur will typically rank as expenses of the proceeding.
(b) Directors of the debtor
Directors’ powers will generally cease in a liquidation or administration (although an officeholder may request their assistance). In a CVA, the directors remain in control (the role of the nominee/supervisor being limited to oversight of the CVA).
(c) Shareholders of the debtor
The shareholders of a debtor have limited involvement in most insolvency proceedings, except in the case of a voluntary liquidation, which is commenced by a shareholders’ resolution.
In the case of a CVA, the shareholders of the debtor are invited to vote on the proposals document. Although the proposal can take effect if it has been approved by the creditors alone, a shareholder of the debtor can apply to the court (although this is extremely rare), which has discretion to determine whether the decision of the company’s shareholders should prevail over the decision of the creditors.
(d) Secured creditors
Secured creditors are unable to vote on a CVA (save to the extent that their debt is ‘under-secured’) and secured debts cannot be compromised by a CVA without the relevant secured creditor’s consent.
In a CVL, creditors are invited to nominate the liquidators; while in a compulsory liquidation, the liquidators may be appointed by a company’s creditors (which may occur at the invitation of the official receiver or at the instigation of a creditor representing 25% in value of the debtor’s creditors). A creditor will be entitled to vote only the unsecured or under-secured element of its debt.
In most circumstances, the administrators’ proposals require the support of at least a majority in value of a company’s creditors. The creditors receive reports from the administrators detailing the progress of the administration and a final progress report. The administrators must also invite creditors to form a creditors’ committee. Any person that has proved for a debt which is not fully secured is eligible to be a member of such committee.
(e) Unsecured creditors
A CVA proposal will be implemented if it is approved by at least 75% by value of the company’s unsecured creditors that vote (at least 50% by value of which must be unconnected with the company) – see question 4.1. The proposal will be binding on all unsecured creditors, even if they are subject to different treatment under the CVA (subject to their rights to appeal on the grounds of fairness).
See question 4.6(d) for the role of creditors generally in a liquidation or an administration. In administration and liquidation, unsecured creditors have an entitlement to share in the prescribed part (which is a fund (maximum £800,000) from the proceeds of realising assets covered by floating charge security). Otherwise, unsecured creditors will receive a distribution only once all secured and preferential creditors have been paid in full.
(f) Employees
A compulsory liquidation automatically terminates employees’ service contracts. Otherwise, the entry of a company into administration, voluntary liquidation or the CVA process has no immediate direct impact on employees. Certain employment-related claims rank as preferential debts in liquidation or administration. The administrators must decide whether they wish to adopt existing employment contracts within 14 days of the commencement of an administration; and once a contract is adopted, priority is given for all ongoing wages, which must be paid as expenses of the administration.
(g) Pension creditors
Unpaid contributions to occupational pension schemes (within certain limits) rank as preferential debts in a liquidation or administration.
Otherwise, any deficit on a defined benefit pension scheme – and any financial support direction or contribution notice issued by the Pensions Regulator exercising moral hazard powers – will constitute an ordinary unsecured claim in an administration or liquidation. The claim will be valued on a full buy-out basis, meaning that pension creditors may often have a material influence in the process.
The occurrence of an administration, liquidation or CVA will constitute a ‘qualifying insolvency event’ in respect of a pension scheme, triggering an ‘assessment period’ during which the Pension Protection Fund (PPF) will determine whether it should take responsibility for it. If so, and pending this determination, the PPF is entitled to stand in the shoes of the pension trustees and exercise creditors’ rights on behalf of the pension scheme.
(h) Insolvency officeholder
Insolvency officeholders have the responsibilities described in question 4.5. The administrators have a duty to act in the best interests of all creditors (not just the creditor that appointed them, if applicable).
(i) Court
Certain types of insolvency proceedings may be commenced in or out of court.
Following the opening of insolvency proceedings, the court generally takes a supervisory role only. Insolvency officeholders are officers of the court and have a duty to report to the court; and the court may provide directions to the insolvency officeholder upon request.
Certain actions that may be taken by insolvency officeholders require the court’s prior approval.
An administrator or liquidator may apply to court to bring claims for wrongful or fraudulent trading against directors, or to seek to set aside antecedent transactions.
Finally, a creditor or member of the company may apply to court to challenge the insolvency officeholder’s conduct, or to challenge a CVA.