Answer ... The main types of insolvency proceedings to which a company may become subject under English law are administration, receivership and liquidation. Established restructuring tools –such as company voluntary arrangements, schemes of arrangement, restructuring plans and standalone moratoria – also exist. In particular, lenders may consider the appointment of an administrator or receiver (where available) as an option for enforcing their security.
An English registered limited liability partnership (LLP) may also enter administration, liquidation and administrative receivership in a similar way to a company, albeit with certain modifications. Similarly, schemes of arrangement, restructuring plans, partnership voluntary arrangements (ie, a modified version of a company voluntary arrangement) and standalone moratoria are also available to LLPs.
Administration: An administrator (being a licensed insolvency practitioner) can be appointed out of court with respect to:
- a company incorporated in England and Wales or Scotland;
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a company:
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- with its ‘centre of main interests’ (COMI) in the United Kingdom;
- incorporated in a European Economic Area (EEA) state; or
- not incorporated in an EEA state but with its COMI in an EU member state other than Denmark); or
- an ‘establishment’ in the United Kingdom.
The administrator can be appointed by the company, its directors or the holder of a qualifying floating charge. Alternatively, an administrator can be appointed by the court upon the application of the company or its directors or one or more of the borrower’s creditors. The holders of qualifying floating charges must be given prior notice of the intention to appoint an administrator.
The administrator has the power to dispose of assets (including assets subject to a floating charge), and must perform its functions in the interests of the company’s creditors as a whole (regardless of the wishes of the secured lenders that made the appointment) with the aim of achieving one of the following objectives:
- rescuing the company as a going concern; or
- if that is not practicable, achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up; or
- if that is not practicable, realising property to make a distribution to secured or preferential creditors, as long as that will not unnecessarily harm the interests of the creditors as a whole.
A pre-pack administration sale is often used to sell the assets of an insolvent company. A pre-pack operates whereby marketing and negotiations for a sale of the company’s business and assets take place before administration, with the sale occurring shortly after the administrator is appointed. This often enables the value of assets – in particular, brands – to be preserved.
It is a statutory requirement for an administrator to report to creditors on a regular basis and in practice, the administrator will also regularly engage with the secured lenders. Lenders should be aware of the following effects of administration:
- Upon administration, the company becomes subject to a statutory moratorium that prevents creditors enforcing their claims against the company without the prior consent of the administrator or the court, including with respect to the enforcement of security. The moratorium does not apply to any security arising under a financial collateral arrangement within the meaning of Financial Collateral Arrangements (No 2) Regulations 2003.
- If a company is subject to an outstanding winding-up petition (see “Liquidation” below), neither the company nor its directors can use the out-of-court route to appoint an administrator. A court application can be used in this circumstance and a qualifying floating charge holder can still use the out-of-court route.
- A company can enter administration despite a secured creditor having appointed a receiver to certain of the company’s assets, but any so appointed receiver must vacate fixed charge office if the administrator requires it to do so.
- Any standalone moratorium (see “Standalone moratorium” below) will automatically come to an end on the company going into administration.
The distribution of realisations of a company’s assets will be subject to the statutory waterfall.
Receivership: Where a lender holds a fixed charge over certain assets (including real estate), the lender may be able to appoint a fixed charge receiver (or a Law of Property Act 1925 (LPA) receiver) over those assets. Usually, a receiver will be appointed pursuant to the terms of the relevant security document. In such a case the terms of the receivership (including the powers of the receiver) are governed by the terms of the security document. Additionally, the LPA provides a charge holder with a statutory right to appoint an LPA receiver.
Broadly, the receiver’s role is to take custody of the charged assets and manage them. Ordinarily, a receiver will also be given the power to realise the assets that are the subject of the fixed charge in order to discharge the relevant company’s indebtedness to the relevant creditor.
Although the receiver owes a residual duty to the borrower as a result of the borrower’s interest in the equity of redemption in the charged assets, its duty is primarily owed to the appointing creditor. Accordingly, lenders generally have a degree of input over the receivership process and sale strategy to be adopted with respect to the charged assets, and the receiver will consult with the lenders regularly. However, care must be taken by a lender not to inadvertently become a mortgagee in possession.
Administrative receivership: An administrative receiver can be appointed by creditors which have security over the whole or substantially the whole of the company’s property.
Since the entry into force of the Enterprise Act 2002, the concept of administrative receivership has been effectively abolished as a remedy for the holders of floating charges created after 15 September 2003, subject to some important but limited exceptions (primarily relating to capital markets transactions); and as a result, administrative receiverships are now rare in practice in financing transactions.
Liquidation: Compulsory liquidation (or winding-up) involves the appointment by the court of a licensed insolvency practitioner as liquidator, typically upon the application of a creditor, to wind up the company. Compulsory liquidation is a terminal process whereby the liquidator’s role is to collect in, realise and distribute the assets of the company to its creditors according to their ranking; there is no rescue element. As such, compulsory liquidation is not usually a remedy favoured by secured lenders if other more convenient, and potentially less value-destructive, enforcement options are available.
Voluntary liquidations are out-of-court processes for placing a company into liquidation and are instigated by a resolution of a company’s members. A creditors’ voluntary liquidation is used for an insolvent entity and a members’ voluntary liquidation is used to liquidate solvent entities, requiring the directors of the company to swear a statutory declaration of solvency. Written notice is to be given to the holder of a qualifying floating charge prior to the company passing the resolution for voluntary liquidation, at which point the qualifying floating charge holder has the option to appoint an administrator. In a creditors’ voluntary winding-up, the directors of the company must seek a nomination from creditors as to the individual to be appointed as liquidator. The members may nominate an insolvency practitioner to be the liquidator, but the creditors can override this choice and elect a different liquidator.
Once a liquidator is appointed:
- the powers of the directors of the company cease;
- the conduct of the liquidation is in the hands of the liquidator; and
- the secured creditors have no control rights with respect to the liquidation.
The company usually ceases to trade and the liquidator has the power to do all things necessary to realise the assets and distribute the proceeds to creditors according to the priority of claims.
Secured lenders can enforce their security while the company is in liquidation, although they cannot usually appoint an administrator. With respect to a compulsory liquidation only, there is an automatic statutory moratorium (ie, a stay on commencing or continuing legal proceedings against the company without the leave of the court).
Company voluntary arrangement (CVA): A CVA is a compromise or other arrangement agreed by a company with its creditors, which may involve:
- a delayed or reduced payment of debt;
- capital restructuring; or
- an orderly disposal of assets.
A CVA is a legally binding agreement which, subject to achieving the necessary thresholds, enables all unsecured creditors (even those that did not vote in favour of the arrangement) to be bound by the arrangement from the date it is approved. Secured lenders are not bound without their consent, but will usually be consulted about the process because their consent and cooperation are often required for a viable CVA. A CVA does not result in an automatic statutory moratorium; however, a company can use the standalone moratorium (see “Standalone moratorium” below) while a CVA proposal is being considered. A creditor is unable to take steps against the company that are prohibited under the terms of an approved CVA.
A proposal for a CVA should nominate a qualified insolvency practitioner to supervise the CVA; and once the CVA is approved, the supervisor will monitor its implementation.
Scheme of arrangement/restructuring plan: A scheme of arrangement is similar to a CVA in that it binds the creditors should the requisite voting threshold be met. However, the court plays a greater role:
- approving the relevant meeting of creditors to vote on the scheme; and
- if the creditors approve of the proposed scheme, sanctioning it only if the court is satisfied that the proposed scheme is fair and reasonable, and represents a genuine compromise or arrangement between a company and its creditors and/or members.
Secured creditors may enforce their security prior to the scheme becoming effective; but once the scheme of arrangement has been sanctioned by its members, creditors and the court, it will bind all creditors and may, depending on its terms, restrict the rights of secured creditors.
A restructuring plan is similar to a scheme of arrangement, with the main differences as follows:
- A restructuring plan is available only where a company has encountered or is likely to encounter ‘financial difficulties’ that are affecting or may affect its ability to carry on business as a going concern. A scheme of arrangement is also available for solvent companies.
- The required majority is 75% or more by value of creditors present and voting at the meeting(s) of each class of creditors, there being no additional requirement for that majority to be in number.
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A restructuring plan benefits from a cross-class cramdown provision which allows the court to sanction the plan at a hearing even if a dissenting group in a class of creditors or members results in the plan not being agreed by 75% in value of that class. However, this applies only where:
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- those creditors would be no worse off under the plan than they would be in the event of the ‘relevant alternative’, which is whatever the court considers would be most likely to occur if the plan were not sanctioned; and
- another class of creditors would receive payment or have a genuine economic interest in the event of the relevant alternative.
- This is subject to the court’s overarching discretion not to confirm the plan if it is not considered to be just and equitable (even where these conditions are met).
Standalone moratorium: The standalone moratorium is available to provide eligible companies with a short breathing space from enforcement action by certain creditors while they organise their business affairs in order to achieve a rescue. The eligibility of a company is assessed by considering the type of entity and its regulatory and economic status. An eligible company may obtain a moratorium by either filing certain documents with the court or making an application to the court. During the period of moratorium, the directors remain in control of the business (unlike administration) and a monitor (being a licensed insolvency practitioner) is appointed to ensure compliance with the statutory terms of the moratorium. The moratorium initially lasts for 20 business days but can be extended if certain conditions – including payment of certain debts – are satisfied. The moratorium is largely similar to that which applies in an administration; in particular, no steps may be taken to enforce any security over the company’s property except with the permission of the court unless, among other things, the security is created or otherwise arising under a financial collateral arrangement (as defined in the Financial Collateral Arrangements (No 2) Regulations 2003).
The standalone moratorium (provided that the statutory criteria are met) can be used in combination with a CVA, scheme of arrangement or restructuring plan such that proposals are made while the company is subject to a moratorium; however, once approval/sanction of any of these arrangements is granted, the standalone moratorium will terminate.